-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KmMy/KeDylJ36j679LQy2oBv8XEAlEMarZZ/aCTX71tSl2oj6sUjn5FhEEYkV13g Te3BpoezkozwDlrKThEPqA== 0000891618-97-003379.txt : 19970814 0000891618-97-003379.hdr.sgml : 19970814 ACCESSION NUMBER: 0000891618-97-003379 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISIONEER INC CENTRAL INDEX KEY: 0001002517 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770411272 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27038 FILM NUMBER: 97657761 BUSINESS ADDRESS: STREET 1: 34800 COMPUS DRIVE CITY: FREMONT STATE: CA ZIP: 94555 BUSINESS PHONE: 4158126400 MAIL ADDRESS: STREET 1: 2560 W BAYSHORE RD CITY: PALO ALTO STATE: CA ZIP: 94303 10-Q 1 FORM 10-Q FOR PERIOD ENDED JUNE 29, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL QUARTER ENDED JUNE 29, 1997 COMMISSION FILE NUMBER 0-27038 ------------------------ VISIONEER, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3156479 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER)
34800 CAMPUS DRIVE FREMONT, CA 94555 (510) 608-0300 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ 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 [ ]. The number of shares of the registrant's Common Stock, $0.001 par value, outstanding as of July 30, 1997 was 19,499,020. ================================================================================ 2 VISIONEER, INC. FORM 10-Q THREE MONTHS ENDED JUNE 30, 1997 INDEX
PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements a) Condensed Balance Sheets at June 30, 1997 and December 31, 1996............. 2 b) Condensed Statements of Operations for the three month and six month periods ended June 30, 1997 and June 30, 1996....................................... 3 c) Condensed Statements of Cash Flows for the six month periods ended June 30, 1997 and June 30, 1996...................................................... 4 d) Notes to Condensed Financial Statements..................................... 5 Management's Discussion and Analysis of Financial Condition and Results of Item 2. Operations..................................................................... 8 PART II: OTHER INFORMATION Item 1. Legal Proceedings.............................................................. 17 Item 2. Changes in Securities.......................................................... 17 Item 3. Defaults Upon Senior Securities................................................ 17 Item 4. Submission of Matters to a Vote of Security Holders............................ 17 Item 5. Other Information.............................................................. 17 Item 6. Exhibits and Reports on Form 8-K............................................... 17 Signatures............................................................................... 18
1 3 PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VISIONEER, INC. BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ ASSETS Current assets: Cash and cash equivalents............................................. $ 18,112 $ 22,391 Short-term investments................................................ 2,432 8,747 Restricted cash....................................................... 62 62 Accounts receivable, less allowances of $4,530 and $3,931............. 6,078 10,780 Inventory............................................................. 3,120 4,508 Prepaid expenses and other current assets............................. 890 911 ------- ------- Total current assets.......................................... 30,694 47,399 Property and equipment, net............................................. 3,248 4,158 Other assets............................................................ 155 228 ------- ------- $ 34,097 $ 51,785 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank Borrowings....................................................... $ 2,500 $ -- Accounts payable...................................................... 8,661 11,449 Deferred revenue...................................................... 2,247 334 Accrued sales and marketing incentives................................ 2,098 2,474 Accrued payable to sub-contractors.................................... 4,075 1,100 Accrued liabilities................................................... 3,616 3,235 ------- ------- Total current liabilities..................................... 23,197 18,592 ------- ------- Stockholders' equity: Common stock, $0.001 par value; 50,000,000 shares authorized at June 30, 1997 and December 31, 1996; 19,412,378 and 19,202,609 shares issued and outstanding at June 30, 1997 and December 31, 1996, respectively....................................................... 19 19 Additional paid-in-capital............................................ 87,430 86,951 Deferred compensation relating to stock options....................... (200) (250) Notes receivable from stockholders.................................... (324) (329) Accumulated deficit................................................... (76,025) (53,198) ------- ------- Total stockholders' equity.................................... 10,900 33,193 ------- ------- $ 34,097 $ 51,785 ======= =======
The accompanying notes are an integral part of these financial statements. 2 4 VISIONEER, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- -------------------- 1997 1996 1997 1996 ------- ------- -------- ------- Revenues: Product revenues............................... $ 8,526 $ 8,009 $ 17,086 $21,209 Royalty revenues............................... 1,907 1,774 3,395 6,780 ------- ------- -------- ------- Total net revenues..................... 10,433 9,783 20,481 27,989 ------- ------- -------- ------- Cost of revenues: Cost of product revenues....................... 7,368 7,039 24,878 17,575 Cost of royalty revenues....................... 207 189 292 900 ------- ------- -------- ------- Total cost of revenues................. 7,575 7,228 25,170 18,475 ------- ------- -------- ------- Gross profit (loss).............................. 2,858 2,555 (4,689) 9,514 ------- ------- -------- ------- Operating expenses: Research and development....................... 2,374 2,647 5,404 5,019 Selling, general and administrative............ 5,783 6,866 12,672 11,999 Restructuring charge........................... 675 -- 675 -- ------- ------- -------- ------- Total operating expenses............... 8,832 9,513 18,751 17,018 ------- ------- -------- ------- Operating loss................................... (5,974) (6,958) (23,440) (7,504) Interest income.................................. 306 661 647 1,273 Interest expense................................. (26) (24) (34) (33) ------- ------- -------- ------- Net loss......................................... $(5,694) $(6,321) $(22,827) $(6,264) ======= ======= ======== ======= Net loss per share............................... $ (0.29) $ (0.33) $ (1.18) $ (0.33) ======= ======= ======== ======= Weighted average common shares and equivalents... 19,317 19,033 19,359 18,987 ======= ======= ======== =======
The accompanying notes are an integral part of these financial statements. 3 5 VISIONEER, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................................ $(22,827) $(6,264) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization...................................... 1,069 865 Accounts receivable allowances, net................................ 599 (286) Other.............................................................. 55 50 Changes in assets and liabilities: Accounts receivable.............................................. 4,103 2,954 Inventory........................................................ 1,388 (5,041) Prepaid expenses and other current assets........................ 21 (237) Other assets..................................................... 73 (111) Accounts payable................................................. (2,788) (1,419) Deferred revenue................................................. 1,913 (917) Accrued sales and marketing incentives........................... (376) 335 Accrued payable to sub-contractors............................... 2,975 (125) Other accrued liabilities........................................ 381 879 -------- ------- Net cash used in operating activities................................... (13,414) (9,317) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of short-term investments....................... 6,315 (4,378) Transfer from (to) restricted cash.................................... -- 1,362 Capital expenditures for property and equipment....................... (159) (1,031) -------- ------- Net cash provided by (used in) investing activities..................... 6,156 (4,047) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Bank Borrowings....................................................... 2,500 -- Proceeds from issuance of common stock, net........................... 479 6,917 Payments on capitalized lease obligations............................. -- (119) -------- ------- Net cash provided by financing activities............................... 2,979 6,798 -------- ------- Net decrease in cash and cash equivalents............................... (4,279) (6,566) Cash and cash equivalents at beginning of period........................ 22,391 39,909 -------- ------- Cash and cash equivalents at end of period.............................. $ 18,112 $33,343 ======== =======
The accompanying notes are an integral part of these financial statements. 4 6 VISIONEER, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION: The accompanying unaudited condensed financial statements of Visioneer, Inc. (the "Company" or "Visioneer") have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, these interim condensed financial statements reflect all adjustments, consisting of normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows at June 30, 1997, and for other periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996. The results for the quarter ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997, or any future period. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company's fiscal year ends on the Sunday closest to December 31. Accordingly, fiscal 1997 will end December 28, 1997 and will contain 52 weeks, fiscal 1996 ended December 29, 1996 and contained 52 weeks. The Company reports quarterly results on thirteen-week quarterly periods, each ending on the Sunday closest to month-end. For purposes of presentation, the Company has indicated its accounting year as ending December 31 and its interim quarterly periods as ending on the respective calendar month-end. NOTE 2. BALANCE SHEET COMPONENTS: Inventory consists of the following (in thousands):
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ Raw materials.................................................. $ 29 $1,433 Work-in-process................................................ 114 1,453 Finished goods................................................. 2,977 1,622 ------ ------ $3,120 $4,508 ====== ======
During the six month period ended June 30, 1997, and primarily in the three month period ended March 31, 1997, the Company recorded net inventory reserves and write-offs of approximately $3.9 million. In addition, during the same period, the Company recorded $5.0 million of reserves in connection with the cancellation of certain purchase commitments. 5 7 VISIONEER, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) Property, plant and equipment, net consist of the following (in thousands):
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ Machinery and equipment....................................... $ 3,692 $ 5,129 Software...................................................... 1,349 1,259 Leasehold improvements........................................ 281 368 Furniture and fixtures........................................ 688 607 ------- ------- 6,010 7,363 Accumulated depreciation and amortization..................... (2,762) (3,205) ------- ------- $ 3,248 $ 4,158 ======= =======
NOTE 3. NET LOSS PER SHARE: Net loss per share data is based upon the weighted average number of outstanding shares of common stock. Common stock equivalents, which includes stock options and warrants (using the treasury stock method), are excluded as their effect is antidilutive. NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share." This statement is effective for the Company's year ending December 31, 1997. The Statement redefines earnings per share under generally accepted accounting principles. Under the new standard, primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. If the Company had adopted this Statement on January 1, 1996 it would not have had a material impact on the reported loss per share for the three and six month periods ended June 30, 1997 and 1996. NOTE 5. LITIGATION AND PATENT INFRINGEMENT CLAIMS: On November 1, 1996, Millennium, L.P. ("Millennium"), a Cayman Island limited partnership, filed an infringement action against Compaq alleging that Compaq's scanner keyboard system, which utilizes certain technology that is licensed from the Company, and used in its products, infringes certain patent claims. The Company has acknowledged that it will indemnify Compaq with respect to the claims that Millennium has asserted against Compaq to the extent required by the Company's OEM agreement with Compaq. The Company intends to defend against these claims vigorously. However, the outcome of the lawsuit cannot be accurately predicted and if the Company is unsuccessful in this matter, it could have a significant material adverse effect on the Company's business, operating results and financial condition. NOTE 6. DEBT: On June 26, 1997, the Company obtained a $7.5 million line of credit. The facility, which expires on June 25, 1998, bears an interest rate of 0.25% over the Prime Rate. The agreement provides for borrowings up to the lesser of 70% of eligible domestic accounts receivables and 60% of eligible distributor accounts receivables or $7.5 million. Under the terms of the agreement, the Company can use the line of credit to obtain letters of credit of up to $2.0 million. The line of credit is collateralized by a security interest in substantially all of the Company's current and future tangible and intangible assets. The terms of the agreement require, among other terms, a minimum ratio of current assets to current liabilities, a maximum ratio of indebtedness to tangible net worth and maximum quarterly losses. At June 30, 1997, the Company had outstanding bank borrowings of $2.5 million. In July, the Company repaid these borrowings. 6 8 VISIONEER, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 7. RESTRUCTURE: The Company implemented a restructuring plan of all its organizations in May 1997. It included a decrease of approximately 40% of total employee and consultant headcount and a significant reduction in variable sales and marketing expenditures. A one-time restructuring charge of $675,000 was recorded in the three month period ended June 30, 1997, representing severance paid to terminated employees and contractors and other related expenses. 7 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited financial statements and notes thereto included in Part I -- Item 1 of this Quarterly Report and the audited financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 1996 contained in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996. Except for the historical information contained herein, the matters discussed in this document are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this report and, in particular, the factors described under "Additional Factors That May Affect Future Results," and those mentioned in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996 under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OVERVIEW Visioneer designs, develops and markets intelligent paper input systems and image management software. The Company has a limited operating history upon which an evaluation of the Company and its prospects can be based. The success of the Company will depend on its ability to adopt certain product cost reduction measures, thereby improving its gross margins, implement certain expense reduction measures while generating sales of PaperPort products significantly in excess of sales during the past several quarters, introduce new products and enhancements to existing products which respond to customer needs, attain market acceptance and effectively compete against other products. This in turn will depend in part on the ability of the Company to convince end users to adopt paper management systems for the desktop and to educate end users about the benefits of the Company's products. There can be no assurance that the Company will be successful in reducing its costs and expenses, nor is there any assurance that the market for paper input systems will develop or that the Company will achieve broad market acceptance of its products. The Company has incurred annual net losses since inception. There can be no assurance that the Company will be able to attain profitability during any particular period or in the near future. As of June 30, 1997, the Company had an accumulated deficit of $76 million. Although the Company had, in the past, experienced revenue growth during several quarters, the growth rates have neither been consistent nor sustainable and are not indicative of future operating results. 8 10 RESULTS OF OPERATIONS The following table presents, as a percentage of total net revenues, certain selected financial data for the three month and six month periods ended June 30, 1997 and June 30, 1996. VISIONEER, INC. STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------- ------------------ 1997 1996 1997 1996 ------ ------ ------- ------ Revenues: Product revenues................................... 81.7% 81.9% 83.4% 75.8% Royalty revenues................................... 18.3% 18.1% 16.6% 24.2% ------ ------ ------- ------ Total net revenues.............................. 100.0% 100.0% 100.0% 100.0% ------ ------ ------- ------ Cost of revenues: Cost of product revenues........................... 70.6% 72.0% 121.5% 62.8% Cost of royalty revenues........................... 2.0% 1.9% 1.4% 3.2% ------ ------ ------- ------ Total cost of revenues.......................... 72.6% 73.9% 122.9% 66.0% ------ ------ ------- ------ Gross profit (loss).................................. 27.4% 26.1% (22.9%) 34.0% ------ ------ ------- ------ Operating expenses: Research and development........................... 22.8% 27.1% 26.4% 17.9% Selling, general and administrative................ 55.4% 70.2% 61.9% 42.9% Restructuring charge............................... 6.5% 0.0% 3.3% 0.0% ------ ------ ------- ------ Total operating expenses........................ 84.7% 97.2% 91.6% 60.8% ------ ------ ------- ------ Operating loss....................................... (57.3%) (71.1%) (114.4%) (26.8%) Interest income...................................... 2.9% 6.8% 3.2% 4.5% Interest expense..................................... (0.2%) (0.2%) (0.2%) (0.1%) ------ ------ ------- ------ Net Loss............................................. (54.6%) (64.6%) (111.5%) (22.4%) ====== ====== ======= ======
