-----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, CPSVzOFog1w+g0MxHjhh4NZc1jLdbXjfVuhTgsX1wS+UgmlBszOSM5fvXUbvcAYc 6cKCA0vPkcvQ7j98pPI4/g== 0000950130-95-001942.txt : 19951002 0000950130-95-001942.hdr.sgml : 19951002 ACCESSION NUMBER: 0000950130-95-001942 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19950531 FILED AS OF DATE: 19950928 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMAGRAPHICS CORP CENTRAL INDEX KEY: 0000818470 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 060888312 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16071 FILM NUMBER: 95577104 BUSINESS ADDRESS: STREET 1: 8500 CAMERON ROAD CITY: AUSTIN STATE: TX ZIP: 78754-3999 BUSINESS PHONE: 2038815400 MAIL ADDRESS: STREET 1: 60 SILVERMINE ROAD CITY: SEYMOUR STATE: CT ZIP: 06483 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: May 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-16071 ------- SUMMAGRAPHICS CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 06-0888312 -------- ---------- (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 8500 Cameron Road, Austin, Texas 78754 -------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 835-0900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Common Stock, Par Value $.01 Per Share -------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or such shorter period that the Registrant was required to file such reports), and has been subject to such filing requirements for the past ninety (90) days. YES [ ] NO [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. YES [X] NO [ ] 1 The aggregate market value as of August 18, 1995, of Common Stock held by non- affiliates of the Registrant: $16,145,003 based on the last reported sale price on the National Market System as reported by NASDAQ, Inc. The number of shares of Common Stock outstanding as of August 18, 1995: 4,612,858 2 PART I ITEM 1 BUSINESS - ------ -------- Summagraphics Corporation was incorporated in Delaware on June 29, 1972. The Company's executive offices are located at 8500 Cameron Road, Austin, Texas 78754, telephone number (512) 835-0900. Unless the context otherwise requires, the "Registrant", the "Company" and "Summagraphics" refer to Summagraphics Corporation and its consolidated subsidiaries. GENERAL Summagraphics is engaged in the manufacture and sale of digitizing tablets, large format plotters, thermal transfer printers, and graphic cutters. A digitizer is a computer graphics input device, functionally similar to a keyboard or mouse, consisting of an electronic stylus or cursor and a tablet containing a grid of sensors which translate engineering drawings, maps and other graphic information into digital form for entry into a computer. A pen plotter is a computer graphics output device, functionally similar to a printer, but used to automatically draw lines, symbols, diagrams and other graphics output. An ink jet plotter is a computer graphics output device, functionally similar to a printer and pen plotter, but it uses ink jet technology rather than ink pen technology to automatically draw lines, symbols, diagrams and other graphics output. A thermal transfer printer, capable of interfacing with PostScript(R) and other industry standard software, uses Summagraphics' patented techniques to produce brilliantly colored, high quality images up to 24" x 40" for sign-making applications. A cutter performs a function similar to a plotter, but rather than drawing an image onto a sheet of paper it accurately cuts on various media (such as vinyl) along a programmed image employing the same technique as a plotter except using a knife instead of a pen. The Company's products are used in applications with high-performance computer graphics systems, including computer-aided design, manufacturing, engineering, publishing and graphic arts. The Company added pen plotters and cutters to its pre-existing digitizer product lines in May 1990 with the acquisition of Houston Instrument. This acquisition broadened the Company's presence in the U.S. market, provided the Company with a manufacturing facility in Belgium and expanded the Company's U.S., European and Far Eastern distribution networks. Approximately 56% of the Company's net sales for the fiscal year ended May 31, 1995 was attributable to overseas markets. The Company's products are sold by its sales force primarily through distributors and also to OEMs which incorporate the Company's products into their own computer products. The Company's products may be integrated with most personal computers, including IBM-compatible personal computers and Apple personal computers, workstations from Sun Microsystems and Digital Equipment, and publishing systems from Scitex, and are compatible with most industry standard CAD and graphics software applications. 3 The Company's strategy is: to pursue sales and market share growth for its existing product lines, through product enhancements and new product introductions; to devote resources to research and development of new products; and, as and if appropriate opportunities arise, to acquire or develop one or more complementary product lines or businesses serving the computer graphics markets. Summagraphics acquired the Houston Instrument Division ("Houston Instrument") of Ametek, Inc. ("Ametek") from Ametek in May 1990 in an asset purchase transaction for a consideration of $23.4 million in cash (after certain post- closing adjustments) and a $5 million principal amount 8% Convertible Subordinated Note issued to Ametek by the Company. The Company repurchased the remaining balance of the Note ($2.5 million) on May 25, 1994 for $1.8 million and cancelled the 333,333 warrants granted at the time of the acquisition (exercisable at $15 per share) and issued 300,000 warrants, 150,000 of which expired on May 1, 1995 and 150,000 of which are exercisable at $9 per share expiring on May 1, 1997. In March 1992, the Company restructured its North American operation by combining the management and administrative processes of its digitizer and Houston Instrument Divisions into a single operating unit; and established an administrative headquarters in Europe responsible for cutter manufacturing, and sales, distribution and service of all Company products for the European market. Further restructuring was initiated in May 1993, associated with the arrival of a new President and Chief Executive Officer who joined the Company in April 1993. The restructuring included a reduction in work force, asset write-downs, consolidation of manufacturing operations in the Company's Austin, Texas facility, changes in some of the Company's senior executives, and a redeployment of assets to apply them more effectively. Also, North America and Asia Pacific sales, manufacturing, and engineering administration is now based in Austin, Texas. During fiscal year 1995, the Company changed its corporate headquarters from Seymour, Connecticut to Austin, Texas, and in late fiscal year 1995 undertook additional organizational actions which included a reduction in force and abandonment of the remaining portion of the Company's Connecticut lease. DIGITIZERS MARKET AND APPLICATIONS. Digitizers have accounted for approximately forty percent (40%) of the sales of the Company in fiscal year 1995. Summagraphics' primary markets for digitizers are in computer-aided design, engineering and manufacturing (CAD/CAE/CAM). Digitizers typically are used with personal computers and workstations and support a broad range of software applications which include high-end computer aided publishing, construction management and costing, graphics design and animation, mapping and geographic information systems (GIS) and geological/seismic analysis. They also are used frequently with software systems such as AutoCAD. Newspaper publishers, for example, use the Company's digitizers as part of their complete computer-aided publishing systems for publication layout. Engineers and architects use the Company's digitizers in estimating construction costs rapidly and accurately from blueprints and site plans while in the field. Animation and graphics design uses for the Company's digitizers vary widely and include use in cinema productions, colorization of black and white movies and television weather and sport analysis. Digitizers offer significant benefits of speed and efficiency to the user in CAD design over other input methodologies such as computer mice and on-screen menus. 4 Uses for digitizers include desktop publishing, image processing and pen-based computing. See "Business -- Product Development." TECHNOLOGY. Digitizers are capable of determining the absolute location of a stylus or cursor to within several thousandths of an inch on a grid of sensors imbedded in a tablet. Depending upon the technology used, this is accomplished by pulsing either the grid or the cursor with an electric current causing a reciprocal electrical flow in the cursor or the grid. This reciprocal flow is measured, converted into a set of digital X-Y coordinates and transmitted to a host computer for processing. Digitizers can offer significant advantages over other entry devices such as keyboards, mice, trackballs, lightpens, joystick and touchpanels in graphics intensive applications due to their high level of precision, greater functionality and increased productivity. Keyboards are primarily used for inputting text and numerical information and are not well suited for graphics applications. Mice are low accuracy, relative pointing devices commonly used with icon-based operating systems and low-resolution graphics applications. By contrast, digitizers are capable of inputting X-Y coordinate data to communicate an absolute position. Absolute positioning allows accurate drawing and selection of discrete points on the surface of the digitizing tablet. The latter is critical to high accuracy tasks such as digitizing a map or an existing CAD drawing. The Company's digitizer products are primarily based on electromagnetic technology whereby a cursor or a grid generates an electromagnetic field which is measured by built-in electronic instruments. These methods produce digitizers capable of higher resolution than other commonly-used technologies (magnetostrictive and resistive). Electromagnetic tablets offer the additional advantage of being relatively unaffected by temperature, humidity, electrical noise and conductive materials on the digitizing surface. PRODUCTS. The Company offers three (3) series of electromagnetic digitizers: desktop, industry standard tablets (the SummaSketch Series); low-cost, large- format tablets (the Summagrid(R) Series); and large-format, high accuracy tablets (the Microgrid(R) Series). Digitizers are offered in standard configurations for the distribution market and are customized to meet specific OEM and foreign market specifications. All are supported by a broad range of accessory products including styli, cursors, pressure sensitive pens, power supplies, cabling and software templates. Digitizers may be software or hardware configured to meet various requirements. The SummaSketch Series electromagnetic tablets, sold under the trade names SummaSketch III and SummaSketch III Professional, comprises a majority of the Company's digitizer sales. MM tablets are constructed using a single printed circuit board housing the X-Y grid and the control and interface electronics. Applications include desktop CAD, CAM, CAE, graphic arts design and general purpose computing. The Summagrid (SG) Series electromagnetic tablets are constructed of a single large printed circuit board containing the X-Y grid and control interface circuitry housed in a separate chassis common to all sizes. The Summagrid Series offers customers a large format tablet with similar accuracy and resolution to a desktop unit but at a significantly lower cost than the Microgrid Series. Applications include cost estimation, facilities management and low-end CAD or mapping. Both the Summagrid and the Microgrid Series of digitizers are available in backlit versions for high-end medical and tracing applications. 5 The Microgrid (MG) Series electromagnetic tablets are constructed of a single large printed circuit board containing the X-Y grid. Control and interface electronics are integrated into the tablet in a chassis common to all sizes of tablets. Applications include high-end CAD, CAE, cartography and civil and mechanical engineering, which require greater accuracy and line resolution than desktop models offer. Each Microgrid tablet is tested on the Company's laser interferometer test bed to guarantee accuracy. The Company introduced a product enhancement in fiscal year 1993 which enables the user to utilize at their discretion the cursor or stylus as either a corded or battery powered cordless (convertible) version. Cordless cursors are an added convenience to users of large tablets where the large tablet surface otherwise necessitates a long cord. The cordless technology used on Summagrid represents core technology for the Company which can be applied to new and existing digitizer products to offer unique customer benefits. Additionally, the Company introduced its Microgrid(R) Ultra Series large-format tablet which is an upgrade of the Company's Microgrid Series high-accuracy tablets for applications requiring precise formatting devices such as GIS mapping, electronic design and CAD. In fiscal year 1995, the Company introduced the Summa Expression, a high performance desktop tablet designed for graphic arts applications such as drawing, painting, illustration and animation. This tablet features a small 6" x 8" active area footprint and allows drawing with high precision and flexibility using 256 levels of pressure sensitivity and customizable menu buttons. This tablet is the first of a planned series of high performance small-format tablets dedicated to address the needs of the professional graphics user. The SummaPad/TM/ was also introduced in fiscal year 1995. This tablet features a 4" x 5" active area and also provides pressure sensitivity. PLOTTERS MARKET AND APPLICATIONS. The Company began to market plotters in May 1990 with the acquisition of Houston Instrument. In each of the last three (3) fiscal years, plotters have accounted for approximately thirty percent (30%) of the Company's sales. The Company's primary markets for plotters are in computer-aided design and engineering. Its pen plotter products are used extensively by architects and mechanical, electrical electronic and civil engineers to create complex drawings and specifications. Pen plotters are also used with computerized mapping, geographical exploration and geographic information systems, where precise high quality hard-copy output is required. The Company's plotters are also used extensively in many other application areas, including medical, scientific, business and educational presentation graphics. Pen plotters remain the most cost effective means to create high quality wide format, permanent line drawings. The Company introduced in fiscal year 1994 a large-format, color thermal wax transfer printer-- SummaChrome/TM/ -- for use in in-house design departments of corporations and retail chains, advertising agencies, graphic design firms, and sign, copy and photo shops servicing both businesses and consumers. Applications include the production of colored signs, presentation materials, photo enlargements, design renderings, maps, and satellite images. In fiscal year 1995, the Company re-evaluated the resources required to sell this product and decided to focus its energy on the segment of the graphics market where they were already positioned for success -- sign-making. Recognizing their unique opportunity to offer the first large-format digital printing solution that can print directly on vinyl without any additional process for UV or water resistance, the Company shifted its marketing focus to take advantage of this technological advantage. Since 6 the Company already had the sign-making channel in place to support its SummaSign Series of high performance cutters/plotters, this shift in market focus is more cost effective to execute. In fiscal year 1995, the Company introduced its SummaJet/TM / 2 Series of ink jet plotters for the CAD market. The SummaJet 2 entry took advantage of a void in the existing ink jet market for low cost color printing. TECHNOLOGY. All types of plotters function by creating images on hard-copy media such as paper or polyester film. Pen plotters may be distinguished from other hard-copy output devices, because pen plotters create hard copy of vector, or point-to point lines, while other plotters produce raster, which constructs an image as a series of dots, a print band at a time. Pen plotters function by receiving plot commands downloaded from a computer and, by following these instructions, moving one of a selection of pens relative to paper, film or other media, thereby generating a drawing. The media is driven bi-directionally on one axis while the pen is driven on the other axis. Both functions are microprocessor controlled, highly responsive, closed-loop servo systems that permit accurate and precise graphic creation. The Company has developed significant expertise in relevant software, servo, paper handling and mechanical design technologies. The Company's line of feature-enhanced pen plotters called the HiPlot/(R)/ 7000 Series in A-to D-size and A-to E-size plotters, improving speed of throughput and plot quality. The Company introduced in fiscal year 1994 its SummaChrome/TM/ Imaging System, a color thermal transfer printer, which produces large-format color output images up to 24" x 40" direct on vinyl. The product is intended for sign-makers who produce large-format vinyl or screen print signs. Since it prints directly on vinyl, it eliminates the need for weeding, transferring images and enabling the user to make vivid, fine -lined large-format signs which are durable in outdoor applications for up to 3-5 years. The Company introduced in fiscal year 1995 its SummaJet plotter which is the Company's entry into the color D- and E- size ink jet market. The product is both raster and vector compatible and intended to address the CAD market with features like replot, automatic pilot, printing, replot, automatic scaling and mirror functions. PRODUCTS. The Company offers a series of large-format plotters and small- format plotters. The Company's offering of large-format plotters include high performance, high speed CAD pen plotters. The Company introduced the HiPlot 7000 Series of pen plotters in late fiscal year 1993. The HiPlot Series offers users additional features of faster plot completion, a primary application requirement and, in addition, improved plotting quality and a new feature called HIQueue/TM/, a plot management package for networked multi-user environments. The ability to effectively manage plot data in a networked multi-user environment is a strong requirement among users. 