<PAGE>
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 3, 1998.
Or
[ ] 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)
1378 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 7, 1998 there were 11,840,453 shares of common stock, $.01
par value, outstanding.
This Report on Form 10-Q includes 47 pages with the Index to Exhibits
located on page 21.
<PAGE> 1
JETFAX, INC.
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED OCTOBER 3, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30,
1998 and December 31, 1997........................... 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30,
1998 and 1997........................................ 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997........ 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9
PART II. OTHER INFORMATION
Item 5. Other Information...................................... 21
Item 6. Exhibits and Reports on Form 8-K....................... 21
Signature.............................................. 22
</TABLE>
2
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 (1)
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 457 $ 4,200
Short-term investments 4,561 3,024
Accounts receivable, net 4,252 4,820
Inventories 4,746 4,029
Prepaid expenses 271 277
-------- --------
Total current assets 14,287 16,350
Property, net 1,211 1,160
Other assets 1,604 1,346
-------- --------
Total assets $ 17,102 $ 18,856
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,203 $ 1,672
Accrued liabilities 1,771 1,864
-------- --------
Total current liabilities 2,974 3,536
Deferred revenue 25 49
Stockholders' equity:
Convertible preferred stock, $0.01 par value;
5,000,000 shares authorized, shares
outstanding: none in 1998 and 1997 - -
Common stock, $0.01 par value; 35,000,000
shares authorized, shares outstanding:
11,830,382 in 1998 and 11,741,383 in 1997 118 117
Additional paid-in capital 42,847 42,881
Accumulated deficit (28,862) (27,727)
-------- --------
Total stockholders' equity 14,103 15,271
-------- --------
Total liabilities and stockholders' equity $ 17,102 $ 18,856
======== ========
</TABLE>
(1) Derived from the December 31, 1997 audited consolidated
balance sheet included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
See notes to condensed consolidated financial statements.
3
<PAGE> 3
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product $ 5,986 $ 4,049 $ 18,092 $ 12,269
Software and technology license fees 1,366 1,777 3,781 3,237
Development fees 396 469 1,296 1,818
-------- -------- -------- --------
Total revenues 7,748 6,295 23,169 17,324
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 4,186 2,944 12,314 8,740
Cost of software and license
revenues 151 136 600 563
Research and development 1,267 1,241 4,055 3,655
Selling and marketing 1,749 1,566 5,660 4,357
General and administrative 480 698 1,884 2,065
Acquisition and related expenses - - - 1,681
-------- -------- -------- --------
Total costs and expenses 7,833 6,585 24,513 21,061
-------- -------- -------- --------
Loss from operations (85) (290) (1,344) (3,737)
-------- -------- -------- --------
Other income (expense):
Interest income 86 152 248 196
Interest expense - (23) (2) (96)
Other income (expense) 46 (48) 22 (80)
-------- -------- -------- --------
Total other income, net 132 81 268 20
-------- -------- -------- --------
Income (loss) before income taxes 47 (209) (1,076) (3,717)
Provision for income taxes 10 25 59 79
-------- -------- -------- --------
Net income (loss) 37 (234) (1,135) (3,796)
Less cumulative dividends on Series P
Redeemable Preferred Stock - - - (68)
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders $ 37 $ (234) $ (1,135) $ (3,864)
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.00 $ (0.02) $ (0.10) $ (0.40)
======== ======== ======== ========
Diluted $ 0.00 $ (0.02) $ (0.10) $ (0.40)
======== ======== ======== ========
Shares used in computing net
income (loss) per share:
Basic 11,806 11,599 11,767 9,676
======== ======== ======== ========
Diluted 12,838 11,599 11,767 9,676
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 4
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,135) $ (3,796)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 295 220
Warrant compensation expense - 625
Changes in assets and liabilities:
Trade receivables 568 (1,665)
Inventories (717) (1,254)
Prepaid expenses 6 (220)
Accounts payable (469) (402)
Deferred revenue (24) 25
Accrued liabilities (17) 152
-------- --------
Net cash used for operating activities (1,493) (6,315)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments (1,537) -
Purchase of property (346) (512)
Increase in other assets (258) (321)
-------- --------
Net cash used for investing activities (2,141) (833)
-------- --------
Cash flows from financing activities:
Proceeds from sale of Common Stock 3 19,716
Repurchase of Common Stock (112) -
Repayment of notes payable - (2)
Line of credit borrowings, net - 500
Repayment of equipment term note borrowings - (198)
Redemption of Preferred Stock - Series P, net - (2,794)
-------- --------
Net cash provided by (used for) financing
activities (109) 17,222
-------- --------
Increase (decrease) in cash and cash equivalents (3,743) 10,074
Cash and cash equivalents, beginning of period 4,200 369
-------- --------
Cash and cash equivalents, end of period $ 457 $ 10,443
======== ========
Supplemental cash flow information:
Interest paid $ 2 $ 120
======== ========
Taxes paid - foreign withholding $ - $ 77
======== ========
Supplemental non-cash investing and financial
information:
Conversion of accrued ESPP for purchase of Common Stock $ 76 -
======== ========
Cumulative dividends on Series F Convertible
and Series P Redeemable Preferred Stock $ - $ 304
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 5
JETFAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Interim Financial Information
The accompanying condensed consolidated financial statements of JetFax,
Inc. and its wholly-owned subsidiaries ("JetFax" or the "Company") as of
September 30, 1998 and for the three and nine months ended September 30,
1998 and 1997 are unaudited. In the opinion of management, the condensed
consolidated 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 Annual
Report on Form 10-K for the year ended December 31, 1997.
Fiscal Period End
The Company uses a 52-53 week fiscal year ending on the first Saturday
on or after December 31. For presentation purposes, the Company refers
herein to the 13-week and 39-week periods ended October 4, 1998 and October
5, 1997 as the three and nine months ended September 30, 1998 and 1997,
respectively.
Per Share Information
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average common shares outstanding for the period
while diluted earnings (loss) per share also includes the dilutive impact of
stock options and warrants. The Company completed its initial public
offering of its common stock in June 1997. Basic and diluted per share
amounts presented for the period prior to the IPO represent the pro forma
computation including the common equivalent shares from convertible
preferred stock which converted in connection with the IPO. The dilutive
effect of options was not included in the calculation of diluted loss per
share for the nine months ended September 30, 1998 and the three and nine
months ended September 30, 1997 because to do so would have had an anti-
dilutive effect as the Company had net loss for these periods.
