-----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, JYA6iNuvCYuuKQwZkc+Wb9VHwkdm47nW3M4UA/IR0od/Kn/4TxItWyQpOJXhPc2C RuS6uPQq3EnJsiXiIugEsA== 0000898430-95-001938.txt : 19951003 0000898430-95-001938.hdr.sgml : 19951003 ACCESSION NUMBER: 0000898430-95-001938 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERSONAL COMPUTER PRODUCTS INC CENTRAL INDEX KEY: 0000725394 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 330021693 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12641 FILM NUMBER: 95577897 BUSINESS ADDRESS: STREET 1: 10865 RANCHO BERNARDO RD CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194858411 MAIL ADDRESS: STREET 1: 10865 RANCHO BERNARDO RD CITY: SAN DIEGO STATE: CA ZIP: 92127 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1995 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] for the transition period from to -------- --------- Commission file No. 0-12641 [LOGO OF PERSONAL COMPUTER PRODUCT, INC.] PERSONAL COMPUTER PRODUCTS, INC. (Name of small business issuer in its charter) DELAWARE 33-0021693 (State or other jurisdiction of (IRS Employer ID No.) incorporation or organization) 10865 Rancho Bernardo Road San Diego, California 92127 (619) 485-8411 (Address of principal executive offices and issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.005 par value (Title of Class) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ----- ------ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Registrant's total consolidated revenues for the fiscal year ended June 30, 1995 were $14,394,000. At September 22, 1995, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $4,533,800, based on the average bid and asked prices in the over-the-counter market as reported by Nasdaq. At September 22, 1995, there were 17,428,934 shares of common stock, $0.005 par value, of the registrant issued and outstanding. Information required by Part III of this Form 10-KSB is incorporated therein by reference from the Company's definitive Proxy Statement with respect to its 1995 annual meeting of stockholders to be filed pursuant to Regulation 14A within 120 days after June 30, 1995. Transitional Small Business Disclosure Format Yes No X ----- ----- Part I - ------------------------------------------------------------------------------- Item 1. Description of Business Personal Computer Products, Inc. was incorporated in March, 1982 under the laws of the State of California, and reincorporated in May, 1983 under the laws of the State of Delaware. Laser Printer Accessories Corporation, a Delaware corporation ("LPAC"), and Prima, Inc., a California corporation doing business as Prima International ("Prima"), are all wholly-owned subsidiaries of Personal Computer Products, Inc. (collectively "PCPI" or the "Company"). PCPI and its subsidiaries (1) develop and license laser printer technology; (2) manufacture, market, and distribute laser printer controllers and accessories; and (3) market and distribute internationally a variety of personal computer accessory products. The following diagram illustrates the organization of the Company. PCPI PCPI TECHNOLOGY DISTRIBUTION --------------- ------------ Controller Printer Products Development PC and Mac Products Technology Transfer Imaging Products R&D Engineering Direct Sales Tiered Distribution Adobe PostScript International Trading Imaging Technologies Through its technology division ("PCPI Technology"), the Company designs, develops, and markets firmware (software embedded in memory chips), circuit boards, application-specific integrated circuits ("ASICs") and software for use in personal computer imaging devices. The Company's technology and products are used primarily in laser printers and multifunction devices (combined printer, scanner, copier, and facsimile). The Company sells these controllers separately to sellers of laser printers, and licenses its controller board technology to other producers of laser printer engines and/or controllers. Recent PCPI Technology customers have included: Xerox Corporation, Matsushita Electric Company, Ltd. (Panasonic), Hypertec, Inc., Integrated Device Technology, Inc., Samsung Electronics Company, Ltd., Seiko Instruments and Minolta Company Ltd. Through its distribution division (the "Distribution Division"), which is composed of the Company's LPAC and Prima subsidiaries, the Company provides enhancement and accessory products to the personal computer and printer markets both in the U.S. and overseas. The Distribution Division markets and distributes value-added personal computer accessory products, including memory products such as floppy and hard disk drives from SyQuest(TradeMark) and Fujitsu(TradeMark), tape drives, and CD-ROM drives; and PCMCIA products that include miniaturized accessories such as memory devices and fax/modems for laptop and notebook computers. Industry Overview Page printers, especially laser printers, have become an established means of printing data generated by computers. The market for laser printers has grown significantly over the past several years. In 1993, overall industry figures revealed page printer (laser, LED, inkjet, etc.) sales accounting for 58 percent of total worldwide printer sales - 14 million units. The worldwide installed base of such devices is expected to grow to over 21 million units by 1997, 76 percent of all printers sold. PostScript-compatible printers accounted for approximately 20% of the market in 1993. This share is expected to be 22% by 1995. According to industry analysts including International Data Corporation, InfoCorp, and BIS Strategic Decisions, the worldwide printer market in 1992 comprised approximately 21.4 million units with a projected compound annual growth rate (CAGR) of 7.3% from 1993 through 1996. Generally, demand is 2 driven by first-time general business purchases outside the U.S. market, as well as replacement and first-time small business purchases in the domestic U.S. market. The worldwide printer market is dominated by the U.S., which is expected to continue through 1997. The U.S. is expected, however, to account for less market share over time due to market maturation. Inkjet printers were introduced in the late 1970's. In the last two years, inkjet has become the fastest growing technology, setting new growth records due to its relatively low cost and good quality reproduction in both monochrome and color. Speed is the greatest concern at this time. Most inkjet printers produce output at 3 pages per minute. If speed is to be increased, ink drying times will have to improve. Higher end inkjet models, particularly color models, typically incorporate Adobe PostScript functionality. Laser printers continue to be the dominant technology in use for page printing and high-end imaging. PostScript functionality makes up approximately 20% of this market. Laser technology is the only printer technology that is primarily sourced from Japan. Many impact and inkjet printers are manufactured in France, Singapore, Korea, and Taiwan, among others. Currently, over 75% of all laser printer engines are derived from Japan. At present, the leading printer manufacturer worldwide is Hewlett Packard, with leadership positions in both laser and inkjet technologies. Hewlett Packard is followed by Japanese manufacturers Epson, Panasonic, and Star. Other than Hewlett Packard, Apple, and Lexmark, Japanese printer companies occupy the other six positions in the top nine. [GRAPH APPEARS HERE] Features that tend to differentiate printers, particularly in the high volume/ high growth page printer technologies such as inkjet and laser, include the presence of the PostScript page description language, high resolution capability, network-ready connectivity, and output at rated engine speed. Color capability is an important issue in desktop printing. Of the 750,000 inkjet units forecast to sell in the U.S. for 1993, over 650,000 were color- capable. For color capability on other technologies such as laser, dye sublimation, and thermal transfer, PostScript Level 2 (the latest iteration of the PostScript page description language) capability is important for graphics compatibility and high quality reproduction. An additional component to the market has been recently introduced: multifunctionality. There is new emphasis on the development of desktop printing solutions that provide the end-user printer/copier/facsimile functionality in the same device. As many as 40 vendors are already involved in the development and marketing of over 150 such devices, with many more on the horizon. Color copiers have been on the market for about 20 years. They have evolved from stand-alone, walk-up machines in central reproduction departments to ultra- sophisticated, multiple-function products. U.S. sales of color copiers have concentrated on pay-for-print centers, copy outlets and professional users of color machines. Installations in the United States totaled more than 31,360 color electrophotographic copiers, including analog and digital machines, with Canon commanding approximately 55% of the installed base. Xerox follows with slightly more than 11%. The U.S. color copier market reached a volume of $185 million in 1993 and is projected to be over $1.2 billion by 1998. Color laser printers began entering the U.S. marketing during 1994. It is anticipated that many models of desktop color laser printers will offer many of the document-finishing features of color copiers, such as document sorting, collating, and stapling. Multiple input trays will accommodate network users and enhance printer versatility. It is additionally anticipated that such devices will offer scanning and facsimile functions in addition to printing as a way to overcome price sensitivity. 3 In order to be successful in the future, copier and printer vendors will have to adopt new product strategies to differentiate themselves and to provide more features to offset the growth of the color laser printer market. The key element of this strategy is multifunctionality so that high-quality, high-performance machines can be used by computer networks in the office. Business Strategy PCPI Technology's strategy is focused on the continued development and implementation of laser printer technology. The Company's development resources are directed toward the development of Adobe PostScript controllers and Adobe CPSI software implementations of PostScript. This technology will be directed toward the development of controllers that support multifunction devices (combining printer, facsimile/modem, copier, scanner) on the low-end ("LaserImage/TM/"); and development of controllers that support high- functionality color digital copier/printers on the high-end (ColorImage/TM/). The Company's mission has been the development of intelligent board-level devices that would add value to personal computers and peripheral devices. Since 1983, the Company has been an active licenser and/or OEM provider of its LaserImage(R) printer controller technology to a number of companies throughout the world. These include or have included: AEG Olympia (Germany), Elebra (Brazil), Fujitsu (Japan), Goldstar (Korea), HyperTek (Korea), Matsushita Electric Company -Panasonic (Japan), Mita (Japan), Ricoh (Japan), Samsung Electronics Company (Korea), Tandy Corporation (United States), Tokyo Electric Company (Japan), Xerox (United States), and others. In order to accommodate the manufacturing requirements of its licensees, the Company also has preferred relationships for off-shore manufacturing. Such relationships allow PCPI to provide manufacturing capabilities without the need to invest and build an extensive manufacturing infrastructure. The Company's facilities easily accommodate the needs for integration and testing. The Company had extensive technical relationships that enable it to offer the latest technology to its customers. These have included arrangements for joint development of ASIC semiconductor components for laser printer controllers with Motorola and DP-Tek; authorized developer relationships with Adobe and Hewlett Packard; and font licensing with Agfa Compugraphic and The Company (URW). In November 1993, PCPI consummated its arrangement with Adobe Systems Incorporated as an authorized co-developer for the implementation of the PostScript page description language on printers. Adobe, in the past year, has invested approximately $99 million in research and development related to its products, such as PostScript. Adobe in order to accommodate the needs of printer companies who wish to incorporate the PostScript language into their products, has appointed a few third-parties to provide some of the custom engineering resources required to integrate PostScript on printer controllers. The PostScript integration process on printer controllers is complex, requiring considerable expertise in hardware design and firmware development and implementation. Adobe and PCPI have agreed that PCPI is uniquely suited to serve the needs of printer companies who desire to include PostScript on these products. PCPI serves a critical function in providing the latest technology and rapid time-to-market to those companies who wish to remain competitive in the printer market by offering features that meet the standards of the computer industry. PCPI Technology The principal business of PCPI Technology has been the development, licensing, and marketing of imaging technology and products; principally desktop printing and publishing. PCPI Technology's strategy has been to attempt to adjust to the evolving personal computer market by developing and/or implementing technology that will enable it and its licensees to compete with, or supplement, the products of the industry's dominant manufacturers. PCPI sells and licenses, usually on a non-exclusive basis, its printer controller technology and its proprietary software. Its typical customers are manufacturers of laser printers and controllers. In the majority of cases, PCPI transfers existing technology, or modifies that technology to meet the specifications of the customer. Typically, the licensing fees derived from these activities are based on the number of units sold by the licensee that incorporate the licensed technology. In addition, PCPI receives, in most cases, initial engineering fees for adapting its technology to the requirements of the particular purchaser or licensee, and mini-mum license fees to keep the license in effect. The widespread availability of laser printers spawned a new class of applications software for desktop publishing. Using this soft-ware, a user can create, on a personal computer, a finished, high-quality, 4 printed document that incorporates a variety of type sizes, styles, and fonts previously available only through a commercial printer. As printers become more capable and sophisticated, it has become more difficult for users to know exactly what combination of features is best or most appropriate. At the most basic level, however, users want a printer that creates great looking documents; and they want one that works with their computer system, regardless of the software on that system. Only one kind of printer meets all the criteria of the end-user -- a printer that comes with genuine Adobe PostScript software. Unlike printers using other software (including PostScript clones), printers that use genuine Adobe PostScript place no limits on how the user's information may be displayed; nor what kind of document can be created or printed. This means that whether users are employing DOS, Windows, OS/2/TM/, UNIX(R), Macintosh, a mini or mainframe computer system, or any combination of these platforms, they can output work on any printer that has Adobe PostScript. PostScript is the most dependable way to print for business users. And, PostScript files can also be sent over networks, including those from Novell, 3Com, and others. The Company's Adobe PostScript Interpreter ("APSI") project, which includes its Millennium Series controllers) includes the implementation of Adobe PostScript for OEM customers. These controllers are based on IDT RISC (reduced instruction set circuit) processors or the AMD-29200 processor. Associated ASIC chips are to be implemented as dictated by functionality. The features and functions of APSI are defined as follows: . Adobe platform . Adobe PostScript Level 2 . PCL5 (LaserJet4) emulation . Parallel and Appletalk/TM/ (Macintosh) communications Additional features/functions to be implemented, depending on customer demand, include GDI (Microsoft Windows) support, doubleRES (resolution increase), PCPI PhotoImage/TM/ (resolution/grayscale enhancement), serial I/O (communications), multifunctionality (fax, scanning, etc.) and Novell (network) connectivity. Customer targets are OEMs who wish to market PostScript printers to resellers and end-users. The OEM must also be an Adobe licensee in order to be authorized to purchase APSI technology. To enhance its ability to market its technology, PCPI has entered into a sales agreement with Nippo, Ltd. of Japan for the promotion of licensing of the Company's Adobe PostScript controllers. Nippo has also made an equity investment in PCPI in the amount of approximately $1.7 million. Japanese laser printer developers represent the dominant customer base for the Company's technology. Nippo is currently a supplier of copier and laser printer engine mechanical parts to the Japanese copier and laser printer industry. Integrated Device Technology, Inc. represents PCPI's first design partnership to incorporate Adobe PostScript in a new generation of printer controllers. IDT offers state-of-the-art, high-performance RISC (reduced instruction set computing) chips that maximize the performance of controllers that incorporate PostScript functionality. This is particularly significant in markets that require the best possible printer performance, such as color printing, electronic pre-press graphics applications, etc. IDT's worldwide sales force will supplement PCPI's sales effort by representing the PCPI/IDT/PostScript solution to its customer and prospect base. IDT, with over 2,600 employees worldwide, has annual revenues that exceed $300 million. In July 1994, PCPI signed a controller development agreement with Matsushita Electric Company, Ltd. of Japan for a new Panasonic brand multifunction device that will feature printing, scanning, facsimile, and copier functionality. The new controller will be based upon PCPI's LaserImage technology. PCPI's LaserImage Series of controllers are available in a variety of different configurations. They typically provide, either as part of the controller, or through add-on boards or plug-in cartridges, industry-standard printer emulations, such as PCL from Hewlett Packard. The controller boards have been designed to minimize the use of microchip and memory components, thereby enabling production of each controller at a cost lower than would otherwise be the case. Its relationship with Motorola, Inc., for example, resulted in the development of a family of specialty circuits (ASICs) that are designed specifically for laser printer controllers. Through its license of DP-Tek's patented TrueImage/TM/ technology, PCPI is able to provide doubleRES (the unique ability to quadruple the amount of dots per square inch that a laser printer engine can place on paper. In this way, a 300 dpi laser printer may be transformed into a 600 dpi printer, which would otherwise require an alternative, more expensive 5 engine.) As part of this technology, the Company provides Microsoft Windows/TM/ compatibility to laser printers. PCPI's ColorImage series of controllers also feature the integration of Adobe/TM/ PostScript. The support of high-performance desktop printing requires considerable processing power. PCPI's ColorImage models employ IDT MIPS RISC processors along with supporting ASICs. The result is a controller that fully supports the latest features and functions of Adobe PostScript. ColorImage is a stand-alone controller, located at the workstation, to support high- performance/functionality color printers. The result is a product that significantly out-performs other controllers. The ColorImage system includes a robust color management system that has been designed to provide complete control over the color calibration of any input or output device including scanners, monitors, digital cameras, photo CD, printers, film recorders, proofing devices, etc. ColorImage software is, in effect, a color engine that makes every input device see a target profile that matches the objectives of the user. The quality and consistence of documents created using the ColorImage system is assured through a comprehensive, user-controlled calibration process. PCPI projects considerable growth in technology sales, largely on the strength of its relationship with Adobe. Distribution In October 1993, PCPI acquired Prima International, a world-wide distributor of high technology products. Prima provides manufacturers with international distribution and marketing capabilities, as well as offering U.S. purchasing facilities for international buyers. Prima functions in three basic areas: product distribution and representation, buying office/commodity sales, and international management. PCPI organized its LPAC distribution subsidiary in 1989 to take advantage of the growing market for laser printer accessories such as its ImageFont/TM/, ImageScript/TM/, LaserImage/TM/ and doubleRES/TM/ lines of cartridges, emulations, and other products that add functionality and value to the basic laser printer. The products previously marketed through LPAC could be marketed through Prima. Prima has been active in the international market for over 12 years, and understands the multi-cultural, multilingual requirements of this business. It has developed a network of highly qualified resellers located in every country of significance. In addition, its headquarters location, in the heart of Silicon Valley, California, provides access to the premier suppliers of disk and tape drives, controllers, scanners, terminals, network boards, modems, fax cards, and graphics products, as well as relationships with manufacturers developing new technologies. Prima offers international market penetration for U.S. high-technology manufacturers through use of their extensive sales channels including sub- distributors and resellers; and also representing products to the OEM and end- user communities. Prima tailors international sales and distribution programs suited to specific product needs. For many international buyers, locating a trustworthy, reliable source to purchase U.S. products on an "as needed" basis is essential to their ability to build systems and maintain a complete product offering to their customers. Prima offers these customers in-depth knowledge of the high technology market, proximity to the major producers of high technology products, and industry associations which date back to the 1960's. Through close relationships with many manufacturers, U.S. distributors, and representatives, Prima provides immediate access to hardware, software, firmware, media, accessories, and components for its international clients. Prima offers its international clients a vast network of Prima associates which results in increased marketing opportunities and options -- and decreased "time-to-market." Prima's domestic (U.S.) business focuses on direct sales to end-users via its Peripherals Direct operating unit, formed in early 1994. The purpose of this operating unit is to add incremental sales of the company's products at margins higher than would be possible through multi-tier distribution. Prima serves as a corporate-wide focal point for sales of products to resellers (dealers and distributors) worldwide as well as a conduit for products to end-users at competitive price points on high-demand computer peripheral products such as disk drives. Prima exports and imports a variety of high technology products with an emphasis on peripherals and accessories compatible with IBM, Apple Macintosh, the leading brands of small business computers, and UNIX and Novell. The focus on these markets has afforded Prima the ability to develop the technical expertise needed to fully support suppliers and customers. 6 Principal product lines include: (1) PDQ memory devices (principally removable SyQuest-brand disk drives) for PCs and Macintosh computers and (2) PCMCIA products, which represent new technology in media and value-added computer accessories for notebook and palmtop devices. Five well-defined domestic (U.S.) markets are represented: these include among others (1) the installed user base of PC-compatible storage; (2) the installed user base of Macintosh-compatible storage; and (3) users of notebook and palmtop computers that are compatible with the PCMCIA standard. Production and Sources of Supply PCPI presently contracts for the manufacture of its products with a number of suppliers located in the San Diego and San Jose, California areas. The suppliers assemble products, utilizing components purchased by the Company from other sources. The terms of supply contracts are negotiated separately in each instance. The Company is satisfied that its present assembly contractors have sufficient capacity to meet projected market demand for the Company's products, or that alternate sources are available without undue disruption. PCPI has not experienced any significant difficulty over the past several years in engaging contractors, or in purchasing components. PCPI contract suppliers generally perform a multi-step quality control test prior to shipping their products to the Company. PCPI, in turn, performs additional tests on the products, adds appropriate software, and then packages and ships the products to customers. In addition to buying such items as printed circuit boards and other components from outside suppliers, the Company purchases software programs, in the form of floppy disks, from vendors who have licenses to sell such software to the Company from the originators of such software, and has, from time to time, directly licensed system software used in certain PCPI products. Marketing Marketing and sales activities are conducted by approximately 8 Company employees. Each of the divisions and subsidiaries utilizes dedicated sales personnel. Research and Development Despite the fact that there can be no assurance that PCPI can successfully produce new products, nor that such products will be profitable, the Company will be required to continue to spend substantial sums on research and development in the foreseeable future in order to enhance existing products, and to develop new products. New technology developed, or products introduced, by other entities, including major computer companies, could adversely affect the marketability of the Company's products. Consequently, the Company is compelled to continue development of new technologies, and implementation of new technologies, in order to remain competitive. Competition The markets for computer hardware and software have been characterized by rapid and continuing technological change, and by intense competition. The Company provides differentiation in the laser printer controller/accessories marketplace through the capability of its controllers, the quality and extent of accompanying printer emulation software, and the ability of these controllers to provide added-value through image enhancement technologies such as increased resolution and image enhancement. Printer and computer accessories are often commodities that do not provide significant differentiation. The Company, through its Prima subsidiary, strives to differentiate itself by providing superior customer service, timely delivery of product to its customers, and competitive pricing. Proprietary Protection PCPI's software is copyrighted; however, such protection as the copyright laws provide does not prevent other companies from emulating the effects achieved by such software. PCPI owns no patents, but has obtained registration of several of its trade-names or trademarks, including: PCPI, LaserImage, ImageScript, and ImageFont. 7 Employees The Company, including its Prima, and LPAC subsidiaries, employed a total of 41 persons (all full-time) at June 30, 1995, of whom 8 were in corporate administration and finance, 16 in engineering and research and development, 4 in production, and 13 in sales and marketing. Other The costs and effects of compliance with Federal, state, and local environmental laws and other existing or probable governmental regulations are not, and are not expected to be, material. In certain cases, government (Federal Communications Commission) approval is required with respect to PCPI's controller products. Item 2. Description of Property The Company, and its LPAC subsidiary, occupy approximately 23,000 square feet of space in a facility located at 10865 Rancho Bernardo Road, San Diego, California 92127, at a monthly rental rate of $11,500. The lease expires on August 31, 1996. The Company owns no real property. Prima International occupies 5,000 square feet of space in a facility located at 3350 Scott Boulevard, Building No. 7, Santa Clara, California 95054, on a month- to-month basis at a monthly rental rate of $4,745. Item 3. Legal Proceedings The Company, because of the nature of its business, is from time to time involved in legal actions. The Company, after discussion with legal counsel, does not consider that any of these legal actions now pending will result in a material adverse effect on the consolidated financial position or results of operations of the Company and, further, does not consider that any such proceedings fall outside ordinary, routine litigation incidental to the business of the Company. Item 4. Submission of Matters To a Vote of Security Holders Not applicable. 8 Part II - ------------------------------------------------------------------------------- Item 5. Market for Common Equity and Related Stockholder Matters The Company's common stock is traded in the over-the-counter market, and quoted on Nasdaq (symbol: PCPI). The following table sets forth the high and low bid quotations of the Company's common stock for the periods indicated as reported by Nasdaq. Prices shown in the table represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission, and do not necessarily represent actual transactions.