7 SummaChrome, the Company's color thermal transfer printer for the sign market, produces color prints up to 24" x 40" of exceptional clarity and brilliance. Its patented Ribbon Printing/TM/ mechanism permits highly precise registration and increased resolution to 400 dpi from thermal's traditional desktop 300 dpi range. CUTTERS Cutters are output devices, similar in construction to a pen plotter, but employ a knife in place of a pen to cut vinyl for signs and banners, artfilm for screen printing, and various stencil materials for etching text and images into glass, wood and stone via an abrasive etching process. Cutter performance is primarily measured by speed, acceleration, and guaranteed accuracy. Additional features include knife type, tool pressure and software compatibility. Speed is measured by how many inches the knife moves per second. Acceleration is how quickly the knife reaches its top speed, this is important since most signs consist of short lines. Guaranteed accuracy depends on the drive mechanism, either friction or sprocket, in the cutter. There are currently two (2) types of knife systems used to cut material; drag and tangential. Drag knife units typically cost less, have less knife pressure capability, and are used for general sign applications. Tangential knife units are typically more expensive, with more knife pressure, greater precision cutting abilities and the ability to cut a wider variety of material. The Company markets a line of precision cutters designed to produce low-cost, computer-generated letter and graphics for sign and display making applications. During late fiscal year 1993 the Company introduced two (2) new tangential cutters, the T1000 and the T600. In fiscal year 1994 the Company introduced three (3) new drag knife cutters, the D610, D750 and the D1300. These cutters primarily differ in the width of sign media they handle, the type of knife used and the features they contain. In fiscal year 1995, the Company introduced the SummaSign cutter (the SummaSign 1010 Plus). This high performance cutter combines an advanced media handling system, offers both sprocket drive and friction drive and is therefore capable of handling plain media as well as half- inch industry-standard punched media. The Company also introduced the low cost, small-format SummaCut Series of cutters designed for small, independent sign shops who produce a limited quantity of vinyl signs. AFTER MARKET SERVICE AND SUPPORT The Company's customer service group provides customer support for the Company's products via depot, on-site or on an exchange basis with standard warranty protection programs which include Limited Lifetime Warranty, 48-Hour Priority Response/TM/ in the first year after purchase, along with additional warranty options for 24-Hour Priority Response/TM/ and multiple product leasing options. This group also sells a wide range of plotting media and a variety of pens for use with its plotters. The Company also offers a library of CAD digitizer templates for use with AutoCAD. The Company's templates simplify the use of CAD programs and increase productivity by permitting the user to bypass nested menus and access necessary commands quickly. PRODUCT DEVELOPMENT During fiscal year 1993, 1994 and 1995 the Company's research and development expenses were $8,003,000, $5,631,000, and $6,761,000, respectively. 8 During fiscal year 1993, the Company acquired joint ownership of a broad patent for incorporating a digitizer into a liquid crystal display (LCD) without the use of a separate digitizer X-Y grid. This allows for a very cost effective approach to "writing on the screen" pen computer systems. The Company has been investigating relationships with LCD manufacturers to pursue this technology further, and recently entered into a license agreement with Sharp Corporation to enable them to enhance their product line of combined displays and input panels. The Company's SummaChrome imaging system employs a technology for producing high quality color thermal transfer images in sizes up to 24" x 40" targeted to be sold to the sign market. MARKETING AND CUSTOMERS The Company seeks to offer a broad line of application-compatible computer peripheral products for graphics input and output and to develop strong brand recognition. The Company has developed a world-wide sales network including OEMs, distributors and manufacturers' representatives and maintains sales offices in the United States, Belgium, France and Germany. The Company also maintains a support and technical assistance program for third-party software developers in emerging markets and has on occasion entered into several joint marketing support arrangements with developers of selected applications. No single customer of the Company accounts for ten percent (10%) or more of the Company's yearly sales. The Company's network of distributors consists of national, vertical and regional distributors. National distributors in the United States, such as Ingram Micro, Inc. and Merisel, and Computer 2000 in Europe, sell to retail accounts and account for a large percentage of the Company's sales. Vertical distributors sell to retail accounts. They carry a line of the Company's products and specialize in integrating the Company's standard products into specialized systems for vertical markets. Regional distributors focus on an area typically composed of five (5) to seven (7) states and specialize in applications and accounts which require a greater amount of service and technical skill in making the sale. The Company attempts in most instances to have more than one (1) distributor in foreign countries. The Company believes that by avoiding reliance upon exclusive distributorship arrangements it broadens the market for its products and fosters constructive competition among its distributors. The Company also sells its products directly to OEMs for incorporation into systems manufactured by them and indirectly to smaller OEMs through a network of manufacturer representatives. Many of these sales are customized products which are incorporated into the OEMs design cycles. The Company's CAD Warehouse, Inc. subsidiary sells Summagraphics products and products of other companies, advertises through trade publications and its own catalog, and sells through orders. See Note 7 of Notes to Consolidated Financial Statements for information on the Company's foreign and domestic sales. The Company maintains domestic sales/service offices in Seymour, Connecticut; Austin, Texas; and Huntington Beach, California. The Company has foreign sales subsidiaries located in Brussels, Belgium; London, England; Munich, Germany; and a foreign sales office located in Paris, France. 9 The Company's marketing and sales organization consists of these groups: product/management, distribution sales, marketing communications, and customer service. Product management is responsible for market research, new product planning and pricing strategies. The North America/Asia Pacific sales group, headquartered in Austin, Texas, includes regional sales managers covering domestic and foreign territories who are responsible for both direct and indirect OEM account relationships, and distribution managers who work with national, regional and vertical distributors. The European sales group is headquartered in Brussels, Belgium and operates in a manner similar to its North America/Asia Pacific counterpart. Each of the North America/Asia Pacific and European sales and service groups has a marketing communications group responsible for trade shows, advertising, product sales, literature and customer relations, and a customer service support capability responsible for customer service and assisting customers with technical issues. MANUFACTURING OPERATIONS, QUALITY CONTROL AND WARRANTIES The Company has certain of its manufacturing performed outside the United States to take advantage of lower manufacturing costs, while allowing the Company to maintain high standards of quality. The Company maintains a manufacturing facility in Gistel, Belgium for the manufacture of cutters and distribution of all of its products sold in the European market. In order to reduce manufacturing costs, the Company recently entered into agreements to outsource manufacturing of its SummaJet ink jet product line and its large-format digitizer product line and has an ongoing program of investigating the outsourcing of manufacturing of its remaining products. Final assembly of products takes place either at the outsourcing manufacturing locations or at the Company's facilities in Austin, Texas and Gistel, Belgium where there is also product warehousing. The Company also does product warehousing and distribution at its Seymour, Connecticut location. The Company generally purchases devices, components and sub-assemblies from more than one source both domestically and internationally where alternative sources are available and economical; however, the Company uses sole suppliers for certain components. The Company believes that it maintains adequate inventories of sole source items and that alternative components or sources for those items could be readily incorporated into the Company's products. The Company's present manufacturing capacity is adequate to meet its anticipated production requirements for the foreseeable future. If required, the Company has the ability to increase purchases under its existing manufacturing and second source agreements or to manufacture domestically products currently manufactured offshore. The Company maintains quality control procedures for products manufactured both domestically and offshore. These procedures include quality testing during design, prototype and pilot stages of production, inspection of incoming raw materials, inspection of sub-assemblies and testing of finished product using automatic test equipment. Finished products undergo burn-in testing to provide for long-term, reliable operation. 10 The Company warrants its products for periods ranging from ninety (90) days to the life of the product. The Company makes available extended warranties, spare parts and out-of-warranty repair service in the United States and Europe. To date, warranty costs have been insignificant. COMPETITION The markets in which the Company sells it products are highly competitive. The Company faces actual and potential competition from a number of established manufacturers, both domestic and international, including the Company's largest competitors, CalComp, Inc., a subsidiary of Lockheed Corporation, and Hewlett- Packard Co., which have or may have significantly greater financial, technical, manufacturing and marketing resources than the Company; and Mutoh America Corporation, Wacom Company, Ltd., Encad, Inc., and Oce Vandergrinten. CalComp competes primarily with the Company's digitizer and plotter products; Mutoh competes primarily with the Company's cutter products; and Hewlett-Packard competes primarily with the Company's plotter products. The Company's lower cost products face competition from manufacturers of mice and tablets, including Logitech, Inc. The Company recently entered into an OEM agreement with Mutoh for the production and sale of certain products of each of those companies by the other, to enhance the Company's product offerings. The Company believes that its competitive ability also depends on the quality, pricing, performance and support of its products, manufacturing costs and the Company's technical capability and successful introduction of new products and product enhancements. See "Business -- Product Development and Emerging Markets." The Company believes that it offers a number of important attributes, including its product price and performance, market presence, technological expertise, quality of its product line, relationships with certain OEMs and its well-developed distribution channels. Inability to match product introductions or enhancements or price/performance of competitors' products could adversely affect the Company's market share and profitability. BACKLOG The Company manufacturers on the basis of its forecast of near-term demand and maintains inventories of finished products in anticipation of firm orders from its customers. The Company typically ships within thirty (30) days receipt of orders. While certain OEMs and distributors place orders for scheduled deliveries, most of the Company's customers currently order products on an as- needed basis. For this reason, and because customers may cancel or reschedule orders with little or no penalty, or may place orders on shipment hold, and because the Company may decline to ship to customers for credit reasons, the Company believes that it has no backlog orders that are firm, and, in any event, that the level of such orders is not indicative of sales. EMPLOYEES As of May 31, 1995, the Company employed approximately 311 people, 238 domestically and 73 internationally. None of the employees are covered by a collective bargaining agreement, although the Company's employees in Belgium are covered by government mandated benefits. The Company believes that relations with its employees are good. 11 PATENTS AND PROPRIETARY INFORMATION The Company attaches importance to its portfolio of patents, trademarks, copyrights, trade secrets and know-how. In the course of research and development, Summagraphics engineers at times devise inventions which the Company may elect to patent if it would provide a clear-cut market advantage, inhibit competitors, or generate a source of licensing revenues. The Company has approximately fifty patents and twenty patents pending in the United States and in a number of foreign countries. The Company also relies on trade secrets, know-how, contracts, copyrights, trademarks and patents to establish and protect its proprietary rights and to maintain the confidentiality of trade secrets, proprietary information and creative developments. As part of Summagraphics' strategy for protecting its technology and market position, it will announce certain inventions that it intends to use but does not intend to patent in order to prevent competitors and others from obtaining patent protection on such inventions. As a matter of cost control, the Company may allow certain patents that it judges to be obsolete to lapse. The Company believes that its proprietary information is protected to the fullest extent practicable. There can be no assurance that the confidentiality agreements upon which the Company relies to protect its trade secrets and know- how would be upheld by the courts. Moreover, patents relating to particular products do not necessarily preclude competitors from successfully marketing substitute products to compete with patented products. The Company believes that the loss of any particular patent, or group of patents, will not have a material adverse effect on the Company's financial position and results of operations. Other companies may also obtain patents covering configurations and processes relating to the Company's products, which would require the Company to obtain licenses. There can be no assurance that the Company will be able to acquire such licenses, if required, on commercially reasonable terms. ITEM 2 PROPERTIES - ------ ---------- The Company's executive offices are located in Austin, Texas in a leased building having a total of 96,400 square feet of space. The lease will expire in June 2010. In addition, the Company leases a building in Seymour, Connecticut (the lease will expire in November 1998), which is being vacated, and owns a building in Gistel, Belgium, and those buildings have a total of 84,000 and 43,180 square feet of space, respectively. The Company also leases office space for selling operations in Huntington Beach, California and Macedonia, Ohio, and in three (3) foreign countries (Germany, France and Belgium). Except for the Seymour, Austin and Gistel facilities, these locations function primarily as sales, training and field service centers for their regions. See Note 9 of Notes to Consolidated Financial Statements for information regarding the Company's obligations under leases. ITEM 3 LEGAL PROCEEDINGS - ------ ----------------- The Company is a party to several legal actions arising in the normal course of business. The Company believes that the disposition of these matters will not have a material adverse affect on its financial position or results of operations taken as a whole. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- None 12 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED - ------ ----------------------------------------------------- STOCKHOLDER MATTERS - ------------------- COMMON STOCK MARKET AND DIVIDEND INFORMATION The Company's common stock is traded in the over-the-counter market and is quoted on the NASDAQ National Market System (symbol SUGR). The following table shows the range of high and low sales prices for the Company's common stock. As of May 31, 1995, the Company had 450 holders of record of its common stock. This does not include holdings in street or nominee names.
QUARTER ENDED HIGH LOW - ------------------------------------------------- Aug. 31, 1993 3 7/8 3 5/8 Nov. 30, 1993 4 3/4 4 1/2 Feb. 28, 1994 7 5/8 7 3/8 May 31, 1994 7 3/4 7 1/4 Aug. 31, 1994 7 1/2 6 1/4 Nov. 30, 1994 9 3/8 7 7/8 Feb. 28, 1995 8 6 5/8 May 31, 1995 5 2 5/8
ITEM 6 SELECTED FINANCIAL DATA - ------ ----------------------- See page 54 hereof. ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------ ---------------------------------------------------------------- RESULTS OF OPERATIONS - ---------- ---------- See pages 32-37 hereof. ------ ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ ------------------------------------------- The following consolidated financial statements of the Company and the independent auditors' report are on pages 38-53 hereof. ------ Independent Auditor's Report Consolidated Balance Sheets -- May 31, 1994 and 1995 Consolidated Statements of Operations -- Years ended May 31, 1993, 1994 and 1995 Consolidated Statements of Stockholders' Equity -- Years ended May 31, 1993, 1994 and 1995 Consolidated Statements of Cash Flows -- Years ended May 31, 1993, 1994 and 1995 Notes to Consolidated Financial Statements The information captioned "Quarterly Results of Operations" is on page 54 . ----- 13 ITEM 9 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------ ------------------------------------------------------------------- The Company has no disagreement on accounting or financial disclosures matters with its independent auditors, nor did it change auditors during the fiscal year ended May 31, 1995. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- DIRECTORS The following table sets forth the age, the principal occupation during the past five (5) years and the positions with the Company of each director and any other directorships held by such person in any company subject to the reporting requirements of the Securities Exchange Act of 1934 or in any company registered as an investment company under the Investment Company Act of 1940.
NAME AGE PRINCIPAL OCCUPATION DIRECTORSHIPS - ---- --- -------------------- ------------- Michael S. Bennett 43 President and Chief Executive Officer and Director of the Company since April 1993; Senior level positions at Dell Computer Corp. since 1988; Director of the Company since 1993. Ken Draeger 55 President and Chief Executive Officer Galileo Electro-Optics Decision Data Services, Inc. Since 1992; Corp. Previously, President of Agfa Compugraphic since September of 1988; Director of the Company since June 1994. Andrew Harris 40 Director of TechDirect International Ltd. since 1994; President of Dell International from 1987 to 1994; Director of the Company since January 1995. G. Glenn Henry 53 PC Division Director, MIPS Technologies, Inc. since late 1993; Chief Technical Officer, Dell Computer Corp. since early 1993; SVP Product Group, Dell Computer Corp. since before 1989; Director of the Company since August 1993. Stephen J. Keane 67 Director of the Company since July, 1985. Storage Technology Corp., Maxserv, Inc. Dennis G. Sisco 49 Senior Vice President, Dun & Bradstreet Corp. Gartner Group, Inc. since July 1993; President, D & B Enterprises since December 1988, Director of the company since October 1983.
