UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 4, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
--------------------- --------------------
Commission File Number 0-22561
J E T F A X, I N C.
(Exact name of Registrant as specified in its charter)
Delaware 77-0182451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1376 Willow Road, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-0600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of November 3, 1997 there were 10,817,080 shares of common stock, $.01 par
value, outstanding.
This Report on Form 10-Q includes 43 pages with the Index to Exhibits located on
page 17.
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<TABLE>
JETFAX, INC.
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED OCTOBER 4, 1997
<S> <C>
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets - September 30, 1997 and
December 31, 1996 3
Condensed Statements of Operations - For the Three Months
and Nine Months Ended September 30, 1997 and 1996 4
Condensed Statements of Cash Flows - Nine Months
Ended September 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
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2
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
JETFAX, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1997 1996 (1)
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,412 $ 106
Accounts receivable, net 4,296 2,434
Inventories 3,659 2,339
Prepaid expenses 288 61
-------- --------
Total current assets 18,655 4,940
Property, net 952 615
Other assets 1,000 566
-------- --------
Total assets $ 20,607 $ 6,121
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,363 $ 1,857
Accrued liabilities 664 619
Notes payable - 502
-------- --------
Total current liabilities 2,027 2,978
Long-term debt - 198
Redeemable preferred stock - 2,726
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000
shares authorized, 1997; 9,000,000 shares
authorized, 1996; shares outstanding:
1997 - none; 1996 - 995,599 - 63
Common stock, $0.01 par value; 35,000,000
shares authorized, 1997; shares outstanding:
1997 - 10,817,080; 1996 - 995,599 108 10
Additional paid-in capital 34,095 13,880
Accumulated deficit (15,623) (13,734)
-------- --------
Total stockholders' equity 18,580 219
-------- --------
Total liabilities, redeemable preferred
stock and stockholders' equity $ 20,607 $ 6,121
========= ========
(1) Derived from the December 31, 1996 audited balance sheet included in the
Company's Registration Statement on Form S-1 (No. 333-23763), as amended,
which was declared effective on June 10, 1997.
See notes to condensed financial statements.
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3
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<TABLE>
JETFAX, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1997 (1) 1996 1997 (1) 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product $ 4,049 $ 3,173 $ 12,270 $ 10,270
Development fees 469 380 1,773 830
Software and technology license fees 1,077 518 1,560 1,485
------- -------- -------- -------
Total revenues 5,595 4,071 15,603 12,585
------- -------- -------- -------
Costs and expenses:
Cost of product revenues 2,981 2,549 8,838 8,806
Research and development 1,127 662 3,035 1,341
Selling and marketing 991 924 2,782 2,814
General and administrative 436 293 1,161 725
Crandell acquisition charges - - 1,681 -
------- -------- -------- -------
Total costs and expenses 5,535 4,428 17,497 13,686
------- -------- -------- -------
Income (loss) from operations 60 (357) (1,893) (1,101)
Other income (expense):
Interest income 152 4 194 37
Interest expense - (2) (44) (89)
Other income (expense) (46) 1 (69) (7)
------- -------- -------- -------
Total other income (expense) 106 3 81 (59)
------- -------- -------- -------
Income (loss) before income taxes 166 (354) (1,812) (1,160)
Provision for income taxes 24 63 76 64
------- -------- -------- -------
Net income (loss) 142 (417) (1,889) (1,224)
Less cumulative dividends on Series P
Redeemable Preferred Stock - (39) (68) (117)
------- -------- -------- -------
Net income (loss) applicable to common
stockholders $ 142 $ (456) $ (1,957) $ (1,341)
======== ======= ======== ========
Net income (loss) per share $ 0.01 $ (0.05) $ (0.20) $ - (2)
======== ======= ======== ========
Shares used in computing
net income (loss) per share 12,437 8,461 9,571 - (2)
======== ======= ======== ========
(1) Effective December 31, 1996, JetFax, Inc. changed its fiscal year end
from March 31 to a 52-53 week reporting year ending on the first Saturday
on or after December 31. For presentation purposes, the Company refers
herein to the 13-week period from July 6, 1997 to October 4, 1997 as the
quarter ended September 30, 1997 and the 39-week reporting period ended
October 4, 1997 as its nine month reporting period ended September 30, 1997.
(2) As a result of the Company's change in its fiscal year end, (see note
above), the results for the nine months ended September 30, 1996 include
the last quarter of the prior fiscal year for which per share data is not
presented pursuant to rules of the Securities and Exchange Commission.
See notes to condensed financial statements.
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4
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<TABLE>
JETFAX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,889) $ (1,224)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 171 119
Warrant compensation expense 625 -
Reversal of inventory reserves and
purchase commitment - (645)
Changes in assets and liabilities:
Trade receivables (1,862) (874)
Inventories (1,320) 40
Prepaid expenses (227) (3)
Accounts payable (494) (2,742)
Accrued liabilities 45 (140)
--------- ---------
Net cash used for operating activities ( 4,951) (5,469)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (509) (366)
Increase in other assets (434) (344)
--------- ---------
Net cash used for investing activities (943) (710)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 19,694 11,095
Repayment of notes payable (502) (2,589)
Repayment of related party notes payable - (2,202)
Repayment of long-term debt (198) -
Redemption of preferred stock - Series P, net (2,794) -
--------- ---------
Net cash provided by financing activities 16,200 6,304
--------- ---------
Net increase in cash and cash equivalents 10,306 125
Cash and cash equivalents, beginning of period 106 305
--------- ---------
Cash and cash equivalents, end of period $ 10,412 $ 430
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 45 $ 89
========= =========
Taxes paid - foreign withholding $ 77 $ 64
========= =========
Supplemental noncash investing and financial
information:
Conversion of note payable to stockholder, to
Series P Redeemable Preferred Stock issuable $ 2,287
========= =========
Conversion of convertible notes payable into
Series F Convertible Preferred Stock $ 1,929
========= =========
Cumulative dividends on Series F Convertible
and Series P Redeemable Preferred Stock $ 304 $ 643
========= =========
See notes to condensed financial statements.
</TABLE>
5
<PAGE>
JETFAX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Interim Financial Information
The accompanying condensed financial statements of JetFax, Inc. ("JetFax" or
the "Company") as of September 30, 1997 and for the three and nine months ended
September 30, 1997 and 1996 are unaudited. In the opinion of management, the
condensed financial statements include all adjustments (consisting of normal
recurring accruals) that management considers necessary for a fair presentation
of its financial position, operating results and cash flows for the interim
periods presented. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year.
This financial data should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Registration Statement on
Form S-1 (No. 333-23763), as amended, which was declared effective on June 10,
1997.
Fiscal Period End
Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or after
December 31. For presentation purposes, the Company refers herein to the 13-week
period from July 6, 1997 to October 4, 1997 as the quarter ended September 30,
1997 and the 39-week reporting period ended October 4, 1997 as its nine month
reporting period ended September 30, 1997.
Net Income (Loss) Per Share
Net income (loss) per share is based on the reported net income (loss)
adjusted for cumulative dividends on Series P Redeemable Preferred Stock (prior
to its redemption in June 1997) to arrive at net income (loss) applicable to
common stock. Net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares include (i) convertible preferred stock, except Series
P Redeemable Preferred Stock, (using the ''if converted'' method) and (ii) stock
options and warrants (using the treasury stock method). Common equivalent shares
are excluded from the computation if there is a net loss as their effect is anti
dilutive, except that, pursuant to the Securities and Exchange Commission's
Staff Accounting Bulletins and staff policy, such computations include all
common and common equivalent shares issued within the twelve months preceding
the initial filing date of the Company's registration statement for its recently
completed initial public offering as if they were outstanding for all periods
presented. In addition, all outstanding preferred stock and cumulative dividends
that converted into common stock in connection with the Company's initial public
offering in June 1997 are included in the computation as common equivalent
shares even when the effect is anti-dilutive.
2. Common Stock Offering
In June 1997, the Company completed an initial public offering of 3.5 million
shares of Common Stock (2.75 million shares offered by the Company and 0.75
million shares offered by selling stockholders) at $8.00 per share with net
proceeds to the Company of $19.7 million. In connection with the initial public
offering, all of the convertible preferred stock, except the Series P Redeemable
Preferred Stock, and related accrued dividends outstanding at the time of the
initial public offering automatically converted into 6,456,681 shares of Common
Stock. Approximately $2.8 million of the net proceeds were used for the
mandatory redemption of the Series P Redeemable Preferred Stock following the
closing of the Company's initial public offering in June 1997.