High Low ------------------------------------------------ Year ended June 30, 1994 First quarter $ 1.31 $ .72 Second quarter 1.28 .69 Third quarter 1.31 .56 Fourth quarter 1.13 .56 Year ending June 30, 1995 First quarter $ .88 $ .50 Second quarter .78 .41 Third quarter .59 .25 Fourth quarter .56 .19 ------------------------------------------------
The listing requirements under The Nasdaq SmallCap Market are that a company maintain at least $1,000,000 of public market float, maintain at least $1,000,000 of capital and surplus and maintain a bid price of $1.00 for 10 consecutive trading days within a ninety day period for the publicly traded shares. If a company maintains at least $2,000,000 of capital and surplus, there is no minimum bid price requirement. The Company was notified that it was not in compliance with the above minimum bid requirements based on its then capital and surplus. The Company presented a plan to Nasdaq to achieve compliance with said requirements and has been granted an exception from these listing requirements until September 30, 1995. Should the Company be unsuccessful in satisfying the above requirements, its common stock could become subject to delisting from The Nasdaq SmallCap Market. If the Company's common stock is delisted, it would be quoted only on the NASD OTC Bulletin Board and the Company could reapply for listing once the Nasdaq listing requirements are satisfied. The number of stockholders of record of common stock, $.005 par value, of the Company was 313 at June 30, 1995. PCPI has never declared, or paid, any cash dividends on the PCPI Common Stock. PCPI currently intends to retain earnings, if any, after any payment of dividends on its 5% Convertible Preferred Stock and 5% Series B Convertible Preferred Stock, for use in its business, and, therefore, does not anticipate paying any cash dividends on the PCPI Common Stock. Holders of the 5% Convertible Preferred Stock are entitled to receive, when and as declared by the Board of Directors, but only out of amounts legally available for the payment thereof, cumulative cash dividends at the annual rate of $50.00 per share, payable semi-annually, and commencing on October 15, 1986. PCPI has never declared, or paid, any cash dividends on the PCPI 5% Convertible Preferred Stock. Dividends in arrears at June 30, 1995 were $1,673,000. Holders of the 5% Series B Convertible Preferred Stock are entitled to receive, when and as declared by the Board of Directors, but only out of amounts legally available for the payment thereof, cumulative cash dividends at the annual rate of $500 per share, payable annually. 9 Item 6. Management's Discussion and Analysis or Plan of Operations Results of Operations Overview The Company had a net loss from continuing operations of $2,510,000 for fiscal 1995 compared to a net loss of $3,588,000 for fiscal 1994. Total revenues from continuing operations were $14,394,000 for fiscal 1995 versus $10,832,000 for fiscal 1994. The Company's recent focus of its business efforts on the development of Adobe/TM/ PostScript/TM/-based controllers and other controllers featuring PCPI's ImageBase/TM/ software platform, has resulted in the recognition during fiscal 1995, of approximately $1,097,000 in revenues associated with contracts to adapt the Company's software products to controllers that will be integrated with the hardware products of various OEM customers, including Integrated Device Technology, Inc. (IDT), Matsushita Electric Company, Ltd. (Panasonic), Samsung Electronics Company, Seiko Instruments and Minolta Company, Ltd. PCPI's strategy has required the Company to alter its focus away from some of its traditional revenue sources and to make expenditures in support of these efforts. As a result, the Company's business continues to be in a significant transition and there are important short-term operational and liquidity challenges. Accordingly, year-to-year financial comparisons may be of limited use due to these important changes in the Company's business and also due to the Company's strategic acquisition of Prima in October 1993. As described in Note 2 to the financial statements, effective March 24, 1995, the Company sold 81% of the common stock of ImageSoft Incorporated. The operations of ImageSoft were not significant. The Company had inadequate working capital to invest additional funds in ImageSoft and has not provided any significant funding to ImageSoft operations for the past few years. The disposal of ImageSoft resulted in a gain of $227,000 as the result of ImageSoft's excess liabilities over assets on that date. As described in Note 5 to the financial statements, in January 1995, the Company converted certain outstanding notes payable into 1,117,197 unregistered shares of the Company's common stock. The Company recognized an extraordinary gain on the issuance of these shares of approximately $209,000 representing the difference in the aggregate conversion price and the market value of the shares. Fiscal 1995 includes non-recurring non-cash gains of $227,000 on the sale of ImageSoft, $234,000 on the settlement of license agreements and an extraordinary gain on the conversion of notes payable into common stock of $209,000 and a non- cash accounting loss of $204,000 on the conversion of the 5% Notes into common stock. Revenues Sales of products from continuing operations were $13,043,000 for fiscal 1995 versus $10,526,000 for fiscal 1994. Sales of products by the Company's Prima subsidiary were $12,487,000 for the year ended June 30, 1995. Prima sales were $9,482,000 for the year ended June 30, 1994, which only included sales from the date of acquisition in October 1993. Prima's business consists of product distribution and integration, including sales of its PDQ(TM) line of memory devices featuring SyQuest(TM) removable cartridge technology. A shortage of working capital during fiscal 1995 imposed limitations on the Company's operations, including Prima's business. The Company's sales of products from continuing operations, other than Prima sales, for the year ended June 30, 1995 were $556,000 compared to $1,044,000 for the year ended June 30, 1994, both of which are far lower than the Company's historic product sales. During the year ended June 30, 1995, PCPI sold, to a single customer, $231,000 of laser printer engines. Sales of printer products marketed through the Company's Laser Printer Accessories Corporation ("LPAC") subsidiary, were $243,000 during fiscal 1995 and were $286,000 during fiscal 1994. During fiscal 1995, the Company performed work on engineering projects that were funded by OEM customers under non-recurring engineering contracts (NRE). NRE revenue for the year ended June 30, 1995 was $1,097,000, which was recognized during the course of development based on the percentage of completion method. 10 Licensing and royalties for the year ended June 30, 1995 were $254,000 versus $306,000 for the year ended June 30, 1994. In the past, licensing and royalty revenue has shown significant year-to-year fluctuation. PCPI has submitted several proposals to prospective customers in order to develop Adobe PostScript- based controllers and other controllers based upon its ImageBase technology. While the Company has entered into some contracts with OEM customers for controller development, there can be no assurance that additional contracts will be obtained for the development of such controllers, or that the existing contracts will be completed, or that products will then be shipped by the customer in order to generate future royalty and license revenues. Cost of Products Sold Cost of products sold from continuing operations for the year ended June 30, 1995 and 1994 was $11,883,000 and $10,128,000, respectively, representing a gross margin of 8.9% and 3.8%, respectively. The increased margin is attributed to a change in the product mix at Prima between the periods and reduced amortization of prepaid license and royalties. In addition, the product sales during the year ended June 30, 1995 resulted in lower royalty charges compared to the previous year's product sales. Selling, General and Administrative Selling, general and administrative expenses from continuing operations for fiscal 1995 were $3,149,000 versus $3,324,000 for fiscal 1994. The decrease is due to (1) reductions in selling expenses due primarily to the Company's working capital shortage, (2) the permanent reduction in the Company's rent on its San Diego facilities (from approximately $27,000 to $11,500 per month) during the second quarter of fiscal 1995, (3) reductions in force due to attrition and (4) general reductions in overhead expenses. These were partially offset by (1) increases in sales commissions as the result in increased product and technology sales during the year (2) the absence of Prima expenses in the first quarter of fiscal 1994 (the Company acquired Prima in the second quarter of fiscal 1994), and 3) the effect of temporary reductions of wages and salaries for the first quarter of fiscal 1994. Research and Development Research and development expenditures from continuing operations for fiscal 1995 were $1,283,000 versus $546,000 for fiscal 1994. These expenditures consist of engineering expenses associated with the development of controller technologies and designs for PCPI technology customers. During fiscal 1995 the Company did not capitalize any costs pursuant to Statement of Financial Accounting Standard No. 86 ("Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed") as the Company did not have any qualifying expenditures. The Company capitalized $674,000 of such costs in fiscal 1994. The Company's current development projects have been funded by OEM customers under development contracts. Other Income and Loss Interest expense from continuing operations was $114,000 for fiscal 1995 versus $103,000 for fiscal 1994. Interest expenses were due to outstanding debt balances. The year ended June 30, 1995 includes non-recurring non-cash gains of $234,000 on the settlement of license agreements and $227,000 on the disposal of ImageSoft (discontinued operations) and a non-cash accounting loss in accordance with Statement of Financial Accounting Standards No. 84 ("Induced Conversions of Convertible Debt") of $204,000 on the conversion of the 5% Notes into common stock. The Company also recognized an extraordinary non-cash gain of $209,000 on the conversion of notes payable into common stock representing the difference in the aggregate conversion price of the shares issued and their market value at the date of conversion. The year ended June 30, 1994 includes non-recurring gains of $11,000 as the result of the sale of investment securities. Discontinued Operations Effective March 24, 1995, the Company sold 81% of its ImageSoft subsidiary. The Company's discontinued ImageSoft subsidiary (software distribution and publishing) had sales for the year ended June 30, 1995 of approximately $93,000 compared to sales of $261,000 for the year ended June 30, 1994. 11 Total ImageSoft operating expenses for the year ended June 30, 1995 and 1994 were $164,000 and $657,000, respectively. Liquidity and Capital Resources During fiscal 1995, the Company experienced operating difficulties due to its lack of working capital. The shift in focus toward Adobe co-development projects presents continuing liquidity problems because, in the short-term, these activities are net users of working capital. The Company believes its current working capital and anticipated operating cash flows may not be sufficient to meet its financial resource requirements. Adequate working capital is necessary to continue the Company's operations, develop its technology licensing business and to deliver the resulting products to contract customers in an efficient and timely manner. Shareholders should note the Company's weak cash position and negative working capital, and the possibility of continuing operating losses. In addition, the Company's auditors have stated, in their audit report, that certain factors raise substantial doubt about the Company's ability to continue as a going concern. During the year ended June 30, 1995 PCPI's liquidity improved slightly, despite operating losses during the year, as the result of converting approximately $2,535,000 of liabilities into common and preferred stock of the Company. Despite the conversion, at June 30, 1995 the Company had a negative balance of working capital of $649,000, an improvement from the negative working capital of $1,155,000 as of June 30, 1994. The Company is currently seeking additional financing in order to meet its short-term and long-term liquidity requirements. However, there can be no assurance that such financing will be available. In addition, the Company will continue to pursue opportunities to convert existing liabilities of the Company into equity in order to improve its working capital position. As of June 30, 1995, Prima's unused special purpose line of credit was $214,000. PCPI has no material commitments for capital expenditures. 12 Item 7. Financial Statements PAGE ---- Report of independent accountants............................................ 14 Consolidated balance sheet as of June 30, 1995............................... 15 Consolidated statement of operations for the year ended June 30, 1995 and 1994............................................. 16 Consolidated statement of cash flows for the year ended June 30, 1995 and 1994............................................. 17 Consolidated statement of shareholders' equity for the year ended June 30, 1995 and 1994............................................. 18 Notes to consolidated financial statements................................... 