14 EXECUTIVE OFFICERS The executive officers of the Company, the age of each, and the period during which each has served in his present office are as follows: MICHAEL S. BENNETT (43) joined the Company in April 1993 as President and Chief Executive Officer and as a Director. Previously he was Vice President, PC Systems, of Dell Computer Corporation since December 1990, and before that served as Vice President and General Manager of Dell Marketing Corporation. Earlier he was President and CEO of Pritronix, Inc., before that served as President and CEO of Interlan, Inc., and prior to that he was employed for twelve (12) years by Digital Equipment Corporation in various managerial positions in manufacturing and sales in the United States and in Europe. DENNIS JOLLY (45) joined the Company in September, 1995 as a Senior Vice President of Sales, Marketing, and Service handling the sales, marketing and support organizations and responsibilities for non-Europe areas. Previously, Mr. Jolly was with Dell Computer Corporation for seven years in various capacities, most recently as Group Vice President, Indirect Channel, USA of Dell Computer Corporation. Prior thereto, he was Director of Marketing for Fourth Shift Corporation, a manufacturing software company, and before that was employed by Apple Computer for five years in various capacities, lastly as Regional Sales Manger. DAVID G. OSOWSKI (43) joined the Company in September 1986 as Corporate Controller. In May 1990, he became Corporate Controller and Vice President of the Company's Digitizer Division and in May 1991, he was promoted to Senior Vice President, Controller and Treasurer of the Company. Prior to joining the Company, Mr. Osowski served as Assistant Controller at Boehringer Ingelheim Pharmaceuticals, Inc. and before that was an audit supervisor at Price Waterhouse. He holds a BS degree from the University of Bridgeport. DARIUS C. POWER (49) joined the Company as Senior Vice President of Worldwide Manufacturing in July, 1995. Prior to joining the Company, Mr. Power was Vice President of Manufacturing for Leading Edge Products, Inc. and prior thereto, he was Managing Director of Manufacturing Operations for AST Research, Inc. ROBERT B. SIMS (53) joined the Company as Vice President, General Counsel and Secretary in June 1984. In May 1990, he was promoted to Senior Vice President, General Counsel and Secretary. Mr. Sims has served in corporate counsel capacities at Mathematical Applications Group, Inc., Lever Brothers Company, Raymark Corporation and General Signal Corporation and has been associated with the law firms of Whitham and Ransom and Cahill Gordon & Reindel. Mr. Sims is director of Raytech Corporation. He holds a BS degree from Franklin and Marshall College, a Juris Doctor (JD) degree from The George Washington University Law School (National Law Center) and an MBA from New York University Graduate School of Business Administration. JOHN UFFORD (44) joined the Company in October, 1994 as Senior Vice President of Output Devices and has since assumed management responsibility for Input Devices as well. Prior to joining Summagraphics , he was with the DuPont Company for 15 years in a variety of technical and managerial positions. His most recent assignment was as the Vice President of Engineering for ImagiTex, a DuPont subsidiary. Prior thereto, he was the Manager, Digital Systems for Electronic Imaging within DuPont. 15 ITEM 11 EXECUTIVE COMPENSATION - ------- ---------------------- SUMMARY COMPENSATION TABLE (COMPENSATION AND OTHER INFORMATION CONCERNING EXECUTIVE OFFICERS) The following table sets forth all cash compensation for services in all capacities with the Company and its subsidiaries rendered during the fiscal year ended May 31, 1995, for the Chief Executive Officer at the end of the last complete fiscal year and for each of the four (4) most highly compensated executive officers: LONG TERM ---------
ANNUAL COMPENSATION COMPENSATION AWARDS NAME OF INDIVIDUAL ------------------- ------------------- OR NUMBER OF ALL OTHER PERSONS IN GROUP (1) CAPACITIES IN WHICH SERVED YEAR SALARY ($) BONUS ($)(2) STOCK OPTIONS(3) COMPENSATION(4)($) - -------------------- -------------------------- ---- ---------- ------------ ---------------- ------------------ Michael S. Bennett President and 1995 250,000 ----- 10,000 ---- Chief Executive Officer 1994 250,000 ----- 31.250 ---- 1993 32,225 ----- 175,000 ---- David G. Osowski Senior Vice President, 1995 120,000 ----- 10,000 ---- Controller and Treasurer 1994 120,000 6,600 28,500 ---- 1993 127,483 22,350 6,000 3,850 William S. Paxton(5) Senior Vice President 1995 125,000 ----- 10,000 ---- Operations 1994 125,000 ----- 12,868 ---- Robert B. Sims Senior Vice President 1995 132,000 ----- 10,000 ---- General Counsel and 1994 132,000 6,600 28,500 ---- Secretary 1993 133,663 14,250 6,000 3,600 John C. Ufford Senior Vice President 1995 72,769 ----- 15,000 ---- Input/Output Devices
(1) The Company presently has six (6) executive officers, including the CEO. (2) Includes bonus payments accrued and paid during indicated fiscal year and includes bonus payments which had accrued during prior fiscal year but were paid in indicated fiscal year, all under the Company's management bonus plan and as discretionary bonus authorized by the Company's Board of Directors. (3) See also "Option Grant Table" for option grants. (4) Includes Company contributions to Cash or Deferral Profit Sharing Plan (401(k) Plan). (5) Mr. Paxton left the Company in June 1995. 16 OPTION GRANTS IN LAST FISCAL YEAR POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK % OF TOTAL APPRECIATION FOR OPTION TERM (2) OPTIONS -------------------------------- GRANTED TO EXERCISE EMPLOYEES OR BASE EXPIRATION HISTORIC IN FISCAL PRICE DATE RATE % NAME OPTIONS YEAR 1995 ($/SHARE) ($/SHARE) (1) 5%($) $10%($)$ (3) APPRECIATION - ------------------------ ------- --------- ---------- -------- ------- ----- -------- --- ------------ Micheal S. Bennett 10,000 6% 7.00 06/28/04 $44,023 $111,562 n/a (55.36%) David G. Osowski 10,000 6% 7.00 06/28/04 $44,023 $111,562 n/a (55.36%) William S. Paxton, Jr. 10,000 6% 7.00 06/28/04 $44,023 $111,562 n/a (55.36%) Robert B. Sims 10,000 6% 7.00 6/28/04 $44,023 $111,562 n/a (55.36%) John C. Ufford 15,000 10% 8.00 10/24/04 $75,467 $191,249 n/a (60.94%)
(1) The options granted are non-qualified and are exercisable starting one (1) year from the grant date but not after ten (10) years from the grant date. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED IN-THE- SHARES UNEXERCISED OPTIONS MONEY ACQUIRED AT 5/31/95 OPTIONS AT 5/31/95 ON VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/ EXERCISE REALIZED (#) UNEXERCISABLE NAME (#) ($) EXERCISABLE/UNEXERCISABLE ($) - ---- --- --- ------------------------- --- Michael S. Bennett -0- -0- 91,250/125,000 62,300/ -0- David G. Osowski -0- -0- 42,832/65,500 -0- / -0- William S. Paxton, Jr. -0- -0- -0-/-0- -0- / -0- Robert B. Sims -0- -0- 47,332/22,668 -0-/ -0- John C. Ufford -0- -0- -0-/15,000 -0-/ -0-
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- -------------------------------------------------------------- BENEFICIAL OWNERSHIP OF VOTING SECURITIES (PRINCIPAL STOCKHOLDERS; DIRECTORS; OFFICER) The following table sets forth certain information concerning the beneficial ownership of the Common Stock as of August 18, 1995 by persons known to the company to own beneficially five percent (5%) or more of the outstanding shares of Common Stock of the company, by each Director of the Company, by each named executive officer of the Company set forth in the 17 Summary Compensation Table and by all directors and executive officers of the Company as a group. Except as otherwise indicated, the persons listed have sole voting and investment power with respect to shares beneficially owned by them. Amount and Nature of Approximate Name and Affress Beneficial Percentage of Beneficial Owner Ownership (1) Class - ---------------- ------------- ----- Bessemer Venture Funds (2)...................... 306,562 6.6% 1025 Old Country Road Suite 205 Westbury, NY 11590 John G. Panutsos................................ 255,065 5.5% C.L. King & Associates.......................... 244,500 5.3% Michael S. Bennett(3)........................... 91,250 2.0% Ken Draeger(4).................................. 3,000 * Andrew Harris................................... -0- * G. Glenn Henry(5)............................... 6,000 * Stephen J. Keane(6)............................. 7,500 * Dennis G. Sisco(7).............................. 7,500 * David G. Osowski(8)............................. 58,833 1.3% William S. Paxton............................... -0- * Robert B. Sims(9)............................... 56,332 1.2% John C. Ufford(10).............................. 5,000 * All directors and all executive officers as a group(11)....................................... 235,415 5.1% * Less than 1%. - ---------------- (1) Except as otherwise noted, each person or group named in the table has sole investment and voting power with respect to all shares of Common Stock shown as beneficially owned by such person or group. (2) Includes shares held by Bessemer Venture Partners I, L.P., shares held by Bessemer Venture Partners II, L.P., shares held by G. Felda Hardymon and shares held by affiliated parties. Mr. Hardymon was a director of the Company who retired. (3) Includes 74,583 shares which Mr. Bennett has the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995 or within (60) days thereafter. (4) Includes 3,000 shares which Mr. Draeger has the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995, or within sixty (60) days thereafter. (5) Includes 6,000 shares which Mr. Henry has the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995, or within sixty (60) days thereafter. (6) Includes 7,500 shares which Mr. Keane has the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995, or within sixty (60) days thereafter. (7) Includes 7,500 shares which Mr. Sisco has the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995, or within sixty (60) days thereafter. (8) Includes 51,832 shares which Mr. Osowski has the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995, or within sixty (60) days thereafter. (9) Includes 56,332 shares which Mr. Sims has the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995, or within sixty (60) days thereafter. (10) Includes 5,000 shares which Mr. Ufford has the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995, or within sixty (60) days thereafter. (11) Includes 228,414 shares which all directors and all executive officers as a group have the right to acquire pursuant to the exercise of stock options which are exercisable on August 18, 1995, or within sixty (60) days thereafter. 18 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- None PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------- ---------------------------------------------------------------- (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements. The following consolidated financial statements of the Company and the independent auditors' report are on pages 38-53 hereof. ----- Independent Auditors' Report Consolidated Balance Sheets -- May 31, 1994 and 1995 Consolidated Statements of Operations -- Years ended May 31, 1993, 1994 and 1995 Consolidated Statements of Stockholders' Equity -- Years ended May 31, 1993, 1994 and 1995 Consolidated Statements of Cash Flows -- Years ended May 31, 1993, 1994 and 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. The following consolidated financial statement schedule of the Company is included herein on page 31. -- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS All other Financial Statement Schedules have been omitted because they are not applicable or because the applicable disclosures have been included in the Consolidated Financial Statements or in the Notes thereto. 3. Lists of Exhibits. EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1,4.1 Third Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988 (File No. 0-16071) and incorporated herein by this reference). 19 3.2, 4.2 By-laws of the Registrant, as amended (filed as Exhibit 3.02 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 4.3 Specimen Common Stock certificate (filed as Exhibit 4.02 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 4.4 8% Convertible Subordinated Note due May 1, 1995 of Summagraphics Corporation (filed as Exhibit 2 to the Registrant's' Current Report on Form 8-K, dated May 14, 1990, and incorporated herein by this reference). 10.1 Lease between 330 Realty Associates and the Company dated May 28, 1987 (filed as Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.2 1985 Employee Stock Purchase Plan (filed as Exhibit 10.04 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.3 1984 Executive Stock Purchase Plan, as amended (filed as Exhibit 10.05 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.4 Form of Stock Purchase Agreement under 1984 Executive Stock Purchase Plan (filed as Exhibit 10.06 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.5 1987 Stock Plan, as amended (filed as Exhibit 10.12 to the Registrant's Form 10-K for fiscal year 1994 and incorporated herein by reference). 10.6 1989 Performance Unit Plan (filed as Exhibit 10.11) to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989 (File No. 0-16071) and incorporated herein by this reference). 10.7 Form of Employment Agreement between Summagraphics Corporation and senior executive officers (filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989 (File No. 0-16071) and incorporated herein by this reference). 10.8 Management Bonus Plan letter (filed as Exhibit 10.09 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 20 10.9 The Cash or Deferral Profit Sharing Plan (filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.10 Amended and Restated Shareholders' Agreement, as amended (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.11 Second Amendment to Amended and Restated Shareholders' Agreement, as amended (Exhibit 10.13) (filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988 (File No. 0-16071) incorporated herein by this reference). 10.12 Agreement of Sale, dated as of March 14, 1990, by and between Ametek and Summagraphics Corporation (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K, dated May 14, 1990, and incorporated herein by reference). 10.13 Registration Rights Agreement, dated as of May 1, 1990, between the Company and Ametek, Inc. (filed as Exhibit 3 to the Registrant's Current Report on Form 8-K, dated May 14, 1990, as amended on July 13, 1990 and August 15, 1990 and incorporated here in by this reference). 10.14 Termination Agreement dated as of May 31, 1994 to terminate the Registration Rights Agreement dated May 1, 1990, between Ametek, Inc. and Summagraphics Corporation (filed as Exhibit 10.21 to the Registrant's Form 10-K for fiscal year 1994 and incorporated herein by reference). 10.15 Registration Rights Agreement, dated as of May 25, 1994, between Ametek, Inc. and Summagraphics Corporation (filed as Exhibit 10.22 to the Registrant's Form 10-K for fiscal year 1994 and incorporated herein by reference). 10.16 Lease Agreement dated as of May 28, 1992 by and between QRS 10-12 (TX), Inc. and QRS 11-5 (TX), Inc., as landlord, and Summagraphics Corporation, as tenant, on premises located at 8500 Cameron Road, Austin, Texas in connection with the sale and leaseback of that property (filed as Exhibit 10.24 to the Registrant's Annual Report for the fiscal year ended May 31, 1992 (File No. 0-16071) and incorporated herein by this reference). 10.17 Employment Agreement, dated April 16, 1993, between the Company and Michael S. Bennett (filed as an Exhibit to the Registrant's Annual 10-K for the fiscal year ended may 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 10.18 Letter of Credit Agreement dated September 9, 1992, between Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 21 10.19 Deed of Pledge of Business dated September 9, 1992, between Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 10.20 Acceptance of Subordination dated October 12, 1992, between Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 10.21 Amendment No. 1 to the Lease Agreement, dated as of August 27, 1993, between QRS 10-12 (TX), Inc. and QRS (TX), Inc. as landlord and Summagraphics Corporation, as tenant (filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 10.22 Employment Modification Agreement dated as of April 25, 1995, by and between the Company and Michael S. Bennett. 10.23 Credit Agreement dated as of July 18, 1994 by and between the Company and Silicon Valley Bank. 10.24 Security Agreement dated as of December 13, 1994 between the Company and Heller Financial, Inc. 10.25 Amendment dated as of June 1, 1995 of the Security Agreement dated as of December 13, 1994 between the Company and Heller Financial, Inc. 10.26 Asset Purchase Agreement dated as of November 10, 1994 among the Company, CAD Warehouse, Inc. (a Nevada corporation), CAD Warehouse, Inc. (a Delaware corporation), John G. Panutsos, Rosemary Wollet, and David C. Hoffer. 10.27 Amendment No. 1 to Form S-3 Registration Statement under the Securities Act of 1933 dated April 3, 1995 relating to the registration of 133,323 shares of the Company's Common Stock. 10.28 Form 8 Amendment No.1 to Form 8-K Report of the Company. 10.29 Amendment No. 2 dated as of April 12, 1995 of the Lease Agreement dated as of May 28, 1992, by and between QRS 10-12 (TX), Inc. and QRS 11-5 (TX), Inc. and the Company. 10.30 Manufacturing Agreement dated as of September 13, 1995 between the Company and Harvard Manufacturing Ventures, LLC. 22 10.31 License Agreement dated as of July 31, 1995 between the Company and Sharp Corporation. 22.1 Subsidiaries 27 Financial Data Schedule 23 REPORTS ON FORM 8-K Reports on Form 8-K filed by the Company during the fourth quarter of the Company's fiscal year ended May 31, 1995 were as follows: None 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Summagraphics Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUMMAGRAPHICS CORPORATION AUGUST 29, 1995 BY: /s/ MICHAEL S. BENNETT ------------------ MICHAEL S. BENNETT PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following on behalf of Summagraphics Corporation and in the capacities and on the date indicated. /s/ MICHAEL S. BENNETT - ---------------------------- President, Chief MICHAEL S. BENNETT Executive Officer August 29, 1995 /s/ DAVID G. OSOWSKI - ---------------------------- Senior Vice President, DAVID G. OSOWSKI Controller & Treasurer August 29, 1995 (Principal Financial & Accounting Officer) /s/ KEN DRAEGER Director August 29, 1995 - ---------------------------- KEN DRAEGER /s/ ANDREW HARRIS Director August 29, 1995 - ---------------------------- ANDREW HARRIS /s/ G. GLENN HENRY Director August 29, 1995 - ---------------------------- G. GLENN HENRY /s/ STEPHEN J. KEANE Director August 29, 1995 - ---------------------------- STEPHEN J. KEANE /s/ DENNIS G. SISCO Director August 29, 1995 - ---------------------------- DENNIS G. SISCO 25 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE - ----- ---------------------- ---- 3.1,4.1 Third Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988 (File No. 0-16071) and incorporated herein by this reference). 3.2, 4.2 By-laws of the Registrant, as amended (filed as Exhibit 3.02 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 4.3 Specimen Common Stock certificate (filed as Exhibit 4.02 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 4.4 8% Convertible Subordinated Note due May 1, 1995 of Summagraphics Corporation (filed as Exhibit 2 to the Registrant's' Current Report on Form 8-K, dated May 14, 1990, and incorporated herein by this reference). 10.1 Lease between 330 Realty Associates and the Company dated May 28, 1987 (filed as Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.2 1985 Employee Stock Purchase Plan (filed as Exhibit 10.04 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.3 1984 Executive Stock Purchase Plan, as amended (filed as Exhibit 10.05 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.4 Form of Stock Purchase Agreement under 1984 Executive Stock Purchase Plan (filed as Exhibit 10.06 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.5 1987 Stock Plan, as amended (filed as Exhibit 10.12 to the Registrant's Form 10-K for the fiscal year 1994 and incorporated herein by this reference).
26 10.6 1989 Performance Unit Plan (filed as Exhibit 10.11) to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989 (File No. 0-16071) and incorporated herein by this reference). 10.7 Form of Employment Agreement between Summagraphics Corporation and senior executive officers (filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989 (File No. 0-16071) and incorporated herein by this reference). 10.8 Management Bonus Plan letter (filed as Exhibit 10.09 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.9 The Cash or Deferral Profit Sharing Plan (filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (No. 33- 15658) and incorporated herein by this reference). 10.10 Amended and Restated Shareholders' Agreement, as amended (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (No. 33-15658) and incorporated herein by this reference). 10.11 Second Amendment to Amended and Restated Shareholders' Agreement, as amended (Exhibit 10.13) (filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988 (File No. 0-16071) incorporated herein by this reference). 10.12 Agreement of Sale, dated as of March 14, 1990, by and between Ametek and Summagraphics Corporation (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K, dated May 14, 1990, and incorporated herein by reference). 10.13 Registration Rights Agreement, dated as of May 1, 1990, between the Company and Ametek, Inc. (filed as Exhibit 3 to the Registrant's Current Report on Form 8-K, dated May 14, 1990, as amended on July 13, 1990 and August 15, 1990 and incorporated here in by this reference). 10.14 Termination Agreement dated as of May 31, 1994 to terminate the Registration Rights Agreement dated May 1, 1990, between Ametek, Inc. and Summagraphics Corporation (filed as Exhibit 10.21 to the Registrant's Form 10-K for the fiscal year 1994 and incorporated herein by this reference).