6
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<TABLE>
JETFAX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Materials and supplies $ 1,554 $ 1,276
Work-in-process 317 235
Finished goods 1,788 828
-------- --------
Total $ 3,659 $ 2,339
======== ========
4. Accrued Liabilities
Accrued liabilities consist of (in thousands):
September 30, December 31,
1997 1996
------------- ------------
Compensation and related benefits $ 446 $ 220
Product warranty 89 140
Other 129 259
-------- --------
Total $ 664 $ 619
======== ========
</TABLE>
5. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these statements will not
impact the Company's financial position, results of operations or cash flows.
Both statements are effective for fiscal years beginning after December 15,
1997, with earlier application permitted.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), ''Earnings Per Share".
The Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997
and will restate at that time earnings per shares ("EPS") data for prior periods
to conform with SFAS 128. Earlier application is not permitted. SFAS 128
replaces the presentation of primary EPS with a presentation of basic EPS. Basic
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. SFAS 128 also requires, among other things, dual presentation of basic
EPS and diluted EPS on the face of the income statement for all entities with
complex capital structures. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Assuming SFAS 128 had been in effect
during the current and prior year periods, basic and diluted EPS for the quarter
and nine months ended September 30, 1997 and 1996 would not have differed from
the Company's EPS currently reported for the periods.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (the ''Securities Act'') and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), including statements
regarding the Company's expectations, hopes, intentions or strategies regarding
the future. When used herein, the words ''may,'' ''will,'' ''expect,''
''anticipate,'' ''continue,'' ''estimate,'' ''project,'' ''intend'' and similar
expressions are intended to identify forward-looking statements within the
meaning of the Securities Act and the Exchange Act. Forward-looking statements
include: statements regarding events, conditions and financial trends that may
affect the Company's future plans of operations, business strategy, results of
operations and financial position. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. Investors are cautioned that any forward-looking statements
are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below, under the heading "Factors That May Affect Operating
Results" and elsewhere in this Report on Form 10-Q.
The Company was incorporated in Delaware in August 1988 and since that time
has engaged in the development, manufacture and sale of its branded
multifunction products (''MFPs'') which consist of electronic office devices
that combine print, fax, copy and scan capabilities in a single unit. The
Company also entered into agreements with manufacturers ("OEMs") of MFPs for
the customization and integration of the Company's embedded system technology
and desktop software in several OEM products.
Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
following December 31. The 13-week period from July 6, 1997 to October 4, 1997
is referred to herein as the quarter ended September 30, 1997 and the 39-week
reporting period ended October 4, 1997 as its nine-month reporting period ended
September 30, 1997.
The Company's revenues are derived from three sources: (i) product revenues
consisting of sales of JetFax branded MFPs, consumables and upgrades; (ii)
development fees for engineering services; and (iii) software and technology
license fees related to both its embedded system technology for MFPs and its
desktop software. Historically, product revenues have accounted for the
majority of the Company's total revenues. For the quarter ended September 30,
1997, product revenues, development fees, and software and technology fees, as
a percentage of total revenues, were 72.4%, 8.4%, and 19.2%, respectively, as
compared to 78.0%, 9.3%, and 12.7% for the comparable period in the prior year.
For the nine months ended September 30, 1997, product revenues, development
fees, and software and technology license fees, as a percentage of total
revenues, were 78.6%, 11.4%, and 10.0%, respectively, as compared to 81.6%,
6.6%, and 11.8% for the comparable period in the prior year.
The Company in the past has experienced, and in the future may experience,
significant fluctuations in quarterly operating results that have been or may
be caused by many factors including: the timing of introductions of new
products or product enhancements; initiation or termination of arrangements
between the Company and significant OEM customers or dealers and distributors;
and the size and timing of and fluctuations in end user demand: currency
fluctuations; and general economic conditions. The Company expects that its
operating results will continue to fluctuate significantly as a result of these
and other factors.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Operations
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product 72.4% 78.0% 78.6% 81.6%
Development fees 8.4 9.3 11.4 6.6
Software and technology license fees 19.2 12.7 10.0 11.8
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses:
Cost of product revenues 53.3 62.6 56.6 70.0
Research and development 20.1 16.3 19.4 10.7
Selling and marketing 17.7 22.7 17.8 22.3
General and administrative 7.8 7.2 7.4 5.7
Crandell acquisition charges - - 10.8 -
------ ------ ------ ------
Total costs and expenses 98.9 108.8 112.0 108.7
------ ------ ------ ------
Income (loss) from operations 1.1 (8.8) (12.0) (8.7)
Interest and other income (expense) 1.9 0.1 0.4 (0.5)
Income (loss) before income taxes 3.0 (8.7) (11.6) (9.2)
Provision for income taxes 0.5 1.5 0.5 0.5
------ ------ ------ ------
Net income (loss) 2.5% (10.2)% (12.1)% (9.7)%
====== ====== ====== ======
</TABLE>
Quarter and Nine Months Ended September 30, 1997 Compared to Quarter and Nine
Months Ended September 30, 1996
Revenues. Total revenues increased 37% to $5.6 million for the quarter
--------
ended September 30, 1997 from $4.1 million for the quarter ended September 30,
1996 and increased 24% to $15.6 million for the nine months ended September 30,
1997 from $12.6 million in the comparable prior year period. Product revenues
advanced 28% for the quarter to $4.0 million from $3.2 million in the same
quarter of the prior year and rose 19% to $12.3 million for the nine months
ended September 30, 1997 from $10.3 million for the comparable prior year
period reflecting primarily increased domestic unit shipments of JetFax MFPs
and related consumables and upgrades. The quarter ended September 30, 1997 was
a period of major product transition with the introduction of the next
generation MFP product line, the JetFax M900 Series. Product growth during the
quarter ended September 30, 1997 was partially constrained by the transition
due to a number of engineering and supply issues. As a result, the product time
to market was delayed several weeks during the third quarter, contributing to a
product revenue shortfall from expected levels. These transitional engineering
and supply issues have been largely eliminated and the Company believes that
the product transition delays are resolved.
Development fees increased 23% to $469,000 for the quarter ended September
30, 1997 from $380,000 in the same quarter of the prior year and increased 114%
to $1.8 million for the nine months ended September 30, 1997 from $830,000 for
the comparable period in the prior year, due to significant new OEM programs
undertaken in the last twelve months. The Company has previously reported
delays on completion of the last milestone of a development agreement with one
of its OEM's, for which it had recognized cumulative revenues of $316,000 as of
March 31, 1997 and June 30, 1997. Progress has been made towards the
completion of the project and the OEM is currently shipping the product. The
OEM has agreed that the final milestone payment will be paid in full. The
Company recognized $100,000 in additional revenue on this development contract
in the quarter ended September 30, 1997 and expects to recognize the remaining
$50,000 relating to the last milestone payment upon
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
completion of a mutually agreed final software deliverable in the next several
months.
Software and technology licensing fees increased 108% to $1.1 million for
the quarter ended September 30, 1997 from $518,000 for the quarter ended
September 30, 1996 and increased 5% to $1.6 million from $1.5 million for the
respective 1997 and 1996 nine month periods. The nine month period in 1997
included significant licensing fees from the Company's software licensing and
from the Company's development project with Hewlett-Packard which more than
offset the decline due to the end of life of Xerox products for which JetFax
earned royalties. International revenues decreased to 18% of total revenues
for the nine months ended September 30, 1997 from 28% for the comparable period
in 1996, as a result of lower international product shipments, primarily in
Europe, and lower OEM development fee revenue from foreign companies.
Two customers, IKON Office Solutions and Hewlett-Packard, accounted for $3.2
million (21%) and $1.9 million (12%), respectively, of total revenues for the
nine months ended September 30, 1997. One of the customers, IKON Office
Solutions, accounted for $1.8 million (15%) of total revenues for the nine
months ended September 30, 1996.
Cost of Product Revenues. Cost of product revenues increased 17% to $3.0
------------------------
million for the quarter ended September 30, 1997 from $2.5 million in the same
quarter in the prior year and were flat at $8.8 million for the 1997 and 1996
nine month periods. Given the higher product revenue level in the current
year, the product gross margins advanced to 26.4% and 28.0%, respectively, for
the quarter and nine months ended September 30, 1997 from 19.7% and 14.3% for
the respective year ago periods. The improvements in the gross margin for the
JetFax branded products and consumables were due to manufacturing efficiencies,
higher volumes, and a shift in mix to the newer JetFax M5 product line.