Total Net Revenues Total net revenues increased 7% to $10.4 million for the three month period ended June 30, 1997 from $9.8 million for the comparable period in 1996. The increase was attributable primarily to introduction of the Company's new color sheet-fed scanner, the PaperPort Strobe, which started shipping in production quantities in June. Although overall unit sales of scanners increased 22% between the comparable three month periods, overall revenue growth was not matched as average selling prices of grayscale scanners decreased nearly 20% in such period. Total net revenues, for the six month period ended June 30, 1997, decreased 27% to $20.5 million from $28.0 million for the comparable period in 1996. The decrease was attributable to several factors. First, retail scanner unit shipments were down significantly in the three month period ended March 31, 1997 from the same period in 1996 because the sheet-fed scanner market transitioned from grayscale to color much more rapidly than the Company had anticipated and the corporate market was not developing as quickly as the Company had expected. Second, the revenues for the three month period ended March 31, 1997 were also adversely impacted by an average 20% reduction in scanner prices made by the Company effective February 1, 1997. Third, while royalties from the Company's OEM partners remained relatively flat for the three month period ended June 30, 1997 as compared to the same period in 1996, OEM royalties declined significantly during the three month period ended March 31, 1997 as compared the same period in 1996 because Hewlett-Packard stopped purchasing the Company's product in the second quarter of 1996 and the Company and Compaq mutually agreed to terminate the OEM licensing agreement in the first quarter of 9 11 1997. Finally, as a result of anticipated pricing actions and the planned introduction of new products, the Company recorded price protection reserves of $2.5 million during the three month period ended March 31, 1997. Net revenues from PaperPort Deluxe, the Company's first standalone software product, introduced in December 1996, accounted for approximately 8% of total net revenues for the three month period ended June 30, 1997. For the six month period ended June 30, 1997, net revenues for PaperPort Deluxe accounted for approximately 10% of total net revenues. Total net revenues from international sales were approximately 7% of total net revenues for the three month period ended June 30, 1997 as compared to 9% for the same period in 1996. Total net revenues from international sales for the six month period ended June 30, 1997 represented approximately 10% of total net revenues as compared to 9% for the comparable period in 1996. The recent decline in international sales was a direct result of the Company's decision to restructure its international sales and marketing operations. In April 1997, the Company terminated its local sales operations for Europe and the Asia-Pacific regions and began focusing on distribution partners who have established sales outlets and local country expertise. The strategy is designed to minimize expenses and maximize profitability for the regions. However, in the near term, until the strategy is fully implemented, it is unlikely that the Company will be able to sustain the same level of revenues from international sales as it has experienced in the previous several quarters. The introduction of major new products and enhancements of existing products, are expected to have a significant impact on the Company's quarterly and annual revenues. As is characteristic of the initial stages of personal computer product life cycles, the Company expects that sales volumes of any new product may increase in the first few months following introduction due to the purchase of initial inventory by the Company's distribution channels. Thereafter, revenues may decline or stabilize until the end of a product life cycle, at which time revenues are likely to decline significantly. Many competitors have entered the market in the last 24 months and although they helped to establish market demand for paper input products, they also have applied significant pricing pressures to which the Company has had to respond. Due to the inherent uncertainties of product development and new product introductions, the Company cannot accurately predict the exact quarter in which a new product or version will be ready to ship. Any delay in the scheduled release of major new products would have a material adverse impact on the Company's total net revenues and operating results. The Company has experienced and may continue to experience significant fluctuations in revenues and operating results from quarter to quarter and from year to year due to a combination of factors, many of which are outside of the Company's direct control. These factors include development of the paper input systems market, demand for the Company's products, the Company's success in developing, introducing and shipping new products and product enhancements, the market acceptance of such products, the Company's ability to respond to new product introductions and price reductions by its competitors, which the Company expects will continue through the foreseeable future, the timing, cancellation or rescheduling of significant orders, the purchasing patterns and potential product returns from the Company's distribution channels, the Company's relationships with its OEM partners and distributors, the performance of the Company's contract manufacturers and component suppliers, the availability of key components and changes in the cost of materials for the Company's products, the Company's ability to attract, retain and motivate qualified personnel, the timing and amount of research and development and selling, general and administrative expenditures, and general economic conditions. Total Cost of Revenues Total cost of revenues as a percentage of total net revenues was 73% for the three month period ended June 30, 1997 compared to 74% for the comparable period in 1996. Total cost of revenues as a percentage of total net revenues was 123% for the six month period ended June 30, 1997 compared to 66% for the comparable period in 1996. The year to year increase was a result of significant charges taken in the three month period ended March 31,1997 for write-offs, increased reserves relating to excess and obsolete inventory, and cancellation of certain purchase commitments relating to grayscale scanner products. A substantial 10 12 portion of the total manufacturing cost of the PaperPort is represented by various components, particularly PCBAs, a contact image sensor array and the Company's proprietary ASIC. Prices and availability of these components can fluctuate significantly. Because the market for paper input systems and, in particular, the Company's products, is new and rapidly evolving, the Company's ability to forecast its demand for finished goods and key components was and still is limited and involves a substantial amount of risk. The market's transition to color scanners has been much faster than originally anticipated by the Company and the Company's corporate marketing strategy has not developed as quickly as originally expected. Based on these factors, the Company recorded charges of approximately $9.5 million to cover estimated cancellation charges and to increase inventory related reserves in the three month period ended March 31, 1997. Due to variations in product mix, planned and unplanned pricing actions, and manufacturing related costs associated with future product transitions, the Company anticipates quarterly fluctuations and continued pressure on its cost of revenues and gross margins for the balance of 1997, which will have a material adverse effect on the financial condition and results of operations of the Company. The Company is currently pursuing several product cost reduction projects, which the Company expects will help counteract margin erosion common to the peripherals market. However, there can be no assurance that the Company will be successful in these efforts, nor that if these efforts are successful, that they will be sufficient to allow the Company to compete effectively in the scanner market. Research and Development Expenses Research and development expenses decreased 10% in absolute dollars to $2.4 million in the three month period ended June 30, 1997 from $2.6 million in the comparable period in 1996, while decreasing as a percentage of total net revenues to 23% from 27%. The decrease in spending was the result of a reduction in engineering employees and consultants. At June 30, 1997 the Company employed 27 full-time employees and 9 consultants in research and development compared to 51 employees and 21 consultants at June 30, 1996. The reduction was part of a company- wide restructure implemented in May. Research and development expenses increased 8% in absolute dollars to $5.4 million in the six month period ended June 30, 1997 from $5.0 million in the comparable period in 1996. The increase in spending was primarily due to significant expenditures associated with the development and prototyping of PaperPort Strobe, the Company's new color sheet fed scanner. The Company believes that the continued development of new products and the enhancement of existing products is essential to its success, and will continue to invest in activities which it believes are essential to the success of the Company. To date, the Company has not capitalized any development costs and does not anticipate capitalizing any such costs in the foreseeable future. Selling, General and Administrative Expenses and Restructuring Charge Selling, general and administrative expenses decreased 16% in absolute dollars to $5.8 million in the three month period ended June 30, 1997 from $6.9 million in the comparable period in 1996. As a percentage of total net revenues, selling, general and administrative expenses decreased to 55% from 70%. The decrease was primarily attributable to the Company's adoption of a strategy to focus on its core domestic scanner and software products. As a result, the Company completed a restructuring plan of all its organizations in May, including a decrease of approximately 40% of total employee and consultant headcount and a significant reduction in variable sales and marketing expenditures. A one-time restructuring charge of $675,000 was recorded in the three month period ended June 30, 1997, representing severance paid to terminated employees and contractors and other related expenses. Although the spending cuts were designed to decrease the Company's on-going operating expenses, there can be no assurance that the spending cuts would not adversely affect future revenue levels, which would have an adverse affect on the Company's financial condition and future operating results. Selling, general and administrative expenses increased 6% in absolute dollars to $12.7 million in the six month period ended June 30, 1997 from $12.0 million in the comparable period in 1996. The increase was the result of significantly larger sales and marketing expenditures and increased number of employees and consultants in the three month period ended March 31, 1997 as compared to the same period in 1996. Although the Company has adopted rigid spending controls, selling, general and administrative expenses may fluctuate from quarter to quarter, in absolute terms, depending on a variety of factors, including the timing of the introduction of any new products, expansion of the Company's distribution 11 13 channels, general advertising not related to product introductions and a new international sales and marketing strategy. Other Income, Net Other income, net, consists primarily of interest earned on cash equivalents and short-term investments. Other income, net was $280,000 for the three month period ended June 30, 1997 compared to $637,000 for the three month period ended June 30, 1996. Other income, net, was $613,000 for the six month period ended June 30, 1997, compared to $1.2 million for the comparable period in 1996. These decreases were the result of a decrease in interest income from decreased cash equivalents and short-term investments, as a consequence of the Company's operational losses over the last several quarters. Taxation The Company had no tax provision during the six month period ended June 30, 1997 and 1996 due to the net loss incurred. The Company did not record a tax benefit of operating losses for the first six months of 1996 and 1997 due to the uncertainty of their realization. Liquidity and Capital Resources The Company's cash, cash equivalents and short-term investments totaled $20.6 million at June 30, 1997 as compared to $31.2 million at December 31, 1996. The $10.6 million decrease was primarily used to fund $13.4 million in operating activities for the first six months of 1997. The negative cash flows from operating activities was attributed to a net loss of $22.9 million, offset by non-cash charges and changes in working capital. Cash used for operating activities in the first six months of 1996 was $9.3 million, of which $6.3 million was used to fund net losses and a net decrease in non-cash charges and working capital of $3.0 million. Cash provided by investing activities for the six month period ended June 30, 1997 was $6.2 million, primarily from net sales of short-term investments. Cash used in investing activities for the six month period ended June 30, 1996 was $4.0 million, of which $3.0 million was associated with net purchases of short-term investments and transfers to restricted cash, and $1.0 million was used for capital expenditures. Cash provided by financing activities for the six months ended June 30, 1997 was $3.0 million. The Company had debt borrowings of $2.5 million and the balance of the cash provided by financing activities resulted from the issuance of new Common Stock in connection with the Company's employee stock purchase plan. Cash provided by financing activities was $6.8 million for the six month period ended June 30, 1996. The majority of the cash was the result of the exercise of the over-allotment option granted to the underwriters in the December 1995 initial public offering. Due to the relatively long manufacturing lead times and inventory pipelines associated with the Company's products, as the Company introduces and ramps up production of its new products in subsequent quarters, its investment in inventory will continue to represent a significant portion of working capital. Therefore, in June 1997, the Company negotiated a line of credit to provide an additional source of liquidity. The Company drew down $2.5 million on the line at the end of June to qualify the facility, and the line was paid back in July. The Company believes that its existing sources of liquidity, including current cash balances and its line of credit, will provide adequate cash to fund its operations for at least the next twelve months. Thereafter, if cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may be required to sell additional equity or debt securities. The sale of additional equity or convertible debt securities would result in additional dilution to the Company's stockholders. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS The Company intends to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Specifically, the Company wishes to alert readers that the following important factors, as well as other factors, could in the future affect, and in the past have affected, the Company's actual 12 14 results and could cause the Company's results for future quarters to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company in this report. Dependence on Developing Market; Product Concentration The market for paper input systems and, in particular, for the Company's PaperPort products, is new and rapidly evolving. The Company currently derives substantially all of its revenues from its PaperPort products and expects that revenues from these products will continue to account for a substantial portion of all of its revenues for the foreseeable future. Broad market acceptance of PaperPort products is critical to the Company's future success. This success will depend in part on the ability of the Company, its distributors and other suppliers of paper input scanners to convince end users to adopt paper input systems for the desktop, and the Company's ability to educate end users about the benefits of its products. This success will also depend in part on the Company's ability to offer competitive hardware and software features in its PaperPort products in a limited period of time. Difficulties and Risks Associated with New Product Introduction and Development The market for the Company's products is characterized by rapidly changing technology and frequent new product introductions. The Company's success will depend to a substantial degree upon its ability to develop and introduce in a timely fashion new products and enhancements to its existing products that meet changing customer requirements and emerging industry standards, including the Company's recent introduction of its color scanner product, the PaperPort Strobe. The development of new, technologically-advanced products and product enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends, including with respect to PaperPort Strobe, the Company's belief of significant market demand for color sheet-fed scanner products. There can be no assurance that the Company will be able to identify, develop, manufacture, market or support new products and product enhancements successfully, that any new products or product enhancements will gain market acceptance, or that the Company will be able to respond effectively to technological changes, emerging industry standards or product announcements by competitors. New product announcements by the Company could cause customers to defer purchasing existing products or cause the Company to lower prices of its older products, resulting in distributors claiming price protection credits or returning such products to the Company. Any of these events could have a material adverse effect on the Company's business, operating results and financial condition. The introduction of major new products and enhancements of existing products, such as PaperPort mx and PaperPort Deluxe, introduced in the first quarter of 1997, and PaperPort Strobe, introduced in the second quarter of 1997, has had and will continue to have a significant impact on the Company's quarterly and annual revenues. As is characteristic of the initial stages of personal computer product life cycles, the Company expects that sales volumes of any new product may increase in the first few months following introduction due to the purchase of initial inventory by the Company's distributors. Thereafter, revenues may decline or stabilize until the end of a product life cycle, at which time revenues are likely to decline significantly. To this extent, the Company feels that the level of sales of PaperPort Deluxe and PaperPort mx through the balance of 1997 will not match those of the first six months of 1997. The Company must successfully manage the transition to new products and new versions of existing products. At the end of a product life cycle the Company may experience higher rates of return of its older products and may have to lower the prices of such products, which would result in increased price protection charges and could have a material adverse impact on the Company's net revenues and operating results. The Company experienced higher than normal rates of return of its grayscale scanner products in the first six months of 1997 and incurred significant price protection charges in connection with the Company's release of its new color scanner, the PaperPort Strobe. Due to the inherent uncertainties of product development and new product introductions, the Company cannot accurately predict the exact timing in which a new product or version will be ready to ship. Any delay in the scheduled release of major new products would have a material adverse impact on the Company's net revenues and operating results. 13 15 Fluctuations in Operating Results The Company has experienced and may continue to experience significant fluctuations in revenues and operating results from quarter to quarter and from year to year due to a combination of factors, many of which are outside of the Company's direct control. These factors include development of the paper management systems market, demand for the Company's products, the Company's success in developing, introducing and shipping new products and product enhancements, the market acceptance of such products, the Company's ability to respond to new product introductions and price reductions by its competitors, which the Company expects will continue for the foreseeable future, the timing, cancellation or rescheduling of significant orders, the purchasing patterns and potential product returns from the Company's distribution channels, the Company's relationships with its OEM partners and distributors, the performance of the Company's contract manufacturers and component suppliers, the availability of key components and changes in the cost of materials for the Company's products, the Company's ability to attract, retain and motivate qualified personnel, the timing and amount of research and development and selling, general and administrative expenditures, and general economic conditions. Revenues and operating results in any quarter depend on the volume, timing and ability to fulfill customer orders, the receipt of which is difficult to forecast. A significant portion of the Company's operating expenses is relatively fixed in advance, based in large part on the Company's forecasts of future sales. If sales are below expectations in any given period, the adverse effect of a shortfall in sales on the Company's operating results may be magnified by the Company's inability to adjust operating expenses to compensate for such shortfall. Accordingly, any significant shortfall in revenues relative to the Company's expectations would have an immediate material adverse impact on the Company's business, operating results and financial condition. The Company may also be required to reduce prices in response to competition or increase spending to pursue new product or market opportunities. In the event of significant additional price competition in the market for the Company's products, which is expected, the Company will be required to decrease costs at least proportionately and will be at a significant disadvantage compared to competitors with substantially greater resources, which could more readily withstand an extended period of downward pricing pressure. The Company realizes substantially more revenue from the sale of its branded products than from its royalty arrangements. However, the effect on gross profit and net income from any shifts in product mix is uncertain and depends on the Company's ability to control its costs. Due to all of the foregoing factors, it is likely that at some point in the future the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Accordingly, the Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies participating in new and rapidly evolving markets. There can be no assurance that the Company will be successful in addressing such risks. Dependence on Contract Manufacturers The Company has an independent contract manufacturing agreement with Flextronics. Until the second quarter of 1996, Flextronics had accounted for nearly all of the Company's material procurement, assembly, system integration, testing and quality assurance. Commencing in the second quarter of 1996, the Company began contracting the manufacture of the PaperPort ix, the scanner keyboard, with NMB Technologies, Inc. ("NMB"). In May 1997, the Company entered into a independent contract manufacturing agreement with NMB to manufacture the PaperPort Strobe. Both manufacturing partners are located in the Far East, and therefore, the Company is exposed to the political and economic risks associated with doing business in this region, which could have a material adverse effect on the Company's business, operating results and financial condition. Furthermore, commencement of production of products at new or existing facilities involves certain start-up risks, such as those associated with the procurement of materials and training of production personnel, which may result in delays and quality issues. The unanticipated loss of Flextronics or NMB as manufacturing partners could cause delays in the Company's ability to fulfill orders while the Company identifies a replacement manufacturer. Such an event would have a material adverse effect on the Company's business, operation results and financial condition. 14 16 The Company's manufacturing policies are designed to take advantage of lower manufacturing costs overseas, which may, in certain instances, result in excess or insufficient inventory, or inappropriate mix of component inventory, if orders do not match forecasts. To date, the Company's inventory reflects purchases made based on forecasted sales, however, there can be no assurance that actual sales will match sales forecasts. To the extent the Company has excess inventory, the Company may experience inventory write-downs or may have to lower prices of its products which would result in substantial price protection charges and a negative impact on gross margins. In this regard, the Company did experience a significant excess inventory situation during the quarter ended March 31, 1997, and did record significant inventory write-down and price protection charges. Although the Company will be focusing its efforts to reduce its inventory risk over the next several months, there can be no assurance that the Company will not experience a similar adverse excess inventory situation. Dependence on Distributors To date, the Company has derived a substantial portion of its revenues from sales through its independent distributors. Although the Company has established several strategic OEM partnerships, the Company expects that sales through its independent distributors will continue to account for a substantial portion of its revenues for the foreseeable future. Sales to the top four independent distributors in the first six months of 1997 accounted for 41% of the Company's net revenues compared to 50% for the comparable period of 1996. The Company anticipates that its dependence on any one independent distributor will continue to decrease in the future because of its efforts to expand its distribution channels. The Company's agreements with its distributors are not exclusive, and each of the Company's 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 independent distributors will continue to offer the Company's products or that the Company will be able to recruit additional or replacement distributors. The loss of one or more of the Company's major distributors would have a material adverse effect on the Company's business, operating results and financial condition. Many of the Company's distributors offer competitive products manufactured by third parties. There can be no assurance that the Company's distributors will give priority to the marketing of the Company's products as compared to competitors' products. Any reduction or delay in sales of the Company's products by its distributors would have a material adverse effect on the Company's business, operating results and financial condition. Dependence on Component Suppliers A substantial portion of the total manufacturing cost of the PaperPort is represented by various components, particularly PCBAs, a contact image sensor array and the Company's ASIC. Prices of these components can fluctuate significantly depending primarily upon the availability of these components. Because the market for paper management systems and, in particular, the Company's products, is new and rapidly evolving, the Company's ability to forecast its demand for key components is limited. Due to the long lead times for procurement of certain materials and components ordered by the Company, and, to the extent orders for the Company's products exceed its initial forecasts, the Company may be required to incur expenses for expediting procurement of key components. Intensely Competitive Market The computer and peripherals industry has been characterized by ongoing rapid price erosion and resulting pressure on gross margins. For example, the suggested retail price of PaperPort Vx, when it was introduced in November 1995, was $369, the suggested retail price as of July 1, 1997 is $179. The Company expects that, based on historical trends in the computer and peripherals industry and, in particular, on the Company's recent observations and experiences in the paper management systems market, prices will continue to decline in the future and that competitors will offer products which meet or exceed performance and capabilities of the Company's products. The Company intends to introduce new hardware designs, software upgrades, accessory products and new software features, in part, to respond to anticipated competitive price pressures and new product introductions. If prices fall faster than expected by the Company, or if the 15 17 Company reduces its prices in order to become or remain competitive or for any other reason, the Company may be unable to respond with significant cost reductions and its gross margin could be materially adversely affected. In addition, the Company's gross margin will depend in part on other factors outside of the Company's control, including the availability and prices of key components, the success of the Company's product transition, competition, the timing and amount of royalties received under its OEM arrangements and general economic conditions. Fluctuations in gross margin could have a material adverse effect on the Company's financial condition and operating results. 16 18 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On November 1, 1996, Millennium, L.P. ("Millennium"), a Cayman Island limited partnership, filed an infringement action against Compaq alleging that Compaq's scanner keyboard system, which utilizes certain technology that is licensed from the Company, and used in its products, infringes certain patent claims. The Company has acknowledged that it will indemnify Compaq with respect to the claims that Millennium has asserted against Compaq to the extent required by the Company's OEM agreement with Compaq. The Company intends to defend against these claims vigorously. However, the outcome of the lawsuit cannot be accurately predicted and if the Company is unsuccessful in this matter, it could have a significant material adverse effect on the Company's business, operating results and financial condition. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS IN SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
EXHIBIT NO. DESCRIPTION ---------------------------------------------------------------- ----------- 10.24 Manufacturing Agreement dated May 8, 1997 between the Registrant and NMB Technologies, Inc. 10.25 Loan and Security Agreement dated June 26, 1997 between the Registrant and Silicon Valley Bank 10.26** Letter Agreements dated April 1, 1997 and July 7, 1997 between the Registrant and J. Larry Smart 10.27** Letter Agreement dated April 9, 1997 between the Registrant and Jeff Heimbuck, and Nonstatutory Stock Option Agreements dated April 9, 1997 between the Registrant and Jeff Heimbuck 11.1 Statement of Computation of Net Loss per Common Shares 27.1 Financial Data Schedule
- --------------- ** Management compensatory plan or arrangement (b) REPORTS ON FORM 8-K None 17 19 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on August 12, 1997. VISIONEER, INC. By: /s/ GEOFFREY C. DARBY ------------------------------------ Geoffrey C. Darby Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 18 20 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBITS ------- ----------------------------------------------------------------------------- 10.24 Manufacturing Agreement dated May 8, 1997 between the Registrant and NMB Technologies, Inc. 10.25 Loan and Security Agreement dated June 26, 1997 between the Registrant and Silicon Valley Bank 10.26** Letter Agreements dated April 1, 1997 and July 7, 1997 between the Registrant and J. Larry Smart 10.27** Letter Agreement dated April 9, 1997 between the Registrant and Jeff Heimbuck, and Nonstatutory Stock Option Agreements dated April 9, 1997 between the Registrant and Jeff Heimbuck 11.1 Statement of Computation of Net Loss per Common Shares 27.1 Financial Data Schedule