27 10.15 Registration Rights Agreement, dated as of May 25, 1994, between Ametek, Inc. and Summagraphics Corporation (filed as Exhibit 10.22 to the Registrant's Form 10-K for the fiscal year 1994 and incorporated herein by this reference). 10.16 Lease Agreement dated as of May 28, 1992 by and between QRS 10-12 (TX), Inc. and QRS 11-5 (TX), Inc., as landlord, and Summagraphics Corporation, as tenant, on premises located at 8500 Cameron Road, Austin, Texas in connection with the sale and leaseback of that property (filed as Exhibit 10.24 to the Registrant's Annual Report for the fiscal year ended May 31, 1992 (File No. 0-16071) and incorporated herein by this reference). 10.17 Employment Agreement, dated April 16, 1993, between the Company and Michael S. Bennett (filed as an Exhibit to the Registrant's Annual 10-K for the fiscal year ended may 31, 1993 (File No. 0- 16071) and incorporated herein by this reference). 10.18 Letter of Credit Agreement dated September 9, 1992, between Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 10.19 Deed of Pledge of Business dated September 9, 1992, between Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 10.20 Acceptance of Subordination dated October 12, 1992, between Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 10.21 Amendment No. 1 to the Lease Agreement, dated as of August 27, 1993, between QRS 10-12 (TX), Inc. and QRS (TX), Inc. as landlord and Summagraphics Corporation, as tenant (filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated herein by this reference). 10.22 Employment Modification Agreement dated as of April 25, 1995, by and between the Company and Michael S. Bennett.
28 10.23 Credit Agreement dated as of July 18, 1994 by and between the Company and Silicon Valley Bank. 10.24 Security Agreement dated as of December 13, 1994 between the Company and Heller Financial, Inc. 10.25 Amendment dated as of June 1, 1995 of the Security Agreement dated as of December 13, 1994 between the Company and Heller Financial, Inc. 10.26 Asset Purchase Agreement dated as of November 10, 1994 among the Company, CAD Warehouse, Inc. (a Nevada corporation), CAD Warehouse, Inc. (a Delaware corporation), John G. Panutsos, Rosemary Wollet, and David C. Hoffer. 10.27 Amendment No. 1 to Form S-3 Registration Statement under the Securities Act of 1933 dated April 3, 1995 relating to the registration of 133,323 shares of the Company's Common Stock. 10.28 Form 8 Amendment No.1 to Form 8-K Report of the Company. 10.29 Amendment No. 2 dated as of April 12, 1995 of the Lease Agreement dated as of May 28, 1992, by and between QRS 10-12 (TX), Inc. and QRS 11-5 (TX), Inc. and the Company. 10.30 Manufacturing Agreement dated as of September 13, 1995 between the Company and Harvard Manufacturing Ventures, LLC. 10.31 License Agreement dated as of July 31, 1995 between the Company and Sharp Corporation. 22.1 Subsidiaries 27 Financial Data Schedule
29 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE ------------------------------------------------------------ The Board of Directors and Shareholders Summagraphics Corporation: The audits referred to in our report dated June 27, 1995, except as to Notes 5 and 9 which are as of September 20, 1995, included the related financial statement schedule as of May 31, 1995, and for each of the years in the three- year period ended May 31, 1995, included in the annual report of Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Our report refers to a change in the method of accounting for income taxes in 1993. /s/ KPMG Peat Marwick LLP Austin, Texas June 27, 1995 30 SUMMAGRAPHICS CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MAY 31, 1993, 1994 AND 1995
Balance at Beginning Charged to Balance at Description of Period Cost and Expenses Charge Off's End of Period ----------- ---------- ----------------- ------------ ------------- Allowance for doubtful receivables: 1993 $ 547,000 $ 818,000 $ (246,000) $1,119,000 1994 $1,119,000 $ 124,000 $ (130,000) $1,113,000 1995 $1,113,000 $ 229,000 $ (388,000) $ 954,000 Balance at Beginning Charged to Balance at Description of Period Cost and Expenses Charge Off's End of Period ----------- ---------- ----------------- ------------ ------------- Reserves for excess & obsolete inventory: 1993 $4,126,000 $ 716,000 $ (647,000) $4,195,000 1994 $4,195,000 $ 637,000 $ (606,000) $4,226,000 1995 $4,226,000 $1,497,000 $(1,009,000) $4,714,000
31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, items in the Consolidated Statements of Operations as percentages of net sales. The table and the subsequent discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained elsewhere herein.
Percentage of Net Sales ----------------------- Years Ended May 31, 1993 1994 1995 ---- ---- ---- Net Sales 100% 100% 100% Cost of Sales 64 65 74 --- --- --- Gross Profit 36 35 26 Selling, general and administrative 37 24 28 Research and development 10 7 9 Restructuring and other charges 10 - 3 --- --- --- Operating income (loss) (21) 3 (14) Interest income (expense), net * * (1) Miscellaneous, net * * * --- --- --- Income (loss) before income taxes, extraordinary gain and cumulative effect of change in accounting method (21) 3 (15) Provision for income taxes - - * --- --- --- Income (loss) before extraordinary gain and cumulative effect of change in accounting method (21) 3 (15) Extraordinary gain - 1 - Cumulative effect of change in accounting for income taxes 1 - - --- --- --- Net income (loss) (20) 4 (15) --- --- --- * Not meaningful or less than 1%
1995 Compared to 1994 Net sales increased 1% from 1994 to 1995. The net sales increase reflects record European net sales, positive results of new distribution alliances in Asia, and an increase in sales by CAD Warehouse. These increases were offset by a decline in the Company's North American region, due to the accelerating erosion of the large format pen plotter market, a later-than-planned introduction of the Company's ink jet plotter (SummaJet), the loss of certain digitizer OEM business and the final sell out of large format scanners, which were discontinued in 1994. The Company's gross profit margin declined to 26% in 1995 from 35% in 1994, due to high startup and manufacturing costs related to the new large format ink jet plotter, as well as lower selling prices for the Company's older line of pen plotters. The reduction in gross margin also reflects the costs, including severance, of outsourcing the manufacturing of its ink jet product, which is expected to be completed during the first quarter of fiscal 1996 as well as significant charges for reserves for obsolete and excess inventories. The Company signed a manufacturing outsourcing contract in September 1995 for its ink jet product which it expects will result in improved gross profit margins for this product in 1996. 32 Selling, general and administrative expenses as a percentage of net sales increased from 24% or $18,934,000 in 1994 to 28% or $21,940,000 in 1995. This increase reflects increased promotional costs related to the delayed introduction of the Company's ink jet plotter and the lower than expected sales volume generated by the product. Additional selling costs were also incurred on other products in order to offset the lower revenues of the ink jet product. The Company expects sales and promotional costs to decline in 1996, but still be negatively impacted by continued efforts to increase demand for its ink jet product. The Company's research and development expenses, as a percentage of net sales, increased from 7% in 1994 to 9% in 1995 principally due to the increased spending associated with the development of the new large format ink jet plotters introduced in 1995, new digitizer products and the conversion of its SummaChrome product from primarily a paper printer to a vinyl media printer targeted at the sign making market where the Company's cutter products are sold. The Company anticipates that its research and development costs, as a percentage of net sales, will decline in fiscal 1996 due to a reduction in major product introductions planned for the Company's printer/plotter product lines. Fourth Quarter 1995 Charges - --------------------------- In the fourth quarter of fiscal 1995, the Company incurred various non- recurring/unusual charges, including charges related to lease abandonment, manufacturing outsourcing, unusual new product introduction costs and excess inventory allowances. A lease abandonment charge of approximately $2.2 million was incurred related to the Company's decision to move substantially all remaining activities at its Connecticut facility to Austin, Texas. This charge reflects the remaining lease obligations, leasehold improvement and operating costs associated with the lease which expires in November 1998. The Company incurred approximately $1.4 million in charges, primarily for severance, related to the outsourcing of its ink jet and large format digitizer manufacturing and general downsizing of its North American operations. Delays in the initial introduction and subsequent manufacturing of the SummaJet product resulted in approximately $2.2 million in charges in the fourth quarter for air freighting of materials required for production and for delivery to customers where orders were fulfilled later than requested, price credits to distributors for in-stock inventories related to competitive price reductions to which the company responded in the fourth quarter, rework related to adding a product feature to aid in the marketing of the product, additional promotional expenses to relaunch the product after the delayed introduction and write downs of superseded parts inventories. The Company recorded write-downs for unused fixed assets and for excess and obsolete parts and products inventories of approximately $3.2 million primarily related to discontinued and or excess plotter product lines and for parts and supplies for its large format thermal wax printer that are not required for the vinyl sign making application to which the product is now targeted. 33 As a result of the factors described above, the Company had an operating loss of $10,623,000 in 1995 compared to operating income of $2,664,000 in 1994. Interest expense increased from $421,000 in 1994 to $609,000 in 1995. This increase reflects an increase in average outstanding debt in 1995 as compared to 1994. The increased debt is related primarily to the increased inventory levels maintained by the Company in 1995. The Company had pre-tax loss of $11,412,000 in 1995 versus income of $2,142,000 in 1994. The Company recorded a deferred tax provision of $187,000 related to one of the Company's Belgian subsidiaries which was profitable in 1995. 1994 Compared to 1993 Net sales declined 4% from 1993 to 1994. The decline in sales resulted primarily from a change in channel inventory management practices in North America, continuing erosion of the large format pen plotter market, primarily as a result of competition from ink-jet plotters, and the discontinuance of sales of large format scanners. The Company's gross profit margin declined from 36% in 1993 to 35% in 1994 due to lower sales volume, reduced selling prices and increased freight charges caused by lower inventory levels, offset by cost reductions implemented as part of the consolidation of the Company's North American manufacturing operations and generally tighter spending controls. Selling, general and administrative expenses as a percentage of net sales decreased from 37% in 1993 to 24% in 1994 despite the decline in net sales. Two percent of the decline was due to the elimination of approximately $1,950,000 of litigation expenses incurred in 1993 as a result of the favorable settlement of a patent litigation suit against the Company in early 1994. The favorable settlement, net of related expenses resulted in a gain of approximately $120,000. The absence of large bad debt and intangible asset write-offs were achieved through a combination of general personnel reductions, elimination of personnel and expense redundancies as a result of the consolidation of certain functions at the Company's Texas facility and tighter expense controls in all areas. The Company's research and development expenses, as a percentage of net sales, decreased from 10% in 1993 to 7% in 1994 principally due to general personnel reductions, tighter spending controls and the absence of major product development expenditures as incurred in 1993 for products that were introduced late in 1993 and early 1994. In 1993, the Company incurred a restructuring charge of $8,487,000. No like charges were incurred in 1994. As a result of the factors described above, the Company had operating income for $2,664,000 in 1994 compared to an operating loss of $16,750,000 in 1993. Miscellaneous, net, decreased from income of $220,000 in 1993 to an expense of $206,000 in 1994. This decrease is primarily due to the absence of favorable foreign currency transaction gains realized in 1993. 34 The Company had pre-tax income of $2,142,000 in 1994 versus a loss of $16,835,000 in 1993. In the fourth quarter of 1994 the Company realized a $645,000 extraordinary gain on the early retirement of its remaining $2,500,000 of 8% convertible subordinated debt. Liquidity and Capital Resources In May 1994, the Company amended its U.S. banking agreement, extending the expiry date from May 22, 1994 to November 30, 1994. In July 1994, the Company entered into an eighteen month $8,000,000 revolving credit agreement (U.S. Credit Agreement) for its U.S. operations with a new bank, replacing its previous credit agreement. In November 1994, the Company completed a merger, accounted for as a pooling of interests, with CAD Warehouse, Inc. a leading mail order marketer of computer peripherals primarily to the computer aided design market. The consolidated financial statements, as presented, have been prepared to provide for retroactive effect of the merger. In December 1994, the Company entered into a credit agreement to provide capital expenditure financing in the aggregate amount of $2,500,000. The Company received funding under this line in the amount of $1,153,000 which is repayable over a period of three (3) years. In May 1995, the agreement was extended to August 31, 1995. During 1995, the Company borrowed approximately $9.3 million under its bank credit facilities, primarily to fund increases in inventories. The inventory increase was due primarily to the impact of the delayed sales introduction of the Company's line of large format ink-jet plotters, a slow-down in demand for the Company's line of pen plotters caused by several new competing ink jet products introduced in the latter half of fiscal 1995 and increased cutter inventories to satisfy a large increase in cutter demand. In 1995, as a result of its U.S. operating losses and the various charges described above, the Company violated certain financial covenants with its U.S. bank, the landlord of its Texas facility and the loan agreement for the Company's capital expenditures. In September 1995, all parties agreed to waive all events of default and to revise the respective agreements. In conjunction with the agreement with the U.S. bank, the credit facility will be reduced to $7,000,000 and the term of the facility will be extended to September 30, 1996. The Company cannot receive additional advances under this facility. In return for the commitment, the Company has agreed to issue, at current market values, warrants to acquire shares of the Company's common stock and to provide accelerated repayment of the debt if additional cash proceeds are generated from certain asset dispositions or issuances of any new subordinated debt. The Company's sources of liquidity consist of on-hand cash balances, a $4,000,000 revolving credit facility in Belgium, the loan agreement for capital expenditures, vendor credit and cash generated from operations. The Company's availability under its Belgian bank credit line is calculated based upon percentages, as determined by the banks, of certain eligible receivables and to a lesser extent inventories. The Company has $1,347,000 available under its loan agreement for capital expenditures, but only anticipates utilizing $200,000 before the expiration date of August 31, 1995. The 35 Company will not have any availability under its current domestic credit facility. The Company has a substantial investment in inventories for its ink jet plotter, thermal wax printer and pen plotters. Because of this investment, the Company will not be required to purchase a substantial portion of the materials required to build these output devices during the first two quarters of fiscal 1996. During the year the Company utilized its cash balances and credit facilities to fund operations, working capital, capital expenditures and other costs. Charges against the restructuring reserve established in 1993 totaled $2,081,000 during 1995. The remaining reserves of $1,804,000 relate to leased space at the Company's former corporate headquarters in Connecticut. The Company expects the restructuring and lease abandonment reserves to be utilized ratably over the next four years. The Company estimates substantial savings in 1995 as a result of the restructuring in 1993. The Company experienced a significant loss in 1995 as a result of its decision to abandon its lease in Connecticut, the delayed introduction of a significant new product, charges related to downsizing operations in North America, write- offs of idle fixed assets and excess or obsolete inventories and significant competitive pressures primarily related to its plotter product lines. The Company has developed a plan to return to profitable levels during fiscal 1996 which include outsourcing certain of its manufacturing and distribution requirements as well as reducing expenditures in all areas. The waiver received on the U.S. Credit Agreement was based in part, on management's projections of future operations and cash flows. The ability of the Company to achieve its projections is dependent upon various factors, some of which may be outside the control of the Company. In addition management is considering various alternatives to raise additional funds including additional debt or equity financing and/or sales of certain operating assets. However, there can be no assurance that any such alternatives can be successfully consummated. IMPACT OF INFLATION The Company believes that inflation has not had a material effect on the results of operations to date. However, since the Company sources a substantial portion of its production from Far East manufacturers, the cost of imported product is dependent on the inflation rate in those countries, fluctuations in the value of the U.S. dollar and import duties or restrictions. The Company does a substantial portion of its business internationally. The Company's products are priced in dollars in all North American, Latin American, Asian and Pacific Rim countries. In Europe, the Company prices its products in local currencies in Germany, England, France, Belgium and in dollars in other European and Middle Eastern countries. Approximately 50% of sales are denominated in local currencies and 50% in dollars. The European operations incur approximately the same percentages of their expenses in either local currencies or dollars. Accordingly, the Company believes that it effectively matches cash inflows and outflows and is not subject to material cash flow impacts due to currency fluctuations. During the year the devaluation in Mexican peso has slowed sales to Mexico and caused a slowdown in collection from customers in Mexico. However, the Company has not experienced nor does it expect any material write-offs of receivables from this event. ACCOUNTING FOR ASSET IMPAIRMENT During March, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived 36 Assets and for Long-Lived Assets To Be Disposed Of." The Company is required to adopt Statement 121 in the fiscal year beginning June 1, 1996. Statement 121 requires that long-lived assets and certain indentifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has not completed all of the analyses required to estimate the impact of the new statement, however, the adoption of Statement 121 is not expected to have a material adverse impact on the Company's financial position or the results of its operations at the time of adoption. 