Research and Development. Research and development expenses increased
------------------------
70% to $1.1 million for the quarter ended September 30, 1997 from $662,000 for
the quarter ended September 30, 1996 and also increased 126% to $3.0 million
from $1.3 million for the nine months ended September 30, 1997 and 1996,
respectively. As a percentage of revenues, research and development expenses
increased to 20.1% and 19.4% for the 1997 quarter and nine month periods from
16.3% and 10.7% for the corresponding periods a year ago. The year to year
increases in research and development expenses resulted primarily from: (i) the
additional software development personnel added with the acquisition of the
Crandell Group in July 1996, (ii) additional personnel added in 1997 and (iii)
external consultant and prototype expenses. The Company incurred higher
expenses during the quarter ended September 30, 1997 due to prototype and non-
recurring engineering costs related to the introduction of the JetFax M900
Series product line. The Company believes that the development and
introduction of new products is critical to its success and expects that
research and development expenses will increase on a dollar basis in the
future, although at a lower rate than that experienced in the nine months ended
September 30, 1997.
Selling and Marketing. Selling and marketing expenses increased 7% to
---------------------
$991,000 for the quarter ended September 30, 1997 from $924,000 for the
comparable quarter in the prior year. Headcount was relatively flat while
there was an incremental rise in non-personnel marketing expenses due to higher
revenues. As a percentage of revenues, selling and marketing expenses fell to
17.8% for the nine month period ended September 30, 1997 from 22.3% for the
comparable period of 1996 due to marketing expenses remaining relatively flat
as revenues increased.
General and Administrative. General and administrative expenses
--------------------------
increased 49% to $436,000 in the quarter ended September 30, 1997 from $293,000
in the comparable 1996 quarter. General and administrative expenses rose 60%
to $1.2 million for the nine month period ended September 30, 1997 from
$725,000 for the comparable period of 1996. As a percentage of revenues,
general and administrative expenses rose to 7.4% for the nine month period of
1997 from 5.8% for the nine month period of 1996. The increases were primarily
due to higher personnel, facilities, business insurance, and hiring expenses.
Crandell Acquisition Charges. There were no additional charges in the
----------------------------
quarter ended September 30, 1997 for the Crandell acquisition. The total
Crandell acquisition charges were approximately $1.7 million for the nine
months ended September 30, 1997. The nine-month period ended September 30, 1997
included a $1.0 million final payment in July 1997 to the Crandell Group in
lieu of future royalty payments; Crandell acquisition charges of $0.6 million
through June 1997 for an variable equity award classified as compensation; and
$56,000 for compensation expenses through June 1997 associated with royalties
related to the continuing employment of the founders of the Crandell Group.
Interest and Other Income (Expense). Interest and other income (expense)
-----------------------------------
increased to $106,000 for the quarter ended September 30, 1997 from $3,000 for
the comparable quarter of the prior year. Interest income earned on the
proceeds from the Company's initial public offering was $152,000 for the
quarter ended September 30, 1997.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
For the nine months ended September 30, 1997, interest and other income
(expense) was $81,000 compared to ($59,000) in the prior year. Net interest
income for the nine months ended September 30, 1997 was $150,000 versus net
interest expense of $52,000 for the comparable 1996 time period. Foreign
exchange losses were $45,000 for the nine months ended September 30, 1997
versus $8,000 for the comparable 1996 time period.
Provision for Income Taxes. Due to the Company's net losses, there was
--------------------------
no provision for federal or state income taxes for the quarter and nine months
ended September 30, 1997 and 1996, respectively. The $24,000 and the $77,000
income tax provision for the quarter and nine months ended September 30, 1997,
respectively, were related to foreign withholding taxes on certain development
fees.
Net income (loss). The Company reported net income for the third quarter
-----------------
ended September 30, 1997 of $142,000 or $0.01 per share compared to a net loss
of $417,000 for the comparable period in the prior year. The net loss for the
nine months ended September 30, 1997 was $1.9 million including non-recurring
charges of $1.7 million related to the acquisition of the Crandell Group.
Excluding non-recurring charges, the net loss for the nine months ended
September 30, 1997 was $208,000 compared with a net loss of $1.2 million for
the nine months ended September 30, 1996.
Liquidity and Capital Resources
The Company has financed its operations to date principally through private
placements of debt and equity securities, proceeds from borrowings under a bank
line of credit, debt associated with the Crandell Acquisition, and most
recently, its initial public offering of common stock declared effective on June
10, 1997. The total amount of equity raised through September 30, 1997 in the
form of Common Stock and Series A through F Convertible Preferred Stock was
$34.5 million. The Series A through F Convertible Preferred Stock converted into
Common Stock upon the closing of the initial public offering. Additionally,
$2.8 million of Series P Redeemable Preferred Stock and accrued dividends that
was outstanding prior to the Company's initial public offering was redeemed
following the closing of the offering at the election of the holder of the
Series P Redeemable Preferred Stock.
At September 30, 1997, the Company had $1.5 million available under its bank
credit facility under which there were no borrowings at September 30, 1997. This
lending facility is collateralized by substantially all of the Company's assets.
The maximum amount available under the line of credit is the lesser of $1.5
million or 80% of the Company's eligible outstanding domestic accounts
receivable. The revolving line of credit terminates on August 23, 1998 and is
subject to renegotiation at that time. The line of credit contains certain
covenants which include the requirements that the Company maintain tangible net
worth (as defined) of $3.0 million, quarterly net income, a quick ratio of at
least 1.0 to 1.0, a maximum debt to net worth ratio (as defined) of 1.5 to 1.0
and certain minimum liquidity and debt service coverage. In addition, the
agreement prohibits the payment of cash dividends. The Company was in compliance
with all such covenants at September 30, 1997. The $250,000 note payable to the
Crandell Group and the equipment term loan were paid in full during the quarter
ended September 30, 1997.
Cash and cash equivalents increased to $10.4 million at September 30, 1997
from $106,000 at December 31, 1996. Operating activities for the nine months
ended September 30, 1997 used cash of $5.0 million. Inventories increased $1.3
million to $3.7 million at September 30, 1997 from $2.3 million at December 31,
1996, due primarily to: (i) an increase in finished goods inventory in
connection with the introduction of the Company's newest product,
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
the JetFax M910 due to softer sales than originally anticipated and (ii)
stocking higher levels of consumables and product upgrades. Accounts receivable
increased $1.9 million to $4.3 million at September 30, 1997 from $2.4 million
at December 31, 1996 principally due to the increase in product sales and higher
receivables related to development contracts. Accounts payable decreased $0.5
million to $1.4 million at September 30, 1997 from $1.9 million at December 31,
1996 related to a $1.0 million payment associated with the acquisition of the
Crandell Group partially offset by higher inventory levels.
Investing activities for the nine months ended September 30, 1997 used cash
of approximately $0.9 million for $0.5 million of property purchases and $0.4
million of other assets. Financing activities for the nine months ended
September 30, 1997 provided cash of $16.2 million from $19.7 million of net
proceeds from the Company's June 1997 initial public offering partially offset
by $0.7 million of debt repayments and the $2.8 million redemption of Series P
Preferred Stock.
The Company currently believes that the net proceeds of its initial public
offering completed in June 1997, together with available borrowings under its
line of credit, and funds from current and anticipated operations, will be
sufficient to meet the Company's working capital and capital expenditure
requirements for at least the next 12 months. If the Company acquires one or
more businesses or products, the Company's capital requirements could increase
substantially. In the event of such an acquisition or should any unanticipated
circumstances arise which significantly increase the Company's capital
requirements, there can be no assurance that necessary additional capital will
be available on terms acceptable to the Company, if at all.
Factors That May Affect Operating Results
- -----------------------------------------
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. In addition to those risk
factors discussed elsewhere in this Report on Form 10-Q, the Company has
identified the following risk factors which could affect the Company's actual
results and cause actual results to differ materially from those in the forward-
looking statements.
The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some,
but not all, of those risks and uncertainties which may have a material adverse
effect on the Company's business, financial condition or results of operations.
This section should be read in conjunction with the unaudited Condensed
Financial Statements and Notes thereto included in Part I - Item 1 of this
Quarterly Report on Form 10-Q and the audited Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1996, contained in the
Company's Registration Statement on Form S-1, as amended (No. 333-23763), which
was declared effective on June 10, 1997.