<TABLE>
<CAPTION>
Three Months Nine months
Ended September 30, Ended September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 37 $ (234) $ (1,135) $ (3,864)
======== ======== ======== ========
SHARES USED IN COMPUTATION
Weighted average common shares
outstanding used in computation of
basic earnings (loss) per share 11,806 11,599 11,767 9,676
Dilutive effect of stock options
and warrants 1,032 - - -
-------- -------- -------- --------
Shares used in computation of
diluted net income (loss) per share 12,838 11,599 11,767 9,676
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.02) $ (0.10) $ (0.40)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.02) $ (0.10) $ (0.40)
======== ======== ======== ========
</TABLE>
6
<PAGE> 6
JETFAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase 673,636 shares of common stock at prices ranging
from $3.88 to $8.00 were outstanding as of September 30, 1998, but not
included in the computation of diluted earnings per share because the
options' prices were greater than the average market price of the common
shares as of such date and, therefore, would be antidilutive under the
treasury stock method.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Materials and supplies $ 1,973 $ 1,776
Work-in-process 432 143
Finished goods 2,341 2,110
-------- --------
Total $ 4,746 $ 4,029
======== ========
</TABLE>
3. Accrued Liabilities
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Compensation and related benefits $ 820 $ 509
Royalties 216 215
Acquisition related accruals 25 375
Product warranty 72 94
Other 638 671
-------- --------
Total $ 1,771 $ 1,864
======== ========
</TABLE>
4. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from non-owner
sources. For the three and nine months ended September 30, 1998 and 1997,
there were no differences between the Company's comprehensive income and net
income.
5. Effect Of Changes In Accounting Principles
In June 1997, the Financial Accounting Standards Board issued SFAS 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
7
<PAGE> 7
JETFAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of this statement will not impact the Company's consolidated financial
position, results of operations or cash flows. The Company will adopt this
statement in its financial statements for the year ending December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair value,
and provides for hedging accounting when certain conditions are met. This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. On a forward-looking basis, although the Company has
not fully assessed the implications of this new statement, the Company does
not believe adoption of this statement will have a material impact on the
Company's financial position or results of operations.
8
<PAGE> 8
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. These forward-
looking statements are made in reliance upon the safe harbor provision of
The Private Securities Litigation Reform Act of 1995. 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.
The Company uses a 52-53 week reporting year ending on the first
Saturday on or following December 31. The 13-week periods from July 5, 1998
to October 3, 1998 and from July 6, 1997 to October 4, 1997 are referred to
herein as the three months ended September 30, 1998 and September 30, 1997,
respectively. The 39-week periods from January 4, 1998 to October 3, 1998
and from January 5, 1997 to October 4, 1997 are referred to herein as the
nine months ended September 30, 1998 and September 30, 1997, respectively.
The Company's revenues are derived from three sources: (i) product
revenues consisting of sales of JetFax branded MFPs, consumables and
upgrades; (ii) software and technology license fees related to both its
embedded system technology for MFPs and its desktop software; and (iii)
development fees for the customization and integration of the Company's
embedded system technology and desktop software in OEM products.
Historically, product revenues have accounted for the majority of the
Company's total revenues. For the three months ended September 30, 1998,
product revenues, software and technology fees, and development fees as a
percentage of total revenues, were 77%, 18%, and 5%, respectively, as
compared to 64%, 28%, and 8% for the comparable period in the prior year.
For the nine months ended September 30, 1998, product revenues, software and
technology fees, and development fees as a percentage of total revenues,
were 78%, 16%, and 6%, respectively, as compared to 71%, 19%, and 10% 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,
expansion, reduction or termination of arrangements between the Company and
significant OEM customers or dealers and distributors; 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
discussed under the heading "Factors That May Affect Operating Results".
Results of Operations
The following table sets forth certain items in the Company's statements
of operations for the periods indicated (in thousands).
9
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product $ 5,986 $ 4,049 $ 18,092 $ 12,269
Software and technology license
fees 1,366 1,777 3,781 3,237
Development fees 396 469 1,296 1,818
-------- -------- -------- --------
Total revenues 7,748 6,295 23,169 17,324
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 4,186 2,944 12,314 8,740
Cost of software and license
revenues 151 136 600 563
Research and development 1,267 1,241 4,055 3,655
Selling and marketing 1,749 1,566 5,660 4,357
General and administrative 480 698 1,884 2,065
Acquisition and related expenses - - - 1,681
-------- -------- -------- --------
Total costs and expenses 7,833 6,585 24,513 21,061
-------- -------- -------- --------
Loss from operations (85) (290) (1,344) (3,737)
Other income, net 132 81 268 20
-------- -------- -------- --------
Income (loss) before income taxes 47 (209) (1,076) (3,717)
Provision for income taxes 10 25 59 79
-------- -------- -------- --------
Net income (loss) $ 37 $ (234) $ (1,135) $ (3,796)
======== ======== ======== ========
</TABLE>
The following table sets forth, as a percentage of total revenues,
certain items in the Company's statements of operations for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product 77.3% 64.3% 78.1% 70.8%
Software and technology license
fees 17.6 28.2 16.3 18.7
Development fees 5.1 7.5 5.6 10.5
-------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 54.0 46.8 53.2 50.5
Cost of software and license
revenues 1.9 2.1 2.6 3.2
Research and development 16.4 19.7 17.5 21.1
Selling and marketing 22.6 24.9 24.4 25.2
General and administrative 6.2 11.1 8.1 11.9
Acquisition and related expenses - - - 9.7
-------- -------- -------- --------
Total costs and expenses 101.1 104.6 105.8 121.6
-------- -------- -------- --------
Loss from operations (1.1) (4.6) (5.8) (21.6)
Other income, net 1.7 1.3 1.2 0.1
-------- -------- -------- --------
Income (loss) before income taxes 0.6 (3.3) (4.6) (21.5)
Provision for income taxes 0.1 0.4 0.3 0.4
-------- -------- -------- --------
Net income (loss) 0.5% (3.7)% (4.9)% (21.9)%
======== ======== ======== ========
</TABLE>
10
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Three and Nine Months Ended September 30, 1998 Compared to Three and Nine
months ended September 30, 1997
Revenues. Total revenues increased to $7.7 million for the three
months ended September 30, 1998, a 23% increase from $6.3 million of revenue
in the three months ended September 30, 1997. For the nine months ended
September 30, 1998 total revenues of $23.2 million increased 34% from the
level achieved in the same period in 1997.