37 SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31, 1993 1994 1995 - ---------------------------------------------------------------------------------------- Net sales $ 81,404,000 $ 77,755,000 $ 78,494,000 Cost of sales 51,772,000 50,526,000 58,188,000 - ---------------------------------------------------------------------------------------- Gross profit 29,632,000 27,229,000 20,306,000 Selling, general and administrative 29,892,000 18,934,000 21,940,000 Research and development 8,003,000 5,631,000 6,761,000 Restructuring, lease abandonment and other charges (note 2) 8,487,000 - 2,228,000 - ---------------------------------------------------------------------------------------- Operating income (loss) (16,750,000) 2,664,000 (10,623,000) - ---------------------------------------------------------------------------------------- Other income (expense): Interest income 124,000 105,000 21,000 Interest expense (429,000) (421,000) (609,000) Miscellaneous, net 220,000 (206,000) (201,000) - ---------------------------------------------------------------------------------------- (85,000) (522,000) (789,000) - ---------------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary gain and cumulative effect of change in accounting method (16,835,000) 2,142,000 (11,412,000) Provision for income taxes (note 8) - - 187,000 - ---------------------------------------------------------------------------------------- Income (loss) before extraordinary gain and cumulative effect of change in accounting method (16,835,000) 2,142,000 (11,599,000) Extraordinary gain (note 5) - 645,000 - Cumulative effect of change in method of accounting for income taxes 411,000 - - - ---------------------------------------------------------------------------------------- Net income (loss) $(16,424,000) $ 2,787,000 $(11,599,000) - ---------------------------------------------------------------------------------------- Net income (loss) per common share: Income (loss) before extraordinary gain and cumulative effect of change in accounting method $ (3.89) $ 0.47 $ (2.56) Extraordinary gain - 0.14 - Cumulative effect of change in method of accounting for income taxes 0.09 - - - ---------------------------------------------------------------------------------------- Net income (loss) per common share $ (3.80) $ 0.61 $ (2.56) - ---------------------------------------------------------------------------------------- Weighted average shares used in computing net income (loss) per common share 4,323,000 4,519,000 4,537,000 - ----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 38 SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MAY 31, 1994 1995 - -------------------------------------------------------------------------------------------- Assets Current assets: Cash $ 819,000 $ 560,000 Accounts receivable (less allowance for doubtful accounts of $1,113,000 in 1994 and $954,000 in 1995) 17,914,000 18,039,000 Inventories: Materials 5,269,000 9,881,000 Work-in process 1,043,000 2,504,000 Finished goods 5,224,000 6,998,000 - -------------------------------------------------------------------------------------------- 11,536,000 19,383,000 Prepaid expenses and other current assets 1,117,000 1,136,000 - -------------------------------------------------------------------------------------------- Total current assets 31,386,000 39,118,000 - -------------------------------------------------------------------------------------------- Fixed assets: Land 290,000 344,000 Building 1,319,000 1,616,000 Machinery and equipment 12,133,000 13,861,000 Furniture and fixtures 1,228,000 1,241,000 Leasehold improvements 1,009,000 1,044,000 Construction-in-progress 187,000 389,000 - -------------------------------------------------------------------------------------------- 16,166,000 18,495,000 Less: accumulated depreciation and amortization (9,725,000) (13,188,000) - -------------------------------------------------------------------------------------------- Net fixed assets 6,411,000 5,307,000 - -------------------------------------------------------------------------------------------- Intangible and other assets, net of accumulated amortization (note 3) 9,509,000 9,176,000 - -------------------------------------------------------------------------------------------- $ 47,336,000 $ 53,601,000 - -------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 9,583,000 $ 12,500,000 Accrued liabilities (notes 2 and 4) 9,274,000 10,619,000 Notes payable (note 5) - 9,548,000 Current portion of long-term debt (note 5) 148,000 561,000 Current obligations under capital leases 458,000 277,000 - -------------------------------------------------------------------------------------------- Total current liabilities 19,463,000 33,505,000 - -------------------------------------------------------------------------------------------- Long-term liabilities, less current portion: Long-term debt (note 5) 947,000 1,579,000 Capital lease obligations 535,000 282,000 Deferred gain on sale of building 510,000 476,000 Deferred tax liability (note 8) - 498,000 Restructuring, lease abandonment and other charges (note 2) 1,804,000 2,857,000 - -------------------------------------------------------------------------------------------- Total long-term liabilities 3,796,000 5,692,000 - -------------------------------------------------------------------------------------------- Commitments and contingencies (note 9) Stockholders' equity (note 6): Preferred stock, $.01 par value, authorized 5,000,000 shares - - Common stock, $.01 par value, authorized 20,000,000 shares, issued 4,546,000 shares in 1994 and 4,645,000 shares in 1995 45,000 46,000 Additional paid-in capital 38,639,000 39,111,000 Retained earnings (accumulated deficit) (13,830,000) (25,879,000) Cumulative translation adjustment (302,000) 1,601,000 - -------------------------------------------------------------------------------------------- 24,552,000 14,879,000 - -------------------------------------------------------------------------------------------- Less: Treasury stock, at cost - 49,000 shares in 1994 and 1995 (465,000) (465,000) Stockholder note receivable (10,000) (10,000) - -------------------------------------------------------------------------------------------- Total stockholders' equity 24,077,000 14,404,000 - -------------------------------------------------------------------------------------------- $ 47,336,000 $ 53,601,000
See accompanying notes to financial statements. 39 SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock --------------------- Number of Additional Paid-in Retained Earnings Years ended May 31, 1993, 1994 and 1995 Shares Amount Capital (Accumulated Deficit) - ----------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1992 4,268,000 $43,000 37,921,000 1,213,000 Sale of common stock 146,000 1,000 58,000 - Sale of common stock pursuant to the 1987 Employee Stock Plan 3,000 - 18,000 - Imputed benefit from the granting of options below fair market value - - 75,000 - Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan 59,000 1,000 276,000 - Awards granted pursuant to the 1987 stock plan 5,000 - 35,000 - Net loss - - - (16,424,000) Sale of treasury stock at $8.00 per share - - 14,000 - Purchase of treasury stock at $7.69 per share - - - - Unrealized translation loss - - - - Dividends paid to stockholders of CAD Warehouse, Inc., an S-corporation - - - (450,000) - ----------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1993 4,481,000 45,000 38,397,000 (15,661,000) - ----------------------------------------------------------------------------------------------------------------------- Sale of common stock pursuant to the 1987 Employee Stock Plan 11,000 - 42,000 - Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan 47,000 - 165,000 - Awards granted pursuant to the 1987 stock plan 7,000 - 35,000 - Net income - - - 2,787,000 Unrealized translation loss - - - - Dividends paid to stockholders of CAD Warehouse, Inc., an S-corporation - - - (956,000) - ----------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1994 4,546,000 45,000 38,639,000 (13,830,000) - ----------------------------------------------------------------------------------------------------------------------- Sale of common stock pursuant to the 1987 Employee Stock Plan 59,000 1,000 304,000 - Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan 37,000 - 150,000 - Awards granted pursuant to the 1987 stock plan 3,000 - 18,000 - Net loss - - - (11,599,000) Unrealized translation gain - - - - Dividends paid to stockholders of CAD Warehouse, Inc., an S-corporation - - - (450,000) - ----------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1995 4,645,000 $46,000 39,111,000 (25,879,000) - ----------------------------------------------------------------------------------------------------------------------- Cumulative Translation Treasury Stock and Stockholders' Years ended May 31, 1993, 1994 and 1995 Adjustment Stockholder Note Equity - ----------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1992 154,000 (292,000) 39,039,000 Sale of common stock - - 59,000 Sale of common stock pursuant to the 1987 Employee Stock Plan - - 18,000 Imputed benefit from the granting of options below fair market value - - 75,000 Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan - - 277,000 Awards granted pursuant to the 1987 stock plan - - 35,000 Net loss - - (16,424,000) Sale of treasury stock at $8.00 per share - 186,000 200,000 Purchase of treasury stock at $7.69 per share - (369,000) (369,000) Unrealized translation loss (147,000) - (147,000) Dividends paid to stockholders of CAD Warehouse, Inc., an S-corporation - - (450,000) - ----------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1993 7,000 (475,000) 22,313,000 - ----------------------------------------------------------------------------------------------------------------------- Sale of common stock pursuant to the 1987 Employee Stock Plan - - 42,000 Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan - - 165,000 Awards granted pursuant to the 1987 stock plan - - 35,000 Net income - - 2,787,000 Unrealized translation loss (309,000) - (309,000) Dividends paid to stockholders of CAD Warehouse, Inc., an S-corporation - - (956,000) - ----------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1994 (302,000) (475,000) 24,077,000 - ----------------------------------------------------------------------------------------------------------------------- Sale of common stock pursuant to the 1987 Employee Stock Plan - - 305,000 Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan - - 150,000 Awards granted pursuant to the 1987 stock plan - - 18,000 Net loss - - (11,599,000) Unrealized translation gain 1,903,000 - 1,903,000 Dividends paid to stockholders of CAD Warehouse, Inc., an S-corporation - - (450,000) - ----------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1995 1,601,000 (475,000) 14,404,000 - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 40 SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31, 1993 1994 1995 - -------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ (16,424,000) $ 2,787,000 $(11,599,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on retirement of debt - (645,000) - Cumulative effect of change in accounting method (411,000) - - Depreciation and amortization 5,536,000 3,580,000 3,629,000 Restructuring, lease abandonment and other charges 8,487,000 - 2,228,000 (Gain) loss on sale of fixed assets 253,000 (4,000) 14,000 Compensation in form of stock 110,000 35,000 18,000 Changes in assets and liabilities: Accounts receivable 2,360,000 34,000 864,000 Inventories (1,111,000) 644,000 (6,985,000) Prepaid and other current assets 126,000 (8,000) 56,000 Accounts payable (1,424,000) 4,465,000 2,670,000 Accrued liabilities (198,000) (4,828,000) 883,000 Other liabilities - (321,000) 18,000 - -------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (2,696,000) 5,739,000 (8,204,000) - -------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (2,782,000) (1,528,000) (1,927,000) Proceeds from sale of fixed assets 29,000 55,000 10,000 Intangible assets (516,000) 38,000 644,000 - -------------------------------------------------------------------------------------- Net cash used in investment activities (3,269,000) (1,435,000) (1,273,000) - -------------------------------------------------------------------------------------- Cash flows from financing activities: Cash dividends paid (450,000) (956,000) (450,000) Proceeds from long-term borrowings 983,000 - 855,000 Proceeds from short-term borrowings 2,805,500 - 9,323,000 Proceeds from sales of common stock 354,000 208,000 455,000 Purchases of treasury stock (369,000) - - Repayment of short-term debt - (2,805,000) - Repayment of long-term debt and capital - - - lease obligations (2,864,000) (2,623,000) (466,000) - -------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities 458,000 (6,176,000) 9,717,000 - -------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (322,000) 42,000 (499,000) - -------------------------------------------------------------------------------------- Net change in cash (5,828,000) (1,830,000) (259,000) Cash at beginning of year 8,477,000 2,649,000 819,000 - -------------------------------------------------------------------------------------- Cash at end of year $ 2,649,000 $ 819,000 $ 560,000 - --------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31,1993, 1994, and 1995 Summagraphics Corporation and Subsidiaries NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Company is primarily engaged in the manufacture and sale of digitizing tablets (computer input devices), and plotters (computer output devices). These products are used in applications with high performance computer graphics systems such as computer-aided design (CAD). The Company engages in the manufacture and sale of cutters. The Company also owns a mail-order distributor of CAD related equipment and software. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated. Cash Equivalents For the purpose of cash flows, the Company considers all highly liquid investments with maturities of three (3) months or less to be cash equivalents. The Company had no cash equivalents at May 31, 1994 and 1995. Inventories Inventories are stated at the lower of cost or market. Cost is applied on a first-in, first-out (FIFO) basis; market is determined on the basis of estimated net realizable value. The Company reserves for inventory that is determined to be obsolete or substantially in excess of forecasted demand. Fixed Assets Fixed assets acquired are stated at cost. Equipment and furniture under capital leases are stated at the lower of the present value of future minimum lease payments or fair value at the inception of the lease. Building depreciation is provided on the straight-line method over a period of fifteen (15) years, depreciation of furniture and fixtures and machinery and equipment (including amortization of assets covered by capital leases) is provided on the straight-line method, based on estimated useful lives ranging from three (3) to ten (10) years. Amortization of leasehold improvements is provided over the lesser of estimated useful life of the improvement or the life of the lease. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized. Intangible Assets Goodwill represents the amount by which the cost to purchase Houston Instrument exceeded the fair market value of the related net assets. The Company assesses the recoverability of its intangible assets by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through projected future operating cash flows before interest over the remaining amortization period. As a result of this ongoing review, the Company reduced the original life of the goodwill from forty (40) to twenty-five (25) years. The effect of the change in fiscal 1995, which was recorded prospectively, is $53,000. Other acquired identifiable intangible assets are amortized using the straight- line method over lives not exceeding seven and one-half (7.5) years. 42 WARRANTY RESERVE The Company provides warranties on its products for various periods. The Company reserves for future warranty costs based on historical failure rates and repair costs. REVENUE RECOGNITION The Company recognizes revenue when product is shipped to customers. Under contract, certain customers may return a small percentage of the prior quarter's net purchases provided the product is in resale condition and a new order of equal value is placed for delivery within thirty (30) days. The Company carries reserves for these and other returns based on historical trends. INCOME TAXES Effective June 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which 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 this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Prior to June 1, 1992, the Company recorded taxes under the provisions set forth in Statement of Financial Accounting Standards No. 96. PER SHARE DATA Net income (loss) per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and warrants, calculated by using the Treasury Stock method. FOREIGN EXCHANGE Assets and liabilities of foreign subsidiaries generally are translated into U.S. Dollars at exchange rates in effect at the end of the year whereas revenues and expenses are translated using average exchange rates that prevailed during the year. Gains and losses that result from this process are shown as an adjustment in stockholders' equity. RECLASSIFICATIONS Certain reclassifications have been made to conform to prior years' data to the current presentation. BASIS OF PRESENTATION The consolidated financial statements of the Company have been prepared to give retroactive effect to the merger with CAD Warehouse, Inc., an S - Corporation, on November 10, 1994 in exchange for 510,000 shares of the Company's common stock. The merger was accounted for using the pooling of interest method. NOTE 2: RESTRUCTURING, LEASE ABANDONMENT AND OTHER CHARGES In the fourth quarter of 1993, the Company incurred an $8,487,000 restructuring charge in response to the difficult worldwide economic conditions as well as to maximize cost efficiencies. The restructuring charge was provided to cover costs of reductions in workforce, and the relocation of the Company's Connecticut manufacturing operations to its Texas facility. The charge included a provision of $248,000 for fixed assets write-downs due to the consolidation, $2,606,000 of lease and leasehold improvement costs for the unused portion of its Connecticut facility, $2,629,000 for severance and related charges due to a 43 fifteen percent (15%) reduction of workforce in June, 1993, and $1,636,000 for manufacturing consolidation costs consisting of moving, relocation, and severance. At May 31, 1995, $1,804,000 of this liability, related to the Connecticut lease, remained. This remaining amount will be utilized over the approximately four (4) years remaining on the lease. In the fourth quarter of 1995, the Company decided to abandon its leased facility in Connecticut, and accordingly recorded a liability of $2,228,000 related to the furtherance of the Company's consolidation of operations to Austin, Texas. This abandoned lease liability relates to the remaining lease and leasehold improvement costs associated with the Company's Connecticut facility. This liability will be funded over the approximately four (4) years remaining on the lease. NOTE 3: INTANGIBLE AND OTHER ASSETS Significant components of intangible and other assets at May 31, 1994 and 1995 are as follows: 1994 1995 ==== ==== Goodwill $9,570,000 $9,912,000 Other acquired intangibles 2,789,000 2,941,000 ========== ========== 12,359,000 12,853,000 Less accumulated amortization 3,232,000 3,903,000 ========== ========== 9,127,000 8,950,000 Other assets 382,000 226,000 ========== ========== $9,509,000 $9,176,000 ========== ========== NOTE 4: ACCRUED LIABILITIES Significant