History of Operating Losses; Accumulated Deficit. The Company had net
------------------------------------------------
income of $142,000 for the quarter ended September 30, 1997 and a net loss of
approximately $1.9 million for the nine months ended September 30, 1997, and net
losses of $0.4 million and $1.2 million for the quarter and nine months ended
September 30, 1996, respectively. The Company's historical losses and certain
preferred stock dividends have resulted in an accumulated deficit of
approximately $15.6 million and $13.7 million as of September 30, 1997 and 1996,
respectively. There can be no assurance that the Company will achieve or sustain
profitability on a quarterly or annual basis in the future.
Potential Fluctuations in Quarterly Results. The Company in the past has
-------------------------------------------
experienced, and in the future may experience, significant fluctuations in
quarterly operating results that have been or may be caused by many factors
including: the timing of introductions of new products or product enhancements
by the Company, its OEMs and their competitors; initiation or termination of
arrangements between the Company and its existing and potential significant OEM
customers or dealers and distributors; the size and timing of and fluctuations
in end user demand for the Company's branded products and OEM products
incorporating the Company's technology; inventories of the Company's branded
products or products incorporating the Company's technology carried by the
Company, its distributors or dealers, its OEMs or the OEMs' distributors that
exceed current or projected end user demand; the
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
phase-out or early termination of the Company's branded products or OEM products
incorporating the Company's technology; the amount and timing of development
agreements, one-time software licensing transactions and recurring licensing
fees; non-performance by the Company, its suppliers or its OEM or other
customers pursuant to their plans and agreements; seasonal trends; competition
and pricing; customer order deferrals and cancellations in anticipation of new
products or product enhancements; software and hardware defects; product delays
or product quality problems; currency fluctuations; and general economic
conditions. The Company expects that its operating results will continue to
fluctuate significantly as a result of these and other factors. In addition, the
Company has often recognized a substantial portion of its revenues in the last
month of a quarter, with such revenues frequently concentrated in the last weeks
or days of a quarter. If an unanticipated order shortfall occurs at the end of
a quarter, the Company's operating results for the quarter could be materially
adversely affected.
Dependence on the MFP Market. The market for MFPs is relatively new and
----------------------------
rapidly evolving. The Company's future success is dependent to a significant
degree upon broad market acceptance of the type of MFPs on which the Company is
focusing its development efforts. This success will be dependent in part on the
ability of the Company and its OEM customers to develop MFPs that provide the
functionality, performance, speed and connectivity demanded by the market at
acceptable price points and to convince end users to broadly adopt MFPs for
office and home office use. There can be no assurance that the market for MFPs
will continue to develop, that the Company and its OEM customers will be
successful in developing MFPs that gain broad market acceptance, that the
Company will be able to offer in a timely manner its embedded system technology,
branded products or desktop software or that the Company's OEM customers will
choose the Company's technology for use in their MFPs. The failure of any of
these events to occur would have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Associated with Change in Focus of the Company's Business. The
---------------------------------------------------------------
Company has historically focused primarily on the development, manufacture and
sale of its branded MFPs and currently derives a substantial portion of its
revenues from the sale of its branded MFPs. The Company expects that its revenue
growth will become more dependent, in part, on increased licensing of the
Company's embedded system technology and desktop software products. However,
there can be no assurance that the Company will realize growth in revenues from
sales and licensing of its embedded system technology or desktop software. If
such growth in revenues does not occur and if revenues from the sale of the
Company's branded MFPs were not to continue at past growth rates, due either to
a change in the Company's deployment of resources or otherwise, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with Increased Focus on MFP Desktop Software Business. In
----------------------------------------------------------------------
the future, the Company expects that its business, financial condition and
results of operations will become more dependent on sales of its MFP desktop
software, particularly JetSuite, which will be sold both separately and bundled
with the Company's branded products and embedded system technology. JetSuite was
released with several OEM products in the third quarter of 1997. There can be no
assurance that errors will not be found in new products, including JetSuite,
after commencement of commercial shipments. Such errors may result in a delay in
market acceptance or a product recall. Because the market for MFP desktop
software products is new and emerging, there can be no assurance that a
significant market, if any, will develop for sales of the Company's MFP desktop
software products, or for sales of upgrades and add-on software products, and
such a failure would likely have a material adverse effect on the Company's MFP
software products business. There can be no assurance that the Company's MFP
desktop software products business will be successful. Any failure by the
Company to develop a successful MFP desktop software products business would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Dealers and Distributors. The Company has derived a
--------------------------------------
substantial portion of its revenues from sales of its branded MFPs through
dealers and distributors. The Company expects that sales of these products
through its dealers and distributors will continue to account for a substantial
portion of its revenues for the foreseeable future. Each of the Company's
dealers and distributors can cease marketing the Company's products with limited
notice and with little or no penalty. There can be no assurance that the
Company's dealers and distributors will continue to offer the Company's products
or that the Company will be able to recruit additional or replacement dealers
and
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
distributors. The loss of one or more of the Company's major dealers and
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's dealers and
distributors also offer competitive products manufactured by third parties.
There can be no assurance that the Company's dealers and distributors will give
priority to the marketing of the Company's products as compared to its
competitors' products. Any reduction or delay in sales of the Company's products
by its dealers and distributors could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on OEMs. The Company has derived a significant portion of its
------------------
revenues from licensing of its embedded system technology and software and from
development services to OEMs. The Company currently has OEM relationships with
Hewlett-Packard Company (''Hewlett-Packard''), Oki Data Corporation (''Oki
Data''), and Samsung Electronics Corporation (''Samsung''). The Company
anticipates that a significant portion of its revenues will be derived from OEMs
in the future and that the Company's revenues will be increasingly dependent
upon, among other things, the ability and willingness of OEMs to timely develop
and promote MFPs that incorporate the Company's technology. The ability and
willingness of these OEMs to do so is based upon a number of factors, such as
the timely development by the Company and the OEMs of new products with
additional functionality, increased speed and enhanced performance at acceptable
prices to end users; development costs of the OEMs; licensing and development
fees of the Company; compatibility with emerging industry standards;
technological advances; intellectual property issues; general industry
competition; and overall economic conditions. Many of these factors are beyond
the control of the Company and its OEMs. Many OEMs, including some of the
Company's OEM customers, are concurrently developing and promoting MFPs that do
not incorporate the Company's technology. In such cases, the OEMs may have
profitability or other incentives to promote internal solutions or competing
products in lieu of products incorporating the Company's technology. No
assurance can be given as to the ability or willingness of the Company's OEMs to
continue developing, marketing and selling products incorporating the Company's
technology. The loss of any of the Company's significant OEMs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with Technological Change. The market for the Company's
------------------------------------------
products and services is characterized by rapidly changing technology, evolving
industry standards and needs, and frequent new product introductions. The
Company currently derives all of its revenues from the sale of its branded MFPs
and related consumables, the licensing of its technology and software, and the
provision of related development services. The Company anticipates that these
sources of revenues will continue to account for substantially all of its
revenues for the foreseeable future. Any failure by the Company or its OEMs to
anticipate or respond adequately to the rapidly changing technology and evolving
industry standards and needs, or any significant delay in development or
introduction of new and enhanced products and services, could result in a loss
of competitiveness or revenues, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Reliance on Limited Product Line. The Company has been primarily engaged in
--------------------------------
the development, manufacture and sale of MFPs and related technology and has
derived a substantial portion of its revenues from sales of its branded MFPs and
consumables. Dependence on a single product line makes the Company particularly
vulnerable to the successful introduction of competitive products. The Company
currently derives a substantial portion of its branded product revenues from
sales of the JetFax M5. The Company recently introduced its next generation MFP,
the JetFax M900 Series product line. The failure of the JetFax M900 Series
product line to gain acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with Product Development and Introduction; Product Delays.
--------------------------------------------------------------------------
The Company's future success is dependent to a significant degree on its ability
to further develop its embedded system technology and software for MFPs in the
time frame required by its OEM and other customers and to develop technology
with the quality, speed and other specifications required by its OEM and other
customers. The Company in the past has experienced delays in product
development, and the Company may experience similar delays in the future. Prior
delays have resulted from numerous factors such as changing OEM product
specifications, delays in receiving necessary components, difficulties in hiring
and retaining necessary personnel, difficulties in reallocating engineering
resources and other
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
resource limitation difficulties with independent contractors, changing market
or competitive product requirements and unanticipated engineering complexity.