Product revenues advanced by 48% for the three months ended September
30, 1998 to $6.0 million from $4.0 million in the same three months of the
prior year. Product revenue dropped 2% in the three months ended September
30, 1998 from the $6.1 million achieved in the preceding three months, due
to seasonally slower market conditions and inventory level adjustments at
one of the Company's marketing channel partners. For the first nine months
of 1998, product revenues of $18.1 million rose 47% from the $12.3 million
for the comparable year ago period. Unit shipments of MFP products
increased almost 60% from year ago levels. MFP revenue increased a lesser
50% during the three months ended September 30, 1998 from the same period in
the prior year due to erosion in average selling price. Consumable revenue
increased 74% in the third quarter versus the year ago three months, while
upgrade revenue decreased by four percent for the same period.
Development fees declined 16% to $396,000 for the three months ended
September 30, 1998 from $469,000 in the same three months of the prior year.
For the nine months, development fees of $1.3 million dropped 29% from the
$1.8 million for the comparable year ago period. Major development
milestones on the original Hewlett-Packard contract were completed during
1997, leading to lower development revenue during the first part of 1998 as
the revenue stream converted to per unit royalties.
Software and technology licensing fees decreased 23% to $1.4 million
from $1.8 million for the three months ended September 30, 1998 and 1997,
respectively. For the nine months ended September 30, 1998, software and
technology licensing fees of $3.8 million rose 17% from the $3.2 million for
the comparable year ago period. The three months ended September 30, 1997
had no royalties from Hewlett-Packard, while the three months ended
September 30, 1998 generated per unit royalties due to the inclusion of: 1)
the Company's PaperMaster software with the H-P SureStore CD-Writer, which
began shipping in February 1998 and 2) the MFP controller design and
JetSuite software with the H-P LaserJet 3100, which began shipping in March
1998. The continued withdrawal from retail distribution of PaperMaster
software partially offset these increases in per unit royalties, as revenue
from DocuMagix products declined over $200,000 in the three months ended
September 30, 1998 from the same period a year ago.
International revenues increased to 21% of total revenues for the three
months ended September 30, 1998 from 18% for the comparable period in 1997,
as a result of higher European shipments. Two customers, Hewlett-Packard
and IKON Office Solutions accounted for $1.3 million (17%) and $1.1 million
(14%), respectively, of total revenues for the three months, compared with
$878,000 (14%) and $775,000 (12%), respectively, for the same year ago
period.
Cost of Product Revenues. Cost of product revenues increased 42% to
$4.2 million for the three months ended September 30, 1998 from $2.9 million
for the same three months in the prior year and increased 41% to $12.3
million from $8.7 million for the nine months ended September 30, 1998 and
1997, respectively. Given the higher revenue in the current year, product
gross margins expanded to 30.1% from 27.3% and to 31.9% from 28.8% for the
three and nine months ended September 30, 1998 and 1997, respectively. The
reduced cost of the Series M900 MFPs relative to the preceding M5 product
line has more than offset the 10-15% average selling price erosion over the
past year.
The Company purchases print engines for its new Series M900 product line
in Yen from Oki Data Corporation. In order to reduce the potential
volatility related to the ongoing Yen liability, the Company entered into a
Yen hedge in August 1997. Given the considerable expense associated with
maintaining the Yen hedge, coupled with the recent strengthening of the Yen
in relation to the dollar, the Company decided to sell its Yen hedge,
generating a profit of $44,000 which was included as part of cost of goods
sold.
Cost of Software and License Revenues. Cost of software and license
revenues of $151,000 in the 1998 third quarter rose 11% from $136,000 for
the same period in 1997, while rising seven percent to $600,000 from
$563,000 for the nine months ended September 30, 1998 and 1997,
respectively. The increase in per unit royalty revenues related to the
Company's PaperMaster software with the H-P SureStore CD-Writer, generated a
corresponding increase in per unit royalties payable for certain technology
licensed from others for the three months ended September 30, 1998.
11
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Research and Development. Research and development expenses increased
2% to $1.3 million for the three months ended September 30, 1998 from $1.2
million for the same three months in 1997 and increased 11% to $4.1 million
from $3.7 million for the nine months ended September 30, 1998 and 1997,
respectively. Research and development expenses as a percentage of revenues
decreased to 16% for the third quarter of 1998 from 20% for the
corresponding year ago quarter. Average engineering headcount was
essentially flat for the three months ended September 30, 1998 and 1997,
respectively.
Selling and Marketing. Selling and marketing expenses increased 12% to
$1.7 million for the three months ended September 30, 1998 from $1.6 million
for the comparable three months in the prior year and increased 30% to $5.7
million from $4.4 million for the nine months ended September 30, 1998 and
1997, respectively. As a percentage of revenues, selling and marketing
expenses dropped slightly to 23% for the three months ended September 30,
1998 versus 25% for the comparable period of 1997. Headcount increased 40%
for the three months ended September 30, 1998 from the prior year period.
The higher personnel costs and higher dealer incentives related to the
increased product shipments were partially offset by a reduction in
DocuMagix expenses related to the discontinuance of selling software in the
retail channel.
General and Administrative. General and administrative expenses fell
31% to $480,000 in the three months ended September 30, 1998 from $698,000
in the comparable 1997 period, and decreased 9% to $1.9 million versus $2.1
million for the nine months ended September 30, 1998 and 1997, respectively.
Headcount decreased approximately 12% from the year ago period. Specific
general and administrative expenses related to DocuMagix operations for the
current three months were essentially eliminated compared to the year ago
quarter, partially offset by increased public company expense for items such
as SEC reporting and director and officer liability insurance. As a
percentage of revenues, general and administrative expenses declined to 6%
for the third quarter of 1998 from 11% for the same period in 1997.