components of accrued liabilities at May 31, 1994 and 1995 are as follows: 1994 1995 ==== ==== Payroll and other compensation $1,461,000 $1,223,000 Federal, state, foreign, and payroll withholding taxes 774,000 444,000 Sales returns and allowances 1,040,000 3,026,000 Restructuring and lease abandonment costs 2,081,000 1,039,000 Other 3,918,000 4,887,000 ========== ========== $9,274,000 $10,619,000 ========== ========== 44 NOTES 5: INDEBTEDNESS AND LIQUIDITY A. Long-Term Debt Long-term debt at May 31, 1994 and 1995 consists of the following: 1994 1995 ==== ==== Convertible subordinated note (i) $ - $ - Other (ii) 1,095,000 2,140,000 ========== ========== 1,095,000 2,140,000 Less current portion 148,000 561,000 ========== ========== $ 947,000 $1,579,000 The aggregate maturities of long-term debt are as follows: 1996 $ 561,000 1997 490,000 1998 352,000 1999 105,000 2000 and thereafter 632,000 ========== $2,140,000 ========== (i) Convertible Subordinated Note In connection with the acquisition of Houston Instrument, the Company issued to the seller an 8%, five-year, interest only, $5,000,000 convertible subordinated note due on May 1, 1995. The note was convertible at anytime after May 1, 1991 into 333,333 shares of common stock of the Company at $15.00 per share, subject to adjustment, through the exercise of attached warrants. In July, 1992, the Company exercised its option to prepay $2,500,000, thereby reducing the remaining note balance to $2,500,000. In May, 1994, the Company repurchased the note (with a remaining balance of $2,500,000) for $1,800,000, resulting in an extraordinary gain of $645,000. In connection with the note repayment, the Company canceled the existing 333,000 warrants and issued 300,000 new warrants to purchase shares of the Company's common stock (150,000 of which expired on May 1, 1995 and 150,000 of which are exercisable at $9.00 a share, subject to adjustment, and expire on May 1, 1997). (ii) Other Consists of local borrowings of a Belgian subsidiary, including a $1,054,000 mortgage due in the year 2005, on the subsidiary's facility in Gistel, Belgium. Interest rates on this debt range from 7.55% to 10% per annum. Also, in December 1994, the Company entered into a loan agreement (Loan Agreement) that provides financing for capital expenditures through May 31, 1995, to a maximum amount of $2,500,000. The Company received funding under this agreement in the amount of $1,153,000, through May 31, 1995, which is payable over a period of three (3) years at a rate based on London InterBank Offered Rate (LIBOR). In May 1995, the agreement was extended to August 31, 1995. Under the terms of the agreement, the Company is subject to certain covenants and restrictions. At May 31, 1995, the Company was in default with respect to certain of the covenants. On September 18, 1995, the Company executed an agreement which waives the existing 45 events of default and provides for amendments to the financial covenants acceptable to both the lender and the Company. B. REVOLVING CREDIT AGREEMENTS On October 12, 1992, one of the Company's Belgian subsidiaries entered into a $4,000,000 Credit Agreement. This agreement has no defined expiry date and requires the bank to give six (6) months notice of termination, if no defaults exist. Borrowings under this agreement may be in the form of various bank instruments, in various currencies and at various rates, at the Company's option, and are secured by essentially all of the subsidiary's assets except real property. Under the terms of the agreement, the subsidiary is subject to certain covenants and restrictions. As of May 31, 1995, the subsidiary was in compliance with all covenants and restrictions. At May 31, 1995, $1,452,000 was available under this agreement. In July, 1994, the Company entered into an $8,000,000 Credit Agreement (U.S. Credit Agreement) with a new bank replacing the $6,000,000 facility in place at May 31, 1994. Under the terms of the agreement, the Company is subject to certain covenants and restrictions. Borrowings under this agreement may be in the form of various bank instruments at rates based on the bank's base rate and are secured by substantially all of the Company's North American assets. At May 31, 1995, the Company was in default under the terms of the Credit Agreement. On September 18, 1995 the Company received a commitment to amend the existing Credit Agreement to extend the maturity date to September 30, 1996, waive the existing events of default, reduce the facility to $7,000,000, and to adjust the facility pricing and covenants and restrictions. At May 31, 1995, there was no incremental availability under this agreement. In return for the commitment, the Company has agreed to issue, at market value, warrants to acquire shares of the Company's common stock and to apply a portion of proceeds from certain cash inflows outside the ordinary course of business, if any, to outstanding principal. C. LIQUIDITY The Company experienced a significant loss in 1995 as a result of its decision to abandon its lease in Connecticut, the delayed introduction of a significant new product, charges related to downsizing operations in North America, write- offs of idle fixed assets and excess or obsolete inventories and significant competitive pressures primarily related to its plotter product lines. The Company has developed a plan to return to profitable levels during fiscal 1996 which include outsourcing certain of its manufacturing and distribution requirements as well as reducing expenditures in all areas. The waiver received on the U.S. Credit Agreement was based in part, on management's projections of future operations and cash flows. The ability of the Company to achieve its projections is dependent upon various factors, some of which may be outside the control of the Company. In addition, management is considering various alternatives to raise additional funds including additional debt or equity financing and/or sales of certain operating assets. However, there can be no assurance that any such alternatives can be successfully consummated. NOTE 6: STOCKHOLDERS' EQUITY A. COMMON STOCK RESERVED The following shares of common stock are reserved for issuance at May 31, 1995: Stock option plans: Employee stock plan 1,213,000 46 Non-employee director stock option plan 75,000 Performance unit plan 50,000 ========= 1,338,000 Warrants 150,000 Employee stock purchase plan 35,000 ========= 1,523,000 ========= B. Stock Option Plans The Company's 1987 Stock Option Plan provides for the granting to directors, consultants, officers, and other employees of options to purchase a total of 1,350,000 shares of common stock. The Company's 1988 Non-Employee Director Stock Option Plan ("Directors' Plan") for outside directors provides for the issuance of options for 75,000 shares of common stock exercisable for a period of ten (10) years from date of the option grant. Under the Directors' Plan, each member of the Board of Directors ("Board") who is neither an employee nor an officer of the Company will be automatically granted on October 31 of each year an option to purchase 3,000 shares of the Company's common stock. In addition to these two plans, the Board may also grant qualified and non- qualified options, stock purchase rights, and stock awards. Any options, awards, etc., granted under these plans are required to be at prices which are not less than the fair market value per share of common stock on the date of grant. The options, awards, etc., shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Board may specify. Each option shall expire on the date specified by the Board, subject to earlier termination provisions, but not more than, under 1987 Stock Plan, ten (10) years and one day and, under the Directors' Plan, ten (10) years, from the date of grant. A summary of changes in stock issuable under employee and non-employee option plans follows: Range of Shares Exercise Prices ====== ================ Outstanding at May 31, 1992 501,000 $6.00 - $13.25 Granted 285,000 3.75 - 9.00 Exercised (8,000) 4.00 - 9.00 Canceled (152,000) 7.00 - 12.00 ========= ================== Outstanding at May 31, 1993 626,000 3.75 - 13.25 Granted 543,000 .01 - 7.13 Exercised (18,000) 3.50 - 7.13 Canceled (202,000) 3.13 - 11.50 ========= ================== Outstanding at May 31, 1994 949,000 .01 - 13.25 Granted 182,000 3.13 - 8.63 Exercised (62,000) 3.13 - 8.00 Canceled (225,000) 3.13 - 13.25 ========= ================== Outstanding at May 31, 1995 844,000 $.01 - $9.00 ========= ================== At May 31, 1995, 424,000 options were exercisable at prices ranging from $.01 to $9.00 a share. 47 C. Employee Stock Purchase Plan The 1988 Employee Stock Purchase Plan which was approved by stockholders in 1989, provides that eligible employees may authorize payroll deductions between 2% and 10% of their regular pay to purchase up to a maximum of 2,000 shares of the Company's common stock in a fiscal year. The purchase price of the stock is the lesser of 85% of the average market price of the Company's common stock on either the first or last business day of the Payment Period. Payment Periods begin on June 1 and December 1 each year. The aggregate number for shares which may be purchased under this plan is 250,000, of which 215,000 have been purchased to date. D. Performance Unit Plan The 1989 Performance Unit Plan which was approved by stockholders in fiscal 1990, provides that officers and key employees of the Company may be granted performance units by the Board or a committee comprised of at least three (3) Board members (no such committee has been appointed). Performance units, which are the equivalent of $100 each, may be granted either in cash or shares of common stock or any combination thereof, to participants upon the attainment of certain achievement objectives as established by the Board. No performance units have been granted to date. NOTE 7: FOREIGN AND DOMESTIC OPERATIONS, EXPORT SALES, AND MAJOR CUSTOMERS Sales, operating income (loss), and identifiable assets of the Company by geographical area are as follows: Years Ended May 31, 1993 1994 1995 ---- ---- ---- Sales to unaffiliated customers: United States $ 45,147,000 $ 42,175,000 $ 34,228,000 Europe 21,881,000 21,435,000 27,381,000 Other 14,376,000 14,145,000 16,885,000 ============ ============ ============ $ 81,404,000 $ 77,755,000 $ 78,494,000 ============ ============ ============ Operating Income (Loss): United States $(11,367,000) $ 1,426,000 $ (9,647,000) Europe (4,255,000) 954,000 2,208,000 Other (1,128,000) 284,000 (3,184,000) ============ ============ ============ $(16,750,000) $ 2,664,000 $(10,623,000) ============ ============ ============ Balance at May 31, 1993 1994 1995 ---- ---- ---- Identifiable Assets: United States $ 38,237,000 $ 35,082,000 $ 34,898,000 Europe 20,066,000 18,751,000 21,987,000 Eliminations (6,028,000) (6,497,000) (3,284,000) ============ ============ ============ $ 52,275,000 $ 47,336,000 $ 53,601,000 ============ ============ ============ During 1993, 1994, and 1995, export sales were $14,376,000, $14,145,000, and $16,885,000, respectively. No one customer accounted for greater than ten percent (10%) of net sales in any of these years. 48 NOTE 8: INCOME TAXES A $187,000 provision for income taxes was recorded in 1995 (none was recorded in 1994 or 1993). The provision (benefit) for income taxes consists of the following for 1993, 1994, and 1995: Year ended May 31, 1993 Current Deferred Total ------- -------- ----- Federal $(411,000) $ 789,000 $ 378,000 State - (88,000) (88,000) Foreign - (290,000) (290,000) ========= ========= ========= Total $(411,000) $ 411,000 $ - ========= ========= ========= Year ended May 31, 1994 Current Deferred Total ------- -------- ----- Federal $ - $ - $ - State - - - Foreign - - - ========= ========= ========= Total $ - $ - $ - ========= ========= ========= Year ended May 31, 1995 Current Deferred Total ------- -------- ----- Federal $(400,000) $ - $(400,000) State - - - Foreign 21,000 566,000 587,000 ========== ========== ========= Total $(379,000) $ 566,000 $ 187,000 ========== ========== ========== Effective June 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 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 this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the net deferred tax asset (liability) as of May 31, 1994 and 1995 were as follows: U.S. Federal As of May 31, 1994 & State Foreign ------------ ------- Deferred tax assets: Other assets $ 328,000 $ - Inventory reserves 1,495,000 - Restructuring accruals 1,261,000 354,000 Other miscellaneous items 1,180,000 197,000 Tax credit carryforwards 1,986,000 - Net operating loss carryforwards 1,708,000 2,085,000 Valuation allowance (7,440,000) (901,000) =========== =========== Total deferred tax asset 518,000 1,735,000 Deferred tax liabilities: Property, Plant, and Equipment 518,000 - Tax deductible goodwill - 1,735,000 =========== =========== Total deferred tax liability 518,000 1,735,000 =========== =========== Net deferred tax asset (liability) $ - $ - =========== =========== 49 U.S. Federal As of May 31, 1995 & State Foreign Deferred tax assets: Other assets $ 944,000 $ 153,000 Inventory and warranty reserves 1,792,000 - Restructuring accruals 2,283,000 51,000 Accounts receivable and return reserves 1,201,000 - Tax credit carryforwards 1,689,000 - Net operating loss carryforwards 3,598,000 2,361,000 Valuation allowance (10,518,000) (79,000) ============ =========== Total deferred tax asset 989,000 2,486,000 ============ =========== Deferred tax liabilities: Property, plant, and equipment 989,000 - Tax deductible goodwill - 2,984,000 Total deferred tax liability 989,000 2,984,000 ============ =========== Net deferred tax asset (liability) $ - $ (498,000) ============ =========== The valuation allowance for deferred tax assets as of June 1, 1994 was $8,341,000. The net change in the valuation allowance for the year ended May 31, 1995 was an increase of $2,256,000. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of May 31, 1995 will be allocated as follows: Income tax benefit that would be reported in the consolidated statement of operations $ 10,343,000 Goodwill 254,000 =============== $ 10,597,000 =============== The provision for income taxes varies from the amounts computed by applying the U.S. Federal Income Tax rate of thirty-four percent (34%) as follows: 1993 1994 1995 Amount % Amount % Amount % ------ - ------ - ------ - Computed "expected" tax expense (benefit) $(5,724,000) (34.0) $ 947,000 34.0 $(3,880,000) (34.0) Increase (reduction) resulting from: Benefit of Subchapter S Corporation status (169,000) (1.0) (333,000) (11.9) (156,000) (1.4) Change in the beginning of the year balance of the valuation allowance for deferred tax assets allocated to income tax expense 6,298,000 37.4 (690,000) (24.8) 2,256,000 19.8 Differing foreign tax rates (166,000) (1.0) 57,000 2.0 104,000 0.9 State taxes-net of federal benefit (223,000) (1.3) - - - - Amortization of goodwill 28,000 .2 26,000 .9 2,099,000 18.4 Other differences (44,000) (.3) (7,000) (.2) (236,000) (2.1) ============= ====== ========= ===== =========== ===== $ - - $ - - $ 187,000 1.6 ============= ====== ========= ===== =========== =====
50 At May 31, 1995, the Company had available NOL carryforwards of approximately $10,584,000 and $5,874,000 for U.S. and foreign tax reporting purposes, respectively. The NOL carryforwards for tax reporting purposes expire in varying amounts in the U.S. through the year 2009. The NOL's in foreign jurisdictions carryforward indefinitely. Further, the Company has general business credit carryforwards of approximately $669,000 which expire through the year 2007, foreign tax credits of $514,000 which expire through the year 2000, and alternative minimum tax carryforwards of $322,000 which have no expiration dates. U.S. and foreign income (loss) from operations before federal, state, and foreign income taxes are as follows: 1993 1994 1995 U.S. $(13,759,000) $ 2,326,000 $(13,034,000) Foreign (3,076,000) 461,000 1,622,000 ============ =========== ============ $(16,835,000) $ 2,787,000 $(11,412,000) ============ =========== ============ The Company is currently undergoing an audit of its 1991 through 1993 U.S. Federal income tax returns. There have been no material deficiencies asserted by the IRS for the audit to date. NOTE 9: COMMITMENTS AND CONTINGENCIES A. Leases In May, 1992, the Company concluded a sale and leaseback of its Austin, Texas facility. The Company recorded a $612,000 gain on the sale which was deferred and is being amortized over the lease term. The lease is an eighteen (18) year operating lease expiring in the year 2010. The lease provides for a fixed rental charge, plus additional rent based on increases in the Consumer Price Index. Under the terms of the agreement, the Company is subject to certain covenants and restrictions. At May 31, 1995, the Company was in default with certain of the covenants. On September 20, 1995, the lessor committed to waive defaults at May 31, 1995 and to forbear against exercising remedies to financial covenant violations in exchange for commitments to specific performance by the Company through August 31, 1996. The Company leases various assets used in its operations, primarily buildings and equipment. Substantially all of the leases provide that the Company pay for maintenance and insurance. Future minimum lease payments for leased capital assets total $607,000 of which $48,000 represents interest. Capital leases and non-cancelable operating leases, exclusive of the Connecticut facility, at May 31, 1995 require the following annual minimum lease payments: 51 Capital Operating Leases Leases ------- --------- 1996 $312,000 $ 1,049,000 1997 270,000 1,009,000 1998 25,000 946,000 1999 - 899,000 2000 - 865,000 Later years - 8,626,000 ======== =========== $607,000 $13,394,000 ======== =========== Rental expense on operating leases for 1993, 1994, and 1995 was $1,803,000, $1,530,000 and $1,686,000, respectively. The original cost and net book value of furniture and equipment under capital lease at May 31, 1995 was $1,776,000 and $164,000, respectively. B. Employee 401 (k) Plan The Company's 401(k) Plan covers all full-time employees who have completed six (6) months of continuous employment and are eighteen (18) years of age or older. Under the terms of the plan an employee may contribute up to twenty percent (20%) of annual compensation, up to five percent (5%) of which will be matched by the Company at 25%, 50%, 75% or 100% of the employee contribution depending on years of service. Employee contributions vest fully upon contribution while employer contributions vest twenty percent (20%) per year. Employer contributions for 1993, 1994, and 1995 were $268,000, $0 and $0, respectively. Additional contributions may be authorized by the Board of Directors predicated on Company performance. C. Litigation The Company is party to various legal actions and administrative proceedings and subject to various claims arising in the normal course of business. The Company believes that the disposition of these matters will not have a material adverse effect on its financial position or results of operations taken as a whole. NOTE 10: SUPPLEMENTARY CASH FLOW INFORMATION AND OTHER For the years ended May 31, 1993, 1994, and 1995 certain supplementary cash flow information follows: 1993 1994 1995 -------- -------- -------- Cash paid during the year for: Interest $450,000 $421,000 $609,000 Income taxes $499,000 $ - $ - Non-cash financing activities, capital leases $693,000 $175,000 $ 15,000 In the fourth quarter of fiscal 1995, the Company incurred various non- recurring/unusual charges, including charges related to lease abandonment, manufacturing outsourcing, unusual new product introduction costs and excess inventory allowances which aggregated approximately $9 million. 52 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Summagraphics Corporation: We have audited the accompanying consolidated balance sheets of Summagraphics Corporation and subsidiaries as of May 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended May 31, 1995. 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summagraphics Corporation and subsidiaries as of May 31, 1994 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1995, in conformity with generally accepted accounting principles. As discussed in note 8 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993. /s/ KPMG Peat Marwick LLP Austin, Texas June 27, 1995, except as to notes 5 and 9 which are as of September 20, 1995. 53 Summagraphics Corporation and Subsidiaries Selected Financial Information