The Company has experienced delays in one of its current development projects
and, pursuant to certain provisions of its development agreement, the final
milestone payment thereunder has been delayed. In addition, the Company's
software and hardware have in the past, and may in the future, contain
undetected errors or failures that become evident upon product introduction or
as product production volumes increase. There can be no assurance that errors
will not be found; that the Company will not experience problems or delays in
meeting the delivery schedules for or in the acceptance of products by the
Company's OEMs or other customers; that there will not be problems or delays in
shipments of the Company's branded products or OEMs' products; or that the
Company's new products and technology will meet performance specifications under
all conditions or for all anticipated applications. Given the short product life
cycles in the MFP market, any delay or difficulty associated with new product
development, introductions or enhancements could have a material adverse effect
on the Company's business, financial condition and results of operations.
Effect of Rapid Growth on Existing Resources; Potential Acquisitions. The
--------------------------------------------------------------------
Company has grown rapidly in recent years. A continuing period of rapid growth
could place a significant strain on the Company's management, operations and
other resources. The Company's ability to manage its growth will require it to
continue to invest in its operational, financial and management information
systems, procedures and controls, and to attract, retain, motivate and
effectively manage its employees. There can be no assurance that the Company
will be able to manage its growth effectively and to successfully utilize the
new management information system, and failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company may, from time to time, pursue the acquisition of other
companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect the
Company's operating results, including the diversion of management's attention,
the assimilation of the operations and personnel of the acquired companies, the
amortization of acquired intangible assets and the potential loss of key
employees. No assurance can be given that any acquisition by the Company will
not materially and adversely affect the Company or that any such acquisition
will enhance the Company's business.
Dependence on Outside Suppliers; Dependence on Sole Source Suppliers. The
--------------------------------------------------------------------
Company relies on various suppliers of components for its products. Many of
these components are standard and generally available from multiple sources.
However, there can be no assurance that alternative sources of such components
will be available at acceptable prices or in a timely manner. Therefore, any
interruption in the supply of such components could have a material adverse
effect on the Company's business, financial condition and results of operations.
Many of the components used in the Company's products are purchased from
suppliers located outside the United States. Foreign manufacturing facilities
are subject to risk of changes in governmental policies, imposition of tariffs
and import restrictions and other factors beyond the Company's control. There
can be no assurance that United States or foreign trading policies will not
restrict the availability of components or increase their cost. Certain
components used in the Company's products are available only from one source. If
sole source suppliers were to limit or reduce the sale of such components to the
Company, or if such suppliers were to experience financial difficulties or other
problems which prevented them from supplying the Company with the necessary
components, it could have a material adverse effect on the Company's business,
financial condition and results of operations. Any shortage or interruption in
the supply of any of the components used in the Company's products, or the
inability of the Company to procure these components from alternate sources on
acceptable terms, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Intellectual Property Rights; Risk of Infringement. The
----------------------------------------------------------------
Company's success is heavily dependent upon its proprietary technology. To
protect its proprietary rights, the Company relies on a combination of
copyright, trade secret and trademark laws and nondisclosure and other
contractual restrictions. The Company may be unable to effectively protect its
proprietary rights and, in any event, enforcement of the Company's proprietary
rights may be expensive. The Company's source code also is protected as a trade
secret. However, the Company is subject to the risk of unauthorized use or
misappropriation or reverse engineering of the Company's products and
proprietary information. There can be no assurance that the Company's means of
protecting its proprietary rights will
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
be adequate or that the Company's competitors will not independently develop
similar technology. The Company's technology increasingly may become the subject
of infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company or its OEMs in the future. In the
event of an adverse ruling in any litigation regarding intellectual property,
the Company may be required to pay substantial damages, discontinue the use and
sale of infringing products, expend significant resources to develop non-
infringing technology or obtain licenses to infringing or substituted
technology. The failure of the Company to develop, or license on acceptable
terms, a substitute technology could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Key Personnel. The Company is largely dependent upon the
---------------------------
skills and efforts of its senior management, particularly Edward R. Prince, III
(''Rudy Prince''), its President and Chief Executive Officer, and Lon Radin, its
Vice President of Engineering, and other officers and key employees, some of
whom only recently have joined the Company. The Company maintains key person
life insurance policies on Rudy Prince and Lon Radin. None of the Company's
officers or key employees, other than Michael Crandell, Vice President of
Software, are covered by an employment agreement with the Company. The Company
believes that its future success will depend in large part upon its ability to
attract and retain highly skilled engineering, managerial, sales, marketing and
operations personnel, many of whom are in great demand. Competition for such
personnel, especially engineering, has recently increased significantly. The
loss of key personnel or the inability to hire or retain qualified personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations.
International Activities. Revenues from sales to the Company's customers
------------------------
outside the United States accounted for 17%, and 25% of the Company's total
revenues for the three months ended September 30, 1997 and 1996, respectively.
Revenues from international sales accounted for 18% and 28% of the Company's
total revenues for the nine months ended September 30, 1997 and 1996,
respectively. The Company expects that revenues from customers located outside
the United States may increase in both absolute dollars and as a percentage of
total revenues in the future. The international market for the Company's branded
products and products incorporating the Company's technology and software is
highly competitive, and the Company expects to face substantial competition in
this market from established and emerging companies and technologies developed
internally by its OEM customers. Risks inherent in the Company's international
business activities also include currency fluctuations and restrictions, the
burdens of complying with a wide variety of foreign laws and regulations,
including Postal, Telephone and Telegraph (''PTT'') regulations, longer accounts
receivable cycles, the imposition of government controls, risks of localizing
and internationalizing products to local requirements in foreign countries,
trade restrictions, tariffs and other trade barriers, restrictions on the
repatriation of earnings and potentially adverse tax consequences, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Substantially all of the Company's
international sales are currently denominated in U.S. dollars and, therefore,
increases in the value of the U.S. dollar relative to foreign currencies could
make the Company's products less competitive in foreign markets. Because of the
Company's international activities, it faces certain currency exposure and
translation risks.
Possible Volatility of Stock Price. The trading price of the Common Stock may
----------------------------------
be subject to significant fluctuations in response to variations in quarterly
results of operations, announcements of new products by the Company or its
competitors, developments or disputes with respect to proprietary rights,
general trends in the industry, overall market conditions and other factors. In
addition, the stock market historically has experienced extreme price and volume
fluctuations, which have particularly affected the market price of securities of
many high technology companies and which at times have been unrelated or
disproportionate to the operating performance of such companies. These market
fluctuations may adversely affect the market price of the Common Stock.
16
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
Exhibit
Number Description Page
------- ------------------------------------------------------- ----
<S> <C> <C>
10.1 Amended and Restated Loan and Security Agreement between
the Registrant and Venture Banking Group, a division of
Cupertino National Bank dated September 17, 1997. 19
11.1 Statement regarding calculation of net income (loss) per
share. 42
27.1 Financial Data Schedule. 43
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
--------------------
during the quarter ended October 4, 1997.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JETFAX, INC.
-------------------
(Registrant)
Date: November 6, 1997 By: /S/ ALLEN K. JONES
-------------------
Allen K. Jones
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Accounting and
Financial Officer)
18
<PAGE>
</TABLE>
EXHIBIT 10.1
JETFAX, INC.