Acquisition Charges and Related Expense. Acquisition charges emanated
from the purchase of substantially all the assets of the Crandell Group,
Inc. in July 1996 and the purchase of DocuMagix, Inc. through a pooling of
interests transaction which closed in December 1997. There were no
acquisition related charges in the three months ended September 30, 1998 and
1997. Charges of $1.7 million for the nine months ended September 30, 1997
were due to the Crandell Group acquisition and consisted of a $1.0 million
payment to the Crandell Group in lieu of future royalty payments, $625,000
for a variable equity award classified as compensation and $56,000
associated with royalties related to the continuing employment of the
founders.
Interest and Other Income (Expense). Interest and other income
(expense) was income of $132,000 for the three months ended September 30,
1998 compared with income of $81,000 for the comparable three months of the
prior year and was income of $268,000 compared with income of $20,000 for
the nine months ended September 30, 1998 and 1997, respectively. Net
interest income, foreign exchange gain, and other income were $86,000,
$8,000, and $38,000, respectively, for the three months ended September 30,
1998. Net interest income, foreign exchange loss, and other expense were
$129,000, $36,000, and $12,000 respectively, for the three months ended
September 30, 1997.
Provision for Income Taxes. Due to the Company's cumulative net
losses, there was no provision for federal or state income taxes for the
three months ended September 30, 1998 and 1997, respectively. The $10,000
and $25,000 income tax provisions for the third quarters of 1998 and 1997,
respectively, were related to state franchise taxes and foreign withholding
taxes on certain development fees, as were the $59,000 and $79,000 for the
first nine months of 1998 and 1997.
Net Income (Loss). The Company reported net income for the three
months ended September 30, 1998 of $37,000 or $0.00 per fully diluted share
compared to a net loss of $234,000 or $0.02 per share for the comparable
period in the prior year. The net loss for the nine months ended September
30, 1998 and 1997 was $1.1 million compared to $3.8 million, respectively.
The improvement from loss to income for the three months was due to a
combination of; 1) revenue increase of 23%, 2) product gross margin
improvement of approximately three percentage points, and 3) operating
expense reduction of 11 percentage points in relation to revenue.
12
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 sales of common stock. The total amount of equity raised through
September 30, 1998 was $43 million through a series of private financing
rounds at both JetFax and DocuMagix, and sales of common stock.
At September 30, 1998, the Company had $1.5 million available under its
bank credit facility under which there were no borrowings at September 30,
1998. 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 was renegotiated
on September 18, 1998, and terminates on August 23, 1999. The line of
credit contains certain covenants which include the requirements that the
Company maintain tangible net worth (as defined) of $5.0 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, 1998.
The Company's working capital decreased by $1.5 million to $11.3 million
as of September 30, 1998 from $12.8 million as of December 31, 1997. Cash,
cash equivalents and short-term investments decreased to $5.0 million at
September 30, 1998 from $7.2 million at December 31, 1997. Inventories of
$4.7 million at September 30, 1998 increased from $4.0 million at December
31, 1997. Collection of development fees and royalties caused a reduction
of accounts receivable to $4.3 million at September 30, 1998 from $4.8
million at December 31, 1997. Accounts payable declined to $1.2 million at
September 30, 1998 from $1.7 million at December 31, 1997, primarily
resulting from a reduction in DocuMagix payables.
Investing activities for the nine months ended September 30, 1998 used
$2.1 million of cash: $1.5 million for the purchase of short-term
investments, $346,000 for property purchases, and $258,000 for investment in
other assets due principally to a $400,000 minority interest investment in a
privately-held company.
The Company currently believes that its cash and equivalents, 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 the next twelve 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.
13
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Factors That May Affect Operating Results
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 Consolidated Financial Statements and Notes thereto
included in Part I - Item 1 of this Quarterly Report on Form 10-Q and the
audited Consolidated Financial Statements and Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for
the year ended December 31, 1997, contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
History of Operating Losses; Accumulated Deficit. The Company has
experienced annual net losses since inception. The Company's historical
losses and certain preferred stock dividends have resulted in an accumulated
deficit of approximately $28.9 million as of September 30, 1998. There can
be no assurance that the Company will achieve 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,
expansion, reduction 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 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; industry and technology developments;
changes in the Company's operating expenses; 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. A substantial portion of the Company's operating expenses is
related to personnel, development of new products, marketing programs and
facilities. The level of spending for such expenses cannot be adjusted
quickly and is based, in significant part, on the Company's expectations of
future revenues and anticipated OEM commitments. If such commitments do not
result in revenues or operating expenses are significantly higher, the
Company's business, financial condition and results of operations will be
adversely affected, which could have a material adverse effect on the price
of the Company's Common Stock.
Furthermore, 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. The Company's branded
products are primarily sold through dealers, and such dealers often place
orders for products at or near the end of a quarter. As a result, because
one or more key orders that are scheduled to be booked and shipped at the
end of a quarter may be delayed until the beginning of the next quarter or
cancelled, revenues for future quarters are not predictable with any
significant degree of accuracy. For these and other reasons, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indicators of
future performance. It is likely that in future quarters, the Company's
operating results, from time to time, will be below the expectations of
public market analysts and investors, which could have a material adverse
effect on the price of the Company's Common Stock.
The accuracy of quarterly license revenues from OEMs reported by the
Company has been, and the Company believes will continue to be, dependent on
the timing and accuracy of product sales reports received from the Company's
OEMs. These reports are provided only on a quarterly basis (which may not
coincide with the Company's quarter) and are subject to delay and potential
revision by the Company's OEMs. Therefore, the Company is required to
estimate all of the recurring license revenues from OEMs for each quarter.
As a result, the Company will record an estimate of such revenues prior to
public announcement of the Company's quarterly results. In the event the
product sales reports received
14
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
from the Company's OEMs are delayed or subsequently revised, the Company may
be required to restate its recognized revenues or adjust revenues for
subsequent periods, which could have a material adverse effect on the
Company's business, financial condition and results of operations and the
price of the Company's Common Stock.