(000s omitted, except per share data) 1991 1992 1993 1994 1995 - -------------------------------------------------------------------------------------------------- Statement of Operations Data: Net sales $ 80,794 $ 77,295 $ 81,404 $ 77,755 $ 78,494 Operating income (loss) 7,644 810 (16,750) 2,664 (10,623) Income (loss) before extraordinary gain and cumulative effect of change in accounting method 4,673 (1,231) (16,835) 2,142 (11,599) Extraordinary gain - - - 645 - Cumulative effect of change in accounting for income taxes - - 411 - - Net income (loss) 4,673 (1,231) (16,424) 2,787 (11,599) Net income (loss) per common share: Income (loss) before extraordinary gain and cumulative effect of change in accounting method 1.14 (0.30) (3.89) 0.47 (2.56) Extraordinary gain - - - 0.14 - Cumulative effect of change in accounting for income taxes - - 0.09 - - Net income (loss) per common share $ 1.14 $ (0.30) $ (3.80) $ 0.61 $ (2.56) Weighted average shares used in computing net income (loss) per common share 4,116 4,113 4,323 4,519 4,537 Balance Sheet Data: Working capital $ 16,421 $ 23,982 $ 11,329 $ 11,923 $ 5,613 Total assets 59,594 61,086 52,276 47,336 53,601 Long-term debt 5,370 5,261 3,627 947 1,579 Retained earnings (accumulated deficit) 2,443 1,213 (15,661) (13,830) (25,879) Stockholders' equity $ 39,519 $ 39,039 $ 22,314 $ 24,077 $ 14,404 - -------------------------------------------------------------------------------------------------- Quarterly Results of Operations (000s omitted, except per share data) 1994 Aug. 31 Nov. 30 Feb. 28 May 31 - -------------------------------------------------------------------------------------------------- Net sales $ 17,130 $ 19,479 $ 19,460 $ 21,686 Operating income (loss) (566) 1,038 852 1,330 Income (loss) before income taxes and extraordinary gain (708) 910 679 1,261 Extraordinary gain - - - 645 Net income (loss) (725) 927 679 1,906 Net income (loss) per common share: Income (loss) before extraordinary gain (0.16) 0.21 0.15 0.27 Extraordinary gain - - - 0.14 Net income (loss) per common share $ (0.16) $ 0.21 $ 0.15 $ 0.41 - -------------------------------------------------------------------------------------------------- 1995 Aug. 31 Nov. 30 Feb. 28 May 31 - -------------------------------------------------------------------------------------------------- Net sales $ 18,651 $ 20,419 $ 22,273 $ 17,151 Operating income (loss) 294 487 516 (11,920) Income (loss) before income taxes 303 384 180 (12,279) Net income (loss) 303 384 180 (12,466) Net income (loss) per common share $ 0.06 $ 0.08 $ 0.04 $ (2.74) - --------------------------------------------------------------------------------------------------
Note - The Consolidated Financial Statements of the Company have been restated - ---- to give retroactive effect to the merger with CAD Warehouse, Inc. (See note 1 of Notes to the Consolidated Financial Statements). 54 COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG SUMMAGRAPHICS CORPORATION, NASDAQ US INDEX AND NASDAQ COMPUTER MANUFACTURERS
Indexed to 5/31/90 NASDAQ US Index NASDAQ Computer Manufacturers Summagraphics $ 100 $ 100 $ 100 $ 114 $ 115 $ 110 $ 133 $ 126 $ 59 $ 160 $ 153 $ 31 $ 169 $ 125 $ 56 $ 201 $ 185 $ 23
[GRAPH APPEARS HERE] 55 EX-10.22 2 EMPLOYMENT MODIFICATION AGMNT DATED APR. 25 1995 EXHIBIT 10.22 EMPLOYMENT MODIFICATION AGREEMENT --------------------------------- This Employment Modification Agreement (the "Agreement"), dated as of April 25, 1995, by and between Summagraphics Corporation, a Delaware Corporation (the "Company") and Michael S. Bennett (the "Employee"). WHEREAS, the Employee is serving the Company as its President and Chief Executive Officer and as a Director; and WHEREAS, the Employee has provided valuable support and service to the Company as its President and Chief Executive Officer and as a Director; and WHEREAS, the Employee and the Company are parties to an Employment Agreement dated as of April 16,1993 (the "Employment Agreement"); and WHEREAS, the Employee and the Company's Board of Directors (the "Board") have agreed that they would like to extend the Term of the Employee's employment (as that Term is defined in the Employment Agreement) and to make certain other changes in the Employee's terms of employment, as hereinafter provided. NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Employee and the Company hereby agree as follows: SECTION 1. Term Of Agreement. The Term of the Employee's employment as provided ----------------- in the Employment Agreement shall be extended from April 15,1996 through and including the close of business on May 31,1997 (and that extended period shall also be herein defined as the Term). At its sole discretion, the Board may further extend the Term for such period of time as may be mutually agreed upon between the Company and the Employee. The definition of "Term" shall include any such further extended periods. The Company and the Board shall give the Executive at least six (6) months prior written notice of its intention to extend or not to extend the Term beyond May 31, 1997. SECTION 2. Salary. The Board shall review the Employee's current base salary ------- ("Base Salary") and current fiscal year bonus ("Bonus") prior to the end of the original Term of the Employment (4/16/96) and shall make such adjustments to that Base Salary and Bonus as, in the sole discretion of the Board, the Board shall determine, provided, however, that the revised base salary and bonus shall not be less than the current Base Salary of $250,000 and the current fiscal year's Bonus opportunity of $125,000.00 (based on the Company's attainment of the level of operating income (or other) target as has been approved by the Board). SECTION 3. Stock Options. For the remainder of the Term the Board of Directors ------------- will include employee in the annual renewal of stock options as determined by the compensation committee. 1 SECTION 4. Severance. Notwithstanding any of the provisions of the Employment ---------- Agreement which shall remain in full force and effect, in the event the Board determines, for whatever reason, that it will not extend the Term beyond May 31, 1997, the Executive shall be paid as severance ("Severance") an amount equivalent to his annual base salary for the twelve month period beginning on June 1, 1997 and ending on May 31,1998. Severance shall be paid in full within thirty (30) days of termination date. SECTION 5. General Provisions. ------------------ (a) All other provisions of the Employment Agreement shall continue to apply and are hereby incorporated by reference into this Agreement. (b) Entire Agreement. This Agreement supersedes any and all other agreements, ---------------- either oral or in writing, between the parties hereto with respect to the employment of Employee by the Company and contains all covenants and agreements between the parties with respect to such employment in any manner whatsoever. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party or anyone acting on behalf of any party, which are not embodied herein, and that no agreement, statement or promise not contained in this Agreement shall be valid or binding. Any breach or alleged breach of this Agreement by Employee or termination hereof shall in no way affect Employee's or the Company's obligations under any other agreement to which the Company and the Employee are parties. (c) Successors: Binding Agreement. The Company will require any successor ----------------------------- (whether direct or indirect, by purchase, merger, consolidation or otherwise) of all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumptions and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled hereunder if Employee terminated Employee's employment for Good Reason as that term is defined in the Employment Agreement. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (d) Notice. For the purposes of this Agreement, Notices, and all other ------ communications provided for in this Agreement, shall be in writing and shall be deemed to have been duly given when delivered or mailed by registered mail, return receipt requested, postage pre-paid, addressed if to the Company to its Board at its principal executive offices, and if to Employee at his address as it appears on the Company's records, or such other address as either party may 2 have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (e) Amendment. No provision of this Agreement may be modified, waived or ---------- discharged unless such waiver, modification or discharge is agreed to in writing and signed by Employee and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach of the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any other provisions or conditions at the time or at any prior or subsequent time period. (f) Validity. The invalidity or unenforceability of any provision of this --------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (g) Counterparts. This Agreement may be executed in several counterparts, each ------------- of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (h) Governing Law. This Agreement shall be construed and all rights hereunder ------------- shall be determined in accordance with the laws of the State of Texas and the performance thereof shall be governed in accordance with its laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SUMMAGRAPHICS CORPORATION By: /s/ Dennis Sisco /s/ Michael S. Bennett ---------------- ---------------------- Dennis Sisco Michael S. Bennett c-ext320.doc 3 EX-10.23 3 CREDIT AGREEMENT DATED JULY 18, 1994 EXHIBIT 10.23 CREDIT AGREEMENT [Line of Credit Loans] THIS CREDIT AGREEMENT, dated as of July 18, 1994 by and between SUMMAGRAPHICS CORPORATION, a Delaware corporation with its principal place of business at 60 Silvermine Road, Seymour, Connecticut 06483 (the "Borrower") and -------- SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3000 Lakeside Drive. Santa Clara, California 95054, with a loan production office located at Wellesley Office Park. 45 William Street, Wellesley, Massachusetts 02181 doing business under the name Silicon Valley East (the "Bank"). ---- Section 1 Line of Credit Loans. - ------- - ---- -- ------ ----- 1.1 Amount. Subject to and upon the terms and conditions set forth below, ------- the Bank agrees to make loans (each a "Line of Credit Loan" and collectively the ------------------- "Line of Credit Loans") to the Borrower under this Section 1.1 from time to time -------------------- to and including January 10, 1996 (the "Commitment Expiration Date"), unless -------------------------- earlier terminated pursuant to Section 1.6, in an aggregate principal amount not to exceed at any one time outstanding the sum of $8,000,000 (the "Line of Credit -------------- Commitment"), subject to the limitation set forth in Section 1.4. Within the - ---------- limit of the Line of Credit Commitment, the Borrower may borrow, repay and reborrow at any time or from time to time until the Commitment Expiration Date, or the termination of the Line of Credit Commitment, whichever occurs earlier. 1.2 Line of Credit Note. The Line of Credit Loans shall be evidenced by ------------------- and payable with interest in accordance with the note of the Borrower in the form of attached Exhibit A, dated today's date (the "Note"). --------- ---- 1.3 Requests For Line of Credit Loans. Whenever the Borrower desires to --------------------------------- obtain a Line of Credit Loan, it shall notify the Bank by telex, telecopy or telephone received no later than 1:00 p.m. (Boston time) one Banking Day before the day on which the requested Line of Credit Loan is to be made. Such notice shall specify the effective date and the amount of such Loan. Each such notice (a "Notice of Borrowing") shall be irrevocable and shall be immediately followed ------------------- by a written Borrowing Certificate by the Borrower substantially in the form of attached Exhibit G, provided, if such written confirmation differs in any --------- material respect from the action taken by the Bank, the records of the Bank shall control absent manifest error. The Bank shall make such Line of Credit Loan by crediting its amount in immediately available funds to the Borrower's regular deposit account with the Bank. 1.4 Borrowing Base. The Borrower shall not permit, or request any advance -------------- or the issuance of any Letter of Credit hereunder that would cause, the sum of (a) the aggregate unpaid principal amount of all Line of Credit Loans under the Line of Credit Commitment, (b) the aggregate Letter of Credit Usage and (c) the aggregate amount of all banker's acceptances created for the account of the Borrower as provided in Section 1.8 below (the sum of (a), (b) and (c), the "Extensions of Credit"), to exceed at any time an amount equal to the lesser of - --------------------- (i) the Commitment or (ii) the sum of (A) 80% of all Eligible Domestic Accounts Receivable and (8) 80% of Eligible International Accounts Receivable (collectively. the "Borrowing Base"). If at any time the aggregate principal -------------- amount of all Extensions of Credit exceeds the Borrowing Base, the Borrower shall, on the next Banking Day, prepay such excess principal amount together with accrued interest thereon at the applicable rate, and if such excess is not eliminated thereby, the Borrower shall also pledge to the Bank an amount by which the aggregate Extensions of Credit exceed the Borrowing Base, in a manner acceptable to the Bank. -2- 1.5 Maturity Date of Line of Credit Loans. All Line of Credit Loans shall ------------------------------------- mature and the total unpaid principal amount thereof shall be due and payable on the Commitment Expiration Date. at which time all amounts advanced under this Section 1 shall be immediately due and payable. 1.6 Termination of Commitment. The Borrower, upon (a) at least two (2) ------------------------- Banking Days' prior written notice to the Bank and (b) the repayment in full of the outstanding principal balance of the Line of Credit Loans (and accrued interest thereon) and the payment in full of any expenses or other fees owed by the Borrower to the Bank under or pursuant to this Agreement, may elect to permanently terminate the Line of Credit Commitment. 1.7 Letters of Credit. The Borrower may use up to $5,000,000 of the Line ----------------- of Credit Commitment for Letters of Credit to be issued by the Bank, provided that in each case (a) the Borrower executes and delivers a letter of credit application and reimbursement agreement satisfactory to the Bank and complies with any conditions to the issuance of such Letter of Credit (including payment of any applicable fees); (b) the Bank has approved the form of such Letter of Credit; (c) such Letter of Credit bears an expiration date not later than the Commitment Expiration Date; and (d) the conditions set forth in Sections 4.2 and 4.3 shall have been satisfied as of the date of the issuance of the Letter of Credit. 1.8 Banker's Acceptances. Subject to the requirements set forth below, the -------------------- Borrower may use the available Line of Credit Commitment by requesting that the Bank accept the Borrower's time drafts (payable up to 90 days after sight), and discount such drafts at the applicable interest rate. The aggregate outstanding amount of all acceptances so created by the Bank may not exceed $3,000,000 at any time. As a condition to the creation and discount of any acceptance by the Bank: (i) the Borrower shall have executed and delivered an acceptance credit agreement satisfactory in form and substance to the Bank (an "Acceptance ---------- Agreement), and shall have complied with any conditions to the creation of such - --------- acceptance (including the payment of any acceptance commission and the satisfaction of any additional collateral requirements) set forth therein; (ii) such acceptance shall be an Eligible Acceptance (as defined in Section 9.1 below); (iii) the maturity date of such acceptance may not occur later than the Commitment Expiration Date unless the Bank otherwise agrees in writing; and (iv) the conditions set forth in Sections 4.2 and 4.3 below shall have been satisfied as of the date of the creation of such acceptance. Section 2 Interest Rates; Payments and Optional Prepayments. ------------------------------------------------------------ 2.1 Interest Rates. -------------- (a) The Borrower agrees to pay interest on the unpaid principal amount of each Line of Credit Loan for each day from and including the date such Line of Credit Loan was made to but excluding the date the principal amount of such Line of Credit Loan is due (whether at maturity, by acceleration or otherwise), at a fluctuating rate per annum equal to the Prime Rate plus the Applicable Margin (as defined below) which interest rate shall change when the Prime Rate shall change. The "Applicable Margin" shall be three-quarters of one percent (3/4%) ----------------- per annum, provided, however, that effective upon, and after the occurrence of a Rate Reduction Event, the Applicable Margin, shall be one-half of one percent (1/2%) per annum. Such interest shall be payable monthly in arrears on the last day of each month commencing with the first such date hereafter and when the principal amount of such Line of Credit Loan is due (whether at maturity, by acceleration or otherwise). (b) Any overdue principal of any such Line of Credit Loan and, to the extent permitted by law, overdue interest thereon. shall, at the Bank's option, bear interest (after as well as before judgment), payable on demand. for each day from and including the date payment was due to but excluding the date of actual payment, at a fluctuating rate per annum equal to four (4) -3- percentage points above the rate of interest applicable under Section 2.1 (a) immediately prior to the occurrence of the delinquency. 2.2 Manner and Place of Payment. All payments under this Agreement or --------------------------- otherwise in respect of the Borrower Loans shall be made not later than 2:00 p.m. (Boston Time) on the date when due and shall be made in immediately available funds at the Office of the Bank or by the Borrower's check drawn on the depository account(s) maintained by the Borrower with the Bank payable to the Bank or its order. All payments shall be made without setoff, counterclaim, withholding or reduction of any kind whatsoever. Borrower will regularly deposit some portion of funds received from its business activities in accounts maintained by the Borrower at the Office of the Bank. Borrower hereby requests and authorizes the Bank to debit any of Borrower's accounts with the Bank, specifically, without limitation, Account Number 07007264-70, for payments of interest due on the Line of Credit Loans and any other obligations owing by the Borrower to the Bank. The Bank will notify the Borrower of all debits which the Bank makes against the Borrower's accounts. Any such debits against the Borrower's accounts shall in no way be deemed a set-off. 2.3 Payments Due on Saturdays. Sundays and Holidays. Whenever any payment ----------------------------------------------- to be made hereunder or under the Note shall be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall be included in computing any interest or fees due. 2.4 Optional Prepayments. The Borrower shall have the right to prepay the -------------------- Line of Credit Loans in whole or in part, without premium or penalty, at any time and from time to time, provided that at the time of the prepayment in full of the Line of Credit Loans, the Borrower shall pay all interest accrued on the amount prepaid. Principal amounts repaid or prepaid under the Line of Credit Note or the Line of Credit Commitment may be reborrowed by the Borrower subject to the terms hereof. 