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
19
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions
1.2 Accounting Terms
2. LOAN AND TERMS OF PAYMENT
2.1 Advances
2.2 Overadvances
2.3 Interest Rates, Payments, and Calculations
2.4 Crediting Payments
2.5 Fees
2.6 Additional Costs
2.7 Term
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance
3.2 Conditions Precedent to all Advances
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest
4.2 Delivery of Additional Documentation Required
4.3 Right to Inspect
5. REPRESENTATIONS AND WARRANTIES
5.1 Due Organization and Qualification
5.2 Due Authorization; No Conflict :
5.3 No Prior Encumbrances
5.4 Bona Fide Eligible Accounts
5.5 Merchantable Inventory
5.6 Name; Location of Chief Executive Office
5.7 Litigation
5.8 No Material Adverse Change In Financial
Statements
5.9 Solvency
5.10 Regulatory Compliance
5.11 Environmental Condition
5.12 Taxes
5.13 Subsidiaries
5.14 Government Consents
5.15 Full Disclosure
6. AFFIRMATIVE COVENANTS
6.1 Good Standing
6.2 Government Compliance
6.3 Financial Statements, Reports, Certificates
6.4 Inventory; Returns
6.5 Taxes
6.6 Insurance
6.7 Principal Depository
6.8 Quick Ratio
6.9 Debt-Net Worth Ratio
6.10 Tangible Net Worth
20
<PAGE>
6.11 Profitability
6.12 Registration of Intellectual Property Rights
6.13 Further Assurances
7. NEGATIVE COVENANTS
7.1 Dispositions
7.2 Change in Business
7.3 Mergers or Acquisitions
7.4 Indebtedness
7.5 Encumbrances
7.6 Distributions
7.7 Advances to Employees or Shareholders
7.8 Investments
7.9 Transactions with Affiliates
7.10 Subordinated Debt
7.11 Inventory
7.12 Compliance
8. EVENTS OF DEFAULT
8.1 Payment Default
8.2 Covenant Default
8.3 Material Adverse Change
8.4 Attachment
8.5 Insolvency
8.6 Other Agreements
8.7 Subordinated Debt
8.8 Judgments
8.9 Misrepresentations
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies
9.2 Power of Attorney
9.3 Accounts Collection
9.4. Bank Expenses
9.5 Bank's Liability for Collateral
9.6 Remedies Cumulative
9.7 Demand; Protest
10. NOTICES
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
12. GENERAL PROVISIONS
12.1 Successors and Assigns
12.2 Indemnification
12.3 Time of Essence
12.4 Severability of Provisions
12.5 Amendments in Writing, Integration
12.6 Counterparts
12.7 Survival
12.8 Confidentiality
21
<PAGE>
This LOAN AND SECURITY, AGREEMENT ("Agreement") is entered into as of September
17, 1997, by and between JetFax, Inc. ("Borrower") and Venture Banking Group, a
division of Cupertino National Bank ("Bank").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank desires
to extend credit to Borrower. This Agreement sets forth the terms on which Bank
will advance credit to Borrower, and Borrower will repay the amounts owing to
Bank.
AGREEMENT
The parties agree as follows:
I . DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms shall
have the following
definitions:
"Accounts" means all presently existing and hereafter arising accounts, contract
rights, and all other forms of obligations owing to Borrower arising out of the
sale or lease of goods (including, without limitation., the licensing of
software and other technology) or the rendering of services by Borrower, whether
or not earned by performance, and any and all credit insurance, guaranties, and
other security therefor, as well as all merchandise returned to or reclaimed by
Borrower and Borrower's Books relating to any of the foregoing.
"Advance" Or "Advances' means an Advance under the Revolving Facility.
"Affiliate" means, with respect to any Person, any Person that owns or controls
directly or indirectly such Person, any Person that controls or is controlled by
or is under common control with such Person, and each of such Person's senior
executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses (including reasonable
attorneys' fees and expenses) incurred in connection with the preparation,
negotiation, administration, and enforcement of the Loan Documents; and Bank's
reasonable attorneys' fees and expenses incurred in amending, enforcing or
defending the Loan Documents, whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records including: ledgers;
records concerning Borrower's assets or liabilities, the Collateral, business
operations or financial condition; and all computer programs, or tape files, and
the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1 hereof.
"Business Day" means any day that is not a Saturday, Sunday, or other day on
which banks in the State of California are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached hereto.
22
<PAGE>
"Committed Revolving Line" means One Million Five Hundred Thousand
Dollars ($1,500,000).
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided, however, that the term "Contingent
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that such
amount shall not in any event exceed the maximum amount of the obligations under
the guarantee or other support arrangement.
"Current Assets" means, as of any applicable, date,, all amounts that should, in
accordance with GAAP, be included as current assets on the consolidated balance
sheet of Borrower and its, Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all amounts that should,
in accordance with GAAP, be included as current liabilities on the consolidated
balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the
extent not already included therein, all outstanding Advances made under this
Agreement, including all Indebtedness that is payable upon demand or within one
year from the date of determination thereof unless such Indebtedness is
renewable or extendable at the option of Borrower or any Subsidiary to a date
more than one year from the date of determination., but excluding Subordinated
Debt.
"Daily Balance" means the amount of the Obligations owed at the end of a given
day.
"Eligible Domestic Accounts" means those Accounts that arise in the ordinary
course of Borrower's business that comply with all of Borrower's representations
and warranties to Bank set forth in Section 5.4; provided, that standards of
eligibility may be fixed and revised from time to time by Bank in Bank's
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts
shall not include the following:
(a) Accounts that the account debtor has failed to pay within ninety
(90) days
of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose
Accounts the account debtor has failed to pay within ninety (90) days of invoice
date;
(c) Accounts with respect to which the account debtor is an
officer, employee,
or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, retentions, or
other terms by reason of which
the payment by the account debtor may be conditional;
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(e) Accounts with respect to which the account debtor is an Affiliate
of Borrower;
(f) Accounts with respect to which the account debtor does
not have its principal place of business in the United States, except for
Eligible Foreign Accounts;
(g) Accounts with respect to which the account debtor is the United
States or any department, agency, or instrumentality of the United States;
(h) Accounts with respect to which Borrower is liable to the account
debtor for goods sold or services rendered by the account debtor to Borrower,
but only to the extent of any amounts owing to the account debtor against
amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including Subsidiaries
and Affiliates, whose total obligations to Borrower exceed thirty percent (30%)
of all Accounts, to the extent
such obligations exceed the aforementioned percentage, except as approved in
writing by Bank;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which the
account
debtor does not have its principal place of business in the United States and
that are: ( 1 ) supported by one or more letters of credit in favor of Bank as
beneficiary, in an amount and of a tenor, and issued by a financial institution,
acceptable to Bank; or (2) that Bank approves on a case-by-case basis, and that
are not excluded by clauses (a) through (k) under the defined term Eligible
Domestic Accounts.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of 1974, as amended,
and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect from time to
time.
"Indebtedness" means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against any person
or entity under any provision of the United States Bankruptcy Code, as amended,
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Inventory" means all present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of
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every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including stock, partnership
interest or other securities) any Person., or any loan, advance or capital
contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or notes executed
by Borrower, and any other agreement entered into between Borrower and Bank in
connection with this Agreement, all as amended or extended from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the business
operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means August 23, 1998.
"Negotiable Collateral" means all of Borrower's present and future letters of
credit of which it is a beneficiary, notes, drafts, instruments, securities,
documents of title, and chattel paper, and Borrower's Books relating to any of
the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.
"Periodic Payments" means all installments or similar recurring payments that
Borrower may now or hereafter become obligated to pay to Bank pursuant to the
terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in the
Schedule;
(c) Subordinated Debt; and
(d) Indebtedness to trade creditors incurred in the ordinary course of
business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
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(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or held by Borrower or
any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment, or (ii) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) and (c) above, provided that any extension, renewal or replacement
Lien shall be limited to the property encumbered by the existing Lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most recently
published in The Wall Street Journal, as the "prime rate," whether or not such
published rate is the lowest
rate available from Bank.
Quick Assets" means, at any date as of which the amount thereof shall be
determined, the consolidated cash, cash-equivalents, accounts receivable and
investments, with maturities not to exceed 90 days, of Borrower determined in
accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer, the
Chief Financial Officer and the Controller of Borrower.
"Revolving Facility" means the facility under which Borrower may
request Bank to issue Advances, as specified in Section 2.1 hereof.
"Schedule" means the schedule of exceptions attached hereto If any.
I
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i) any general
partnership interest or (ii) more than 50% of the stock of which by the terms
thereof ordinary voting power
26
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to elect the Board of Directors, managers or trustees of the entity shall, at
the time as of which any determination is being made, be owned by Borrower,
either directly or through an Affiliate.
"Tangible Net Worth" means at any date as of which the amount thereof shall be
determined, the consolidated total assets of Borrower and its Subsidiaries
minus, without duplication, (i) the sum of any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the amount thereof shall be
determined, all obligations that should, in accordance with GAAP be classified
as liabilities on the consolidated balance sheet of Borrower, including in any
event all Indebtedness, but specifically excluding Subordinated Debt.
1.2 Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 Advances. Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed the lesser of the Committed Revolving Line or the Borrowing Base. For
purposes of this Agreement, "Borrowing Base" shall mean an amount equal to
eighty percent (80%) of Eligible Domestic Accounts. Subject to the terms and
conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may
be repaid and reborrowed at any time during the term of this Agreement.
Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile
transmission or telephone no later than 3:00 p.m. California time, on the
Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank
will credit the amount of Advances made under this Section 2.1 to Borrower's
deposit account.
The Revolving Facility shall terminate on the Maturity Date, at which time all
Advances under this Section 2.1 and other amounts due under this Agreement shall
be immediately due and payable. The Obligations of Borrower under this
Agreement will be evidenced by this Agreement and by a promissory note in a form
acceptable to Bank.
2.2 Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Section 2.1 of this Agreement
is greater than the lesser of (i) the Committed Revolving Line or (ii) the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of
such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.3(b), any,
Advances shall bear interest, on the average Daily Balance, at a rate equal to
one-half (.50) percentage points above the Prime Rate.
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(b) Default Rate. All Obligations shall bear interest, from
and after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on
the seventieth calendar day of each month during the term hereof. Bank shall,
at its option, charge such interest, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts or against the Committed
Revolving Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under
the Loan Documents shall be computed on the basis of a three hundred sixty (360)
day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to Seven Thousand Five Hundred
Dollars ($7,500), which fee shall be due on the Closing Date and shall be fully
earned and nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's customary fees
and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for
each appraisal of Collateral and financial analysis and examination of Borrower
performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon the date hereof, all Bank Expenses incurred
through the Closing Date, including reasonable attorneys' fees and expenses,
and, after the date hereof, all Bank Expenses, including reasonable attorneys'
fees and expenses, as and when they become due.
2.6 Additional Costs. In case any change in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law), in each case after the date of this, Agreement:
(a) subjects Bank to any tax with respect to payments of principal or
interest or any other amounts payable hereunder by Borrower or otherwise with
respect to the transactions contemplated hereby (except for taxes on the overall
net income of Bank imposed by the United States of America or any political
subdivision thereof);
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(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or
similar requirement against assets held by, or deposits In or for the account
of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance
under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank
or impose any expense upon Bank with respect to any loans, Bank shall notify
Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in
cost, reduction in income or additional expense as and when such cost, reduction
or expense is incurred or determined, upon presentation by Bank of a statement
of the amount and setting forth Bank's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest error.
2.7 Term. This Agreement shall become effective on the Closing Date
and, subject to
Section 12.7, shall continue in full force and effect for a term ending on the
Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Advances under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding termination, Bank's Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The obligation of Bank to
make the initial Advance is subject to the condition precedent that Bank shall
have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) promissory note;
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due specified in Section
2.5
hereof;
(f) accounts receivable audit prior to an Advance under Section
2.1; and
(g) such other documents, and completion of such other matters, as Bank
may reasonably deem, necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of
Bank to make each Advance, including the initial Advance, is further subject to
the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2. 1;
(b) the representations and warranties contained in Section 5 shall be
true and
correct in all material respects on and as of the date of such Payment/Advance
Form and on the effective date of each Advance as though made at and as of each
such date, and no Event of Default shall have occurred and be continuing, or
would result from such Advance. The making of each Advance shall be
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<PAGE>
deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security. Borrower grants and pledges to Bank a
continuing
security interest in all presently existing and hereafter acquired or arising
Collateral in order to secure prompt repayment of any and all Obligations and in
order to secure prompt performance by Borrower of each of its covenants and
duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitutes valid, first priority
security interest in Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower
shall from time to time execute and deliver to Bank, at the request of the Bank,
all Negotiable Collateral, all financing statements and other documents that
Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan Document.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have
the right, upon reasonable prior notice, from time to time during Borrower's
usual business hours, to inspect Borrower's Books and to make copies thereof and
to check, test, and appraise the Collateral in order to verify Borrower's
financial condition or the amount, condition of, or any other matter relating
to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as, follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is
a corporation
duly existing and in good standing under the laws of its state of incorporation
and qualified and licensed to do business in, and is in good standing in, any
state in which the conduct of its business or its ownership of property requires
that it be so qualified.
5.2 Due Authorization: No Conflict. The execution, delivery,
and performance of the
Loan Documents are within Borrower's powers, have been duly authorized, and are
not in conflict with nor constitute a breach of any provision contained in
Borrower's Articles of Incorporation or Bylaws, nor will they constitute an
event of default under any material agreement to which Borrower is a party or by
which Borrower is bound. Borrower is not in default under any agreement to
which it is a party or by which it is bound, which default could have a Material
Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and
indefeasible title to the Collateral, free and clear of Liens, except for
Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The property giving rise to such Eligible Accounts has
been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material respects
of good and marketable quality, free from all material defects.
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5.6 Name; Location of Chief Executive Office. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a Material Adverse Effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.8 No Material Adverse Change in Financial Statements. All
consolidated financial
statements related to Borrower and any Subsidiary that have been delivered by
Borrower to Bank fairly present in all material respects Borrower's consolidated
financial condition as of the date thereof and Borrower's consolidated results
of operations for the period then ended. There has not been a material adverse
change in the consolidated financial condition of Borrower since the date of the
most recent of such financial statements submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts (including
trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary
has met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations G, T and U of the Board of Governors of' the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.1I Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused
to be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any
stock, partnership interest or other equity
securities of any Person, except for Permitted Investments.
5.14 Government Consents. Borrower and each Subsidiary has
obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all
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governmental authorities that are necessary for the continued operation of
Borrower's business as currently conducted.
5.15 Full Disclosure. No representation, warranty or other statement
made by Borrower
in any certificate or written statement furnished to Bank contains any untrue
statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained in such certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and
for so long as Bank may have any commitment to make an Advance hereunder,
Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate
existence and good standing in its jurisdiction of incorporation and maintain
qualification in each jurisdiction in which the failure to so qualify could have
a Material Adverse Effect. Borrower shall maintain, and shall cause each of its
Subsidiaries to maintain, to the extent consistent with prudent management of
Borrower's business, in force all licenses, approvals and agreements, the loss
of which could have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to
meet, the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. Borrower shall comply, and shall cause each
Subsidiary to comply, with all statutes, laws ordinances and government rules
and regulations to which it is subject, noncompliance with which could have a
Material Adverse Effect or a material adverse effect on the Collateral or the
priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as
soon as available, but in any event within thirty (30) days after the end of
each fiscal quarter, a company prepared consolidated balance sheet and income
statement covering Borrower's consolidated operations during such period,
certified by a Responsible Officer; (b) as soon as available, but in any event
within ninety (90) days after the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Bank; (c) within five (5) days upon becoming available, copies of
all statements, reports and notices sent or made available generally by Borrower
to its security holders or to any holders of Subordinated Debt and all reports
on Form 10-K and 10-Q filed with the Securities and Exchange Commission; (d)
promptly upon receipt of notice thereof, a report of any legal actions pending
or threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000)
or more; and (e) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.
Within thirty (30) days after the last day of each month, Borrower shall deliver
to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
accounts receivable and accounts payable when borrowing under Section 2.1.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit D hereto.
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<PAGE>
Bank shall have a right from time to time hereafter to audit Borrower's Accounts
at Borrower's expense, provided that such audits will be conducted no more often
than one annual audit before advancing under Section 2.1 unless an Event of
Default has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances,
if any, as between Borrower and its account debtors shall be on the same basis
and in accordance with the usual customary practices of Borrower, as they exist
at the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand appropriate certificates attesting to the
payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided. that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance
(a) Borrower, at its expense, shall keep the Collateral insured against
loss or damage by fire, theft, explosion, sprinklers, and all other hazards and
risks, and in such amounts, as ordinarily insured against by other owners in
similar businesses conducted in the locations where Borrower's business is
conducted on the date hereof. Borrower shall also maintain insurance relating
to Borrower's ownership and use of the Collateral in amounts and of a type that
are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon
Bank's request, Borrower shall deliver to Bank certified copies of such policies
of insurance and evidence of the payments of all premiums therefor. All
proceeds payable under any such policy shall, at the option of Bank, be payable
to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
fiscal quarter, a ratio of Quick Assets to Current Liabilities of at least 1.0
to 1.0.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the last day
of each fiscal
quarter, a ratio of Total Liabilities less Subordinated Debt to Tangible Net
Worth plus Subordinated Debt of not more than 1.50 to 1.0.
6.10 Tangible Net Worth. Borrower shall maintain, as of the last day
of each fiscal quarter, a Tangible Net Worth of not less than Three Million
Dollars ($3,000,000).