- --------------- ** Management compensatory plan or arrangement EX-10.24 2 MANUFACTURING AGREEMENT DATED MAY 8, 1997 1 Exhibit 10.24 N.M.B. TECHNOLOGIES INC. MANUFACTURING AGREEMENT This Manufacturing Agreement ("Agreement") is made this 8th day of May, 1997 (the "Effective Date") between Visioneer Inc., a Delaware Corporation, having its principal place of business at 34800 Campus Drive, Fremont, California 94555 (hereinafter "Customer") and NMB Technologies Inc., having its principal place of business at 9730 Independence Avenue, Chatsworth, California 91311 (hereinafter "N.M.B."). 1. Work. 1.1 Manufacture Test and Assembly. N.M.B. agrees to use reasonable commercial efforts to perform the work (hereinafter "Work") pursuant to purchase orders or changes to purchase orders issued by Customer and accepted by N.M.B.. Work shall mean to procure components and other supplies and to manufacture, test, assemble, and ship products (hereinafter "Products") pursuant to detailed, written specifications for each such Product which are provided by Customer and accepted by N.M.B. and to deliver such Products to a Customer designated location. For each Product or revision thereof, written specifications shall include but are not limited to, a bill of materials, schematics, assembly drawings, test specifications, current revision number, and approved vendor list (hereinafter "Specifications"). This Agreement shall not constitute a requirements contract and Customer shall not be obligated to order Products from N.M.B. 1.2 License Grant. Customer hereby Grants N.M.B. a non-exclusive, non-transferable license, royalty-free license to use Customer's patents, trade secrets and other intellectual property provided by Customer to N.M.B. solely for purposes of developing and manufacturing Products solely for delivery to Customer pursuant to the terms and conditions of this Agreement. The license granted to N.M.B. pursuant to this Section shall terminate immediately upon any termination of the Agreement. 1.3 No Sub-Contracting. The rights granted under this Agreement do not permit N.M.B. to utilize third parties to manufacture the Products. In the event N.M.B. wishes to sub-contract any of the manufacturing of the Products, N.M.B. will seek Customer's written consent, which consent will not unreasonably withheld. Customer's consent to sub- contracting will be contingent upon the third-party demonstrating its ability and commitment to manufacturing Products that consistently meet the Specifications. 2. Requirements for Purchasing. 2.1 Purchase Order Commitments. N.M.B. shall supply such quantities of Product meeting the Specifications on the delivery dates requested by Customer provided such quantities and delivery dates are in conformance with Product lead-times and Customer 5 forecasts as set forth below. At the beginning of each month during the term of this Agreement, Customer agrees to provide N.M.B. with rolling forecasts of Customer's estimated aggregate purchase requirements of Product for the 1 2 subsequent six-month period. Such forecasts shall not be legally binding on Customer, but shall be prepared in good faith and shall represent Customer's reasonable expectation of its aggregate purchase requirements of Product from all sources for the forecasted period. N.M.B. shall use its best efforts to supply a quantity of Product equal to Customer's forecasted Product quantities. All orders of Product submitted by Customer shall be initiated by written purchase orders sent to N.M.B.. Customer shall submit such purchase orders to N.M.B. at least one hundred twenty (120) days prior to the date of requested delivery, or such longer period of time as mutually agreed upon for Long Lead Inventory (defined below). Each purchase order shall reference this Agreement, and the applicable written Specifications as described in Section 1. Upon termination of this Agreement, or termination of a product covered by this Agreement, Customer shall purchase from N.M.B., at its cost, all Inventory (defined below) purchased by N.M.B. in the amount necessary to fill purchase orders accepted prior to termination, but which were not completed at the time of termination. In addition Customer shall purchase from N.M.B., at its cost, all Special Inventory (defined below) purchased by N.M.B. for which N.M.B. has obtained Customer's prior written approval in the amount necessary to fill purchase orders accepted prior to termination, but which were not completed at the time of termination, and in effect at the time the order with N.M.B.'s supplier was placed; provided, however, that in no event shall Customer have any liability for Special Inventory ordered or purchased by N.M.B. in excess of the amount necessary to fill such purchase orders. NMB shall not buy materials to support FORECASTS from Customer unless specifically authorized, in writing, by Customer, and Customer shall not be liable for any materials purchased by NMB to support a FORECAST. NMB shall make every effort to mitigate inventory exposure by returning components to suppliers wherever possible, and by expeditiously canceling outstanding Purchase Orders whenever possible. NMB will work with Customer to minimize cancellation or restocking charges to the fullest practical limit, including joint negotiations with suppliers. However, Visioneer will not unreasonably withhold payment from NMB due to its actions with regard to inventory returns or P0 cancellation. "Inventory" shall mean raw materials and supplies necessary for the manufacture of Products covered by purchase orders accepted by N.M.B. "Special Inventory" shall mean those items of Inventory either generally have a lead time longer than ninety (90) days ("Long Lead Inventory") or for which such vendor offers substantial price discounts for orders above a given quantity ("Economic Order Inventory") or which require minimum purchase quantities. If an item is purchased by NMB from a vendor recommended by NMB to Visioneer, then NMB will notify Visioneer in writing of the terms and conditions of sale. Visioneer will then determine and notify NMB in writing if the item is to be classified as Inventory or as Special Inventory. If an item is purchased from a vendor on the Visioneer AVL, then Visioneer will notify NMB in writing if the item is to be classified as Inventory or as Special Inventory. 2 3 2.2 Order Forecast Variations. For each purchase order, Customer can request, and such request shall not be unreasonably denied, that: (i) upon thirty (30) days prior notice, reschedule for up to sixty (60) days from scheduled delivery up to 50% of the Product quantities ordered pursuant to such purchase order and/or (ii) upon thirty (30) days prior notice, increase the quantity of Product ordered by an amount equal to an additional thirty percent (30%) of the quantity of Product ordered. Delivery reschedules of more than 60 days and order quantity increases in excess of 30% must be approved by N.M.B. in writing. 2.3 Acceptable/Rejection. All purchase orders are subject to acceptance. NMB will accept or reject purchase orders within five (5) days of receipt. Notification will be made in writing by an authorized representative of NMB on NMB's acknowledgment form. Upon acceptance and acknowledgment of Customer's purchase order by N.M.B., Customer will be firmly and irrevocable obligated to buy from N.M.B., and N.M.B. will be similarly obligated to manufacture and deliver to Customer the Products in accordance with the quantities and delivery dates specified by the orders, except to the extent of permitted order variations described in Section 2.2 above. Customer may use its standard purchase order form to release items, quantities, prices, schedule, change notices, specifications, or other notice provided for thereunder. In all other respects, this Agreement shall govern, and any inconsistent preprinted terms and conditions on such purchase orders shall be of no effect. 3. Shipments Schedule Change and Cancellation. 3.1 Shipments. All Products delivered pursuant to the terms of this Agreement shall be suitably packed for shipment in accordance with Customer's Specifications, marked for shipment to Customer's destination specified in the applicable purchase order and delivered to a carrier or forwarding agent by the delivery date set forth on the applicable purchase order. Shipment will be CIF Destination (designated by Visioneer), at which time risk of loss and title will pass to Customer. All freight, insurance, customs duties, import fees and other shipping expenses, as well as any special packing expenses not included in the original price quotation for the Products, will be paid by Customer. 3.2 Cancellation. Customer may not cancel any portion of an accepted purchase order without N.M.B.'s prior written approval, which will not be unreasonably withheld. If the parties agree upon a cancellation, Customer will pay N.M.B. for Products and Inventory (including Special Inventory) affected by the cancellation as follows: (i) 100% of the contract price for all finished Products in N.M.B.'s possession, (ii) 100% of the cost of all Inventory in N.M.B.'s possession and not returnable to the vendor or usable for other customers, whether in raw form of work in process, (iii) 100% of the cost of all Inventory on order and not cancelable, and (iv) any vendor cancellation charges incurred with respect to Inventory accepted for cancellation or return by the vendor. N.M.B. will use reasonable commercial efforts, including the mutual involvement of customer, to return unused Inventory for a full refund, net of restocking charges of such vendor and to cancel pending orders. Customer will be entitled to take delivery of all Products and Inventory to be paid for by Customer under this section, after N.M.B '5 receipt of payment therefor. 4. Engineering Changes. Customer may request, in writing, that N.M.B. incorporate an Engineering Change into the Product. Such request will include a description of the proposed change sufficient to permit N.M.B. to evaluate its feasibility. N.M.B.'s evaluation shall be in writing and shall 3 4 state the impact on delivery schedule and expected cost. N.M.B. will not be obligated to proceed with the Engineering Change until the parties have agreed in good faith on the changes to the Product Specifications, Delivery Schedule and Pricing Schedule and upon the costs to be paid by Customer, including reassembly, retooling or cost of Inventory and Special Inventory on-hand and on-order that becomes obsolete. Customer will be the final authority in defining the Engineering Change activity. 5. Tooling/Non-Recurring Expenses. N.M.B. shall provide non-Product specific tooling at its expense. Customer shall pay for or obtain and consign to N.M.B. for its use any Product specific tooling and other reasonably necessary non-recurring expenses, to be set forth in N.M.B.'s quotation ("Set-Up Property"), provided N.M.13. has obtained Customer's prior written approval to obtain and pay for such Set-Up Property. Customer shall own title to all Set-Up Property. N.M.B. shall hold all Set-Up Property and other property for Customer and shall exercise reasonable care in the use and custody of such property and shall use such property only in performing its obligations under this Agreement. N.M.B. will mark all Set-Up Property to identify it as being the property of Customer. N.M.13. shall not grant any security interest, impose liens or any other encumbrances on said Set-Up Property. Upon termination of this Agreement and upon Customer's written request N.M.B. will promptly return all Set-Up Property to a location identified by Customer at Customer's cost. All software which Customer provides to N.M.B. is and shall remain the property of Customer. N.M.B. shall have a license to copy, modify and use this software during the term of this Agreement solely for the purpose of manufacturing Product for sale to Customer pursuant to the terms of this Agreement. All software developed by N.M.B. to support the process tooling or otherwise shall be and remain the property of N.M.B. unless funded by Customer, in which case such software shall be owned by Customer, and N.M.B. hereby assigns all its right, title and interest in such software to Customer and shall cooperate with Customer, at Customer's expense, before and after the termination of this Agreement, to permit Customer in obtaining and enforcing the full benefits, enjoyment, rights and title throughout the world in such software. 6. Product Acceptance and Warranties. 6.1 Product Acceptance. The Products delivered by N.M.B. will be inspected and tested as required by Customer within forty-five (45) days of receipt. If Products are found to be defective in material or workmanship and/or fail to meet the Specifications, Customer has the right to reject such Products during the acceptance period. Products not rejected during the acceptance period will be deemed accepted. Customer may return rejected Products, freight collect, after completing a failure report and obtaining a return material authorization number from N.M.B. to be displayed on the shipping container. Rejected Products will be repaired or replaced at N.M.B.'s option and returned freight pre-paid within 14 business days of N.M.B.'s receipt thereof. If the Product is source inspected prior to shipment, Customer will inspect goods within five days of delivery date. N.M.B. will not place its name or any other marking not approved by Customer anywhere on the Products or their respective packaging material, except for markings, if any, which are required by law. 6.2 Components. 4 5 6.2.1 Approved Vendor List. Customer is to provide a Bill of Materials and Approved Vendor List ("AVL") for each Product to be manufactured hereunder. N.M.B. shall manufacture the Products using components obtained solely from vendors included on the AVL, as it may change from time to time, as determined by Customer. This AVL shall not be amended without prior written approval of Customer. 6.2.2 Customer Supplied Components. Customer shall be entitled to supply components to N.M.B. at N.M.B.'s expense only with the written consent of N.M.B. and only in such amounts as are necessary for firm orders then placed by Customer. Such components, including provision for failed parts, shall be delivered to N.M.B. not later than one (1) week prior to the scheduled delivery date for the related Products for materials which are managed by Customer and one day for materials that customer is assisting N.M.B. to procure. Should Customer be unable to meet such delivery requirements, Customer may at its option, request N.M.B. to either (i) ship Products to Customer absent the supplied parts on or after seven (7) days from the scheduled delivery date or (ii) hold the Products pending receipt of such components from Customer. Under these circumstances, Customer will give written notification to N.M.B. prior to the scheduled delivery date, and N.M.B. may invoice Customer for such Products on or after seven (7) days from the scheduled delivery date. Customer shall have no right of offset from the purchase price of any Products purchased hereunder with respect to any amounts N.M.B. owed Customer for Customer supplied components. Should N.M.B. be required to procure components at a premium cost as the result of a default by N.M.B., N.M.B. shall be responsible for the premium costs incurred and Customer shall not be required to pay mark-up on the additional cost which is incurred. Should the required premium purchases be required as a result of an act by Customer then Customer shall be responsible for the premium and the associated mark-ups. 6.3 Express Warranty. N.M.B. warrants that the Products will conform to Customer's applicable Specifications and will be free from defects in materials and workmanship for a period of fifteen (15) months from the date of shipment. This express warranty does not apply to product that has been abused, damaged, altered or misused by any person or entity after title passes to Customer. With respect to first articles, prototypes, pre-production units, test units or other similar Products, N.M.B. makes no representations or warranties whatsoever. Notwithstanding anything else in this Agreement, N.M.B. assumes no liability for or obligation related to the performance, accuracy, specifications, failure to meet specifications or defects of or due to fixtures, designs or instructions produced or supplied by Customer. Upon any failure of a Product to comply with the above warranty, N.M.B.'s sole obligation, and Customer's sole remedy, is for N.M.B., at its option, to promptly repair or replace such unit and return it to Customer freight collect. Customer shall return Products covered by the warranty freight prepaid after completing a failure report and obtaining a return material authorization number from N.M.B. to be displayed on the shipping container. N.M.B. MAKES NO OTHER WARAANTIES AS TO THE PRODUCTS, EXPRESSED, IMPLIED, STATUTORY OR IN ANY OTHER PROVISION OF THIS AGREEMENT OR IN ANY COMMUNICATION WITH ANY CUSTOMER, AND N.M.B. SPECIFICALLY DISCLAIMS ANY IMPLIED WAREANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 7. Payment Terms Additional Costs and Price Changes. 7.1 Payment Terms. Payment for any products, services or other costs to be paid by Customer hereunder are due thirty (30) days net from the date the invoice for Products is delivered to 5 6 Customer and shall be made in lawful U.S. currency. If Customer is late with payments, or N.M.B. has reasonable cause to believe Customer may not be able to pay, N.M.B. may require prepayment or delay shipments or suspend work until assurances of payment satisfactory to N.M.B. are received. 