19 13 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Personal Computer Products, Inc. We have audited the consolidated balance sheet of Personal Computer Products, Inc. and its subsidiaries as of June 30, 1995 and the related consolidated statements of operations, cash flows, and shareholders' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated statements of operations, cash flows, and shareholders' equity for the year then ended June 30, 1994, were audited by other auditors whose report dated October 24, 1994, expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Personal Computer Products, Inc. and its subsidiaries as of June 30, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As indicated in the accompanying financial statements and as described in Note 1, the Company has suffered recurring losses from continuing operations, has negative working capital of $649,000, has a net investment in new software products of $1,719,000, and remaining shareholders' equity of $1,216,000. These factors raise substantial doubt about the Company's ability to continue as a going concern and recover its investment in new software products. Management's plans to raise additional financing and execute a growth strategy to capitalize on the Company's investment in new software products are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. BOROS & FARRINGTON APC San Diego, California September 25, 1995 14 PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 1995 - ------------------------------------------------------------------------------- ASSETS - ------------------------------------------------------------------------------- Current assets: Cash $ 322,000 Accounts receivable, net 1,250,000 Inventories 521,000 Other current assets 268,000 ----------- Total current assets 2,361,000 Capitalized software, net 1,193,000 Prepaid licenses and royalties, net 526,000 Property and equipment, net 146,000 ----------- $ 4,226,000 ----------- - ------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 1,719,000 Accrued expenses 269,000 Deferred revenues 21,000 Notes payable 1,001,000 ----------- Total current liabilities 3,010,000 ----------- Commitments - Note 12 Shareholders' equity: 5% convertible preferred stock $1,000 par value, 7,500 shares authorized, 2,318 issued and outstanding 2,318,000 5% Series B convertible preferred stock $1,000 par value, 117 shares authorized, 116.2 issued and outstanding 1,162,000 Preferred stock $1,000 par value, 2,383 authorized, no shares issued and outstanding Common stock $.005 par value, 50,000,000 shares authorized, 17,428,934 shares issued and outstanding 87,000 Paid-in capital 18,019,000 Accumulated deficit (20,370,000) ----------- Total shareholders' equity 1,216,000 ----------- $ 4,226,000 ----------- - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 15 PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------- For the year ended June 30, 1995 1994 - ----------------------------------------------------------------------------------- Revenues: Sales of products $ 13,043,000 $ 10,526,000 Engineering fees 1,097,000 License fees and royalties 254,000 306,000 ------------- -------------- 14,394,000 10,832,000 ------------- -------------- Costs and expenses: Cost of products sold 11,883,000 10,128,000 Selling, general and administrative 3,149,000 3,324,000 Amortization of capitalized software development costs 499,000 322,000 Research and development 1,283,000 546,000 ------------- -------------- 16,814,000 14,320,000 ------------- -------------- Loss from operations (2,420,000) (3,488,000) ------------- -------------- Other income (expense): Interest, net (109,000) (96,000) Settlement of license agreements 234,000 Loss on conversion of convertible debt (204,000) Other (3,000) 14,000 ------------- -------------- (82,000) (82,000) ------------- -------------- Net loss from continuing operations before provision for income taxes (2,502,000) (3,570,000) Provision for taxes 8,000 18,000 ------------- -------------- Net loss from continuing operations (2,510,000) (3,588,000) Discontinued operations: Loss from operations of discontinued subsidiary (71,000) (396,000) Gain on disposal of subsidiary 227,000 ------------- -------------- Net loss before extraordinary item (2,354,000) (3,984,000) Extraordinary gain on the conversion of notes payable into common stock 209,000 ------------- -------------- Net loss $ (2,145,000) $ (3,984,000) ------------- -------------- Primary loss per common share from continuing operations $ (0.18) $ (0.31) ------------- -------------- Primary loss per common share before extraordinary item $ (0.17) $ (0.34) ------------- -------------- Primary loss per common share $ (0.15) $ (0.34) ------------- -------------- Weighted average common shares outstanding $ 14,799,800 $ 12,027,000 - -----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 16 PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------- For the year ended June 30, 1995 1994 - ----------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $ (2,145,000) $ (3,984,000) ------------ ------------ Adjustments to reconcile net loss to cash used by operating activities: Depreciation and amortization of equipment 121,000 140,000 Amortization of software development costs 499,000 322,000 Amortization of prepaid licenses and royalties 219,000 274,000 Gain on disposal of subsidiary (227,000) Loss on conversion of convertible debt 204,000 Extraordinary gain on conversion of notes payable into common stock (209,000) Changes in assets and liabilities: Accounts receivable 133,000 1,035,000 Inventories 691,000 266,000 Other current assets (1,000) 235,000 Accounts payable and accrued expenses 211,000 722,000 Deferred revenues (154,000) 175,000 ------------ ------------ Net cash used by operating activities (658,000) (815,000) ------------ ------------ Cash flows from investing activities: Capitalized software development costs (674,000) Prepaid licenses and royalties (68,000) (420,000) Capital expenditures (67,000) (19,000) ------------ ------------ Net cash used by investing activities (135,000) (1,113,000) ------------ ------------ Cash flows from financing activities: Proceeds from notes payable 761,000 700,000 Repayment of notes payable (407,000) (760,000) Proceeds from line of credit 329,000 Repayment of line of credit (43,000) Principal payments under capital lease obligations (50,000) (39,000) Net proceeds from exercise of employee options and warrants 275,000 72,000 Net proceeds from sale of common stock 88,000 1,846,000 Proceeds from shareholder loans 9,000 170,000 Net proceeds from sale of warrants 50,000 ------------ ------------ Net cash provided by financing activities 962,000 2,039,000 ------------ ------------ Net increase in cash 169,000 111,000 Cash at the beginning of the period 153,000 42,000 ------------ ------------ Cash at the end of the period $ 322,000 $ 153,000 ============ ============ Non-cash financing activities: Conversion of notes payable to common stock $ 1,186,000 ------------ Conversion of accounts payable to preferred stock $ 1,162,000 ------------ Common stock options exercised with accounts payable $ 479,000 ------------ Conversion of preferred to common stock $ 93,000 $ 200,000 ------------ ------------ Conversion of accrued interest to common stock $ 38,000 ------------ Conversion of accrued interest to principal on notes payable $ 54,000 ------------ Fixed assets acquired under capital leases $ 7,000 $ 25,000 ------------ ------------ Prima International assets acquired through debt assumption $ 1,279,000 ------------ Conversion of accounts payable to common stock $ 487,000 ------------ Conversion of accounts payable to notes payable $ 180,000 ------------ Common stock exercised with loans $ 9,000 Supplemental disclosure of cash ------------ flow information: Cash paid during the period for interest $ 19,000 $ 95,000 ------------ ------------ Cash paid during the period for income taxes $ 11,000 $ 17,000 ============ ============ - -----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 17 PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
5% Series B Common Stock 5% Convertible Convertible ------------ Preferred Stock Preferred Stock Paid-in --------------- --------------- Shareholder Accumulated Shares Amount Capital Shares Amount Shares Amount Loans Deficit Total ------ ------ ------- ------ ------ ------ ------ ----- ------- ----- Balance at June 30, 1993 10,444,413 $54,000 $13,232,000 2,611 $2,611,000 $(170,000) $(14,241,000) $1,486,000 Exercise of stock options 146,925 1,000 80,000 (9,000) 72,000 Conversion of preferred stock 57,143 200,000 (200) (200,000) Common stock issued as settlement of accounts payable 577,772 3,000 484,000 487,000 Private sales of common stock 2,225,000 11,000 1,835,000 1,846,000 Warrants issued 50,000 50,000 Repayment of shareholder loans 170,000 170,000 Net loss (3,984,000) (3,984,000) ---------- ------- ----------- ----- ---------- ----- ---------- --------- ------------ ----------- Balance at June 30, 1994 13,451,253 69,000 15,881,000 2,411 2,411,000 (9,000) (18,225,000) 127,000 Exercise of employee stock options 166,500 1,000 84,000 85,000 Exercise of employee warrants 1,125,366 6,000 664,000 670,000 Conversion of preferred stock 26,427 93,000 (93) (93,000) Common stock issued on conversion of notes payable 1,959,388 8,000 1,192,000 1,200,000 Preferred stock issued on conversion of accounts payable 116.2 $1,162,000 1,162,000 Private sales of common stock 700,000 3,000 105,000 108,000 Repayment of shareholder loans 9,000 9,000 Net loss (2,145,000) (2,145,000) ---------- ------- ----------- ----- ---------- ----- ---------- --------- ------------ ----------- Balance at June 30, 1995 17,428,934 $87,000 $18,019,000 2,318 $2,318,000 116.2 $1,162,000 $ 0 $(20,370,000) $ 1,216,000 ========== ======= =========== ===== ========== ===== ========== ========= ============ ===========
See accompanying notes to consolidated financial statements. 18 PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. The Company and Its Capital Resources Personal Computer Products, Inc., a Delaware corporation, and its subsidiaries ("PCPI" or the "Company"), (1) develop and license laser printer technology; (2) manufacture, market, and distribute laser printer controllers and accessories; and (3) market and distribute internationally a variety of personal computer accessory products. The Company has incurred net losses from continuing operations of $2,510,000 and $3,588,000 in 1995 and 1994, respectively; and, as of June 30, 1995 had remaining shareholders' equity of $1,216,000 and negative working capital of $649,000. The Company's negative working capital position has resulted from both its net losses and an aggregate investment in new software products of $1,581,000 in 1994 and 1993. Management plans to continue to pursue a growth strategy in fiscal 1996 that will capitalize on the Company's investment in new software products. The Company is dependent on additional financing in order to continue as a going concern and to realize this investment in new software products through the execution of management's strategy. Management is actively seeking additional funding to support and grow the Company's operations, however, there can be no assurance that this financing will be obtained. Summary of Significant Accounting Policies .Principles of Consolidation The consolidated financial statements include the accounts of PCPI and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. .Inventories Inventories are valued at the lower of cost or market; cost being determined by the first-in, first-out method. .Capitalized Software Costs The Company has developed software technology and capitalized qualifying direct labor and related fringe, facilities, and other overhead costs pursuant to the provisions of Statement of Financial Accounting Standards No. 86 "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". The capitalized software development costs primarily related to software contained in laser printer controllers and add-on products for laser printer controllers. Capitalized software includes emulations of existing software printer control languages currently in the marketplace, as well as software included in laser printer controllers for existing laser printers. The Company's software emulation products are generally offered in different combinations that are designed to provide more value than its competitors' products. Its printer controller products are generally designed to allow existing laser printers to operate at higher performance levels than originally configured. While the Company believes its new products will be accepted in the marketplace and that it will recover its investment in capitalized software, the ultimate realization of this investment is dependent on such acceptance and the Company's ability to market these new products. Costs incurred prior to the establishment of technological feasibility, or subsequent to the release to customers, are expensed as research and development costs as incurred. Capitalized software costs are amortized on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over the estimated economic life of the product, generally three years. Amortization begins when the product is available for general release to customers. .Prepaid Licenses and Royalties Up-front payments for licenses of software and royalties are recorded as prepaid licenses and royalties. Amortization is recorded on a straight-line basis over estimated useful lives generally ranging from three to five years, commencing from the date the underlying technology is available for use by the Company. 19 .Property and Equipment Property and equipment are recorded at cost. Depreciation, including amortization of assets recorded under capitalized leases, is generally computed on a straight-line basis over the estimated useful lives of assets ranging from three to five years. Amortization of leasehold improvements is provided over the initial term of the lease, on a straight-line basis. .Revenues Revenue from the sale of products is recognized as of the date shipments are made to customers. Revenue from long-term software and technology license fees is recognized once the collection is made, or is "probable" as prescribed in AICPA Statement of Position 91-1 "Software Revenue Recognition," and there are no further contractual obligations under the license agreement. Royalties are recognized upon the sale of such products by the licensee. The Company currently has development contracts with original equipment manufacturers ("OEMs") to adapt the Company's software products to the OEMs' hardware products. Revenues under these contracts are recognized based on the percentage-of-completion method. Deferred revenue comprises payments received in advance of revenue to be recognized on such contracts. .Research and Development Research and development costs are charged to expense as incurred. The cost of engineering fee revenue is included as a component of research and development. .Income Taxes The Company's provision for income taxes is accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109 mandates the liability method for computing deferred income taxes. The Company adopted FAS 109 in fiscal 1994 and adoption of the new statement did not have a significant effect on the Company's financial position or results of operations. Prior to fiscal 1994, the Company accounted for income taxes in accordance with FAS 96. .Earnings (Loss) Per Common Share Earnings (loss) per common share is based on the weighted average number of shares of common stock and dilutive common stock equivalents, if any, outstanding during the period, and is computed after giving effect to the dividend requirements of the 5% Convertible Preferred Stock ($118,000 and $126,000 during fiscal 1995 and fiscal 1994, respectively) and the 5% Series B Convertible Preferred Stock. The effect of the conversion privileges of convertible preferred stock and convertible notes payable is antidilutive for the periods presented. Accordingly, such effect is not reflected in the calculation of primary loss per common share. .Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" requires the disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. The carrying value of the financial instruments on the consolidated balance sheet are considered reasonable estimates of the fair value. .Reclassifications Certain amounts in the 1994 consolidated financial statements have been reclassified to conform to the presentation in the 1995 consolidated financial statements. Note 2. Discontinued Operations Effective March 24, 1995, the Company sold 81% of the common stock of its then wholly-owned subsidiary ImageSoft Incorporated ("ImageSoft"), to ImageSoft's president in consideration of a $100,000 Promissory Note ("Note"). The Note is secured by the assets and technologies of ImageSoft and matures on March 24, 2000. The Note bears interest at the annual rate of 7%, payable annually, and calls for the principal to be 20 paid at maturity. The Note has not been reflected in the financial statements and a gain will be recognized as the cash payments are received. As a result of the sale, the Company will account for its investment in ImageSoft under the cost method; accordingly, the results of ImageSoft's operations have been excluded from the consolidated operations from the date of sale. The balance sheet as of June 30, 1995 and statement of operations for the years ended June 30, 1995 and 1994 reflect the sale of ImageSoft. As of June 30, 1995, no assets or liabilities of ImageSoft have been reflected in the Company's financial statements and the Company's remaining 19% investment is recorded at zero. Note 3. Acquisition of Prima International Effective October 1, 1993, the Company acquired all of the outstanding stock of Prima, Inc. ("Prima") doing business as Prima International, a distributor of computer peripherals and add-on products. The purchase price was $10 plus the assumption of Prima's liabilities. The transaction was accounted for as a purchase; accordingly, the results of Prima's operations have been included in consolidated operations from the date of acquisition. The following are the unaudited pro forma results of operations of the Company as though Prima was acquired on July 1, 1993.