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 be 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 PC Software Business. The
Company expects that its business, financial condition and results of
operations will be more dependent on sales of its PC software for JetSuite
MFP desktop and PaperMaster personal document handling, which will be sold
both separately and bundled with the Company's branded products and embedded
system technology. The Company's on-going ability to develop its MFP desktop
software products business will depend upon several factors, including, but
not limited to, the commercial acceptance of the Company's MFP desktop
software products, upgrades and add-on software products, and the ability of
the Company's personnel and distribution channels to sell and support MFP
desktop software products. 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
desktop software products business. There can be no assurance that the
Company's PC software products business will be successful. Any failure by
the Company to develop a successful PC 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. The Company
currently maintains distribution relationships with dealers associated with
IKON Office Solutions (formerly Alco Standard), a national group of office
equipment dealers (''IKON''). The Company has also derived substantial
sales to A. Messerli AG (''Messerli''), one of the Company's office
equipment dealers located in Switzerland. 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 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.
15
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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. For example, the Company no longer
receives royalties from the Xerox WorkCenter 250 MFP, which incorporated the
Company's embedded system technology, as Xerox has ceased production of that
model due to the product reaching the end of its life cycle and pricing
pressures from competitors' products. 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.
The market expects the Company and its OEMs to develop and release, in a
regular and timely manner, new MFPs with better performance and improved
features at competitive price points. As the complexity of product
development increases and the expected time-to-market continues to decrease,
the risk and difficulty in meeting such schedules increase as well as the
costs to the Company and its OEMs. In addition, the Company, its OEMs and
their competitors, from time to time, may announce new products,
capabilities or technologies that may replace or shorten the life cycles of
the Company's branded products and software and the OEM products
incorporating the Company's technology. The Company's success will depend
on, among other things, market acceptance of the Company's branded products,
software and embedded system technology and the demand for MFPs by the
Company's OEM customers; the ability of the Company and its OEM customers to
respond to industry changes and market demands in a timely manner;
achievement of new design wins by the Company in the Company's development
of its branded products as well as the OEMs' development of associated new
MFPs; the ability of the Company and its OEM customers to reduce production
costs; and the regular and continued introduction of new and enhanced
technology, services and products by the Company and its OEMs on a timely
and cost-effective basis. There can be no assurance that the products and
technology of competitors of the Company or its OEMs will not render the
Company's branded products, technology, software or its OEMs' products
noncompetitive or obsolete. 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 Series M900. Sales of the
Series M900 began shipping commercially in the third quarter of 1997. A
reduction in demand for the Series M900, or the Company's failure to timely
introduce its next MFP, would have a material adverse effect on the
Company's business, financial condition and results of operations.
16
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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
resource limitation difficulties with independent contractors, changing
market or competitive product requirements and unanticipated engineering
complexity. The Company experienced delays in one of its development
projects in the past which resulted in delays in receiving payment. 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.
Highly Competitive Industry. The market for MFPs and related
technology and software is highly competitive and characterized by
continuous pressure to enhance performance, to introduce new features and to
accelerate the release of new products. The Company's branded products
compete primarily with the dominant vendors in the fax market, all of whom
have substantially greater resources than the Company and include, among
others, Canon Inc., Panasonic, a division of Matsushita Electrical
Industrial Co., Ltd., Pitney Bowes Inc., Ricoh Co. Ltd., Sharp Electronics
Corporation and Xerox. The Company also competes on the basis of vendor name
and recognition, technology and software expertise, product functionality,
development time and price.
The Company's technology, development services and software primarily
compete with solutions developed internally by OEMs. Virtually all of the
Company's OEMs have significant investments in their existing solutions and
have the substantial resources necessary to enhance existing products and to
develop future products. These OEMs have or may develop competing
multifunction technologies and software which may be implemented into their
products, thereby replacing the Company's proposed or current technologies,
eliminating a need for the Company's services and products to these OEMs.
The Company also competes with technologies, software and development
services provided in the MFP market by other systems and software suppliers
to OEMs. With respect to MFP embedded system technologies, the Company
competes with, among others, Peerless Systems Corporation, Personal Computer
Products, Inc. and Xionics Document Technologies, Inc. With respect to
desktop software, the Company competes with, among others, Caere
Corporation, Simplify Development Corporation, Smith Micro Software, Inc.,
Visioneer Inc., Wordcraft International and Xerox.
As the MFP market continues to develop, the Company expects that
competition and pricing pressures will increase from OEMs, existing
competitors and other companies that may enter the Company's existing or
future markets with similar or substitute products or technologies. Software
solutions may also be introduced by competitors that are less costly or
provide better performance or functionality. The Company anticipates
increasing competition for its MFPs, technologies and software under
development. Most of the Company's existing competitors, many of its
potential competitors and all of the Company's OEMs have substantially
greater financial, technical, marketing and sales resources than the
Company. In the event that price competition increases, competitive
pressures could cause the Company to reduce the price of its branded
products, to reduce the amount of royalties received on new licenses and to
reduce the fees for its development services in order to maintain existing
business and generate additional product sales and license and development
revenues, which could reduce profit margins and result in losses and a
decrease in market share. No assurances can be given as to the ability of
the Company to compete favorably with the internal development capabilities
of its current and prospective OEM customers or with other third-party
vendors, and the inability to do so would have a material adverse effect on
the Company's business, financial condition and results of operations.
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 current 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. JetFax has no present commitments nor is it engaged
in any discussions or negotiations with respect to possible acquisitions. 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. The
Company generally buys components under purchase orders and does not have
long-term agreements with its suppliers. Although alternate suppliers may be
readily available for some of these components, for other components it
could take an undetermined amount of time to qualify a replacement supplier
and order and receive replacement components. The Company does not always
maintain sufficient inventory to allow it to fill customer orders without
interruption during the time that would be required to obtain an adequate
supply of single sourced components. Although the Company believes it could
develop other sources for single source components, no alternative source
currently exists and the process could take several months or longer.
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. Any significant increase in component prices or
decrease in component availability could have a material adverse effect on
the Company's business, financial condition and results of operations.
Certain components used in the Company's products are available only
from one source. The Company is dependent on Oki America, Inc. (''Oki
America''), as the supplier of major components, including the printer
engine, of the Series M900. Oki America is also a competitor of the Company.
The Company is also dependent on American Microsystems, Inc. (''AMI'') to
provide unique application specific integrated circuits (''ASICs'')
incorporating the Company's imaging and logic circuitry, Motorola, Inc.