7.2 Additional Costs. (a) Duties and Taxes. All prices quoted are exclusive of federal, state and local excise, sales, use and similar Duties and taxes, and Customer shall be responsible for all such items. (b) Expediting Charges. Customer shall be responsible for any expediting charges reasonably necessary because of a change in Customer's requirements. N.M.B. shall obtain approval from Customer for expediting charges prior to incurring any such charge. 7.3 Price Changes. The price for Products to be manufactured by N.M.B. is set forth in Exhibit A, the "Price Schedule," to this Agreement. (a) Market Fluctuations. At any time, in the event of extraordinary increases or decreases (in the amount of 5% or more) in the market price of fuels, materials, raw materials, equipment, labor and other production costs, N.M.B. shall have the right to renegotiate in good faith the price of goods not yet shipped or services to be performed, with the exclusion of Finished Products and Special Inventory and if, in good faith, agreement is not achieved, both N.M.B. and Customer shall have the right to terminate the specific purchase order(s) or the Agreement. (b) Cost Reduction. Customer and N.M.B. will review pricing on a quarterly basis with the specific intent of reducing the cost of the product, and NMB will provide a specific plan which will result in a reduction in cost each quarter of five percent (5%) at a minimum. The contact image sensor will not be included in this plan. (c) Engineering Changes. Upon implementation of N.M.B. initiated engineering changes or procurement or alternate sourcing activities that result in a reduction in price, N.M.B. and Customer will each receive fifty percent (50%) of the demonstrated price reduction for six months 6 mths. Upon implementation of Customer initiated engineering changes or procurement or alternate sourcing activities developed by Customer that result in changes to the cost of the Products, the Customer will receive one hundred percent (100%) of the demonstrated price reduction. 8. Term and Termination. 8.1 Term. The term of this Agreement shall commence on the Effective Date hereof above and shall continue thereafter until terminated as provided in Section 8.2. Sections 6.3, 7.1, 7.2, 8.1, 9, 10 and 11 shall survive any termination or expiration of this Agreement. 6 7 8.2 Termination. This Agreement may be terminated by either party for any reason, with or without cause, upon one hundred eighty (180) days written notice to the other party. Termination of this Agreement shall not affect the obligations of either party which exist as of the date of termination. 8.3 Termination for Bankruptcy. Either party may immediately terminate this Agreement if the other party is adjudicated bankrupt, or if a receiver is appointed for the other party or for a substantial portion of its assets, or if an assignment for the benefit of creditors of the other party is made, or if the other party is dissolved or liquidated or has a petition for dissolution or liquidation filed which is not dismissed within forty-five (45) days with respect to it. 9. Indemnification and Limitation of Liability. 9.1 Patents. Copyrights. Trade Secrets. Other Proprietary Rights. Customer shall defend, indemnify and hold harmless N.M.B. from all claims, costs, damages, judgments and attorney's fees resulting from or arising out of any alleged and/or actual infringement or other violation of any patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, trade secrets, proprietary rights and processes or other such rights arising out of N.M.B.'s manufacture of the products pursuant to the Specifications, provided N.M.B. shall promptly notify Customer in writing of the initiation of any such claims. Customer has sole control of the defense and all related settlement negotiations, and N.M.B. shall cooperate fully with Customer in its defense against any such claims, at Customer's expense. Notwithstanding the foregoing, Customer shall have no obligation to indemnify N.M.B. for any hardware or software was provided by Customer. THE FOREGOING STATES THE ENTIRE LIABILITY OF THE PARTIES TO EACH OTHER CONCERNING INFRINGEMENT OF PATENT, COPYRIGHT, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHTS. 9.2 Product Liability. Customer agrees that, if notified promptly in writing and given sole control of the defense and all related settlement negotiations, it will defend N.M.B. from any claim or action and will hold N.M.B. harmless from any loss, damage or injury, including death, which arises from any alleged defect the design of any Products. 9.3 Mutual Indemnity. The parties will indemnify each other against actions, liabilities, loss, damages and expenses resulting from injury or death of any person or loss of or damage to any tangible real or tangible personal property to the extent that such injury, death, loss or damage is proximately caused by the indemnifying party's negligent act or omission or intentional misconduct or that of its agents, employees or subcontractors in connection with the performance of its obligations under this Agreement, provided that the indemnifying party has been notified in writing as soon as practicable of any such claim. The indemnifying party will have the sole right to control the defense of all such claims and in no event will the indemnified party settle any claim without the indemnifying party's prior written approval. 9.4 No Other Liability. EXCEPT FOR THE EXPRESS WARRANTIES CREATED UNDER THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND OR NATURE ARISING OUT OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING THE POSSIBILITY OF 7 8 NEGLIGENCE OF STRICT LIABILITY), OR OTHERWISE, EVEN IF THE PARTY HAS BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE, AND EVEN IF ANY OF THE LIMITED REMEDIES IN THIS AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE. 10. Confidential Disclosure and Proprietary Rights. 10.1 Confidential Information. The term "Confidential Information" as used herein will mean any and all information disclosed by a party hereunder ("discloser") to the other party ("recipient") in written or other tangible form, including information disclosed prior to the date of this Agreement, and which is clearly marked as confidential or proprietary, or in some other manner to indicate its confidential nature. Oral information will not be Confidential Information unless it is designated as confidential by the discloser at the time of disclosure and summarized and identified as being confidential in a writing which is received by recipient within thirty days after disclosure. 10.2 Disclosure. For a period of five (5) years from the date of disclosure, Recipient will neither disclose Confidential Information to any third party nor use the same for any purpose other than those set forth in this Agreement. Recipient will use the same degree of care as it uses to protect its own confidential information, but no less than reasonable care, to prevent the unauthorized use, dissemination or publication of the Confidential Information. In addition to recipient's right to disclose Confidential Information to its employees, recipient will have the right to disclose Confidential Information to any contractor or agent of recipient who has executed and delivered to recipient an agreement containing terms and conditions substantially similar to those set forth in this Section 10. Recipient will promptly advise discloser of any unauthorized disclosure or use of discloser's Confidential Information. This Section 10.2 imposes no obligation upon recipient with respect to Confidential Information which: a) was in the possession of or was known by recipient without an obligation to maintain its confidentiality prior to its receipt from discloser, except Confidential Information disclosed prior to the date of this Agreement and marked within thirty (30) days after the signing of this Agreement by the discloser as confidential or proprietary; b) is or becomes generally known to the public without violation of this Section 10.2 by recipient; c) is rightfully obtained by recipient from a third party without an obligation to keep information confidential; d) is independently developed by recipient without use of Confidential Information or e) is disclosed pursuant to legal, judicial or administrative order or otherwise required by law. 10.3 Proprietary Rights. Recipient will not acquire any rights in the Confidential Information disclosed to it hereunder, except the limited right to use Confidential Information for the purposes set forth in this Agreement. 10.4 Return of Confidential Information. Upon termination of this Agreement, recipient will return all of discloser's Confidential Information disclosed to recipient during the course of this Agreement or will provide to discloser written certification that such Confidential Information has been destroyed. 11. Miscellaneous. 11.1 Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the transactions contemplated hereby and supersedes all prior agreements and 8 9 understandings between the parties relating to such transactions. The Parties shall hold the existence and terms of this Agreement confidential, unless both parties otherwise consent in writing. 11.2 Amendments. This Agreement may be amended only by written consent of both parties. 11.3 Independent Contractor. Neither party shall, for any purpose, be deemed to be an agent of the other party and the relationship between the parties shall only be that of independent contractors. Neither party shall have any right or authority to assume or create any obligations or to make any representations or warranties on behalf of any other party, whether express or implied, or to bind the other party in any respect whatsoever. 11.4 Expenses. In the event a dispute between the parties hereunder with respect to this Agreement must be resolved by litigation or other proceeding or a party must engage an attorney to enforce its right hereunder, the prevailing party shall be entitled to receive reimbursement for all associated reasonable costs and expenses (including, without limitation, attorneys fees) from the other party. 11.5 Security Interest. Until the purchase price and all other charges payable to N.M.B. hereunder have been received in full, N.M.B. hereby retains and Customer hereby grants to N.M.B. a security interest in the Products delivered to Customer and any proceeds therefrom. 11.6 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California, excluding its choice of law principles. The parties consent to the exclusive jurisdiction of the state and federal courts in Santa Clara County, California. 11.7 Force Majeure. In the event that either party is prevented from performing or is unable to perform any of its obligations under this Agreement (other than a payment obligation) due to any Act of God, fire, casualty, flood, earthquake, war, strike, lockout, epidemic, destruction of production facilities, riot, insurrection, material unavailability, or any other cause beyond the reasonable control of the party invoking this section, and if such party shall have used its best efforts to mitigate its effects, such party shall give prompt written notice to the other party, its performance shall be excused, and the time for the performance shall be extended for the period of delay or inability to perform due to such occurrences. Regardless of the excuse of Force Majeure, if such party is not able to perform within sixty (60) days after such event, the other party may terminate the Agreement. 11.8 Assignment. This Agreement shall be binding and inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding the foregoing, neither party shall assign any of its rights nor delegate any of its obligations under this Agreement to any third party without the express written consent of the other, provided that consent shall not be required in connection with a reorganization, merger or sale of such party's business or assets to a third party. IN WITNESS WHEREOF, the parties' authorized representatives have executed this Agreement as of the Effective Date. 9 10 VISIONEER, INC. N.M.B. TECHNOLOGIES INC. By: /s/ Tom Burt By: /s/ Myron Jones ------------------------- ------------------------------ Title: V.P. Operations Title: President ---------------------- --------------------------- Date: 5/8/97 Date: April 28, 1997 ----------------------- ---------------------------- 10 11 EXHIBIT A PRICE SCHEDULE FOR PRODUCTS Customer agrees to pay N.M.B. the following prices for Products: 11 EX-10.25 3 LOAN AND SECURITY AGREEMENT DATED JUNE 26,1997 1 Exhibit 10.25 VISIONEER, INC. LOAN AND SECURITY AGREEMENT ================================================================================ 2 TABLE OF CONTENTS
Page 1. DEFINITIONS AND CONSTRUCTION......................................... 1 1.1 Definitions................................................. 1 1.2 Accounting Terms............................................ 7 2. LOAN AND TERMS OF PAYMENT............................................ 7 2.1 Revolving Advances.......................................... 7 2.1.1 Letters of Credit......................................... 7 2.2 Overadvances................................................ 8 2.3 Interest Rates, Payments, and Calculations.................. 8 2.4 Crediting Payments.......................................... 8 2.5 Fees........................................................ 9 2.6 Additional Costs............................................ 9 3. CONDITIONS OF LOANS.................................................. 9 3.1 Conditions Precedent to Initial Advance..................... 10 3.2 Conditions Precedent to all Advances........................ 10 4. CREATION OF SECURITY INTEREST........................................ 10 4.1 Grant of Security Interest.................................. 10 4.2 Delivery of Additional Documentation Required............... 10 4.3 Right to Inspect............................................ 10 5. REPRESENTATIONS AND WARRANTIES....................................... 11 5.1 Due Organization and Qualification.......................... 11 5.2 Due Authorization; No Conflict.............................. 11 5.3 No Prior Encumbrances....................................... 11 5.4 Bona Fide Eligible Accounts................................. 11 5.5 Merchantable Inventory...................................... 11 5.6 Intellectual Property....................................... 11 5.7 Name; Location of Chief Executive Office.................... 11 5.8 Litigation.................................................. 12 5.9 No Material Adverse Change in Financial Statements.......... 12 5.10 Solvency.................................................... 12 5.11 Regulatory Compliance....................................... 12 5.12 Environmental Condition..................................... 12 5.13 Taxes....................................................... 12 5.14 Subsidiaries................................................ 12 5.15 Government Consents......................................... 12 5.16 Full Disclosure............................................. 12 6. AFFIRMATIVE COVENANTS................................................ 13 6.1 Good Standing............................................... 13 6.2 Government Compliance....................................... 13 6.3 Financial Statements, Reports, Certificates................. 13 6.4 Inventory; Returns.......................................... 14 6.5 Taxes....................................................... 14 6.6 Insurance................................................... 14 6.7 Principal Depository........................................ 14 6.8 Quick Ratio................................................. 14 6.9 Debt-Net Worth Ratio........................................ 14 6.10 Profitability............................................... 14 6.11 Registration of Intellectual Property Rights................ 15 6.12 Further Assurances.......................................... 15 7. NEGATIVE COVENANTS................................................... 15 7.1 Dispositions................................................ 15