6.11 Profitability. Borrower shall be profitable for each
fiscal quarter.
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<PAGE>
6.12 Registration of Intellectual Property Rights. Borrower shall
register or cause to be
registered (to the extent not already registered) with the United States Patent
and Trademark Office or the United States Copyright Office, as applicable, those
intellectual property rights listed on Exhibits A, B and C to the Collateral
Assignment, Patent Mortgage and Security Agreement delivered to Bank by Borrower
in
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<PAGE>
connection with this Agreement within thirty (30) days of the date of this
Agreement. Borrower shall register or cause to be registered with the United
States Patent and Trademark Office or the United States Copyright Office, as
applicable, those additional intellectual property rights developed or acquired
by Borrower from time to time in connection with any product prior to the sale
or licensing of such product to any third party, including without limitation
revisions or additions to the intellectual property rights listed on such
Exhibits A, B and C. Borrower shall execute and deliver such additional
instruments and documents from time to time as Bank shall reasonably request to
perfect Bank's security interest in such additional intellectual property
rights.
6.13 Further Assurances. At any time and from time to time Borrower shall
execute and deliver
such further instruments and take such further action as may reasonably be
requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder shall be
available and
until payment In full of the outstanding Obligations or for so long as Bank may
have any commitment to make any Advances, Borrower will not do any of the
following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than: (i) Transfers of Inventory in the ordinary
course of business; (ii) Transfers of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries; or
(iii) Transfers of worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of its
Subsidiaries to
engage in any business, other than the businesses currently engaged in by
Borrower and any business substantially similar or related thereto (or
incidental thereto), or suffer a material change in Borrower's ownership.
Borrower will not, without thirty (30) days prior written notification to Bank,
relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to
merge or consolidate, with or into any other business organization, or acquire,
or permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person without Bank's prior written
approval.
7.4 Indebtedness. Create, incur, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist
any Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock.
7.7 Advances to Employees or Shareholders. Advance by way of
payment, credit or other manner, any unearned funds to employees or shareholders
of Borrower.
7.8 Investments. Directly or indirectly acquire or own, or
make any Investment in or to, any Person, or permit any of its Subsidiaries so
to do, other than Permitted Investments.
7.9 Transactions with Affiliates. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
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Borrower's business, upon fair and reasonable terms that are no less favorable
to Borrower than would be obtained in an arm's length transaction with a
nonaffiliated Person.
7.10 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.11 Inventory. Store the Inventory with a bailee, warehouseman, or,
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.12 Compliance. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of nay Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation could have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral, or
permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following event; shall constitute an Event of Default by
Borrower
under this Agreement:
8.1 Payment Default. If Borrower f ails to pay the principal of, or
any interests on, any Advances when due and payable; or falls to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an Invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
under Sections 6.7, 6.8, 6.9, 6.10, 6. 11 or 6.12 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within ten (10)
days after, Borrower receives notice thereof or any officer of Borrower becomes
aware thereof, provided, however, that if the default cannot by its nature be
cured within the ten (10) day period or cannot after diligent attempts by
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the failure
to have cured such default shall not be deemed an Event of' Default (provided
that no Advances will be required to be made during such cure period);
8.3 Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
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8.4 Attachment. If any material portion of Borrower's assets
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
(or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded within ten (10) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien., levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within ten (10)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement
to which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($ 100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any
payment on account of Subordinated
Debt, except to the extent such payment is allowed under, any subordination
agreement entered into with
Bank;
8.8 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank,
(c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
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(d) Without notice to or demand upon Borrower, make such payments and
do such acts as Bank considers necessary or reasonable to protect its security
interest in the Collateral. Borrower agrees to assemble the Collateral if Bank
so requires, and to make the Collateral available to Bank as Bank may designate.
Borrower authorizes Bank to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any
of Borrower's owned premises, Borrower hereby grants Bank a license to enter
into possession of such premises and to occupy the same, without charge, for up
to one hundred twenty (120) days in order to exercise any of Bank's rights or
remedies provided herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all, (i)balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank,
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale, or both, by
way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as Bank determines is
commercially reasonable, and apply any proceeds to the Obligations in whatever
manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(I) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence
and during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors schedules
and assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank, may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder Is terminated.
9.3 Accounts Collection. At any time from the date of this
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
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9.4 Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank
complies with reasonable banking practices, Bank shall not in any way or manner
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
All risk of loss, damage or destruction of the Collateral shall be borne by
Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan
Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by Bank of one right or
remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any party
relating
to this Agreement or any other agreement entered into in connection herewith
shall be in writing and (except for financial statements and other informational
documents which may be sent by first-class mail, postage prepaid) shall be
personally delivered or sent by a recognized overnight delivery service,
certified mail, postage prepaid, return receipt requested, or by telefacsimile
to Borrower or to Bank, as the case may be, at its addresses set forth below:
If to Borrower: JetFax, Inc.
1376 Willow Road
Menlo Park, CA 94025-1430 Attn: Allen ]ones
FAX. (415) 326-6003
If to Bank: Venture Banking Group
Three Palo Alto Square, Suite 150
Palo Alto, California 94306
Attn: Dan Pistone
FAX. (415) 843-69459
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.
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11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with, the
internal laws of
the State of California, without regard to principles of conflicts of law. Each
of Borrower and Bank hereby
submits to the exclusive jurisdiction of the state and Federal courts located in
the County of Santa Clara,
State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY
OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, lntegration. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
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in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with, Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
JETFAX, Inc.
By: /S/ ALLEN K. JONES
Title: Vice President, Finance and Chief Financial Officer
VENTURE BANKING GROUP, a division of
CUPERTINO NATIONAL BANK
By: /S/ Daniel Pistone
Title: Assistant Vice President
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<TABLE>
EXHIBIT 11.1
JETFAX, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996 (3)
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding:
Common stock 10,805 990 5,174 -
Dilutive effect of stock options 1,632 - - -
Common Stock equivalents issued
pursuant to SAB 83 (1) - 1,033 689 -
Convertible Preferred Stock (2) - 6,294 3,620 -
Common Stock issuable upon conversion
of cumulative dividends on Series F
Preferred Stock - 144 88 -
------- ------- ------ ------
Common and common equivalent shares
used in computing pro forma income
(loss) per share 12,437 8,461 9,571 -
======= ======= ====== ======
Net income (loss) applicable to common
stockholders:
Net income (loss) $ 142 $ (417) $(1,889) $ -
Less cumulative dividends on Series
P Redeemable Preferred Stock - (39) ( 68) -
------- ------- ------ ------
Net income (loss) applicable to common
stockholders $ 142 $ (456) $(1,957) $ -
======= ======= ======= ======
Net income (loss) per common and
equivalent share $ 0.01 $ (0.05) $ (0.20) $ -
======= ======= ======= ======
</TABLE>
(1) Pursuant to Securities and Exchange Commission's staff Accounting Bulletin
Number 83, all securities issued during the period from March 20, 1996 through
the date of the initial filing of the Company's registration statement in
connection with its initial public offering (March 21, 1997) are included in
the calculation of common stock equivalents as if outstanding for all periods
prior to the offering, even if anti-dilutive. The common stock equivalents of
options and warrants are computed under the treasury stock method, using an
estimate offering price and applicable exercise prices.
(2) The convertible Preferred Stock converted to common stock upon the closing
of the Company's initial public offering effective June 10, 1997. The net
income (loss) per share is computed as if the conversion had occurred at the
beginning of the period.
(3) As a result of the Company's change in its fiscal year end, the results
for the nine months ended September 30, 1996 include the last quarter of the
prior fiscal year for which per share data is not presented pursuant to rules
of the Securities and Exchange Commission.
42
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,412
<SECURITIES> 0
<RECEIVABLES> 4,296
<ALLOWANCES> 0
<INVENTORY> 3,659
<CURRENT-ASSETS> 18,655
<PP&E> 952
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,607
<CURRENT-LIABILITIES> 2,027
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 18,472
<TOTAL-LIABILITY-AND-EQUITY> 20,607
<SALES> 12,269
<TOTAL-REVENUES> 15,603
<CGS> 8,838
<TOTAL-COSTS> 8,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,812)
<INCOME-TAX> 77
<INCOME-CONTINUING> (1,889)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,889)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.20)
<PAGE>
</TABLE>