Year ended June 30, --------------------------- 1995 1994 ----------- ----------- (UNAUDITED) Revenues $14,394,000 $13,092,000 Net loss from continuing operations (2,510,000) (3,639,000) Net loss before extraordinary item (2,354,000) (4,029,000) Net loss (2,145,000) (4,029,000) Primary loss per common share from continuing operations (0.18) (0.31) Primary loss per common share before extraordinary item (0.17) (0.35) Primary loss per common share (0.15) (0.35)
In conjunction with the acquisition, assets acquired and liabilities assumed were each $1,279,000; no goodwill was recorded in connection with this transaction. Note 4. Composition of Certain Financial Statement Captions
June 30, 1995 ------------- Accounts receivable: Trade $1,292,000 Less allowance for doubtful accounts (205,000) ---------- 1,087,000 Current license fees and royalties 163,000 ---------- $1,250,000 ========== Inventories: Materials and supplies $ 213,000 Work in progress 26,000 Finished goods 282,000 ---------- $ 521,000 ========== Capitalized software, at cost: Released products $1,730,000 Products under development 198,000 ---------- 1,928,000 Less accumulated amortization (735,000) ---------- $1,193,000 ==========
21
June 30, 1995 ------------- Prepaid licenses and royalties $ 699,000 Less accumulated amortization (173,000) ---------- $ 526,000 ========== Property and equipment, at cost: Computers and other equipment $ 664,000 Office furniture and fixtures 186,000 Leasehold improvements 134,000 ---------- 984,000 Less accumulated depreciation and amortization (838,000) ---------- $ 146,000 ========== Accrued liabilities: Compensation and vacation $ 177,000 Accrued interest 29,000 Other 63,000 ---------- $ 269,000 ==========
Note 5. Debt 5% Convertible Notes Payable In January 1993, the Company issued 5% Convertible Notes to foreign lending institutions, at par, due December 31, 1995, for an original principal amount of $500,000. The notes bore interest at 5% simple interest per year, payable on December 31st of each year and were convertible, at the option of the holder, into shares of the Company's common stock at $1.50 per share. In January 1995, the conversion rate under the 5% Convertible Notes was reduced from $1.50 to $0.625. As a result of this reduction, the Company recognized a non-cash accounting loss in the amount of $204,000 pursuant to FAS 84 (Statement of Financial Accounting Standards No. 84 - "Induced Conversions of Convertible Debt"). Subsequent to this, holders of the 5% Convertible Notes converted outstanding debt and accrued interest of approximately $526,000 into 842,191 shares of the Company's common stock. Notes Payable Notes payable assumed in the Prima acquisition (Note 3) are unsecured and amounted to $440,000 at the time of acquisition and matured in January 1995. As of June 30, 1995, the outstanding balance of this Prima debt, owed to a private investor, was $20,000. Interest on the note is 8% per annum. In September 1993, the Company issued a Promissory Note in the principal amount of $700,000 to a private investment group. The note bears interest at 10% per annum, is payable semi-annually, and is secured by certain of the Company's contracts receivable. The Note is due on September 17, 1995 and as of that date the Company was in default under the original terms of the agreement. The Company is negotiating an extension on the Note, however, there can be no assurance that an extension can be obtained under acceptable terms and conditions. The private investor group also purchased warrants in September 1993 (Note 8). As of June 30, 1995, the outstanding balance was approximately $431,000. In December 1993, the Company converted approximately $180,000 of trade accounts payable into an unsecured two-year note payable bearing interest at 9.5% per annum. The note calls for minimum monthly principal and interest payments of $5,000, with the balance of $86,000 due on December 15, 1995. At June 30, 1995, the outstanding balance was approximately $170,000. In July, 1995 the Note was declared in default under the terms of the note. In July and October 1994, the Company received an aggregate amount of $686,000 from one of its investors, Nippo, Ltd. and an affiliate (Note 7), under Notes payable due in one year bearing interest ranging from 3% to 7%. In January 1995, the outstanding debt and accrued interest totaling $698,000 was converted into 1,117,197 shares of the Company's common stock. The Company recognized an extraordinary gain on the issuance of these shares of approximately $209,000 representing the difference in the aggregate conversion price and the market value of the shares on the conversion date. In March 1995, one of the Company's directors agreed to loan the Company a gross aggregate amount of up to $100,000 with interest at the rate of 7% per year. Advances under this Note are convertible into unregistered shares of the Company's common stock at the market rate on that date. As of June 30, 1995, borrowing under this Note 22 aggregated $75,000 which is included as a component of Notes Payable. In September 1995, an additional $25,000 was advanced to the Company under this Note. 4-3/4% Convertible Subordinated Notes In November 1993, the Company repaid the outstanding balance of $98,000 under its 4-3/4% convertible subordinated notes issued during fiscal 1989. Bank Loan Payable In April 1995, the Company's Prima subsidiary obtained a $500,000 line of credit from a bank expiring on August 31, 1995. Under the terms of the line of credit, borrowings are restricted to finance the inventory purchases for sales to certain pre-qualified foreign customers of Prima. The line of credit is payable on demand and bears interest at the banks prime rate of interest plus 1.5%, effectively 10.5% as of June 30 1995. The Note is guaranteed under an agreement with the California Export Finance Office ("CEFO") and PCPI and is secured by substantially all of the assets of Prima. As of June 30, 1995, total borrowings outstanding were approximately $286,000. In August, 1995, the line of credit was extended until August 1996. Note 6. Preferred Stock 5% Convertible Preferred Stock During fiscal 1986 and 1987, the Company completed private offerings of an aggregate of 6,050 shares of 5% convertible preferred stock at $1,000 per share which, in the aggregate, generated net proceeds to the Company of $5,233,000. Holders of the 5% convertible preferred stock are entitled to receive, when and as declared by the Board of Directors, but only out of amounts legally available for the payment thereof, cumulative cash dividends at the annual rate of $50.00 per share, payable semi-annually, and commencing on October 15, 1986. Dividends in arrears at June 30, 1995 were $1,673,000. The 5% convertible preferred stock is convertible, at any time, into shares of the Company's common stock, at a price of $3.50 per common share. This conversion price is subject to certain antidilution adjustments, in the event of certain future issuances of common stock, or payment of common stock dividends. During fiscal years 1995 and 1994, a total of 93 and 200 shares, respectively, were converted into 26,147 and 57,143 shares of common stock, respectively. The Company shall reserve, and keep reserved, out of its authorized but unissued shares of common stock, sufficient shares to effect the conversion of all shares of the 5% convertible preferred stock. At June 30, 1995, 662,286 shares of the Company's unissued common stock had been reserved for conversion. In the event of any involuntary or voluntary liquidation, dissolution, or winding up of the affairs of the Company, the 5% convertible preferred stock- holders shall be entitled to receive $1,000 per share, together with accrued dividends, to the date of distribution or payment, whether or not earned or declared. The 5% convertible preferred stock is callable, at the Company's option, at any time beginning in April 1992, at call prices ranging from $1,050 to $1,100 per share. No call on the 5% convertible preferred stock was made during fiscal 1995 or 1994. 5% Series B Convertible Preferred Stock In January, 1995, the Company designated 117 shares of previously undesignated Preferred Stock as 5% Series B Convertible Preferred Stock, par value $1,000 per share ("Series B"). Each share may be converted into 9,523 shares of the Company's common stock at the conversion rate of $1.05. The holders of the Series B have a liquidation preference of $10,000 per Series B share over the common shareholders but are junior to the liquidation preference of the existing 5% Convertible Preferred Stock shareholders. Holders of the Series B are entitled to receive, when and as declared by the Board of Directors, but only out of amounts legally available for the payment thereof, cumulative cash dividends at the annual rate of $500 per share, payable annually. 23 In January 1995, the Company issued 116.2 shares of the 5% Series B Convertible Preferred Stock as settlement of accounts payable totaling $1,162,000. As of June 30 1995 there were no dividends in arrears under the Series B. The Company shall reserve, and keep reserved, out of its authorized but unissued shares of common stock, sufficient shares to effect the conversion of all shares of the Series B. At June 30, 1995, 1,114,286 shares of the Company's unissued common stock had been reserved for conversion. Note 7. Common Stock The Company issued shares of its unregistered common stock during fiscal 1995 as follows: 1,117,197 shares to Nippo, Ltd. for the conversion of $698,000 of a Note Payable and accrued interest; approximately 842,200 shares to three holders of the Company's 5% Convertible Notes for the conversion of the notes payable and accrued interest aggregating $526,000; and 700,000 shares issued to a foreign investor for approximately $108,000. The Company issued shares of its unregistered common stock during fiscal 1994 as follows: 1,000,000 shares to Nippo, Ltd. for $1,000,000; approximately 578,000 shares to three vendors for the conversion of accounts payable in the aggregate amount of $487,000; and, 1,225,000 shares to various other private investors for an aggregate of $846,000, net of issuance costs. Note 8. Common Stock Warrants In March 1991, the Company issued to each of its then four directors five-year warrants, fully exercisable immediately, to purchase an aggregate of 400,000 unregistered shares of common stock at $0.50 per share, the fair market value of the Company's stock on the date the warrants were granted. All of these warrants were exercised during fiscal 1995. In August 1991, the Company issued to each of its then four directors five-year warrants, fully exercisable immediately, to purchase an aggregate of 500,000 unregistered shares of common stock at $0.60 per share, the fair market value of the Company's stock on the date the warrants were granted. During fiscal 1995, 497,000 of these warrants were exercised. In October 1991, the Company issued to each of its then four directors five-year warrants to purchase an aggregate of 1,650,000 unregistered shares of common stock at $0.75 per share, the fair market value of the Company's stock on the date the warrants were granted. Warrants to purchase 825,000 shares of common stock were exercisable 6 months after the date of grant with the remaining 825,000 shares vesting 18 months after the date of grant. During fiscal 1995, 229,000 of these warrants were exercised, and approximately 1,421,000 were exercisable as of June 30, 1995. In September 1993, the Company issued to an investor group that provided the Company loan financing (Note 5), five-year warrants to purchase 250,000 shares of the Company's unregistered common stock at $1.50 per share. Warrants to purchase 62,500 shares were immediately exercisable; the remaining warrants vest equally on a semi-annual basis over the next eighteen months. A second five-year warrant was issued to this group in September 1993 to purchase 250,000 shares of the Company's unregistered common stock at $1.00 per share. Warrants to purchase 137,500 shares were immediately exercisable; the remaining warrants vest at the rate of 37,500 shares on a semi-annual basis. All of these warrants were issued in exchange for cash consideration of $50,000, which management believes approximates their fair market value. In March 1994, the Company issued to three of its then four directors ten-year warrants to purchase an aggregate of 425,000 unregistered shares of the Company's common stock at $0.75 per share, the fair market value of the Company's stock on the date the warrants were granted. In addition, the Company also issued to four employees (two of whom were then officers) ten-year warrants to purchase an aggregate of 151,000 unregistered shares of the Company's common stock at $0.75 per share, the fair market value of the Company's stock on the date the warrants were granted. Fifty percent of the warrants were exercisable immediately and the remaining fifty percent became exercisable in September 1994. None of these warrants have been exercised. 24 In September 1994, the Company granted 5-year warrants to an employee for the purchase of 100,000 shares of common stock with an exercise price of $0.75 per share, the fair market value of the Company's common stock on the date of granted. Warrants to purchase 20,000 shares were immediately exercisable with the remaining warrants vesting equally on an annual basis over the first four years of the warrant term. In September 1994, the Company also issued 3-year warrants to a consultant for services rendered for the purchase of 150,000 shares of common stock with an exercise price of $0.70 per share. Warrants to purchase 50,000 shares were immediately exercisable; the remaining warrants vest equally on an annual basis over the next two years. Note 9. Common Stock Options In July 1984, and in November 1987, the Company adopted stock option plans, under which incentive stock options and non-qualified stock options may be granted to employees, directors, and other key persons, to purchase shares of the Company's common stock, at an exercise price equal to no less than the fair market value of such stock on the date of grant, with such options exercisable in installments at dates typically ranging from one to not more than ten years after the date of grant. A total of 1,060,000 shares of common stock are authorized for issuance under the 1988 Stock Option Plan. At June 30, 1995, options to acquire 276,208 shares were exercisable under the 1984 and 1988 Stock Option Plans. No shares are available for future issuance under the 1984 Stock Option Plan due to the expiration of the plan during 1994. Options to acquire 21,936 shares remained available for grant under the 1988 Plan. The following is a summary of the stock option activity under the Plans:
Shares of Common Stock Option Prices Underlying Per Share Options -------------- ------------- June 30, 1993 $0.50 to $1.37 675,190 Options granted $0.75 to $1.02 133,000 Options exercised $0.50 to $0.82 (146,925) Options canceled $0.50 to $1.37 (108,940) -------- June 30, 1994 $0.50 to $1.02 552,325 Options granted $0.33 to $0.53 36,000 Options exercised $0.50 to $0.82 (166,500) Options canceled $0.50 to $1.02 (61,950) -------- June 30, 1995 $0.33 to $1.02 359,875 ========
Under the terms of the 1988 Stock Option Plan, loans may be made to option holders which permit the option holders to pay the option price, upon exercise, in installments. In October 1993, outside of existing stock option plans, the Company issued to one of its directors options to purchase 150,000 unregistered shares of common stock at $0.72 per share, the fair market value of the Company's stock on the date the options were granted. 25,000 of the options were immediately exercisable; the remaining options become exercisable on October 14, 1994, 1995 and 1996 in the amounts of 25,000, 50,000 and 50,000, respectively. The options expire on December 31, 1999. None of these options have been exercised as of June 30, 1995. Also in October 1993, outside of existing stock option plans, the Company issued to two officers of its newly acquired Prima International subsidiary and one employee of PCPI, options to purchase an aggregate of 650,000 unregistered shares of the Company's common stock at $0.72 per share, the fair market value of the Company's stock on the date the options were granted. 25,000 of the options were immediately exercisable; the remaining options became exercisable on October 14, 1994 and annually thereafter over a five-year period in the amounts of 125,000, 150,000, 150,000, 100,000, and 100,000 options, respectively. All unexercised options immediately terminate if the individual officer or employee ceases to be an employee 25 of the Company or any of its subsidiaries. The options expire on December 31, 1999. None of these options have been exercised as of June 30, 1995. In March 1995, outside of the existing stock option plans, the Company issued to two officers of its Prima subsidiary, five-year options to purchase an aggregate of 100,000 unregistered shares of PCPI common stock at an exercise price of $0.33 per share, the fair market value of the Company's common stock on the date of grant. These options become exercisable one year after the date of grant. In April 1995, outside of the existing stock option plans, the Company issued to four employees (two of whom were then officers), ten-year options to purchase an aggregate of 450,000 unregistered shares of PCPI common stock at an exercise price of $0.52 per share, the fair market value of the Company's common stock on the date of grant. The options become exercisable over a three year period beginning April 24, 1996 in installments of 170,000, 140,000 and 140,000, respectively. Note 10. Significant Customers, Revenue Data, and Concentration of Credit Risk As of and during the year ended June 30, 1995, Computer 2000 accounted for 27% of consolidated accounts receivable and 24% of total consolidated revenues; Modo SRL accounted for 14% of consolidated accounts receivable and 7% of total consolidated revenues; and Xerox Corporation accounted for 10% of consolidated accounts receivable and less than 1% of total consolidated revenues. As of and during the year ended June 30, 1994, Computer 2000 accounted for 14% of consolidated accounts receivable and 20% of total consolidated revenues; Modo SRL accounted for 12% of consolidated accounts receivable and 3% of total consolidated revenues; and Xerox Corporation accounted for 39% of consolidated accounts receivable and 2% of total consolidated revenues. The majority of the Company's sales in fiscal 1995 and 1994 were to European distributors (denominated in U.S. dollars) in the computer peripherals and accessories market through its wholly-owned subsidiary, Prima. During the years ended June 30, 1995 and 1994, 77% and 68% of total consolidated revenues, respectively, were from foreign customers, as reflected in the following table:
Year ended June 30, ------------------------- 1995 1994 ---- ---- Europe $ 8,622,000 $6,772,000 Far East 1,742,000 338,000 Others 733,000 238,000 ----------- ---------- $11,097,000 $7,348,000 =========== ==========
The Company typically has not required collateral for its sales. However, it has required letters of credit or prepayment from time-to-time as deemed necessary. Note 11. Income Taxes The Company elected to adopt Statement of Financial Accounting Standard No. 109 - - "Accounting for Income Taxes" on a prospective basis, effective July 1, 1993. FAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under the FAS 109 asset and liability method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is then provided for deferred tax assets which are more likely than not to not be realized. There was no effect on the Company's financial statements upon adoption of FAS 109. 26 The provision for income taxes for the years ended June 30, 1995 and 1994 comprises:
Year ended June 30, ------------------- 1995 1994 ---- ---- Current: State $4,000 $ 1,000 Federal Foreign 4,000 17,000 ------ ------- $8,000 $18,000 ====== =======
The components of deferred income taxes at June 30, 1995 are as follows: Deferred tax assets: Federal net operating loss carryforward $ 4,783,000 State net operating loss carryforward 230,000 Book reserves and accrued liabilities 558,000 Federal general business and other tax credits 517,000 State R&D and other credits 102,000 ----------- 6,190,000 =========== Deferred tax liabilities: Capitalized software (140,000) ----------- 6,050,000 Valuation allowance (6,050,000) ----------- Deferred taxes $ 0 ===========
The Company's Federal and state net operating loss carryforwards expire in 1999 through 2010. Additionally, the Company's Federal and state research and development credits expire in 1998 through 2009. During 1991 the Company sustained a change in ownership as defined in Section 382 of the Internal Revenue Code; as a result, there is an annual limitation of approximately $350,000 on the utilization of the net operating loss carryforwards generated prior to the date of change. Subsequent to the date of the ownership change in 1991, there have been numerous additional equity issuances; as a result, the Company may have experienced, or could experience in the future, similar ownership changes, which could result in additional limitations on the annual utilization of the Company's net operating loss carryforwards generated prior to the new change in ownership. The provision for income taxes results in an effective rate which differs from the Federal statutory rate. A reconciliation between the actual tax provision and taxes computed at the statutory rate follows:
Year ended June 30, ------------------- 1995 1994 ---- ---- Benefit at Federal statutory income tax rate $(729,000) $(1,394,000) Losses for which no current benefit is available 729,000 1,394,000 Foreign income taxes 4,000 17,000 State income taxes 4,000 1,000 --------- ---------- $ 8,000 $ 18,000 ========= ==========
Note 12. Lease Commitments The Company leases certain equipment under non-cancelable capital leases, which are included in property and equipment. As of June 30, 1995, the cost and accumulated amortization of such equipment was $142,000 and $102,000, respectively. The Company entered into a non-cancelable agreement to lease its operating facilities in San Diego, California, for 6 years, commencing September 1, 1990. In January 1995, the Company renegotiated the terms of the lease reducing the monthly base to $11,500 over the remaining term of the lease. 27 Future minimum rental commitments under non-cancelable leases are reflected in the following table:
Capital Operating Year ended June 30, Leases Leases ------------------- ------- --------- 1996 $ 13,000 $138,000 1997 8,000 15,000 1998 6,000 1999 4,000 -------- Total minimum lease payments 31,000 $153,000 ======== Amount representing interest (11,000) -------- Net present value of minimum lease pmts. $ 20,000 ========