(''Motorola'') to provide microprocessors, Pixel Magic, Inc., a subsidiary
of Oak Technology, Inc. (''Pixel''), to provide a specialized imaging
processor and Rockwell Semiconductor Systems (''Rockwell'') to provide modem
chips. If Oki America, AMI, Motorola, Pixel or Rockwell 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. These sole source providers are subject to quality
and performance issues, materials shortages, excess demand, reduction in
capacity and/or other factors that may disrupt the flow of goods to the
Company or its customers and thereby adversely affect the Company's business
and customer relationships. 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
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<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
copyright, trade secret and trademark laws and nondisclosure and other
contractual restrictions. The Company has no patents or patent applications
pending. As part of its confidentiality procedures, the Company generally
enters into nondisclosure agreements with its employees, consultants, OEMs
and strategic partners and limits access to and distribution of its designs,
software and other proprietary information. Despite these efforts, 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 from time to time licenses portions of its source code and designs
to OEMs and also places such source code and designs in escrow to be
released to OEMs in certain circumstances, which subjects the Company to the
risk of unauthorized use or misappropriation despite the contractual terms
restricting disclosure. In addition, it may be possible for unauthorized
third parties to copy the Company's products or to reverse engineer or
obtain and use the Company's proprietary information. Further, the laws of
some foreign countries do not protect the Company's proprietary rights to
the same extent as do the laws of the United States. There can be no
assurance that the Company's means of protecting its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar technology.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on the
Company's technology increasingly may become the subject of infringement
claims. The Company has in the past received communications from third
parties asserting that the Company's trademarks or products infringe the
proprietary rights of third parties or seeking indemnification against such
infringement. The Company is generally required to agree to indemnify its
OEMs from third party claims asserting such infringement. There can be no
assurance that third parties will not assert infringement claims against the
Company or its OEMs in the future. Any such claims, regardless of merit,
could be time consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company, or at all, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company may initiate claims or litigation
against third parties for infringement of the Company's proprietary rights
or to establish the validity of the Company's proprietary rights. Litigation
to determine the validity of any claims, whether or not such litigation is
determined in favor of the Company, could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel from daily operations. In addition, the Company may lack
sufficient resources to initiate a meritorious claim. 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 affect 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 account for a substantial portion of the
Company's total revenues. 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
19
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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. For
example, late in 1997 the Company established a subsidiary in Germany which
will increase the Company's exposure to foreign exchange risk, and the
Company purchases certain key components pursuant to purchase contracts
denominated in foreign currency.
Dependence on Single Manufacturing Facility; Risks Related to Potential
Disruption. The Company's manufacturing operations are located in its
facility in Northern California. In addition, a number of the suppliers of
components for the Company's products and providers of outsourced assembly,
upon which the Company relies, are located in Northern California. Since the
Company does not currently operate multiple facilities in different
geographic areas, or have alternative sources for many of its components or
outsourced assembly, a disruption of the Company's manufacturing operations,
or the operations of its suppliers, resulting from sustained process
abnormalities, human error, government intervention or natural disasters
such as earthquakes, fires or floods could cause the Company to cease or
limit its manufacturing operations and consequently have a material adverse
effect on the Company's business, financial condition and results of
operations.
No Present Intention to Pay Dividends; Restriction on Payment of
Dividends. The Company has never declared or paid cash dividends on its
Common Stock and intends to retain all available funds for use in the
operation and expansion of its business. The Company therefore does not
anticipate that any cash dividends will be declared or paid in the
foreseeable future. In addition, the Company's credit facility prohibits the
payment of cash dividends without the consent of the lender.
Readiness for Year 2000. Readiness for year 2000 refers to the
issue surrounding computer programs which use two digits rather than four to
define a given year. These programs might read a date using "00" as the
year 1900 rather than the year 2000 and which therefore could cause a system
failure or miscalculation. The Company has and will continue to make certain
investments in its software systems and applications to ensure the Company's
information systems are Year 2000 compliant. The financial impact to the
Company of the Company's Year 2000 compliance effort has not been and is not
anticipated to be material to its financial position or results of
operations in any given year. For example, during 1997 and 1998, the
Company purchased and implemented new manufacturing and accounting
information systems with a total capitalized cost of $338,000. The Company
believes that its current products are Year 2000 compliant. Certain of the
Company's older products, which may not be Year 2000 compliant are no longer
under warranty and the Company believes it has no obligation related to
these products.
The Company has recently implemented new information systems and
accordingly does not anticipate any internal Year 2000 issues from those
information systems, databases or programs. However, the Company could be
adversely impacted by Year 2000 issues faced by major distributors,
suppliers, customers and financial service organizations with which the
Company interacts. The Company expects to complete its assessment of the
potential impact of these ancillary issues by March 1, 1999. There can be
no assurances that the Company will be able to detect all potential failures
of the Company's and/or third parties' computer systems. A significant
failure of the Company's or a third party's computer system could have a
material adverse effect on the Company's business, financial condition and
results of operations, but the Company is unable at this time to assess what
might be the extent of such effect. The Company intends to complete a
contingency plan by July 1, 1999, detailing actions that would be taken in
the event that such a failure occurs.
20
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 5. Other Information
Report Of Offering Securities And Use Of Proceeds Therefrom:
In connection with its initial public offering in 1997, the Company
filed a Registration Statement on Form S-1, SEC File No. 333-23763 (the
"Registration Statement"), which was declared effective by the Commission on
June 10, 1997. The Company registered 4,025,000 shares of its Common Stock,
$0.01 par value per share. The offering commenced on June 11, 1997 and
3,500,000 shares were sold. The over-allotment option was not exercised and
the Company deregistered 525,000 shares on July 11, 1997. The aggregate
offering price of the registered shares was $28,000,000. The managing
underwriters of the offering were Prudential Securities Incorporated and
Cowen & Company. The Company incurred the following expenses in connection
with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions $ 1,960,000
Other expenses 800,000
------------
Total expenses $ 2,760,000
============
</TABLE>
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total
expenses above and the proceeds to selling shareholders were approximately
$19,662,000. From June 11, 1997 to September 30, 1998, the Company used
such net offering proceeds, in direct or indirect payments to others, as
follows:
<TABLE>
<S> <C>
Purchase and installment of machinery and equipment $ 814,154
Acquisition of other businesses 1,250,000
Working capital 7,344,209
Investment in short-term, interest-bearing obligations 5,029,629
Repayment of indebtedness 1,705,342
Redemption of Series P Preferred 2,794,000
Investment in Minority Interest 725,000
------------
Total $ 19,662,334
============
</TABLE>
Each of such amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the prospectus of the
Registration Statement.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
<TABLE>
Exhibit
Number Description
------ ----------------------------------------------------
<S> <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
18, 1998.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. The Company did not file any reports
-------------------
on Form 8-K in the quarter ended September 30, 1998.