i 3 7.2 Change in Business.......................................... 15 7.3 Mergers or Acquisitions..................................... 15 7.4 Indebtedness................................................ 16 7.5 Encumbrances................................................ 16 7.6 Distributions............................................... 16 7.7 Investments................................................. 16 7.8 Transactions with Affiliates................................ 16 7.9 Intellectual Property Agreements............................ 16 7.10 Subordinated Debt........................................... 16 7.11 Inventory................................................... 16 7.12 Compliance.................................................. 16 8. EVENTS OF DEFAULT.................................................... 16 8.1 Payment Default............................................. 17 8.2 Covenant Default............................................ 17 8.3 Material Adverse Change..................................... 17 8.4 Attachment.................................................. 17 8.5 Insolvency.................................................. 17 8.6 Other Agreements............................................ 17 8.7 Subordinated Debt........................................... 17 8.8 Judgments................................................... 17 8.9 Misrepresentations.......................................... 18 9. BANK'S RIGHTS AND REMEDIES........................................... 18 9.1 Rights and Remedies......................................... 18 9.2 Power of Attorney........................................... 19 9.3 Accounts Collection......................................... 19 9.4 Bank Expenses............................................... 19 9.5 Bank's Liability for Collateral............................. 19 9.6 Remedies Cumulative......................................... 20 9.7 Demand; Protest............................................. 20 10. NOTICES.............................................................. 20 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER........................... 20 12. GENERAL PROVISIONS................................................... 20 12.1 Successors and Assigns...................................... 21 12.2 Indemnification............................................. 21 12.3 Time of Essence............................................. 21 12.4 Severability of Provisions.................................. 21 12.5 Amendments in Writing, Integration.......................... 21 12.6 Counterparts................................................ 21 12.7 Survival.................................................... 21 12.8 Confidentiality............................................. 21
ii 4 This LOAN AND SECURITY AGREEMENT is entered into as of June 26, 1997, by and between SILICON VALLEY BANK ("Bank") and VISIONEER, INC. ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 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 a cash advance or cash advances 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 (including fees and expenses of appeal), whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" has the meaning set forth in Section 2.1 hereof. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. 1 5 "Committed Line" means Seven Million Five Hundred Thousand Dollars ($7,500,000). "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. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "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 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. Notwithstanding the foregoing and unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts with terms sixty (60) days or more that the Account Debtor has failed to pay within thirty (30) days of the due date set forth in the invoice for such Account and Accounts with terms less than sixty (60) days that the account debtor has failed to pay within sixty (60) days of the due date set forth in the invoice for such Account; (b) Accounts with respect to an account debtor, twenty five percent (25%) of whose Accounts the account debtor has failed to pay within the time periods required for an Eligible Account set forth in the immediately preceding paragraph (a). (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; 2 6 (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 twenty-five percent (25%) 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. "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. "Intellectual Property Collateral" means any and all right, title and interest of Borrower in the following: (a) Copyrights, Trademarks and Patents; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; 3 7 (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "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 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. "Letter of Credit" or "Letters of Credit" means a letter of credit or similar undertaking issued by Bank pursuant to Section 2.1.1. "Letter of Credit Reserve" has the meaning set forth in Section 2.1.1. "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 the date immediately preceding the first anniversary of the date of this Agreement. "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 4 8 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. "Patents means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "Payment Date" means the twenty-fifth (25th) calendar day of each month. "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; (d) Indebtedness to trade creditors incurred in the ordinary course of business; (f) Indebtedness secured by Permitted Liens; (g) Capital leases or indebtedness incurred solely to purchase equipment which is secured in accordance with clause (c) of "Permitted Liens" below and is not in excess of the lesser of the purchase price of such equipment or the fair market value of such equipment on the date of acquisition; and (h) Extensions, refinancings, modifications, amendments and restatements of any of items of Permitted Indebtedness (a) through (g) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; 5 9 (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any Equipment, acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such Equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such Equipment; and (e) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (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 announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means, as of any applicable date, the unrestricted cash; unrestricted cash-equivalents; net, billed accounts receivable, except distributor Accounts which are over sixty (60) days older than the due date for such Accounts; and investments with maturities of fewer than one year 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 cash 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 (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power 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, research and development expenses (except prepaid expenses), and distributor Accounts which are over sixty (60) days older than the due date for such Accounts, 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. 6 10 "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Assignor connected with and symbolized by such trademarks. 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 Revolving Advances. (a) 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 (i) the lesser of the Committed Line or the Borrowing Base, minus (ii) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit). For purposes of this Agreement, "Borrowing Base" shall mean (i) as to domestic Accounts, an amount equal to seventy percent (70%) of Eligible Accounts and (ii) as to distributor Accounts, an amount equal to sixty percent (60%) of Eligible Accounts. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time prior to the Maturity Date. (b) Procedures. 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. (c) Maturity. The Revolving Facility shall terminate on the Maturity Date, at which time all Advances under this Section 2.1 shall be immediately due and payable. 2.1.1 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be issued letters of credit (each a "Letter of Credit," collectively, the "Letters of Credit") for the account of Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of the Committed Line or the Borrowing Base, minus (ii) the then outstanding principal balance of the Advances; provided that the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) shall not in any case exceed Two Million Dollars ($2,000,000). Each Letter of Credit shall have an expiry date no later than the Maturity Date. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard Application and Letter of Credit Agreement, including the payment of Bank's standard Letter of Credit fee. All amounts actually paid by Bank in respect of a letter of credit shall, when paid, constitute an Advance under this Agreement. (b) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or 7 11 liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit. (c) Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent of the amount thereof (plus cable charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for cable transfer to the country of which it is the currency. (d) Upon the issuance of any letter of credit payable in a currency other than United States Dollars, Bank shall create a reserve under the Committed Line for letters of credit against fluctuations in currency exchange rates, in an amount equal to ten percent (10%) of the face amount of such letter of credit. The amount of such reserve may be amended by Bank from time to time account for fluctuations in the exchange rate. The availability of funds under the Committed Line shall be reduced by the amount of such reserve for so long as such letter of credit remains outstanding. 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 the Committed Line or 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 Rates. (_)Except as set forth in Section 2.3(b), all Advances shall bear interest, on the average Daily Balance thereof, at a rate equal to (i) one-quarter of one percentage point (0.25%) above the Prime Rate in any month following Bank's receipt of the Compliance Certificate, in substantially the form of Exhibit D attached hereto, indicating the ratio of Quick Assets to Current Liabilities is greater than 1.0 to 1.0, and (ii) one-half of one percentage point (0.50%) above the Prime Rate in any month following Bank's receipt of the Compliance Certificate indicating the ratio of Quick Assets to Current Liabilities is less than 1.0 to 1.0. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable in equal installments on the Payment Date of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Committed Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon California time shall be deemed to have 8 12 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 Eighteen Thousand Seven Hundred Fifty Dollars ($18,750), which fee shall be due on the Closing Date and shall be fully earned and nonrefundable (Bank shall credit the commitment fee received from Borrower in the amount of Eighteen Thousand Seven Hundred Fifty Dollars ($18,750) against the facility fee due under this paragraph); (b) Financial Examination and Appraisal Fees. Bank's customary fees and out-of- pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents; and (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. 12.6 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); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error; provided, however, that Borrower shall not be liable for any such amount attributable to any period prior to the date one hundred and eighty (180) days prior to the date of such statement. 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 9 13 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) an audit of Borrower's Accounts at Borrower's expense; (d) intellectual property security agreement; (e) financing statement (Form UCC-1); (f) insurance certificate; (g) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; and (h) 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; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Advance as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Advance. The making of each Advance shall be 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 Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan 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 10 14 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 Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound except to the extent that certain intellectual property agreements prohibit the assignment of the rights thereunder to a third party without the Borrower's or other party's consent and the Loan Documents constitute an assignment. 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. 5.6 Intellectual Property. Borrower is the sole owner of the Intellectual Property Collateral, except for non-exclusive licenses granted by Borrower to its customers in the ordinary course of business. Each of the Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party, except for the infringement action filed on November 1, 1996, by Millenium, L.P., a Cayman Island limited partnership against Compaq alleging that Compaq's scanner keyboard which utilizes certain technology licensed from Borrower, infringes certain patent claims. Except for and upon the filing with the United States Patent and Trademark Office with respect to the Patents and Trademarks and the Register of Copyrights with respect to the Copyrights necessary to perfect the security interests created hereunder, and except as has been already made or obtained, no authorization, approval or other action by, and no notice to or filing with, any United States governmental authority or United States regulatory body is required either (i) for the grant by Borrower of the security interest granted hereby or for the execution, delivery or performance of Loan Documents by Borrower in the United States or (ii) for the perfection in the United States or the exercise by Bank of its rights and remedies hereunder. 5.7 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 11 15 5.8 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. Borrower does not have knowledge of any such pending or threatened actions or proceedings. 5.9 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. 5.10 Solvency. The fair saleable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.11 Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.12 Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.14 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.15 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 governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 5.16 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 12 16 misleading (it being recognized by Bank that the projections and forecasts provided by Borrower are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results). 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make an Advance hereunder, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, certified by a Responsible Officer; (b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within fifteen (15) days upon becoming available, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Two Hundred Fifty Thousand Dollars ($250,000) or more; (e) prompt notice of any material change in the composition of the Intellectual Property Collateral, including, but not limited to, any subsequent ownership right of the Borrower in or to any Copyright, Patent or Trademark not specified in any intellectual property security agreement between Borrower and Bank or knowledge of an event that materially adversely effects the value of the Intellectual Property Collateral; and (f) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within twenty (20) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable; provided, Borrower shall not be required to deliver the aged listings of accounts receivable and accounts payable for any month in which no Obligations are outstanding under this Agreement. Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. 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 every six (6) months unless an Event of Default has occurred and is continuing. 13 17 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000); provided, if such returns and recoveries are pursuant to a binding distributor agreement, Borrower shall only be required to promptly notify Bank of such returns and recoveries in excess of the allowances set forth in such distributor agreements. 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Borrower shall maintain its principal depository and operating accounts with Bank. 6.8 Quick Ratio. Borrower shall maintain, as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.00 to 1.00. 6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the last day of each calendar month, a ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than 1.80 to 1.00. 6.10 Profitability. Borrower shall have a minimum net profit of One Dollar ($1.00) for each fiscal quarter, except that Borrower may suffer losses not to exceed the following amounts for the following quarters: (i) Six Million Dollars ($6,000,000) for the fiscal quarter ending June 30, 1997, (ii) One Million Five Hundred Thousand Dollars ($1,500,000) for the fiscal quarter ending September 30, 1997, and (iii) Five Hundred Thousand Dollars ($500,000) for the fiscal quarter ending December 31, 1997. 14 18 6.11 Registration of Intellectual Property Rights. (a) Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual property rights listed on Exhibits A, B and C to the Intellectual Property 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 any third party, including without limitation revisions or additions to the intellectual property rights listed on such Exhibits A, B and C. (b) 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 the Intellectual Property Collateral. (c) Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld, unless Bank determines that reasonable business practices suggest that abandonment is appropriate. (d) Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.11 to take but which Borrower fails to take, after thirty (30) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.11. 6.12 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment. 7.2 Change in Business. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership. Borrower will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, without the prior written consent of Bank. 15 19 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 other than payment in an aggregate amount not to exceed One Million Dollars ($1,000,000) in any fiscal year made for the repurchase of stock effected in connection with the termination of employees, so long as such payments will not cause an Event of Default to occur under any financial covenant. 