Total rental expense was approximately $202,000 in fiscal 1995 and $356,000 in fiscal 1994. Note 13. Supplementary Income Statement Information
Year ended June 30, ------------------ 1995 1994 ---- ---- Royalty expense $ 78,000 $124,000 -------- -------- Advertising expense $107,000 $157,000 -------- --------
Note 14. Related Party Transactions A director receives compensation as a consultant to the Company on corporate matters and investment banking issues. These consulting fees amounted to $108,000 and $69,000 during fiscal 1995 and 1994, respectively. On April 1, 1994, the Company and the director entered into a five-year consulting agreement for the director to continue to provide these services payable in monthly installments of $9,000. During fiscal 1995, approximately $63,000 owed to the Director was converted into common stock through the exercise of outstanding options. As discussed in Notes 5 and 7, one of the Company's shareholders, Nippo, Ltd. and its affiliate, loaned the Company an aggregate of $686,000. In January, 1995, the outstanding principal balance and accrued interest totaling $698,000 was converted into the Company's common stock. As discussed in Note 5, in March 1995, one of the Company's directors agreed to loan the Company a gross aggregate amount of up to $100,000 with interest at the rate of 7% per year. As of June 30, 1995, borrowing under this Note aggregated $75,000. In September 1995, an additional $25,000 was advanced to the Company under this Note. 28 Item 8. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure (a) Previous independent accountants (i) On August 25, 1995, Personal Computer Products, Inc. ("PCPI") dismissed Price Waterhouse LLP as its independent accountants. (ii) The reports of Price Waterhouse LLP on the financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope or accounting principle, except that the report for the fiscal year ended June 30, 1994 did contain an explanatory paragraph with regard to PCPI's ability to continue as a going concern. (iii) The Registrant's Board of Directors participated in an approved the decision to change independent accountants. (iv) In connection with its audits for the two most recent fiscal years and through August 25, 1995, there have been no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Price Waterhouse LLP would have caused them to make reference thereto in their report on the financial statements for such years. (v) In connection with its audit of the 1993 financial statements, Price Waterhouse LLP issued a letter to the Company identifying material weaknesses in the Company's internal controls. This matter was discussed with the Company's Board of Directors. (vi) The Registrant has requested that Price Waterhouse LLP furnish it with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of such letter, dated August 19, 1995, was filed as Exhibit 16 to the Form 8-K filed on August 29, 1995. (b) New independent accountants (i) The Registrant engaged Boros & Farrington, CPAs, APC as its new independent accountants as of August 25, 1995. During the two most recent fiscal years and through August 25, 1995, the Registrant has not consulted with Boros & Farrington on items which (1) were or should have been subject to SAS 50 or (2) concerned the subject matter of a disagreement or reportable event with the former auditor, (as described in Regulation S-B Item 304(a)(2)). 29 Part III - ------------------------------------------------------------------------------- Pursuant to General Instruction E(3) to Form 10-KSB, the information required by Items 9, 10, 11, and 12 of Part III is incorporated by reference from the Company's definitive Proxy Statement with respect to its 1995 annual meeting of stockholders, to be filed pursuant to Regulation 14A within 120 days after June 30, 1995. Item 13. Exhibits, List, and Reports on Form 8-K (a) The following exhibit list states, in the case of certain exhibits, a prior SEC filing which contains the exhibit and from which it is incorporated by reference. 3(a) Certificate of Incorporation of the Company, as amended, and currently in effect. See also Item 4(a). (Incorporated by reference to Exhibit 3(a) to 1988 Form 10-K.) 3(b) Certificate of Amendment of Certificate of Incorporation of the Company, filed February 8, 1995, as amended, and currently in effect. See also Item 4(b). 3(c) By-Laws of the Company, as amended, and currently in effect. (Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K) 4(a) Amended Certificate of Designation of Personal Computer Products, Inc. with respect to the 5% Convertible Preferred Stock. (Incorporated by reference to Exhibit 4(d) to 1987 Form 10-K.) 4(b) Amended Certificate of Designation of Personal Computer Products, Inc. with respect to the 5% Series B Convertible Preferred Stock. 10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by reference to Form S-8 Filed October 26, 1984, File No. 2-93993.) 10(a.2) Forms of standard Non-Qualified and Incentive Stock Option Agreement for 1984 Stock Option Plan. (Incorporated by reference to Form S-8 filed October 26, 1984, File No. 2-93993.) 10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by reference to Exhibit 10(g) in 1989 Form 10-K.) 10(b.2) Amendment and Restatement of 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10(d) to 1991 Form 10-K.) 10(b.3) Forms of standard Non-Qualified and Incentive Stock Option Agreement for 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10(e) to 1991 Form 10-K) 10(c.1) Standard Industrial Lease Multi-Tenant dated February 2, 1990 between the Company and Bernardo Vista Business Park, Ltd.; First Amendment to Standard Industrial Lease dated February 2, 1990; and Memorandum of Purchase Option Agreement dated August 29, 1990. (Incorporated by reference to Form S-4 dated September 24, 1990, File No. 33-36871.) 10(c.2) Addendum to Lease dated January 12, 1995 for Standard Industrial Lease Multi-Tenant dated February 2, 1990. 30 10(d) Reference is made to the various stock options and warrants granted in 1991 to directors and executive officers as described in Note 8 to the 1995 financial statements. (Incorporated by reference to Exhibit 10(1) to 1991 Form 10-K.) 10(e.1) Executive Employment Agreement, as amended, between the Company and Edward W. Savarese, dated July 1, 1990 and amended as of February 25, 1994. (Incorporated by reference to Exhibit 10(k) to 1994 Form 10-KSB). 10(e.2) Compensation Agreement between the Company and Edward W. Savarese, dated November 16, 1992. (Incorporated by reference to Exhibit 10(af) to 1993 Form 10-KSB.) 10(f) Compensation Agreement between the Company and Harry J. Saal, dated November 16, 1992. (Incorporated by reference to Exhibit 10(ad) to 1993 Form 10-KSB.) 10(g.1) Compensation Agreement between the Company and Irwin Roth, dated November 16, 1992. (Incorporated by reference to Exhibit 10(ag) to 1993 Form 10-KSB.) 10(g.2) Consulting Agreement, dated April 1, 1994, between the Company and Irwin Roth. (Incorporated by reference to Exhibit 10(az) to 1994 Form 10-KSB.) 10(h) Acquisition Agreement for acquisition of Prima International subsidiary on October 1, 1993. (Incorporated by reference to Exhibit 2.1 to Amendment No. 1 to Form 8K/A dated October 14, 1993.) 10(i.1) Third Party Development Partner License Agreement, effective October 22, 1993, between the Company and Adobe Systems Incorporated. (Incorporated by reference to Exhibit 10(ai) to 1994 Form 10-KSB) 10(i.2) Reference Port Appendix No. 1, dated October 22, 1993, to the Postscript Support Source and Object Code Distribution License Agreement between Adobe Systems Incorporated and the Company. (Incorporated by reference to Exhibit 10(aj) to 1994 Form 10-KSB) 10(j) PCPI/APS License Agreement, dated March 28, 1994, between the Company and Integrated Device Technology, Inc. (Incorporated by reference to Exhibit 10(ak) to 1994 Form 10-KSB) 10(k) International Sales Representative Agreement, dated October 15, 1993, between the Company and Nippo Ltd. (Incorporated by reference to Exhibit 10(ao) to 1994 Form 10-KSB). 10(l) Consulting Agreement dated September 17, 1993 between the Company and Marius A. Robinson. (Incorporated by reference to Exhibit 10(aq) to 1994 Form 10-KSB) 10(m.1) Warrant Purchase Agreement, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10(ar) to 1994 Form 10-KSB). 10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares of Common Stock of the Company at $1.50 per share, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10(as) to 1994 Form 10-KSB) 31 10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares of Common Stock of the Company at $1.00 per share, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10(at) to 1994 Form 10-KSB) 10(m.4) Security Agreement between the Company and Fundamental Investors, Ltd., dated September 17, 1993. (Incorporated by reference to Exhibit 10(au) to 1994 Form 10-KSB) 10(m.5) Term Loan Agreement, dated September 17, 1993, between the Company and Fundamental Investors, Ltd. (Incorporated by reference to Exhibit 10(av) to 1994 Form 10-KSB) 10(m.6) Letter Agreement ("Amendment No. 1") to Term Loan Agreement between the Company and Fundamental Investors, Ltd., dated August 18, 1994. (Incorporated by reference to Exhibit 10(aw) to 1994 Form 10-KSB) 10(m.7) Amendment No. 2 to Term Loan Agreement between the Company and Fundamental Investors, Ltd., dated October 19, 1994. (Incorporated by reference to Exhibit 10(ax) to 1994 Form 10-KSB) 10(m.8) Amendment No. 3 to Term Loan Agreement between the Company and Fundamental Investors, Ltd., dated April 7, 1995. 10(m.9) Promissory Note of PCPI for $700,000, dated September 17, 1993 to Fundamental Investors, Ltd. 10(p.7) Amendment No. 2 to Term Loan Agreement between the Company and Fundamental Investors, Ltd., dated October 19, 1994. (Incorporated by reference to Exhibit 10(ay) to 1994 Form 10-KSB) 10(n) Promissory Note of the Company for $180,075, dated December 16, 1993, by the Company payable to Xerox Corporation. (Incorporated by reference to Exhibit 10(aaa) to 1994 Form 10-KSB) 10(o) PCPI/MEI License Agreement, dated September 30, 1994 between the Company and Matsushita Electric Industrial Co., Ltd. (Incorporated by reference to Exhibit 10(aac) to 1994 Form 10-KSB) 10(p) Form of standard Warrant Agreement of March 29, 1994 as described in Note 8 to the 1994 financial statements. (Incorporated by reference to Exhibit 10(aag) to 1994 Form 10-KSB) 10(q) Form of standard Stock Option Agreement of October 14, 1993 as described in Note 9 to the 1994 financial statements. (Incorporated by reference to Exhibit 10(aah) to 1994 Form 10-KSB) 10(r) Compensation Agreement between the Company and Brian Bonar, dated September 1, 1994. 10(s.1) Term loan agreement with Copolymer, Ltd. dated October 7, 1994. 10(s.2) Conversion agreement with regard to Term loan agreement with Copolymer, Ltd. dated January 24, 1995. 10(t) Conversion agreement between Nippo, Ltd. and the Company regarding $400,000 Note dated January 24, 1995. 10(u) Prima International Note and Security Agreement dated April 11, 1995. 16 Price Waterhouse letter to the SEC regarding August 25, 1995 dismissal. (Incorporated by reference to Form 8-K dated August 29, 1995. 32 21 List of Subsidiaries of the Company 23 Consent of Independent Accountants Exhibits 10(a.1), (a.2), (b.1), (b.2), (b.3), (d), (e.1), (e.2), (f), (g.1), (g.2), and (r) are management contracts or compensatory plans or arrangements. The Company will furnish a copy of any exhibit to a requesting stockholder upon payment of the Company's reasonable expenses in furnishing such exhibit. (b) No reports on Form 8-K were filed during the last quarter of fiscal 1995. 33 Signatures In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PERSONAL COMPUTER PRODUCTS, INC. By: EDWARD W. SAVARESE ------------------ Edward W. Savarese Chairman, President, and Chief Executive Officer September 29, 1995 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- EDWARD W. SAVARESE Chairman of the Board of Directors, - ------------------ President, and Chief Executive Officer September 29, 1955 Edward W. Savarese RALPH R. BARRY Secretary and Chief Financial Officer - -------------- (Principal Financial Officer and Ralph R. Barry Principal Accounting Officer) September 29, 1995 BRIAN BONAR Executive Vice President and Director - ----------- Brian Bonar September 29, 1995 HARRY J. SAAL Director - ------------- Harry J. Saal September 29, 1995 IRWIN ROTH Director - ---------- Irwin Roth September 29, 1995
34 Index to Exhibits - ------------------------------------------------------------------------------- Number Description of Exhibit Page 3(a) Certificate of Incorporation of the Company, as amended, and currently in effect. See also Item 4(a). (Incorporated by reference to Exhibit 3(a) to 1988 Form 10- K.)................... * 3(b) Certificate of Amendment of Certificate of Incorporation of the Company, filed February 8, 199............................... 39 3(c) By-Laws of the Company, as amended, and currently in effect. (Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K).... * 4(a) Amended Certificate of Designation of Personal Computer Products, Inc. with respect to the 5% Convertible Preferred Stock. (Incorporated by reference to Exhibit 4(d) to 1987 Form 10-K.)...................................................... * 4(b) Amended Certificate of Designation of Personal Computer Products, Inc. with respect to the 5% Series B Convertible Preferred Stock ........................................................... 40 10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by reference to Form S-8 Filed October 26, 1984, File No. 2-93993.) ....................................................... * 10(a.2) Forms of standard Non-Qualified and Incentive Stock Option Agreement for 1984 Stock Option Plan. (Incorporated by reference to Form S-8 filed October 26, 1984, File No. 2-93993.) ......... * 10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by reference to Exhibit 10(g) in 1989 Form 10-K.) .................. * 10(b.2) Amendment and Restatement of 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10(d) to 1991 Form 10-K ... * 10(b.3) Forms of standard Non-Qualified and Incentive Stock Option Agreement for 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10(e) to 1991 Form 10-K) ................... * 10(c.1) Standard Industrial Lease Multi-Tenant dated February 2, 1990 between the Company and Bernardo Vista Business Park, Ltd.; First Amendment to Standard Industrial Lease dated February 2, 1990; and Memorandum of Purchase Option Agreement dated August 29, 1990. (Incorporated by reference to Form S-4 dated September 24, 1990, File No. 33-36871.) ......................... * 10(c.2) Addendum to Lease dated January 12, 1995 for Standard Industrial Lease Multi-Tenant dated February 2, 1990............. 45 10(d) Reference is made to the various stock options and warrants granted in 1991 to directors and executive officers as described in Note 8 to the 1994 financial statements. (Incorporated by reference to Exhibit 10(1) to 1991 Form 10-K.) .................. * * Exhibit is incorporated by reference only and a copy is not included in this filing. 35 Number Description of Exhibit Page 10(e.1) Executive Employment Agreement, as amended, between the Company and Edward W. Savarese, dated July 1, 1990 and amended as of February 25, 1994. (Incorporated by reference to Exhibit 10(k) to 1994 Form 10-KSB.) ............................. * 10(e.2) Compensation Agreement between the Company and Edward W. Savarese, dated November 16, 1992. (Incorporated by reference to Exhibit 10(af) to 1993 Form 10-KSB.) ......................... * 10(f) Compensation Agreement between the Company and Harry J. Saal, dated November 16, 1992. (Incorporated by reference to Exhibit 10(ad) to 1993 Form 10-KSB.) .................................... * 10(g.1) Compensation Agreement between the Company and Irwin Roth, dated November 16, 1992. (Incorporated by reference to Exhibit 10(ag) to 1993 Form 10-KSB) ............................. * 10(g.2) Consulting Agreement, dated April 1, 1994, between the Company and Irwin Roth. (Incorporated by reference to Exhibit 10(az) to 1994 Form 10-KSB.)............................................ * 10(h) Acquisition Agreement for acquisition of Prima International subsidiary on October 1, 1993. (Incorporated by reference to Exhibit 2.1 to Amendment No. 1 to Form 8K/A dated October 14, 1993.) .......................................................... * 10(i.1) Third Party Development Partner License Agreement, effective October 22, 1993, between the Company and Adobe Systems Incorporated. (Incorporated by reference to Exhibit 10(ai) to 1994 Form 10-KSB.) .............................................. * 10(i.2) Reference Port Appendix No. 1, dated October 22, 1993, to the Postscript Support Source and Object Code Distribution License Agreement between Adobe Systems Incorporated and the Company. (Incorporated by reference to Exhibit 10(aj) to 1994 Form 10-KSB.) ........................................................ * 10(j) PCPI/APS License Agreement, dated March 28, 1994, between the Company and Integrated Device Technology, Inc. (Incorporated by reference to Exhibit 10(ak) to 1994 Form 10-KSB.)................ * 10(k) International Sales Representative Agreement, dated October 15, 1993, between the Company and Nippo Ltd. (Incorporated by reference to Exhibit 10(ao) to 1994 Form 10-KSB.) ............... * 10(l) Consulting Agreement dated September 17, 1993 between the Company and Marius A. Robinson. (Incorporated by reference to Exhibit 10(aq) to 1994 Form 10-KSB.) .................................... * 10(m.1) Warrant Purchase Agreement, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10(ar) to 1994 Form 10-KSB.) ............... * 10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares of Common Stock of the Company at $1.50 per share, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10(as) to 1994 Form 10-KSB.)......................................................... * * Exhibit is incorporated by reference only and a copy is not included in this filing. 36 Number Description of Exhibit Page 10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares of Common Stock of the Company at $1.00 per share, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10(at) to 1994 Form 10-KSB.)......................................................... * 10(m.4) Security Agreement between the Company and Fundamental Investors, Ltd., dated September 17, 1993. (Incorporated by reference to Exhibit 10(au) to 1994 Form 10-KSB.)............................. * 10(m.5) Term Loan Agreement, dated September 17, 1993, between the Company and Fundamental Investors, Ltd. (Incorporated by reference to Exhibit 10(av) to 1994 Form 10-KSB.)................ * 10(m.6) Letter Agreement ("Amendment No. 1") to Term Loan Agreement between the Company and Fundamental Investors, Ltd., dated August 18, 1994. (Incorporated by reference to Exhibit 10(aw) to 1994 Form 10-KSB.)............................................ * 10(m.7) Amendment No. 2 to Term Loan Agreement between the Company and Fundamental Investors, Ltd., dated October 19, 1994. (Incorporated by reference to Exhibit 10(ax) to 1994 Form 10-KSB.) ........................................................ * 10(m.8) Amendment No. 3 to Term Loan Agreement between the Company and Fundamental Investors, Ltd., dated April 7, 1995. ........... 46 10(m.9) Promissory Note of PCPI for $700,000, dated September 17, 1993 to Fundamental Investors, Ltd. (Incorporated by reference to Exhibit 10(ay) to 1994 Form 10-KSB.)............................. * 10(n) Promissory Note of the Company for $180,075, dated December 16, 1993, by the Company payable to Xerox Corporation. (Incorporated by reference to Exhibit 10(aaa) to 1994 Form 10-KSB.) ........... * 10(o) PCPI/MEI License Agreement, dated September 30, 1994 between the Company and Matsushita Electric Industrial Co., Ltd. (Incorporated by reference to Exhibit 10(aac) to 1994 Form 10-KSB.) ........................................................ * 10(p) Form of standard Warrant Agreement of March 29, 1994 as described in Note 8 to the 1994 financial statements. (Incorporated by reference to Exhibit 10(aag) to 1994 Form 10-KSB.) ........................................................ * 10(q) Form of standard Stock Option Agreement of October 14, 1993 as described in Note 9 to the 1994 financial statements. (Incorporated by reference to Exhibit 10(aah) to 1994 Form 10-KSB.) ........................................................ * 10(r) Compensation Agreement between the Company and Brian Bonar dated September 1 , 1994............................................... 48 10(s.1) Term loan agreement with Copolymer, Ltd. dated October 7, 1994... 55 10(s.2) Conversion agreement with regard to Term loan agreement with Copolymer, Ltd. dated January 24, 1995 .......................... 56 10(t) Conversion agreement between Nippo, Ltd. and the Company regarding $400,000 Note dated January 24, 1995 .................. 57 * Exhibit is incorporated by reference only and a copy is not included in this filing. 37 Number Description of Exhibit Page 10(u) Prima International Note and Security Agreement dated April 11, 1995............................................................. 58 16 Price Waterhouse letter to SEC regarding August 25, 1995 dismissal (Incorporated by reference to Form 8-K dated August 29, 1995 ........................................................ * 21 List of Subsidiaries of the Company ............................. 71 23 Consent of Independent Accountants .............................. 72 * Exhibit is incorporated by reference only and a copy is not included in this filing. 38 EX-3.(B) 2 CERT. OF AMEND Exhibit 3(b) State of Delaware Office of the Secretary of State _____________________ I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "PERSONAL COMPUTER PRODUCTS, INC.", FILED IN THIS OFFICE ON THE EIGHTH DAY OF FEBRUARY, A.D. 1995, AT 9 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY RECORDER OF DEEDS FOR RECORDING. [SEAL] _____________________________________ Edward J. Freel, Secretary of State 2008678 8100 AUTHENTICATION: 7402072 950029325 DATE: 02-09-95 39 EX-4.