21
<PAGE> 21
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 17, 1998 By: /s/ ALLEN K. JONES
----------------------------
Allen K. Jones
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Accounting and
Financial Officer)
22
<PAGE> 22
JETFAX, INC.
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
DATED SEPTEMBER 2, 1998
<PAGE> 23
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
1 DEFINITIONS AND CONSTRUCTION
1.1 Definitions 1
1.2 Accounting Terms 6
2. LOAN AND TERMS OF PAYMENT 6
2.1 Advances 6
2.2 Overadvances 6
2.3 Interest Rates, Payments, and Calculations 6
2.4 Crediting Payments 7
2.5 Fees 7
2.6 Additional Costs 7
2.7 Term 8
3. CONDITIONS OF LOANS 8
3.1 Conditions Precedent to Initial Advance 8
3.2 Conditions Precedent to all Advances 8
4. CREATION OF SECURITY INTEREST 9
4.1 Grant of Security Interest 9
4.2 Delivery of Additional Documentation Required 9
4.3 Right to Inspect 9
5. REPRESENTATIONS AND WARRANTIES9
5.1 Due Organization and Qualification 9
5.2 Due Authorization; No Conflict 9
5.3 No Prior Encumbrances 9
5.4 Bona Fide Eligible Accounts 9
5.5 Merchantable Inventory 9
5.6 Name; Location of Chief Executive Office 10
5.7 Litigation 10
5.8 No Material Adverse Change in Financial Statements 10
5.9 Solvency 10
5.10 Regulatory Compliance 10
5.11 Environmental Condition 10
5.12 Taxes 10
5.13 Subsidiaries 10
5.14 Government Consents 10
5.15 Full Disclosure 11
6. AFFIRMATIVE COVENANTS 11
6.1 Good Standing 11
6.2 Government Compliance 11
6.3 Financial Statements, Reports, Certificates 11
6.4 Inventory; Returns 11
6.5 Taxes 12
6.6 Insurance 12
6.7 Principal Depository 12
6.8 Quick Ratio 12
6.9 Debt-Net Worth Ratio 12
6.10 Tangible Net Worth 12
<PAGE> 24
6.11 Profitability 13
6.12 Registration of Intellectual Property Rights 13
6.13 Year 2000 13
6.14 Further Assurances 13
7. NEGATIVE COVENANTS 13
7.1 Dispositions 13
7.2 Change in Business 13
7.3 Mergers or Acquisitions 13
7.4 Indebtedness 13
7.5 Encumbrances 13
7.6 Distributions 13
7.7 Advances to Employees or Shareholders 13
7.8 Investments 13
7.9 Transactions with Affiliates 14
7.10 Subordinated Debt 14
7.11 Inventory 14
7.12 Compliance 14
8. EVENTS OF DEFAULT 14
8.1 Payment Default 14
8.2 Covenant Default 14
8.3 Material Adverse Change 14
8.4 Attachment 15
8.5 Insolvency 15
8.6 Other Agreements 15
8.7 Subordinated Debt 15
8.8 judgments 15
8.9 Misrepresentations 15
9. BANK'S RIGHTS AND REMEDIES 15
9.1 Rights and Remedies 15
9.2 Power of Attorney 16
9.3 Accounts Collection 16
9.4 Bank Expenses 17
9.5 Bank's Liability for Collateral 17
9.6 Remedies Cumulative : 17
9.7 Demand; Protest 17
10. NOTICES 17
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
GENERAL PROVISIONS 18
12.1 Successors and Assigns 18
12.2 Indemnification 18
12.3 Time of Essence 18
12.4 Severability of Provisions 18
12.5 Amendments in Writing, Integration 18
12.6 Counterparts 18
12.7 Survival 18
12.8 Effect of Amendment and Restatement 19
12.9 Confidentiality 19
</TABLE>
<PAGE> 25
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ('Agreement') is
entered into as of September 2, 1998, by and between ) JetFax, Inc.
('Borrower') and Venture Banking Group, a division of Cupertino National
Bank ("Bank").
RECITALS
Borrower and Bank wish to amend and restate the terms of the Amended and
Restated Loan and Security Agreement ('Original Loan Documents') dated
September 17, 1997, as stated herein. 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:
1. 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 flies, 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.
1
<PAGE> 26
"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, twenty percent (20%) 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, return,
sale on approval, bill and hold, retentions, or other terms by reason of
which guaranteed sale, sale or the payment by the account debtor may be
conditional;
2
<PAGE> 27
(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 pre-approved by Bank 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 every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or
3
<PAGE> 28
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, 1999.
"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.
"Original Loan Documents" has the meaning set forth in the Recitals, above.
'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
4
<PAGE> 29
(b) (1) 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 (I ) year from the date of
creation thereof and currently having the highest rating obtainable from
either Standard and 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 (1) 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.
"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 (1) any general
partnership interest or (ii) more than 50% of the stock of which by the
terms thereof ordinary voting power
5
<PAGE> 30
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 plus fifty
percent (50%) of Eligible Accounts for Oki Data Corporation, Oki Europe
Limited and Oki Europe LTD, Scotland. 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 substantially the form of Exhibit C.
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 at a 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 interest, all Bank calendar day of each month during
the term hereof. Bank shall, at its option, charge such 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 Pate is changed from time to
time interest hereunder shall be increased or decreased effective as of 1
2:01 a.m. hereafter, the applicable rate of interest shall change in the
Prime Pate. All interest on the day the Prime Pate is changed, by an amount
equal to such 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 Five Thousand Five Hundred
Dollars ($5,500), which fee shall be due on the Closing Date and shall be
fully earned and nonrefundable;
(b) Facility Examination and Appraisal Fee. Bank's customary fees and
out-of-pocket expenses for Bank's audits 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, requirement special deposit or similar 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 satisfactory to Bank prior to initial
Advance on Revolving Facility; 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
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occurred and be continuing, or would result from such Advance. The making
of each Advance shall be 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 Interest. 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
constitute a 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 Bank, all
Negotiable Collateral, all financing statements and other documents that
Bank may reasonably request, in form satisfactory to 3ank, 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
Documents.