7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 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. 7.9 Intellectual Property Agreements. Borrower shall not permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Borrower's rights and interests in any property included within the definition of the Intellectual Property Collateral acquired under such contracts. 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 (Bank has approved in writing all of Borrower's existing locations for storing Inventory as of the Closing Date), 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, at the request of Bank, 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 Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 16 20 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 or 6.11 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 8.3 Material Adverse Change. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Advances will be required to be made during such cure period); 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within ten (10) days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000) 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 Five Hundred Thousand Dollars ($500,000) 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 17 21 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) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (e) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (f) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (g) 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; (h) 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; 18 22 (i) Bank may credit bid and purchase at any public sale; and (j) 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; (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; (f) to modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower's approval of or signature to such modification by amending Exhibit A, Exhibit B and Exhibit C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims any right, title or interest; (g) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; and (h) to transfer the Collateral into the name of Bank or a third party to the extent permitted under the California Uniform Commercial Code 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. 9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. Bank shall have a non-exclusive, royalty-free license to use the Intellectual Property Collateral to the extent reasonably necessary to permit Bank to exercise its rights and remedies upon the occurrence of an Event of Default. 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. 19 23 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: Visioneer, Inc. 34800 Campus Drive Fremont, CA 94555 Attn: Mr. Geoff Darby FAX: (415) If to Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, CA 95054 Attn: Ms. Kathryn Dienz FAX: (408) 748-9478 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. 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER The Loan Documents 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 20 24 12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; 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 the Loan Documents, 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 agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 12.8 Confidentiality. In handling any confidential information Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. 21 25 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. VISIONEER, INC. By: /s/ Geoffrey C. Darby ------------------------------ Title: CFO ---------------------------- SILICON VALLEY BANK By: /s/ Patrick J. McCarthy ------------------------------- Title: Vice President ---------------------------- 22 26 EXHIBIT A The Collateral shall consist of all right, title and interest of Borrower 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 Borrower'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 Borrower'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 Borrower arising out of the sale or lease of goods, the licensing of 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; (e) All documents, cash, deposit accounts, securities, financial assets, investment properties, securities accounts, securities entitlements, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower'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. 23 EX-10.26 4 LETTER AGREEMENTS DATED APRIL 1, 1997 1 Exhibit 10.26 April 1, 1997 Mr. J. Larry Smart 21245 Comer Drive Saratoga, California 95070 Dear Larry: As you are aware, the Board of Directors of Visioneer, Inc. has decided to implement certain management changes and is pleased to offer you a full time employment position starting April 1, 1997 as acting President and CEO. Your responsibilities will include implementing the management and other organizational changes recommended by the Board. You will report directly to the Board and all Visioneer officers will report to you. As you are also aware, the Board will commence a search for a permanent President and CEO immediately. Your salary will be $20,000 per month, payable in accordance with Visioneer's standard payroll policy. You will be required to devote all of your business time and attention to Visioneer's business. If at anytime during the period of your employment relationship with Visioneer, your relationship is terminated or there is a significant reduction in your duties for any reason other than for Cause (as defined below) or as a result of your voluntary termination, you will be entitled to a severance payment of $60,000 in addition to the salary paid to you as of such date. "Cause" for purposes of this letter shall mean unsatisfactory performance by you of your duties as determined by the Board in its sole discretion, breaches of Visioneer policies or agreements, the conviction of a felony, committing an act of dishonesty, fraud or intentional illegal conduct against Visioneer, the misappropriation of Visioneer property, the breach by you, or any alleged breach, of any other arrangement or relationship between you and another entity which the Board determines in its sole discretion to be injurious to Visioneer in a material manner. The Company has also granted you a nonstatutory option to purchase 135,000 shares of Visioneer Common Stock at the price of $3 3/4 per share. As a nonstatutory stock option, any difference between the fair market value of Visioneer Common Stock on the date of exercise and the date of grant will be treated as ordinary income and withholding tax will be due from you. The option will vest at the rate of 15,000 shares per month for so long as you remain an employee of Visioneer. If, during the first three months of your employment relationship with Visioneer, your relationship is terminated or there is a significant reduction in your duties for any reason other than for Cause or as a result of your voluntary termination, you will become immediately vested with respect to 45,000 shares (which number includes and is not in addition to shares that have vested as of the date of such termination). The stock option will be subject to the execution by you of an Option Agreement setting forth these terms in detail. Under the Option Agreement you will be entitled to exercise the stock option with respect to the shares that have vested as of the date of termination for 90 days after such date. 2 In addition, if at any time during your employment relationship with Visioneer you have achieved certain performance milestones agreed to between you and the Board, the Board will accelerate the vesting of an additional number of shares under the stock option of up to 50% of the number of shares already vested as of such date; provided, however, in no event will you be entitled to acquire more than 135,000 shares under the option. The decision of whether you have achieved such milestones and whether to accelerate the vesting of the option shall be determined by the Board in its sole discretion. You will also be asked to sign Visioneer's standard Confidentiality and Assignment of Inventions Agreement. Your employment relationship with Visioneer will be "at will" and will be terminable by either you or Visioneer at any time for any reason. Except as set forth in this letter, you will not be entitled to acceleration of vesting or any severance payment in connection with your employment relationship with the Company or any termination thereof. In addition, you agree to relinquish any rights you may have to stock options under Visioneer's 1995 Directors' Stock Option Plan. We all look forward to a mutually profitable and enjoyable relationship as we build Visioneer into a premier data input device company together. This letter supersedes our previous letters relating to the subject matter of this letter, including our letter dated February 12, 1997, which is hereby rescinded in its entirety. This includes termination of the options granted to you to purchase 200,000 shares of Visioneer Common Stock, termination of the $25,000 per year consulting fee and termination of any other benefits set forth in such letter. In this regard, you also confirm your resignation as Chairman of the Board of Directors but will remain a director of Visioneer until requested to resign by the Board of Directors, at which time you will resign such position. If you agree with these terms please sign this letter and return it to me by April 1, 1997. Regards, /s/ William J. Harding William J. Harding For the Board of Directors Visioneer, Inc. I accept this offer /s/ J. Larry Smart 4/2/97 ------------------------- --------------- Date 3 July 7, 1997 Mr. J. Larry Smart 21245 Comet Drive Saratoga, California 95070 Dear Larry: This letter amends the letter agreement between you and Visioneer, Inc. dated April 1, 1997, under which you were granted an option to purchase 135,000 shares of Visioneer Common Stock (the "April Option"). The April letter agreement provided that you would be eligible for acceleration of vesting of up to 45,000 shares under the April Option upon achievement of certain performance milestones agreed to between you and the Board. You agree that such acceleration of vesting under the April Option will no longer apply. Instead, you will be eligible for certain acceleration of vesting under an additional option granted to you and summarized below. The April Option will continue to vest at the rate of 15,000 shares per month and, provided you remain an employee of the Company, will be fully vested on January 1, 1998. The Company has granted you an option to purchase 180,000 shares of Visioneer Common Stock at the price of $3 7/16 per share (the "June Option"). The June Option is in addition to the April Option. The June Option will be an incentive stock option under the Company's 1993 Incentive Stock Option Plan to the maximum extent permitted by applicable IRS rules, with the balance of such options being Nonstatutory Stock Options within the meaning of the plan. The June Option will vest at the rate of 15,000 shares per month commencing January 1, 1998 for so long as you remain an employee of Visioneer. You will be eligible for acceleration of vesting under the June Option under any of the following three conditions: (i) if you remain the President and CEO of the Company upon either the Company's hiring of a permanent President and CEO and remain an employee through a subsequent two week transition period (the "CEO Transition Period"), or the consummation of a change of control of the Company, such as the merger of the Company or the sale of substantially all of the Company's assets to a third party, whether either event occurs before or after January 1, 1998, you will become immediately vested with respect to an additional 60,000 shares, or such lesser number of unvested shares remaining under the June Option; (ii) if you remain an employee of the Company through September 30, 1997 and achieve certain performance milestones agreed to between you and the Board based on your performance through September 30, 1997, the Board will accelerate the vesting of up to an additional 45,000 shares under the June Option (such milestones will be based on the six objectives originally communicated to you prior to your commencement of employment); and (iii) if you remain an employee of the Company through the CEO Transition Period and you achieve certain performance milestones agreed to between you and the Board based on your performance after October 1, 1997 and through the CEO Transition Period, the Board will accelerate the vesting of up to an additional 30,000 shares under the June Option. The decision under subsections (ii) and (iii) above of whether you have 4 achieved such milestones shall be determined by the Board in its sole discretion. In addition, your eligibility for acceleration of vesting under subsections (i), (ii) and (iii) will also be subject to the Board's sole determination that you have satisfactorily performed your duties as President, CEO and an employee of the Company during the period covered by such milestones, or, with respect to subsection (i), generally during the term of your employment by the Company. In addition, your eligibility for acceleration of vesting under subsection (i) as a result of a change of control of the Company is subject to the opinion of the Company's accountants that such acceleration of vesting will not disqualify the Company from the availability of pooling of interest accounting treatment in connection with a merger or sale of the Company. Notwithstanding the foregoing, in no event will you be entitled to acquire more than 180,000 shares under the June Option and 135,000 shares under the April Option. As with the April Option, the June Option will be subject to the execution by you of an Option Agreement setting forth in detail these terms. Under the Option Agreement you will be entitled to exercise the June Option with respect to the shares that have vested as of the date of termination for 90 days after such date. Except as set forth in this letter and the April letter agreement between you and Visioneer, you will not be entitled to acceleration of vesting under the April Option or the June Option or any severance payment in connection with your employment relationship with the Company or any termination thereof. In addition, your employment relationship with Visioneer will continue to be "at will" and will be terminable by either you or Visioneer at any time for any reason. Except as provided in this letter agreement, all terms of the April letter agreement shall remain in full force and effect. This letter agreement shall govern, however, in the event of any conflict between such agreements. We all look forward to a mutually profitable and enjoyable relationship as we build Visioneer into a premier data input device company together. Regards, /s/ Jeff Heimbuck Jeff Heimbuck For the Board of Directors Visioneer, Inc. I accept this offer /s/ J. Larry Smart 7/7/97 ------------------------- --------------- Date EX-10.27 5 LETTER AGREEMENT DATED APRIL 9, 1997 1 Exhibit 10.27 April 9, 1997 Mr. Jeff Heimbuck 399 Atherton Avenue Atherton, CA 94027 Dear Jeff: This letter amends and clarifies the letter to you dated March 25, 1997 pursuant to which you were offered the opportunity to join the Board of Directors of Visioneer, Inc. starting March 31, 1997. Your start date shall be April 9, 1997. The grant of 50,000 shares of Visioneer Common Stock referenced in the letter will be allocated as follows in order to comply with certain NASD requirements: (i) 20,000 shares will be granted under Visioneer's 1995 Directors' Stock Option Plan, a copy of which has been delivered to you, and pursuant to which all shares are eligible for acceleration of vesting upon a change of control of Visioneer; (ii) 25,000 shares will be granted pursuant to a stand alone grant made by the Board of Directors which grant will not be subject to shareholder approval; and (iii) 5,000 shares will be granted pursuant to a second stand alone grant made by the Board of Directors which will be subject to shareholder approval. All options will be nonstatutory stock options and will vest at the rate of 25% of the total number of shares subject to each of the options on each anniversary the date of grant. Vesting will, of course, depend on the continuation of your director relationship with the Company and such other conditions as are set forth in the 1995 Directors' Stock Option Plan, as applicable, and the relevant option agreements. The stand alone option grants will be entitled to acceleration of vesting upon a change of control of Visioneer if in connection with such change of control you are requested by the acquiror to resign from Visioneer's Board of Directors or do not serve as a director of the successor corporation. The stock options will be subject to the execution by you of applicable stock option agreements which will set forth these terms in detail. If you agree with these changes, please sign this letter below and return it to me by April 9, 1997. Regards, /s/ David F. Marquardt David F. Marquardt For the Board of Directors Visioneer, Inc. I accept this offer /s/ Jeff HeimbuckUU 4/9/97 -------------------------------- ------------- Date 2 VISIONEER, INC. NOTICE OF NONSTATUTORY STOCK OPTION GRANT Optionee's Name and Address: Jeff Heimbuck _____________________ _____________________ You have been granted an option to purchase Common Stock of Visioneer, Inc. (the "Company"), as follows: Board Approval Date: April 9, 1997 -------------------- Date of Grant (Later of Board Approval Date or Commencement of Employment/Consulting): April 9, 1997 -------------------- Exercise Price Per Share: $3.50 -------------------- Total Number of Shares Granted: 25,000 -------------------- Total Price of Shares Granted: $87,500.00 -------------------- Term/Expiration Date: April 9, 2007 -------------------- Vesting Commencement Date: April 9, 1997 -------------------- Vesting Schedule: 25% of the shares subject to the option shall become exercisable on each anniversary of the Vesting Commencement Date. Termination Period: Option may be exercised for a period of 30 days after termination of Optionee's relationship with the Company as a director of the Company except as set out in Sections 7 and 8 of the Stock Option Agreement (but in no event later than the Expiration Date). -2- 3 By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the Nonstatutory Stock Option Agreement attached and made a part of this document. OPTIONEE: VISIONEER, INC. /s/ Jeff Heimbuck By: /s/ Geoffrey C. Darby - -------------------------- ------------------------------- Signature Jeff Heimbuck Title: CFO - -------------------------- ---------------------------- Print Name -3- 4 VISIONEER, INC. NONSTATUTORY STOCK OPTION AGREEMENT 1. GRANT OF OPTION. Visioneer, Inc., a Delaware corporation (the "Company"), hereby grants to the Optionee named in the Notice of Stock Option Grant attached to this Agreement ("Optionee"), an option (the "Option") to purchase the total number of shares of Common Stock (the "Shares") set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise Price") subject to the terms, definitions and provisions of this Nonstatutory Stock Option Agreement (the "Agreement"). This Option is intended to be a Nonstatutory Stock Option. 2. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant as follows: (a) RIGHT TO EXERCISE. (i) This Option may not be exercised for a fraction of a share. (ii) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitations contained in paragraphs (iii) and (iv) below. (iii) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Stock Option Grant. (b) METHOD OF EXERCISE. (i) This Option shall be exercisable by delivering to the Company a written notice of exercise (in the form attached as Exhibit A) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares of Common Stock as may be required by the Company. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. (ii) As a condition to the exercise of this Option, Optionee agrees to make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the exercise of the Option or disposition of Shares, whether by withholding, direct payment to the Company, or otherwise. 5 (iii) No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company an investment representation statement in customary form, a copy of which is available for Optionee's review from the Company upon request. 4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the following, or a combination of the following, at the election of Optionee: (a) cash; (b) check; (c) surrender of other Shares of Common Stock of the Company that (i) either have been owned by Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (d) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised; or (e) if there is a public market for the Shares and they are registered under the Securities Act, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price. 5. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. TERMINATION OF RELATIONSHIP. In the event of termination of Optionee's Continuous Status as a director of the Company, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set out in the Notice of Stock Option Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified in the Notice of Stock Option Grant, the Option shall terminate. 7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6 above, in the event of termination of Optionee's relationship with the Company as a director of the -2- 6 Company as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from the date of termination of such relationship (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), exercise the Option to the extent otherwise so entitled at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified in this Agreement, the Option shall terminate. 8. DEATH OF OPTIONEE. In the event of the death of Optionee: (a) during the term of this Option and while a director of the Company and having been a director of the Company since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had Optionee continued living and remained as a director of the Company three (3) months after the date of death, subject to the limitation contained in Section 2(i)(d) above in the case of an Incentive Stock Option; or (b) within thirty (30) days after the termination of Optionee's relationship with the Company as a director of the Company, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution. The designation of a beneficiary does not constitute a transfer. An Option may be exercised during the lifetime of Optionee only by Optionee or a transferee permitted by this section. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 10. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the terms of this Option. 11. NO ADDITIONAL EMPLOYMENT RIGHTS. Optionee understands and agrees that the vesting of Shares pursuant to the Vesting Schedule is earned only by continuing as a director of the Company at the will of the Company (not through the act of being hired, being granted this Option or acquiring Shares under this Agreement). Optionee further acknowledges and agrees that nothing in this Agreement shall confer upon Optionee any right with respect to continuation as a director of the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. -3- 7 12. TAX CONSEQUENCES. Optionee acknowledges that he or she has read the brief summary set forth below of certain federal tax consequences of exercise of this Option and disposition of the Shares under the law in effect as of the date of grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) EXERCISE OF NONSTATUTORY STOCK OPTION. Optionee may incur regular federal income tax liability upon the exercise of the Option. Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. In addition, if Optionee is an employee of the Company, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (b) DISPOSITION OF SHARES. Gain realized on the disposition of Shares will be treated as long-term or short-term capital gain depending on whether or not the disposition occurs more than one year after the exercise date. 13. SIGNATURE. This Stock Option Agreement shall be deemed executed by the Company and Optionee upon execution by such parties of the Notice of Stock Option Grant attached to this Stock Option Agreement. [Remainder of page left intentionally blank] -4- 8 EXHIBIT A NOTICE OF EXERCISE To: Visioneer, Inc. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Nonstatutory Stock Option This is official notice that the undersigned ("Optionee") intends to exercise Optionee's option to purchase __________ shares of Visioneer, Inc. Common Stock, under and pursuant to the Nonstatutory Stock Option Agreement dated ___________, as follows: Grant Number: ________________________________ Date of Purchase: ________________________________ Number of Shares: ________________________________ Purchase Price: ________________________________ Method of Payment of Purchase Price: ________________________________ Social Security No.: ________________________________ The shares should be issued as follows: Name:____________________________ Address:_________________________ _________________________ _________________________ Signed:__________________________ Date:____________________________ 9 VISIONEER, INC. NOTICE OF NONSTATUTORY STOCK OPTION GRANT Optionee's Name and Address: Jeff Heimbuck _____________________ _____________________ You have been granted an option to purchase Common Stock of Visioneer, Inc. (the "Company"), as follows: Board Approval Date: April 9, 1997 -------------------- Date of Grant (Later of Board Approval Date or Commencement of Employment/Consulting): April 9, 1997 -------------------- Exercise Price Per Share: $3.50 -------------------- Total Number of Shares Granted: 5,000 -------------------- Total Price of Shares Granted: $17,500.00 -------------------- Term/Expiration Date: April 9, 2007 -------------------- Vesting Commencement Date: April 9, 1997 -------------------- Vesting Schedule: 25% of the shares subject to the option shall become exercisable on each anniversary of the Vesting Commencement Date. Termination Period: Option may be exercised for a period of 30 days after termination of Optionee's relationship with the Company as a director of the Company except as set out in Sections 7 and 8 of the Stock Option Agreement (but in no event later than the Expiration Date). 10 By your signature and the signature of the Company's representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the Nonstatutory Stock Option Agreement attached and made a part of this document. OPTIONEE: VISIONEER, INC. /s/ Jeffrey Heimbuck By: /s/ Geoffrey C. Darby - -------------------------- ------------------------------- Signature Jeffrey Heimbuck Title: CFO - -------------------------- ---------------------------- Print Name -2- 11 VISIONEER, INC. NONSTATUTORY STOCK OPTION AGREEMENT 1. GRANT OF OPTION. Visioneer, Inc., a Delaware corporation (the "Company"), hereby grants to the Optionee named in the Notice of Stock Option Grant attached to this Agreement ("Optionee"), an option (the "Option") to purchase the total number of shares of Common Stock (the "Shares") set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise Price") subject to the terms, definitions and provisions of this Nonstatutory Stock Option Agreement (the "Agreement"). This Option is intended to be a Nonstatutory Stock Option. 2. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant as follows: (a) RIGHT TO EXERCISE. (i) This Option may not be exercised for a fraction of a share. (ii) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitations contained in paragraphs (iii) and (iv) below. (iii) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Stock Option Grant. (b) METHOD OF EXERCISE. (i) This Option shall be exercisable by delivering to the Company a written notice of exercise (in the form attached as Exhibit A) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares of Common Stock as may be required by the Company. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. (ii) As a condition to the exercise of this Option, Optionee agrees to make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the exercise of the Option or disposition of Shares, whether by withholding, direct payment to the Company, or otherwise. 12 (iii) No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company an investment representation statement in customary form, a copy of which is available for Optionee's review from the Company upon request. 4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the following, or a combination of the following, at the election of Optionee: (a) cash; (b) check; (c) surrender of other Shares of Common Stock of the Company that (i) either have been owned by Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (d) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised; or (e) if there is a public market for the Shares and they are registered under the Securities Act, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price. 5. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. TERMINATION OF RELATIONSHIP. In the event of termination of Optionee's Continuous Status as a director of the Company, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set out in the Notice of Stock Option Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified in the Notice of Stock Option Grant, the Option shall terminate. 7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6 above, in the event of termination of Optionee's relationship with the Company as a director of the -2- 13 Company as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from the date of termination of such relationship (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), exercise the Option to the extent otherwise so entitled at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified in this Agreement, the Option shall terminate. 8. DEATH OF OPTIONEE. In the event of the death of Optionee: (a) during the term of this Option and while a director of the Company and having been a director of the Company since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had Optionee continued living and remained as a director of the Company three (3) months after the date of death, subject to the limitation contained in Section 2(i)(d) above in the case of an Incentive Stock Option; or (b) within thirty (30) days after the termination of Optionee's relationship with the Company as a director of the Company, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution. The designation of a beneficiary does not constitute a transfer. An Option may be exercised during the lifetime of Optionee only by Optionee or a transferee permitted by this section. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 10. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the terms of this Option. 11. NO ADDITIONAL EMPLOYMENT RIGHTS. Optionee understands and agrees that the vesting of Shares pursuant to the Vesting Schedule is earned only by continuing as a director of the Company at the will of the Company (not through the act of being hired, being granted this Option or acquiring Shares under this Agreement). Optionee further acknowledges and agrees that nothing in this Agreement shall confer upon Optionee any right with respect to continuation as a director of the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. -3- 14 12. TAX CONSEQUENCES. Optionee acknowledges that he or she has read the brief summary set forth below of certain federal tax consequences of exercise of this Option and disposition of the Shares under the law in effect as of the date of grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) EXERCISE OF NONSTATUTORY STOCK OPTION. Optionee may incur regular federal income tax liability upon the exercise of the Option. Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. In addition, if Optionee is an employee of the Company, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (b) DISPOSITION OF SHARES. Gain realized on the disposition of Shares will be treated as long-term or short-term capital gain depending on whether or not the disposition occurs more than one year after the exercise date. 13. SIGNATURE. This Stock Option Agreement shall be deemed executed by the Company and Optionee upon execution by such parties of the Notice of Stock Option Grant attached to this Stock Option Agreement. [Remainder of page left intentionally blank] -4- 15 EXHIBIT A NOTICE OF EXERCISE To: Visioneer, Inc. Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Nonstatutory Stock Option This is official notice that the undersigned ("Optionee") intends to exercise Optionee's option to purchase __________ shares of Visioneer, Inc. Common Stock, under and pursuant to the Nonstatutory Stock Option Agreement dated ___________, as follows: Grant Number: ________________________________ Date of Purchase: ________________________________ Number of Shares: ________________________________ Purchase Price: ________________________________ Method of Payment of Purchase Price: ________________________________ Social Security No.: ________________________________ The shares should be issued as follows: Name:____________________________ Address:_________________________ _________________________ _________________________ Signed:__________________________ Date:____________________________ EX-11.1 6 STMNT. OF COMPUTATION OF NET LOSS PER COMMON SHARE 1 Exhibit 11.1 VISIONEER, INC. COMPUTATION OF NET LOSS PER COMMON SHARES (In thousands, except per share amounts) (Unaudited)
Three months ended Six months ended June 30, June 30, -------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Weighted average common shares outstanding 19,317 19,033 19,359 18,987 Net loss ................................. $(5,694) $(6,321) $(22,827) $(6,264) ======= ======= ======== ======= Net loss per share ....................... $ (0.29) $ (0.33) $ (1.18) $(0.33) ======= ======= ======== =======
EX-27.1 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the condensed balance sheet, condensed statement of operations and condensed statement of cash flows included in the Company's Form 10-Q for the three months period ended June 30, 1997 and is qualified in its entirety by reference to such financial statements and the notes thereto. 1,000 6-MOS DEC-28-1997 MAR-31-1997 JUN-29-1997 18,112 2,494 10,608 4,530 3,120 30,694 3,248 436 34,097 23,197 0 0 0 19 10,900 34,097 8,526 10,433 7,368 7,575 8,832 0 (280) (5,694) 0 (5,694) 0 0 0 (5,694) (.29) (.29)
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