(B) 3 CERT OF DESIGNATION Exhibit 4(b) CERTIFICATE OF DESIGNATIONS OF PERSONAL COMPUTER PRODUCTS, INC. Certificate of the Designation, Preferences and Relative and Special Rights of the 5% Series B Convertible Preferred Stock, and the Qualifications, Limitations, or Restrictions thereof Not set forth in the Certificate of Incorporation as Amended. ______________________________________________ Pursuant to Section 151 of Title 8 of the Delaware Code ______________________________________________ We, the undersigned, Edward W. Savarese, Chairman of the Board, President and Chief Executive Officer, and Gerry B. Berg, Executive Vice President, Chief Financial Officer and Secretary, of Personal Computer Products, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors of the Corporation by unanimous written consent: RESOLVED, that, pursuant to authority expressly granted to and vested in the Board of Directors by the provisions of the Certificate of Incorporation, as amended, the Board of Directors hereby creates a series of 117 shares of 5% Series B Convertible Preferred Stock of the Corporation (such series being hereinafter called the "Convertible Preferred Stock"), and hereby fixes the powers, designation, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof (in addition to those provisions set forth in the Certificate of Incorporation, as amended, which are applicable to the Convertible Preferred Stock), as follows: (1) The distinctive designation of the Convertible Preferred Stock series shall be "5% Series B Convertible Preferred Stock". The number of shares which shall constitute such Convertible Preferred Stock shall be 117 shares, and such number shall not be increased. (2) All shares of Convertible Preferred Stock shall have a par value of $1,000 per share and shall be of equal rank with each other. (3) The amount payable on shares of the Convertible Preferred Stock in the event of any involuntary or voluntary liquidation, dissolution, or winding up of the affairs of the Corporation shall be $10,000 per share, together with accrued dividends to the date of distribution or payment, whether or not earned or declared, and such amount shall be paid before any distribution is made to holders of any junior stock, including Common Stock of the Corporation. The Convertible Preferred Stock shall be junior, as to payment in the event of any involuntary or voluntary liquidation, dissolution or winding up of the affairs of the Corporation, to the rights and preferences of any 5% Convertible Preferred Stock of the Corporation. (4) The holders of Convertible Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation, but only out of surplus or net profits legally available for the payment thereof, cumulative cash dividends at the annual rate of $500 per share, payable annually on the 15th day of January in each year, to stockholders of record on the respective dates fixed for the purpose by the Board of Directors in advance of payment of each particular dividend. (5) Dividends on the Convertible Preferred Stock shall be payable before any dividends on any junior stock (including Common Stock of the Corporation) shall be paid or set aside for payment, and shall be cumulative from the date of issuance of shares of Convertible Preferred Stock. The Convertible Preferred Stock shall be junior, as to dividends, to the rights of any 5% Convertible Preferred Stock of the Corporation. 40 Exhibit 4(b) (6) Convertible Preferred Stock shall be convertible at any time at the option of the holder thereof into full-paid and non-assessable shares of Common Stock (the "Common Shares") of the Corporation at a conversion price of $1.05 per Common Share, or a conversion rate ("Conversion Rate") of 9,523.81 Common Shares for each share of Convertible Preferred Stock. The Conversion Rate shall be subject to adjustment as provided below. Upon such conversion, no allowance or adjustment shall be made for dividends on either class of stock, but all accrued and unpaid dividends on any shares of Convertible Preferred Stock as of the time of conversion shall be forgiven and eliminated. (7) In order to convert shares of the Convertible Preferred Stock into Common Shares, the holder thereof shall deliver to the principal office of the Corporation the certificate or certificates therefor, duly endorsed to the Corporation or endorsed in blank and accompanied by appropriate instruments of transfer to the Corporation and shall give written notice to the Corporation at said office that he elects to convert such shares. Shares of the Convertible Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the date of surrender of such shares for conversion in accordance with the foregoing provision (the "Conversion Date"), and the person or persons entitled to receive the Common Shares issuable upon such conversion shall be treated for all purposes as the record holder of holders of such Common Shares at such time. As promptly as practicable after the Conversion Date, the Corporation shall issue and deliver at the said office a certificate or certificates for the number of full Common Shares issuable upon such conversion, together with a cash payment in lieu of any fraction of a Common Share as hereinafter provided, to the person or persons entitled to receive the same or to the nominee or nominees of such person or persons. (8) The Conversion Rate shall be adjusted from time to time as follows: (a) In case the Corporation shall (i) pay a dividend on its Common Shares in other Common Shares, (ii) subdivide its outstanding Common Shares, (iii) combine its outstanding Common Shares into a smaller number of Common Shares, or (iv) issue by reclassification of its Common Shares any other shares of the Corporation (including in connection with a merger in which the Corporation is a surviving corporation), the Conversion Rate in effect at the time of the record date for such dividend or the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of each share of the Convertible Preferred Stock converted after such time shall be entitled to receive the aggregate number and kind of shares which, if such share of the Convertible Preferred Stock had been converted immediately prior to such time, the holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any of the events listed above shall occur. (b) In case the Corporation shall issue rights or warrants to the holders of its Common Shares entitling them (for a period expiring within 45 days after the record date for determination of the stockholders entitled to receive such rights or warrants) to subscribe for or purchase Common Shares at a price per share less than the Current Market Price per share (as defined below) on such record date, then in each such case the Conversion Rate shall be adjusted by multiplying the Conversion Rate in effect immediately prior to such record date by a fraction, of which the numerator shall be the number of Common Shares outstanding on the date of issuance of such rights or warrants plus the number of additional Common Shares offered for subscription or purchase, and of which the denominator shall be the number of Common Shares outstanding on the date of issuance of such rights or warrants plus the number of Common Shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price. Such adjustment shall be made whenever any such rights or warrants are issued, and shall apply to conversions made subsequent to the record date for the determination of stockholders entitled to receive such rights or warrants. (c) In case the Corporation shall distribute to holders of its Common Shares (including any such distribution made pursuant to a merger or consolidation in which the Corporation is the surviving corporation, but excluding cash dividends paid or cash or property distributions made out of current or retained earnings available for such purpose as determined in accordance with generally accepted accounting principles) any assets, evidences of its indebtedness or other securities of the Corporation, then in each such case the Conversion Rate shall be adjusted by multiplying the Conversion Rate in effect immediately prior to the record date for determination of stockholders entitled to receive such distribution by a fraction of which the numerator shall be the Current Market Price per Common Share (as defined below) on such record date, and of which the denominator shall be such Current Market Price per Common 41 Share less the fair value (as determined by a resolution of the Board of Directors of the Corporation, after consultation with its investment bankers, which determination shall be conclusive), of the portion of the assets, evidences of its indebtedness or other securities so to be distributed applicable to one Common Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective retroactively with respect to conversions made subsequent to the record date for the determination of stockholders entitled to receive such distribution. (d) For the purpose of any computation hereunder, the Current Market Price per Common Share on any date shall be deemed to be the average of the daily Closing Prices for 30 consecutive Trading Days selected by the Corporation commencing not more than 45 Trading Days before the date in question. The term "Closing Price" on any day shall mean the reported last sale price per Common Share on such day or in case no such sale takes place on such day, the average of the reported closing bid and asking prices in each case on the principal national securities exchange or National Market System on which the Common Shares are listed or admitted to trading, or, if the Common Shares are not so listed or admitted to trading, the average of the closing bid and asked prices in the over-the-counter market as reported by the National Association of Securities Dealers' Automated Quotation System, or, if not so reported, by the National Quotation Bureau, Incorporated, or any successor thereof, of, if not so reported, the average of the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose; and the term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Shares are listed or admitted to trading is open for the transaction of business or, if the Common Shares are not so listed or admitted to trading, a day on which banking institutions in the Borough of Manhattan, City of New York, State of New York, are not authorized or obligated to close. (e) No adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this clause) would require an increase or decrease of at least 1% in the number of Common Shares into which each share of the Convertible Preferred Stock is then convertible; provided, however, that any adjustments which by reason of this clause are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this clause shall be made to the nearest one-hundredth of a share. (f) The Board of Directors may make such adjustments in the Conversion Rate, in addition to those required hereunder, as shall be necessary to resolve any ambiguity or correct any error under this Subdivision, and its action in so doing, as evidenced by a Board resolution, shall be final and conclusive. (g) In any case of reclassification of Common Shares (other than a reclassification of the Common Shares referred to in the proceeding clauses of this Subdivision), any consolidation or merger of the Corporation with or into another corporation or any sale or conveyance to another corporation (other than a wholly-owned subsidiary of the Corporation) of all or substantially all of the property of the Corporation, the holder of a share of the Convertible Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, sale or conveyance by a holder of the number of Common Shares into which such share of the Convertible Preferred Stock might have been converted immediately prior to such consolidation, merger, sale or conveyance and shall have no other conversion rights with regard to such share of Convertible Preferred Stock. In the event of such a reclassification, consolidation, merger, sale or conveyance, effective provision shall be made in the certificate of incorporation of the resulting or surviving corporation or otherwise so that the Conversion Rate applicable to any stock or other securities or property into which the shares of the Convertible Preferred Stock shall then be convertible shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provision with respect to the Common Shares contained in the foregoing clauses of this Subdivision, and the other provisions of this Subdivision with respect to the Common Shares shall apply on terms as nearly equivalent as practicable to any such other shares of stock and other securities and property deliverable upon conversion of shares of the Convertible Preferred Stock. 42 Exhibit 4(b) (h) Whenever any adjustment is required in the Conversion Rate or otherwise under this Subdivision, the Corporation shall forthwith mail a statement describing in reasonable detail the adjustment and the method of calculation used to the holders of record of Convertible Preferred Stock, indicating the effective date of such adjustment. (9) In case: (a) The Corporation shall declare a dividend (or any other distribution) on its Common Shares other than a cash dividend or a distribution paid out of available current or retained earnings determined in accordance with generally accepted accounting principles; or (b) The Corporation shall authorize the granting to the holders of its Common Shares of rights to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (c) Of any reclassification of the capital stock of the Corporation (other than a subdivision or combination of its outstanding shares or Common Shares), or of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or of the sale or transfer of all or substantially all of the assets of the Corporation, or of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation, or (d) The Corporation proposes to take any other action that would require an adjustment of the Conversion Rate; then the Corporation shall cause to be mailed to each record holder of Convertible Preferred Stock at least 20 days (or 10 days in any case specified in Clause (a) or (b)) prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution of rights, or, if a record is not to be taken, the date as of which the holder of Common Shares of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation winding up or other action is expected to become effective and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation, winding up or other action. (10) The Corporation shall at all timed reserve and keep available out of its authorized but unissued Common Shares, for the purpose of issuance upon conversion of the Convertible Preferred Stock, the full number of Common Shares then issuable upon the conversion of all shares of the Convertible Preferred Stock then outstanding. (11) The Corporation will pay any and all taxes that may be payable in respect of the issuance or delivery of Common Shares on conversion of shares of the Convertible Preferred Stock pursuant hereto. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involving issue and delivery of Common Shares in the name other than that in which the shares of the Convertible Preferred Stock so converted were registered, and no such issue and delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. (12) For the purposes hereof, the term "Common Shares" shall include any shares of the Corporation of any class or series which has no preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which is not subject to redemption by the Corporation. (13) No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Convertible Preferred Stock. If any such conversion would otherwise require the issuance of a fractional share, an amount equal to such fraction multiplied by the Closing Price (determined as provided in clause (d) of Subdivision (8) above) of the Common Shares on the day of conversion shall be paid to the holder in cash by the Corporation. If on such date there is no Closing Price, the fair value of a Common Share on such date, as determined by the Board of Directors, shall be used. All shares of Convertible Preferred Stock purchased or otherwise acquired by the Corporation (including shares surrendered for conversion) shall be canceled. 43 Exhibit 4(b) (14) Each holder of Convertible Preferred Stock shall be entitled to receive the same annual, periodic and other reports or communications sent by the Corporation to holders of Common Shares, including, but no limited to, notices of meeting of stockholders and proxy or information statement materials required to be sent to stockholders under the Securities Exchange Act of 1934. The Corporation will mail such reports, communications, notices and proxy or other materials to holders of record of Convertible Preferred Stock in the same manner as mailings are made to holders of record of Common Shares. (15) The holders of Convertible Preferred Stock shall have no voting rights except as may be expressly conferred by statute. (16) While any shares of Convertible Preferred Stock remains outstanding, the Corporation will not issue any shares of Preferred Stock (regardless of series) having dividend or liquidation rights or preferences senior to the Convertible Preferred Stock without the consent of the holders of two-thirds of the outstanding shares of Convertible Preferred Stock. IN WITNESS WHEREOF, this Certificate is made under the seal of PERSONAL COMPUTER PRODUCTS, INC. and signed by Edward W. Savarese, as Chairman of the Board, President and Chief Executive Officer, and Gerry B. Berg as Secretary, this 3rd day of February, 1995. PERSONAL COMPUTER PRODUCTS, INC. BY: Edward W. Savarese -------------------------------- Chairman of the Board, President and Chief Executive Officer ATTEST: BY: Gerry B. Berg -------------------------------- Secretary 44 EX-10.(C.2) 4 ADDENDUM TO LEASE Exhibit 10(c.2) ADDENDUM TO LEASE This Addendum to the Lease of February 2, 1990, is by and between Bernardo Gateway Partners, a California general partnership (Lessor), and Personal Computer Products, Incorporated, a Delaware corporation, herein known as PCPI (Lessee) and is made this twentieth day of January, 1995. The parties hereby agree to amend the terms of this lease for the premises located at 10865 Rancho Bernardo Road, San Diego, California, 92127, a part of the Bernardo Gateway Project, as follows: 1. Back Rent. By signature below, receipt of a check made payable to Bernardo --------- Gateway Partners in the amount of Seventeen Thousand, Five Hundred Dollars and No Cents ($17,500.00 received January 10, 1995) and the issuance of preferred stock of PCPI in the amount of Two Hundred Sixty-Eight Thousand Dollars ($268,000.00) the parties agree to payment in full of all past due monetary obligations with respect to the back rent owed by PCPI. 2. Agreement to Pay Rent. Commencing January 1, 1995, Lessor agrees to monthly --------------------- base rental payments from PCPI for the leased premises in the amount of Eleven Thousand, Five Hundred Dollars ($11,500.000) per month for the balance of the term of the existing lease. 3. Agreement to Vacate. PCPI agrees to vacate the premises upon sixty (60) days ------------------- notice from Lessor. 4. Terms and Conditions. All other terms and conditions of the lease dated -------------------- February 2, 1990, shall remain in full force an effect. Substantial performance has not been bargained for; full and complete performance is required. TIME IS OF THE ESSENCE. 5. Entire Agreement. This agreement supersedes all agreements previously made by ---------------- the parties relative to the subject matter. There are no understandings or agreements between them other than as set forth herein. 6. California Law. This agreement shall be construed in accordance with the laws -------------- of the State of California. Agreed to and by: Personal Computer Products, Inc. Bernardo Gateway Partners By: s/Edward W. Savarese By: s/William J. Brehm -------------------- ------------------ Edward. W. Savarese William J. Brehm Chairman, President and General Partner Chief Executive Officer Date: January 31, 1995 Date: January 31, 1995 45 EX-10.(M.8) 5 AM. 3 TO TERM LOAN AGMT Exhibit 10(m.8) AMENDMENT NO. 3 TO TERM LOAN AGREEMENT THIS AMENDMENT is dated as of April 7, 1995, and relates to the Term Loan Agreement dated September 17, 1993, between Personal Computer Products, Inc., a Delaware corporation ("Borrower"), and Fundamental Investors, Ltd., a Florida limited partnership ("Lender"), as amended pursuant to the parties' letter agreement dated as of August 18, 1994 ("Amendment No. 1"), and the parties' Amendment No. 2 to Term Loan Agreement dated as of October 19, 1995 ("Amendment No. 2") (the "Loan Agreement"). WHEREAS, Events of Default under the Loan Agreement have occurred and remain in effect in that Borrower has failed to make the interest payment due March 17, 1995, and Borrower has failed to pay Lender certain proceeds of Xerox and Panasonic Collateral; and WHEREAS, the parties wish to amend the Loan Agreement in order to cure said Events of Default by providing for additional Collateral, a revised payment schedule and certain other modifications to the Loan Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree that the foregoing recitals are true and correct and further agree as follows: 1. Terms defined in the Loan Agreement are used herein as defined therein. 2. The $20,824 interest amount due March 17, 1995, shall be added to the principal balance as of March 17, 1995. Consequently, the principal balance of the Loan as of the date hereof is $468,787. 3. Attached hereto as Exhibit "A" is Borrower's Collateral summary dated April 7, 1995 (the "Summary"). Borrower represents and warrants to Lender that the Summary accurately sets forth as of the date hereof (i) the existing Collateral, (ii) all proceeds of Collateral received by Borrower, and (iii) the Collateral to be pledged pursuant hereto as set forth in paragraph 4 below. 4. Borrower hereby pledges as additional Collateral a first priority security interest in all of Borrower's present and future right, title and interest in and to (i) the $75,000 payment due to Borrower pursuant to Section 3.2 (iii) of the PCPI/APS License Agreement dated as of March 28, 1994, between Borrower and Integrated Device Technology, Inc., a Delaware corporation, and (ii) the two payments of $100,000 each due to Borrower upon "Beta delivery" and "Final Acceptance" pursuant to Article 5, Exhibit "D" of the Development Agreement dated as of February 27, 1995, between Borrower and Samsung Electronics Co., Ltd., a Korean corporation. In connection with the foregoing amendment to Lender's security interest, Borrower will promptly execute and deliver an appropriate amendment to the existing UCC-1 Financing Statement and such other documents as Lender may reasonably require. 5. Sections 5 and 6 of Amendment No. 2 are hereby deleted. Borrower shall remit to Lender immediately upon receipt all proceeds of the Collateral. 6. Borrower shall cause all payments on the Collateral from Xerox Corporation to be made to Lender through checks sent to Borrower's counsel Brobeck, Phleger & Harrison ("Brobeck") pursuant to the agreements copies of which are attached hereto as composite Exhibit "B." Immediately upon Borrower's receipt of each notice from Brobeck that a Xerox Collateral payment has been received, a duly authorized officer of Borrower shall visit Brobeck's office and endorse the check to Lender. 