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 3orrower 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 Office. Except as disclosed in the Schedule, Borrower has not
done business under any other name other than that specified on the
signature page hereof. The chief executive officer is located at the address
indicated in Section 10 hereof.
5.7 Litigation. On. 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 wit 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.
5.11 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 operator, in the
disposal of, or to produce, store " handle, treat, release, or transport,
any hazardous waste or substance other than in accordance with applicable
law; to the best of Borrower's knowledge, none of the Borrower's properties
or assets has ever been designated or identified in any manner pursuant to
any environments protect on 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
flied 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 qualified 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 Statement Certificates. Borrower shall deliver to
Bank: (a) 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 flied 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 fifteen (15) 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 D hereto, together with aged listings
of accounts receivable and accounts payable when borrowing under Section 2.
1.
Borrower shall deliver to Bank with the quarterly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the
form of Exhibit E hereto.
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 annually, when borrowing 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
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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, and local taxes, assessments, or contributions and, appropriate
certificates attesting to the payment or deposit thereof; and Borrower will
make, and will cause each Subsidiary diary to make, timely deposit of all
material tax payments and withholding taxes required of it by applicable
laws required of it by law, and will execute and deliver to Bank, or 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 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 Net Worth. Borrower shall maintain, as of the last day of each
fiscal quarter, a Tangible Net Worth of not less than Five Million Dollars
($5,000,000).
6.11 Profitability. Borrower shall be profitable for each fiscal
quarter.
6.12 Registration. Borrower shall register or cause to be registered
(to the extent not already 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 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
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<PAGE> 37
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 Year 2000. Borrower has and will take all actions that are
reasonably necessary to maintain its Principal business operations and to
correct any problems arising from the conversion of computer systems or
other circumstances related to the year 2000. Borrower will provide Bank
such information relating to the year 2000 as Bank may reasonably request
from time to time.
6.14 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 a 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: (1)
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 any business. Engage in any business, or permit any of
its Subsidiaries to engage in any business, other than any other 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 Acquisition. 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
the 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.
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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 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 any Advance for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
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 events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay the principal of, or any
interest on, any Advances when due and payable; or fails 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, 6.12 or 6.l3 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 additional reasonable period (which shall not
incurred within a reasonable time, then Borrower shall have an a 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); If there occurs a material adverse change in
Borrower's.
8.3 Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial conditional 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 warrants 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;
15
<PAGE> 40
(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 Bank agrees to assemble the
Collateral if Bank so requires and to make the Collateral available to Bank
as 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 (1 20) 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
(1) balances and deposits of Borrower held by Bank, or (11)
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; 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;
(g) Bank may credit bid and purchase at any public sale; and
(h) 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.
16
<PAGE> 41
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 of any part thereof; (b) set up such
reserves or 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 remedies 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 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 an 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,
post paid) 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 Bank, as the case may be, at its
addresses set forth below:
If to Borrower: JetFax, Inc.
1378 Willow Road
Menlo Park, CA 94025-1430
Attn: Allen Jones
FAX: (650) 463-1971
If to Bank: Venture Banking Group
Three Palo Alto Square, Suite 150
Palo Alto, California 94306
Attn: Dan Pistone
FAX: (650) 813-3813
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.
17
<PAGE> 42
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 a ant 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 officer, employees and agents: (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, Integration. This Agreement cannot be
amended or terminated orally. All prior understanding, 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 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.
18
<PAGE> 43
12.8 Effect of Amendment and Restatement. This Agreement is intended
to and does completely amend and restate, without novation, the Original
Loan Documents. All Security interests granted under the Original Loan
Documents are hereby confirmed and ratified and shall continue to secure all
Obligations under this Agreement.
12.9 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 and Chief Financial
----------------------------------
Officer
-------
VENTURE BANKING GROUP, a division of
CUPERTINO NATION BANK
By: /s/ Daniel Pistone
------------------------------------
Title: Vice President
----------------------------------
19
<PAGE> 44
Debtor: JetFax, Inc.
EXHIBIT A
---------
The Collateral shall consist of all right, tide and interest of Debtor in
and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Debtor's 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 Debtor's Books relating to any of the foregoing,
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, License
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs,
computer-discs, computer tapes, literature, reports, catalogs, design
rights, income tax refunds, payments of insurance and rights to payment of
any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Debtor
arising out of the sale or lease of goods, the licensing of technology or
the rendering of services by Debtor, 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 Debtor and Debtor's
Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Debtor's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements and
confidential information, now owned or hereafter acquired; all mask work or
similar rights available for the protection of semiconductor chips, now
owned or hereafter acquired; all claims for damages by way of any past,
present and future infringement of any of the foregoing; and
(g) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
20
<PAGE> 45
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-
Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS <F1>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 457
<SECURITIES> 4,561
<RECEIVABLES> 4,252 <F2>
<ALLOWANCES> 0
<INVENTORY> 4,746
<CURRENT-ASSETS> 14,287
<PP&E> 1,211 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,102
<CURRENT-LIABILITIES> 2,974
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 13,985
<TOTAL-LIABILITY-AND-EQUITY> 17,102
<SALES> 18,092
<TOTAL-REVENUES> 23,169
<CGS> 12,314
<TOTAL-COSTS> 12,914
<OTHER-EXPENSES> 4,055 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,076)
<INCOME-TAX> 59
<INCOME-CONTINUING> (1,135)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,135)
<EPS-PRIMARY> (0.10) <F4>
<EPS-DILUTED> (0.10)
<FN>
<F1> The 39-week period from January 5, 1998 to October 4,
1998 is referred to herein as the nine months ended
September 30, 1998. Year-to-date data is for quarters
presented.
<F2> Item shown net of allowance, consistent with the
balance sheet presentation.
<PAGE>
<F3> Item consists of research and development.
<F4> Item consists of basic earnings per share.
</FN>
</TABLE>