7. In the event that Borrower raises net proceeds of at least $1,250,000 in equity or debt capital while the Loan is still outstanding, Borrower shall immediately pay Lender from such proceeds the lesser of (i) the balance due on the Loan or (ii) the sum of $173,072 [$88,248 from Xerox, plus $64,000 from Panasonic, plus 3/17/95 interest], which shall be applied to the balance due on the Loan. 8. Immediately upon execution of this Agreement, Borrower shall pay to Lender's attorneys Olle, Macaulay & Zorrilla, P.A., Miami, Florida, the sum of $3,000 in full satisfaction of Lender's legal fees and expenses through the date hereof payable by Borrower pursuant to Section 9.4 of the Loan Agreement. 46 Exhibit 10(m.8) 9. This Amendment No. 3 shall constitute an Amendment to the Loan Agreement and to all other Loan Documents to the extent affected by the terms hereof. 10. Except as amended herein, all terms and provisions of the Loan Agreement and the Loan Documents shall remain in full force and effect, including, but not limited to, Borrower's obligation to make the final principal and interest payment due on September 17, 1995. IN WITNESS WHEREOF, the parties have executed this Amendment No. 3 as of the date first above written. PERSONAL COMPUTER PRODUCTS, INC. Edward W. Savarese, President FUNDAMENTAL INVESTORS, LTD. Marius A. Robinson, General Partner 47 EX-10.(R) 6 EMPLOYMENT AGMT Exhibit 10(r) EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into and effective as of September 1, 1994 (the "Effective Date"), by and between Personal Computer Products, Inc., a Delaware corporation with its principal executive offices at 10865 Rancho Bernardo Road, San Diego, California 92127 (the "Company"), and Brian Bonar, an individual residing at 327 Carlton Ave., Los Gatos, CA 95030 ("Executive"), with reference to the following facts: RECITALS A. The Company desires to obtain the association and services of Executive and is willing to engage his services on the terms and conditions set forth below. B. Executive desires to enter into the employ of the Company for a specific period of time and is willing to do so on those terms and conditions. AGREEMENT --------- In consideration of the forgoing recitals and of the mutual promises and conditions set forth herein, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to employ Executive as its Vice ---------- President, Sales and Marketing, and Executive agrees to accept employment, upon the terms and conditions set forth herein. Executive shall have such duties and responsibilities as may be delegated or assigned from time to time by the Company's Board of Directors. 1.1 Executive agrees to devote substantially all of his productive time, energy and abilities to the proper and efficient discharge of his duties set forth above. 1.2 Executive will not, without the prior written consent of the Company, directly or indirectly: (i) during the term of this Agreement, render services to a business, professional or commercial nature to any other person or entity, whether for compensation or otherwise; or (ii) during the term of this Agreement, engage in any business activity competitive with or adverse to the Company's or its subsidiaries; business in the field of laser printer or computer products, whether alone, as a partner or a member, or as an officer, director, employee or shareholder of another business entity; provided, however, that this provision shall not prohibit Executive from being a not more than one percent shareholder in any publicly traded company and provided, further, that in the event that Executive engages in any such business activity that is competitive with or adverse to the Company's business activity in the field of laser printer or computer products, Company shall have no obligation to pay Executive any amounts under Section 3, but shall, notwithstanding such engaging, have a. continued obligation to pay Executive amounts under Sections 5.6, 5.7 and 5.8 in respect of a prior termination pursuant to Sections 5.2, 5.5 or 5.6. 2. Term. Subject to the termination provisions in Section 5 hereof, the ---- term of Executive's employment shall be for a continuous four (4) year and ten (10) month period, commencing as of the Effective Date (the "Term"). 3. Compensation. ------------ 3.1 Salary. For all services Executive may render to the Company during the ------ Term of this Agreement, including services as an officer, director, consultant or member of any committee of the Company, Executive will be compensated as follows: 9-1-94/6-30-95 Year 1 - $10,000 per month 7-1-95/6-30-96 Year 2 - $10,000 per month 7-1-96/6-30-97 Year 3 - $10,000 per month 7-1-97/6-30-98 Year 4 - $10,000 per month 7-1-98/6-30-99 Year 5 - $10,000 per month Such monthly salary shall be payable in equal bi-monthly installments, subject to income tax withholding and other payroll tax deductions required by applicable state and federal law. 3.1A Salary will be adjusted by a cost of living adjustment at 3.5% per year. 3.1B Commission plan - Commission plan will be agreed to by both parties at the start of each Fiscal Year and will start for Fiscal Year '95 with attachment (a). 48 Exhibit 10(r) 3.1C Stock option and stock grants are attached as attachment (b) and future options are to be granted by the Board of Directors. 3.2 Expenses. During the Term of this Agreement, the Company shall -------- reimburse Executive for reasonable and authenticated out-of-pocket expenses incurred in connection with performance of Executive's duties hereunder, including (without limitation) travel expenses, food and lodging while away from home, and entertainment, subject to such policies as the Company may from time to time reasonably establish for its employees. 3.3 Other Benefits. Subject to the terms hereof, Executive shall receive -------------- the same standard employment benefits as the other executive employees of the Company generally shall from time to time receive, including, for example, health and life insurance programs, vacation, sick leave, bonus plans and medical expense reimbursement plans as may be approved by the Board of Directors. In addition, the Company may, in its sole discretion, grant such additional compensation or benefits to Executive from time to time as it deems proper and desirable. 4. Proprietary Information. Executive acknowledges that Executive currently ----------------------- has knowledge, and during the term of this Agreement will gain further knowledge, of information not generally known about the Company and its present and future subsidiaries (collectively, the "Consolidated Company") and which gives the Consolidated Company an advantage over its competitors, including (without limitation) information of a technical nature, such as "know how," formulae, secret processes or machines, data processes, computer programs, inventions and research projects, and information of a business nature, such as information about costs, profits, markets, sales, Consolidated Company finances, employees, lists of customers and other information of a similar nature to the extent not available to the public, and plans for future developments (collectively, Confidential Information"). Executive agrees to keep secret all such Confidential Information of the Consolidated Company, including information received in confidence by the Consolidated Company from others, and agrees not to disclose any such Confidential Information to anyone outside the Consolidated Company except as required in the course of his duties, either during or after his employment. Executive acknowledges and agrees that all memoranda, notes, records, manuals, drawings, blueprints, equipment and the like relating to any such Confidential Information, shall be and remain the Consolidated Company's sole property, shall not he removed from the Consolidated Company's premises without the Company's express prior written consent and shall be promptly delivered to the Company upon termination of Executive's employment or at any time that Company may so request, including all copies of such materials which Executive may then possess or have under his control. 5. Termination of Employment. This Agreement is terminable prior to the expiration of the Term in the manner and to the extent set forth in this Section 5, and not otherwise. 5.1 Death. This Agreement shall terminate upon the death of the Executive. ----- 5.2 Disability. This Agreement shall terminate upon the permanent ---------- disability of Executive. For purposes of this section "permanent disability" shall mean Executive's inability to perform his duties hereunder for any 145 days in any six (6) consecutive months. 5.3 Termination for Cause. The Company may terminate this Agreement at any --------------------- time without further delay for Executive's willful misconduct including, but not limited to, fraud, dishonesty, willful breach or habitual neglect of duties, disclosure of Confidential Information, and engagement in any activity competitive with or materially adverse to the Consolidated Company during the Term of this Agreement, if such misconduct is material and is not remedied by Executive within ten (10) days after written notice by the Company of same. 5.3A Executive will be subject to sales quotas and performance reviews. Objectives will be agreed to prior to each Fiscal Year and performance will be judged according to the successful completion of sales and corporate objectives. Termination for unsatisfactory performance shall also be Termination for Cause. 5.3B Should the Company not be profitable and not have sufficient cash flow or other resources to pay Executive, moneys then owed shall be accrued and paid for when and if the Company has sufficient cash. 5.4 Voluntary Termination. At any time during the Term, and for any reason, --------------------- Executive may voluntarily terminate this Agreement and resign from the employment of the Company. Such termination and resignation shall he effected by sixty (60) days' prior written notice to the Company. 5.5 Termination for Good Reason. At any time during the Term, the Executive --------------------------- may voluntarily terminate this Agreement and resign from the employment of the Company for Good Reason, as defined below. Such termination and resignation shall be effected by sixty (60) days' prior written notice to the Company. "Good Reason" shall mean termination based upon: 49 Exhibit 10(r) (i) The assignment to the Executive of any duties materially inconsistent with his positions, duties, responsibilities and status with the Company as in effect immediately prior to such assignment, or a significant change in such Executive's reporting responsibilities or offices as in effect immediately prior to such change, except in connection with the termination of the Executive's employment pursuant to Sections 5.1, 5.2, 5.3, 5.4 or 5.6; (ii) A reduction by the Company in the Executive's compensation as set forth in Section 3.1 hereof which is not consented to by the Executive; the Executive may withdraw any prior consent upon 30 days' prior written notice to the Company; (iii) The requirement by the Company that the Executive be based anywhere other than the Company's offices in Santa Clara County, California, except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations, or in the event the Executive consents to any such relocation, the failure by the Company to pay (or to reimburse the Executive) for all reasonable moving expenses in connection with any such relocation. In the event of Termination for Good Reason, the Company shall nonetheless pay to Executive his salary as provided in Section 3.1, together with any other compensation or benefits due hereunder, for the remainder of the five-year 'term, all in a lump sum within seventy-two (72) hours after such termination, and continue all his fringe benefits for the remainder of the five-year Term. 5.6 Termination Without Cause. At any time during the Term, and for any ------------------------- reason or no reason (except as provided in Sections 5.1, 5.2, 5.3 or 5.4), the Company may terminate Executive's employment, provided only that the Company shall nonetheless pay to Executive his salary as provided in Section 3.1, together with any other compensation or benefits due hereunder, for the remainder of the five-year Term, all in a lump sum within 72 hours after such termination, and continue all his fringe benefits for the remainder of the five- year Term. 5.6A Change in corporate control - should the management or ownership of the Company change substantially, Executive may be terminated with the same conditions as paragraph 5.6. 5.7 Effect of Termination. --------------------- (i) In the event Executive's employment is terminated by the Company for cause pursuant to Section 5.3 above, all compensation and other benefits due under this Agreement shall (except as otherwise provided in this Agreement) cease as of the date of such termination of employment ("Employment Termination Date"). (ii) In the event Executive's employment is terminated upon Executive's death and/or permanent disability pursuant to Section 5.1 or 5.2, respectively, the Company shall pay to Executive, his estate or representative Executive's salary as provided in Section 3.1, together with any other compensation or benefits due hereunder, for the remainder of the five-year Term. Additionally, in such event, any stock options Executive exercisable by Executive, his estate or his personal representative until two (2) years after such Employment Termination Date. (iii) In the event Executive's employment is terminated for any reason and the Company has previously purchased an insurance policy on Executive's life, payable to Executive or his family, the Company shall not terminate such policy before its scheduled expiration, seek any refund of any portion of premiums already paid, or change the beneficiaries under such policy. (iv) In the event Executive's employment is terminated for any reason, (a) Executive and his family members shall, in addition to their COBRA rights, have the same rights with respect to disability and life insurance as they would have had if disability and life insurance were covered by COBRA to the same extent medical coverage is, (b) Executive and his family members shall have the same rights with respect to medical, disability and life insurance as they would have had if (i) disability and life insurance were covered by COBRA to the same extent medical coverage is and (ii) June 30, 1995 were the Employment Termination Date, and (c) should Executive die within 18 months after the Employment Termination Date at a time when his medical and/or disability insurance is continuing in force pursuant to COBRA, Section 5.6, Section 5.7 (iv)(a) or Section 5.7 (iv)(b), his family members shall have a new and further right to continue such medical and/or disability insurance for 36 months as if Executive's date of death were an Employment Termination Date to which Section 5.7 (iv)(a) were applicable. 50 Exhibit 10(r) 5.8 Severance Pay. In the event Executive's employment terminates upon the ------------- scheduled expiration of the term and the Company determines not to offer continuing employment to Executive, or in the event Executive's employment terminates under Section 5.6 within six months before the scheduled expiration of the Term, then Executive shall be entitled to be paid, in addition to all other amounts due him, one-half of his "Year 5" annual salary, all in a lump sum within 72 hours after the Employment Termination Date. 6. Specific Enforcement. Executive is obligated under the Agreement to -------------------- render service of a special, unique, unusual, extraordinary, and intellectual character, thereby giving this Agreement peculiar value, so that the loss thereof cannot be reasonably or adequately compensated in damages in an action at law. Therefore, in addition to other remedies provided by law, the Company shall have the right during the Term to compel specific performance hereof by Executive and/or obtain injunctive relief against the performance of services elsewhere by Executive, without the posting of any bond or other security. 7. Controversies. Any controversy or claim arising out of or relating to ------------- Executive's employment and this Agreement, the breach hereof, or the coverage of this arbitration provision, shall he settled by arbitration in San Diego, California, which arbitration shall be in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as such rules shall be in effect on the date of delivery of demand for arbitration. The arbitration of such issues, including the determination of the amount of any damages suffered by any party, shall be to the exclusion of any court of law. The decision of the arbitrators or a majority of them shall be final and binding upon the parties and the personal representatives, executors, heirs, or devisees of Executive, if applicable. There shall be three arbitrators, one to be chosen directly by Executive, the second by the company and the third by the two arbitrators so chosen. The Company and Executive shall each pay the fees of the arbitrators selected by it or him and of its or his own attorneys, the expenses of witnesses and all other expenses connected with the presentation of such party's case. The costs of the arbitration including the cost of the record of transcripts thereof, if any, administrative fees, and all other fees and costs, including those of the third arbitrator, shall be borne one-half by Executive and one-half by the Company. 8. Tax Consequences. The Company shall have no obligation to Executive with ---------------- respect to any tax obligations incurred as the result of or attributable to this Agreement or arising from any payments made or to be made hereunder. Any distributions made pursuant to this Agreement shall be subject to such withholding and reports as may be required by any then-applicable laws or regulations of any state or federal taxing authority. 9. General Provisions. ------------------ 9.1 The failure to enforce any provision of this Agreement shall not be construed as a waiver of any such provision, nor prevent a party thereafter from enforcing the provision or any other provision of this Agreement. The rights granted the parties are cumulative, and the election of one shall not constitute a waiver of such party's right to assert all other legal and equitable remedies available under the circumstances. 9.2 Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, to the attention of the Board of Directors, at the address of its executive office set forth above, and any notice to be given to Executive shall be addressed to him at the residence address set forth above, or such other address as Company and/or Executive may hereafter designate in writing to the other. Any notice shall be deemed duly given when personally delivered or five (5) days after deposit in U.S. mail by registered or certified mail, postage prepaid, as provided herein. 9.3 The provisions of this Agreement are severable, and if any provision of this Agreement shall be held to be invalid or otherwise unenforceable, in whole or in part, the remainder of the provisions, or enforceable parts thereof, shall not be affected thereby. 9.4 Neither Executive nor the Company may assign this Agreement without the prior written consent of the other; provided that this Agreement may be assigned to any successor to the Company's business without Executive's consent. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company, and Executive's rights under this Agreement shall inure to the benefit of and be binding upon his heirs and executors. 9.5 This Agreement supersedes all prior and contemporaneous negotiations, agreements and understandings between the parties, oral or written. No modification, termination or attempted waiver shall he valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced. 51 Exhibit 10(r) 9.6 This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and wholly to be performed within the State of California by California residents. EXECUTIVE: PERSONAL COMPUTER PRODUCTS, INC. _______________________ ------------------------- Brian Bonar Edward W. Savarese Title: Chairman, President, and CEO By: ______________________ Gerry B. Berg Title: Executive Vice President and Secretary 52 Exhibit 10(r) PCPI MEMORANDUM ATTACHMENT "A" FROM: EDWARD W. SAVARESE TO: BRIAN BONAR SUBJ: COMMISSION PLAN DATE: OCTOBER 24, 1994 COMMISSION PLAN FOR BRIAN BONAR BEGINNING NOVEMBER 1, 1994. FOR FISCAL YEAR 1995 MR. BONAR SHALL RECEIVE A ONE AND ONE HALF PERCENT (1-1/2%) COMMISSION ON MONTHLY CASH RECEIPTS BY PCPI FOR PCPI PRODUCT SALES WITH A GROSS MARGIN OP OVER FIFTEEN PERCENT (15%) AND A ONE AND ONE HALF PERCENT (1-1/2%) COMMISSION ON MONTHLY CASH RECEIPTS FROM CONTRACT REVENUES UP TO $3,500 PER MONTH. IN ANY MONTH THAT THE COMMISSION CALCULATION EXCEEDS $3,500 THIS AMOUNT SHALL ACCRUE TO THE NEXT MONTH, UNTIL EACH DECEMBER 31. AT EACH DECEMBER 31 IF THERE IS AN ACCRUAL BALANCE IN THIS ACCOUNT, MR. BONAR WILL RECEIVE THE BALANCE. IN THIS ACCOUNT UP TO A CALENDAR YEAR COMMISSION MAXIMUM AMOUNT OF $55,000. IF THERE IS ANY ADDITIONAL ACCRUALS IN THIS ACCOUNT IT GOES TO ZERO AND THE PLAN RESTARTS ON JANUARY 1 OF EACH YEAR. COMMISSIONS PAID IN ANY ONE CALENDAR YEAR (12 MONTHS FROM JANUARY THROUGH DECEMBER) CAN NOT EXCEED $55,000. 53 Exhibit 10(r) PCPI MEMORANDUM ATTACHMENT "B" FROM: EDWARD W. SAVARESE TO: BRIAN BONAR SUBJ: STOCK OPTIONS DATE: OCTOBER 24, 1994 THE FOLLOWING IS A LISTING OF STOCK OPTIONS GRANTED TO BRIAN BONAR AS OF NOVEMBER 4, 1994: PRIMA ACQUISITION COMPENSATION PLAN: ISSUE DATE: OCTOBER 14, 1993 NUMBER: 150,000 OPTIONS EXPIRATION DATE: DECEMBER 31, 1999 ISSUE PRICE: $ .72 FIRST EXERCISABLE: 25,000 ON OCTOBER 14, 1993 25,000 ON OCTOBER 14, 1994 50,000 ON OCTOBER 14, 1995 50,000 ON OCTOBER 14, 1996 PCPI STOCK WARRANT: ISSUE DATE: SEPTEMBER 22, 1994 NUMBER: 100,000 WARRANTS EXPIRATION DATE: SEPTEMBER 21, 1999 ISSUE PRICE: $ .75 FIRST EXERCISABLE: 20,000 ON SEPTEMBER 22, 1994 20,000 ON SEPTEMBER 22, 1995 20,000 ON SEPTEMBER 22, 1996 20,000 ON SEPTEMBER 22, 1997 20,000 ON SEPTEMBER 22, 1998 54 EX-10.(S.1) 7 PROMISSORY NOTE Exhibit 10(s.1) PROMISSORY NOTE U.S. $286.000 Dated as of October 7, 1994 FOR VALUE RECEIVED, the undersigned Personal Computer Products, Inc., ("PCPI") 10865 Rancho Bernardo Road, San Diego, CA 92127, promises to pay Copolymer Kako Co., Ltd. Japan, 243 Kamihama-cho, Minami-ku, Nagoya 457 Japan, the principal sum of Two Hundred Eighty-Six Thousand United States Dollars (U.S. $286,000), together with interest from the date hereof at seven percent (7%) simple interest per annum, whether prior to or after maturity. This loan will be furnished to PCPI as follows: $150,000 on the 12th of October 1994 and, $136,000 on the 31st of October 1994. Principal and all accrued interest thereon shall be due as follows: Within 30 days after PCPI receives equity funding of Three Million Dollars ($3,000,000); or Six months after the loan amounts are received by PCPI. All wire transfer fees between the two companies will be paid by PCPI. Principal and all accrued interest may be prepaid on the balance due under this Note at any time in whole or in part without penalty or premium. Upon payment in full of all principal and interest payable, this Note shall be surrendered to PCPI for cancellation. This Note shall be governed by and enforced in accordance with the laws of the State of California. This Note may not be changed, modified, waived, amended or terminated except in writing signed by PCPI and Copolymer Kako Co., Ltd. PERSONAL COMPUTER PRODUCTS, INC. By: ------------------------------------- Edward W. Savarese President and Chief Executive Officer 55 EX-10.(S.2) 8 SUBSCRIPTION AGMT Exhibit 10(s.2) PERSONAL COMPUTER PRODUCTS, INC. SUBSCRIPTION AGREEMENT To: Personal Computer Products, Inc. I hereby acknowledge receipt of a full and complete Copy of, and I hereby accept, Personal Computer Products, Inc., Offer as of January 6, 1995, subject to all the terms and conditions of that Offer, and hereby submit $290,271 principal amount and accrued interest of the Company's Note due Copolymer Kako, Co., Ltd. for surrender. I hereby certify that I have the full power and authorization to act for and on behalf of Copolymer Kako, Co., Ltd. Please issue the Common Stock in the names indicated below. NAME ON CERTIFICATES SEND CERTIFICATES TO: Copolymer Kako, Co., Ltd. 243 Kamihama-cho Minami-ku, Nagoya 457, Japan Please print or type name and address I acknowledge that I have had the opportunity to review the financial condition of and current information on the Company including the Company's annual report for its fiscal year ended June 30, 1994 and its Form 10-QSB for the quarter ended September 30, l994, and have been invited to discuss the information with the Company's officers and directors. I acknowledge that the information I have received is all the information I deem necessary to enable me to make a decision whether to accept the Offer, and I, agree to hold the Company harmless from and against any action arising under any Securities law out of my acceptance of the Offer. Dated: January 24, 1995 Nippo, Ltd. ---------------- By: Yuzo Okaya ---------- (Print name) President --------------------------- (Title) 56 EX-10.(T) 9 SUB. AGMT Exhibit 10(t) PERSONAL COMPUTER PRODUCTS, INC. SUBSCRIPTION AGREEMENT To: Personal Computer Products, Inc. I hereby acknowledge receipt of a full and complete Copy of, and I hereby accept, Personal Computer Products, Inc., Offer as of January 6, 1995, subject to all the terms and conditions of that Offer, and hereby submit $407,978 principal amount and accrued interest of the Company's Note due Nippo, Ltd. for surrender. I hereby certify that I have the full power and authorization to act for and on behalf of Nippo, Ltd. Please issue the Common Stock in the names indicated below. NAME ON CERTIFICATES SEND CERTIFICATES TO: Nippo, Ltd. 5-27-12, Sakae, Naka-ku, Nagoya 460, Japan Please print or type name and address I acknowledge that I have had the opportunity to review the financial condition of and current information on the Company including the Company's annual report for its fiscal year ended June 30, 1994 and its Form 10-QSB for the quarter ended September 30, l994, and have been invited to discuss the information with the Company's officers and directors. I acknowledge that the information I have received is all the information I deem necessary to enable me to make a decision whether to accept the Offer, and I, agree to hold the Company harmless from and against any action arising under any Securities law out of my acceptance of the Offer. Dated: January 24, 1995 Nippo, Ltd. ---------------- By: Yuzo Okaya ---------- (Print name) President ------------------------------ (Title) 57 EX-10.(U) 10 LOAN AGMT Exhibit 10(u) BUSINESS LOAN AGREEMENT
- ---------------------------------------------------------------------------------------- Loan Loan Principal Date Maturity No Call Collateral Account Officer Initials - ---------------------------------------------------------------------------------------- $500,000.00 04-11-1995 959-26 190 7098950933 52035
- ------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------ Borrower: PRIMA INTERNATIONAL Lender: U.S. BANK OF CALIFORNIA 3350 SCOTT BLVD., # 7 International Banking SANTA CLARA, CA 98054 980 9th Street, Suite 1100 Sacramento, CA 95814 - ------------------------------------------------------------------------------ THIS BUSINESS LOAN AGREEMENT between PRIMA INTERNATIONAL ("Borrower") and U.S. BANK OF CALIFORNIA ("Lender") Is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement Individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) In granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warrantees, end agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of April 11, 1995, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement In writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower means PRIMA INTERNATIONAL. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or In the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien Interest whatsoever, whether created by law, contract, or otherwise. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Grantor. The word "Grantor" means and Includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. 58 Exhibit 10(u) Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or Involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or Jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means U.S. BANK OF CALIFORNIA, its successors and assigns. Loan. The word Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, It any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes thereto. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as of the date of this Agreement and as of the date of each disbursement of Loan proceeds: Organization. Borrower is a corporation which is duly organized, validly existing, and In good standing under the laws of the State of California. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing In all states In which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. 59 Exhibit 10(u) Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resources Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., Chapters 6.6 through 7,7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laps, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, or about any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, or about any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those has, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, releases or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrow. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note and all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. 60 Exhibit 10(u) Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in ail material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, and (iii) no steps have been taken to terminate any such plan. Location of Borrower's Offices and Records. The chief place of business of Borrower and the office or offices where Borrower keeps its records concerning the Collateral is located at 3350 SCOTT BLVD., 7, SANTA CLARA, CA 98054. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representation and Warranties. Borrower understands and agrees that Lender is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Loan and Note shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all litigation and claims and all threatened litigation and claims affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, prepared by Borrower, and, as soon as available, but in no event later than thirty (30) days after the end of each month, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedule, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with Insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be canceled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage In favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require, Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks Insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than 61 Exhibit 10(u) annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, on Lender's forms, and in the amounts and by the guarantors named below: Guarantors Amounts ---------- ------- CALIFORNIA EXPORT FINANCE OFFICE $450,000.00 PERSONAL COMPUTER PRODUCTS, INC. $500,000.00 Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth In this Agreement and in all other instruments and agreements between Borrower and Lender in a timely manner, and promptly notify Lender it Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement. Operations. Substantially maintain its present executive and management personnel; conduct its business affairs In a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender-free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and In compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and In any event 62 Exhibit 10(u) within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action m' omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and other natural resources. Additional Assurance Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE. COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of borrowers assets, or (c) sell with recourse any of Borrower's accounts, except to Lender . Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan 1o Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. ACCESS LAWS; Without limiting the generality of any provision of this agreement requiring Borrower to comply with applicable laws, rules, and regulations, Borrower agrees that it will at all times comply with applicable laws relating to disabled access including, but not limited to, all applicable titles of the Americans with Disabilities Act of 1990. ADDITIONAL PROVISIONS. 1. This Agreement is subject to the terms and conditions of the CEFO Transaction Attachment Case P1130/930, enclosed herewith as Exhibit I, representing an integral part of this said Agreement Borrower acknowledges having received and read said Attachment and agrees to abide by and be bound by said terms and conditions. All fees associated with the CEFO Guarantee and Transaction Attachment are for the account of Borrower. 2. This facility is limited strictly to the Borrower to assist the Borrower in the export activities referred to in items 2,3,4 and 9 of CEFO'S Transaction Attachment. 3. Guarantor, Personal Computer Products, Inc. (PCPI) will provide the Bank annual, consolidated financial statements and 10-Ks within 90 days of each fiscal year-end. 63 Exhibit 10(u) 4. Guarantor, PCPI, will provide the Bank interim, consolidated financial statements and 10-Qs within 45 days of each quarter-end. 5. Borrower to achieve a positive tangible net worth (as defined according to GAAP) by June 30, 1995. 6. Borrower not to incur losses for more than two consecutive quarters. 7. Advances to be limited to 80 % of approved receivable as reflected in the CEFO Transaction Attachment and defined in Exhibit II. Borrower to provide monthly Borrowing Base Certificates within 30 days of each month-end, together with detailed accounts receivable and accounts payable aging reports. 8. Borrower shall be allowed no additional borrowings during the course of this Agreement. 9. Borrower will establish a cash collateral account with the Bank into which all receipts from the CEFO approved buyers will be deposited and applied toward any outstanding. 10. Any material adverse change in the financial or operating condition of the Borrower or Guarantor during the term of this facility shall constitute an Event of Default hereunder. 11. Borrower agrees that the Bank may conduct field audits as deemed necessary, but in no event less than annually. Costs associated with the field audits are for the account of Borrower. 12. All fees, legal or otherwise, incurred in the preparation, execution and enforcement of this Agreement are for the account of the Borrower. DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory security Interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's' accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held Jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on. indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. Defective Collateraization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or lien on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives lender written 64 Exhibit 10(u) notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or such Guarantor dies or becomes incompetent or any Guarantor revokes any guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower, Insecurity. Lender, In good faith, deems itself insecure. Right to Cure. If any default, other than a Default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Loans immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Sacramento County, the State of California. Subject to the provisions on arbitration, this Agreement shall be governed by and construed In accordance with the laws of the State of California. Arbitration. Lender and Borrower agree that all disputes, claims and controversies between them, whether individual, Joint, or class in nature, arising from this Agreement or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association, upon request of either party. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of the receiver; by exercising any rights relating to personal property, including taking or disposing of such property with or without Judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral, Including any claim to rescind; reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party, Lender and Borrower agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having Jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent Jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. 65 Exhibit 10(u) Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be Joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the persons signing below is responsible for all obligations in this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or. later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any Information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be. considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation Interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's out-of-pocket expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' tees and Lender's legal expenses, whether or not there is s lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party, to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address(es). Severalty. If a court of competent Jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and dl other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower, To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement o any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. 66 Exhibit 10(u) Time Is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with this provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, o between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to an' future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF APRIL 11, 1995. BORROWER: PRIMA INTERNATIONAL By: _________________________ LENDER: U.S. BANK OF CALIFORNIA By:__________________________ Authorized Officer 67 Exhibit 10(u) PROMISSORY NOTE
Loan Loan Principal Date Maturity No Call Collateral Account Officer Initials - ---------------------------------------------------------------------------------------- $500,000.00 04-11-1995 959-26 190 7098950933 52035
- ------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------- Borrower: PRIMA INTERNATIONAL Lender: U.S. BANK OF CALIFORNIA 3350 SCOTT BLVD., # 7 International Banking SANTA CLARA, CA 98054 980 9th Street, Suite 1100 Sacramento, CA 95814 - ------------------------------------------------------------------------------- Principal Amount: $500,000.00 Initial Rate: 10.500% Date of Note: April 11, 1995
PROMISE TO PAY. PRIMA INTERNATIONAL (Borrower") promises to pay to U.S. BANK OF CALIFORNIA ("Lender"), or order, in lawful money of the United States of America, on demand, the principal amount of Five Hundred Thousand & 00/100 Dollars ($500,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan Immediately upon Lender's demand. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning May 1, 1995, with all subsequent Interest payments to be due on the same day of each month after that. interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at lenders address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the LENDER'S PRIME RATE. THIS IS THE RATE OF INTEREST WHICH LENDER FROM TIME TO TIME ESTABLISHES AS ITS PRIME RATE AND IS NOT, FOR EXAMPLE, THE LOWEST RATE OF INTEREST WHICH LENDER COLLECTS FROM ANY BORROWER OR CLASS OF BORROWERS (the "index". THE INTEREST RATE SHALL BE ADJUSTED WITHOUT NOTICE EFFECTIVE ON THE DAY BANK'S PRIME RATE CHANGES. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may' make loans based on other rates as well. The interest rate change will not occur more often than each day. The Index currently is 9.000% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.500) percentage points over the Index, resulting In an initial rate of 10.500% per annum. Notice: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum Interest charge of $50.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. DEFAULT Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due Borrower breaks any promise Borrower has made to Lender, or Borrower fails to perform promptly at the time and strictly in the manner provided in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, of any other agreement, in favor of any other creditor or. person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform borrowers obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's 68 Exhibit 10(u) behalf is false or misleading in any material respect. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any of the events described in this default section occurs with respect to any guarantor of this Note. (h) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all occurred unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, If permitted under applicable law, increase the variable interest rate on this Note to 3.500 percentage points over the Index. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services, Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender In the State of California. If there Is a lawsuit, Borrower agrees upon Lender's request to submit to the Jurisdiction of the courts of Sacramento County, the State of California. subject to the provisions on arbitration, this Note shall be governed by and construed In accordance with the laws of the State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: EUGENE E. HELLAR, C.E.O.; RICHARD A. WALKER, PRESIDENT; and KAREN M. KEITH, CONTROLLER. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs, Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is Insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke,. such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. ARBITRATION. Lender and Borrower agree that all disputes, claims and controversies between them, whether Individual, joint, or class In nature, arising from this Note or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association, upon request of either party. No act to take or dispose of any collateral securing this Note shall constitute a waiver of this arbitration 69 Exhibit 10(u) agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without Judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral securing this Note, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing this Note, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Lender and Borrower agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration, Judgment upon any award rendered by any arbitrator may be entered in any court having Jurisdiction, Nothing in this Note shall preclude any party from seeking equitable relief from a court of competent jurisdiction, The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable In any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. LATE CHARGE. If a payment is 15 days or more past due, borrower will be charged a late charge of 5% of the delinquent payment. PERIODIC REVIEW. Lender will review the loan periodically, but no less often than annually. At the time of the review, Borrower will furnish lender with any additional information regarding Borrower's financial condition and business operations that Lender requests. This information may include, but is not limited to, financial statements, tax returns, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets and forecasts. If, upon review, Lender, in its sole discretion, determines that there has been a material adverse change in Borrower's financial condition, Borrower will be in default. Upon default, Lender shall have all rights specified herein. GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: PRIMA INTERNATIONAL By: ______________________________ 70 EX-21 11 SUBSIDIARIES Exhibit 21 - List of Subsidiaries of the Company 1. Laser Printer Accessories Corporation, a Delaware corporation and a wholly- owned subsidiary of PCPI 2. Prima Inc., a California corporation and a wholly-owned subsidiary of PCPI 3. Personal Computer Products, Inc., a California corporation and a wholly- owned subsidiary of PCPI (Inactive) 4. Co-Processors, Inc., a California corporation and a wholly-owned subsidiary of PCPI (Inactive) 5. PCPI Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of PCPI (Inactive) 71 EX-23 12 CONSENT OF BOROS Exhibit 23 - Consent of Independent Accountants We hereby consent to the incorporation by reference in each of the Registration Statements on Form S-8 (No.'s 2-93993, 33-25980, 33-41396, 33-57372, 33-86262 and 33-86376) of Personal Computer Products, Inc. of our report dated September 25, 1995 appearing on page 14 of this Form 10-KSB. BOROS & FARRINGTON APC San Diego, California September 25, 1995 EX-27 13 FINANCIAL DATA SCHEDULE
5 12-MOS 12-MOS JUN-30-1995 JUN-30-1995 JUL-01-1995 JUL-01-1994 MAR-31-1995 JUN-30-1995 128 322 0 0 1,354 1,250 0 0 720 521 2,461 2,361 152 146 0 0 4,526 4,226 2,451 2,009 741 1,001 83 87 0 0 3,480 3,480 (2,229) (2,351) 4,526 4,226 9,755 13,043 10,656 14,394 8,853 11,883 8,853 11,883 374 499 0 0 96 109 (1,909) (2,502) 4 8 (1,913) (2,510) 156 156 209 209 0 0 (1,540) (2,145) (.11) (.15) (.11) (.15)
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