2.5 Capital Requirements. If the Bank shall determine that the adoption or -------------------- implementation of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank (or its applicable lending office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of the Bank or any Person controlling the Bank (a "Parent") as a consequence of its obligations hereunder to a level below ------ that which the Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy by an amount deemed by the Bank to be material, then from time to time, within 15 days after demand by the Bank the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. A statement of the Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error; provided that the determination thereof is -------- made on a reasonable basis. Section 3 Security. ------------------- 3.1 Security Interests. (a) The Borrower agrees to grant to the Bank a ------------------ security interest in, and a lien on, all right, title and interest of the Borrower in and to all assets of the Borrower and to enter into a Security Agreement in favor of the Bank in the form of Exhibit B hereto (the "Security --------- -------- Agreement") in order to secure payment and performance of the Borrower's - --------- obligations to the Bank under this Agreement, the Note and the other Loan Documents. (b) In addition, the Borrower agrees to enter into a Copyright Mortgage in favor of the Bank in the form of Exhibit C hereto (the "Copyright Mortgage") and -------- ------------------ a collateral assignment of patents -4- Assignment") in order further to secure payment and performance of the ---------- Borrower's obligations to the Bank under this Agreement, the Note and the other Loan Documents. Section 4 Conditions Precedent. ------------------------------- The Bank shall not be obligated to make any of the Extensions of Credit to the Borrower hereunder until the following conditions have been satisfied (in no event later than August 15, 1994): 4.1 Agreement, the Note and the Security Instruments. This Agreement, the ------------------------------------------------ borrowings hereunder. the Note, the Security Instruments and all transactions contemplated by this Agreement and the Security Instruments shall have been duly authorized by the Borrower. The Borrower shall have duly executed and delivered to the Bank this Agreement, the Note and the Security Instruments to the Bank in form and substance reasonably satisfactory to the Bank and its counsel . 4.2 No Default. On the date hereof and on the date of the making of each ---------- Extension of Credit, no Default or Event of Default shall have occurred and be continuing. 4.3 Correctness of Representations. On the date hereof and on the date of ------------------------------ each Extension of Credit. all representations and warranties made by the Borrower in Section 5 below or any other material representation and warranty otherwise in writing in connection herewith shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of today's date, except that representations and warranties expressly limited to a certain date shall be true and correct as of that date. 4.4 Opinion of Counsel for the Borrower. On the date hereof, the Bank ----------------------------------- shall have received the favorable opinion of the general counsel of the Borrower, in form and substance satisfactory to the Bank and its counsel. 4.5 Filing of Financing Statements. etc. On or before the making of any ----------------------------------- Extensions of Credit, the Borrower shall have promptly executed and delivered to the Bank financing statements, and other appropriate documentation relating to the security interests and rights granted pursuant to the Security Instruments. and the Bank shall have duly and promptly recorded or filed the same in such manner and in such places as is required by law (including pursuant to the UCC) to establish, preserve, protect, and perfect such security interests and rights; and all taxes, fees and other charges in connection with the execution, delivery and filing of this Agreement and such financing statements and other appropriate documentation shall have been duly paid. 4.6 Supporting Documents. On or before the date hereof, there shall have -------------------- been delivered to the Bank the following supporting documents: (a) legal existence and corporate good standing certificates with respect to the Borrower dated as of a recent date issued by the appropriate Secretary of State or other officials; (b) certificates dated as of a recent date with respect to the due qualification of the Borrower to do business in each jurisdiction where the failure to be so qualified would have a Material Adverse Effect, issued by the Secretary of State of each such jurisdiction; (c) copies of the corporate charters of the Borrower, certified by the appropriate Secretary of State or other officials, as in effect on the date hereof; (d) a certificate of the Secretary or Assistant Secretary of the Borrower certifying as to (i) the By-Laws of the Borrower as in effect on the date hereof; (ii) the incumbency and signatures of the officers of the Borrower who have executed any documents in connection with -5- the transactions contemplated by this Agreement; and (iii) the resolutions of the Board of Directors and, to the extent required by law, the shareholders. of the Borrower authorizing the execution. delivery and performance of this Agreement and the making of the Line of Credit hereunder, and the execution and delivery of the Note; and (e) all other information and documents which the Bank or its counsel may reasonably request in connection with the transactions contemplated by this Agreement. 4.7 Commitment Fee. The Borrower shall have paid to the Bank a non- -------------- refundable commitment fee in the amount of $30.000 and the Bank's reasonable expenses (including reasonable attorney's fees) in connection herewith. 4.8 Compliance and Borrowing Base Certificates. The Borrower shall have ------------------------------------------ furnished to the Bank a Compliance Certificate in the form of attached Exhibit E --------- appropriately completed and signed by the chief financial officer of the Borrower or other duly authorized officer of the Borrower as to whose authority the Bank has been given notice (an "Authorized Officer), and to the extent the Borrower is requesting an Extension of Credit on the date hereof, a Borrowing Base Certificate in the form of Exhibit F hereto appropriately completed and --------- signed by the chief financial officer, president of the Borrower or other Authorized Officer, each of which certificates shall reflect compliance by the Borrower with the requirements of this Agreement. 4.9 Accounts Receivable Audit. The Bank shall have received the results of ------------------------- an accounts receivable audit satisfactory to the Bank in all reasonable respects. 4.10 Legal Matters All documents and legal matters incident to the ------------- transactions contemplated by this Agreement shall be reasonably satisfactory to Sullivan & Worcester, special counsel for the Bank. Each borrowing hereunder shall constitute a representation and warranty by the Borrower to the Bank that all of the conditions specified in this Section 4 have been complied with as of the time of any such Extension of Credit. Section 5 Representations and Warranties. --------- ------------------------------ In order to induce the Bank to enter into this Agreement and to make the contemplated Extensions of Credit, the Borrower hereby represents and warrants as follows (except to the extent qualified by supplemental disclosure set forth on Schedule A hereto) and the following representations and warranties as so ---------- qualified shall survive the execution and delivery of this Agreement and the Note: 5.1 Corporate Status. The Borrower is a duly organized and validly ---------------- existing corporation in good standing under the laws of the jurisdiction of its incorporation and is duly qualified or licensed as a foreign corporation in good standing in each jurisdiction in which the failure to do so would have a Material Adverse Effect. 5.2 No Violation. Neither the execution, delivery or performance of this ------------ Agreement or any other Loan Document, nor consummation of the contemplated transactions will (i) contravene any law, statute, rule or regulation to which the Borrower or any of its Subsidiaries is subject or any judgment, decree, franchise, order or permit applicable to the Borrower or any of its Subsidiaries, or (ii) conflict or be inconsistent with or result in any breach of, or constitute a default under, or result in or require the creation or imposition of any Lien (other than the lien created by the Security Instruments) upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to, any Contractual Obligation of the Borrower or any of its Subsidiaries, or (iii) violate any provision of the corporate charter or by-laws of the Borrower or any of its Subsidiaries. -6- 5.3 Corporate Power and Authority. The execution, delivery and performance ----------------------------- of this Agreement and the other Loan Documents are within the corporate powers of the Borrower and have been duly authorized by all necessary corporate action. 5.4 Enforceability. This Agreement and each other Loan Document --------------- constitutes a valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and subject to general principles of equity, whether applied in a court of equity or at law. 5.5 Governmental Approvals. No order, permission. consent, approval, ---------------------- license, authorization, registration or validation of, or filing with, or exemption by, any Governmental Authority is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement or any other Loan Document by the Borrower. or the taking of any action contemplated hereby or thereby, except for the filing of UCC-1 financing statements in the appropriate UCC filing offices listed on the Perfection Certificate (as defined in the Security Agreement) and the filing of the Copyright Mortgage and the Patent and Trademark Assignment and except as further disclosed in Schedule A. ---------- 5.6 Financial Statements. (a) The Borrower has furnished the Bank with -------------------- complete and correct copies of the audited consolidated balance sheet of the Borrower and its Subsidiaries as of the Financial Statements Date. and the related audited consolidated statements of income and of cash flows for the fiscal year of the Borrower and its Subsidiaries ended on such date, examined by the Accountants. Such financial statements (including the related schedules and notes) fairly present the consolidated financial condition of the Borrower and its Subsidiaries as of the Financial Statements Date. and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. (b) The Borrower has furnished the Bank with complete and correct copies of the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as of February 28, 1994, and the related consolidated statements of income and of cash flows for the 9-month period ended on such date. Such financial statements (including the related schedules and notes) fairly present the consolidated financial condition of the Borrower and its Subsidiaries as of February 28, 1994, and the consolidated results of their operations and their consolidated cash flows for the 9-month period ended on such date (subject to normal year-end audit adjustments). (c) Neither the Borrower nor any of its Subsidiaries has any material liabilities, contingent or otherwise, including liabilities for taxes or any unusual forward or long-term commitments or any Guarantee, which are not disclosed by or included in the financial statements referenced in subparagraphs (a) and (b) above or in the accompanying notes and there are no unrealized or anticipated losses from any unfavorable commitments of the Borrower or any of its Subsidiaries which may have a Material Adverse Effect. During the period from the Financial Statements Date to the date hereof: (i) there has been no sale, transfer or other disposition by the Borrower of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any Person) material in relation to the financial condition of the Borrower at the Financial Statements Date; and (ii) except as described in Schedule A the Borrower has not made a Restricted ---------- Payment, or agreed or committed to make a Restricted Payment. (d) All the above-referenced financial statements (including the related schedules and notes) have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the Accountants and disclosed therein and, in the case of interim financial statements, subject to normal year-end adjustments and the absence of footnotes and schedules). -7- 5.7 No Material Change. Since the Financial Statements Date there has been ------------------ no development or event, nor to the best knowledge of the Borrower, any prospective development or event, which has had or could have a Material Adverse Effect. 5.8 Litigation. There are no actions, suits or proceedings pending or ----------- threatened against or affecting the Borrower or any of its Subsidiaries before any Governmental Authority, which in any one case or in the aggregate, if determined adversely to the interests of the Borrower or any Subsidiary thereof, would have a Material Adverse Effect. 5.9 Compliance with Other Instruments; Compliance with Law. Neither the ------------------------------------------------------ Borrower nor any Subsidiary thereof is in default under (a) any Contractual Obligation, where such default could have a Material Adverse Effect. or (b) the terms of any Contractual Obligation relating to any Indebtedness of the Borrower or a Significant Subsidiary. Neither the Borrower nor any Subsidiary thereof is in default and or in violation of any applicable statute, rule, writ, injunction, decree, order or regulation of any Governmental Authority having jurisdiction over the Borrower or any Subsidiary thereof which default or violation would have a Material Adverse Effect. 5.10 Subsidiaries. The Borrower has no Subsidiaries except as set forth on ------------ Schedule A as attached as of the date first set forth above or as may be - ---------- amended and supplemented from time to time. 5.11 Investment Borrower Status: Limits on Ability to Incur Indebtedness. ------------------------------------------------------------------- The Borrower is not an "investment company" or a company "controlled by" an investment company within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or State statute or regulation which limits its ability to incur Indebtedness . 5.12 Title to Property. The Borrower has good and marketable title to all ----------------- of its properties and assets, including the properties and assets reflected in the balance sheet of the Borrower as of the Financial Statements Date, except such as have been disposed of since that date in the ordinary course of business, and none of such properties or assets is subject to any Lien except for (a) Permitted Liens, or (b) a defect in title or other claim other than defects and claims that, in the aggregate, would have no Material Adverse Effect. The Borrower enjoys peaceful and undisturbed possession under all leases necessary in any material respect for the operation of its properties and assets, none of which contains any unusual or burdensome provisions which might materially affect or impair such properties or assets. All such leases are valid and subsisting and are in full force and effect. 5.13 ERISA. The Borrower and each member of the Controlled Group have ----- fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA (other than to make contributions or premium payments in the ordinary course). 5.14 Taxes. All tax returns of the Borrower and its Subsidiaries required ----- to be filed with the U.S. Internal Revenue Service or other state and local taxing authorities located in the United States (collectively, "U.S. Taxing ----------- Authorities") have been timely filed, all taxes, fees and other governmental - ------------ charges (other than those being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been established and, in the case of ad valorem taxes or betterment -- ------- assessments, no proceedings to foreclose any lien with respect thereto have been commenced and, in all other cases, no notice of lien has been filed or other action taken to perfect or enforce such lien) shown thereon which are payable have been paid. The charges and reserves on the books of the Borrower and its Subsidiaries for all income and other taxes are adequate, and the Borrower knows of no additional assessment or any basis therefor. As of the date of this Agreement, the Federal income tax returns -8- of the Borrower and its Subsidiaries have not been audited within the last three years, all prior audits have been closed, and there are no unpaid assessments, penalties or other charges arising from such prior audits. 5.15 Environmental Matters. (a) The Borrower and each of its Subsidiaries ------------- ------- have obtained all Governmental Approvals that are required for the operation of its business under any Environmental Law, except where the failure to so obtain a Governmental Approval would not have a Material Adverse Effect. (b) The Borrower and each of its Subsidiaries are in compliance with all terms and conditions of all required Governmental Approvals and are also in compliance with all terms and conditions of all applicable Environmental Laws, noncompliance with which would have a Material Adverse Effect. (c) There is no civil, criminal or administrative action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending or, to the best knowledge of the Borrower threatened against the Borrower or any Subsidiary thereof relating in any way to the Environmental Laws which if adversely determined would have a Material Adverse Effect, and there is no Lien of any private entity or Governmental Authority against any property of the Borrower or any Significant Subsidiary thereof relating in any way to the Environmental Laws. (d) There has been no claim, complaint, notice or request for information received by the Borrower with respect to any site listed on the National Priority List promulgated pursuant to the Comprehensive Environmental Response. Compensation, and Liability Act ("CERCLA"), 42 USC (S) 9601 et sea., or any ------ -- ---- state list of sites requiring investigation or cleanup with respect to contamination by Hazardous Substances. (e) To the best of the Borrower's knowledge, there has been no release or threat of release of any Hazardous Substance at any Borrower Property which would likely result in liability being imposed upon the Borrower or any Subsidiary thereof, which liability would have a Material Adverse Effect. 5.16 Intellectual Property. Schedule A lists all of the copyrights, ------------ --------- -------- - patents, trademarks and similar rights (Intellectual Property) owned by the ------------ -------- Borrower and its Subsidiaries as of the date hereof, together with information, where applicable, as to registration number, filing date, record owner and remaining life. Except as set forth in Schedule A, the Borrower or a Subsidiary -------- -- thereof is the absolute owner of all right, title and interest in the Intellectual Property, free and clear of all Liens in favor of other Persons with full right to pledge, sell, assign. transfer and grant a security interest therein. The Borrower owns or possesses such Intellectual Property and similar rights necessary for the conduct of its business as now conducted, without any known conflict with the rights of others which would have a Material Adverse Effect. No Subsidiary owns Intellectual Property which is necessary for the conduct of the Borrower's business. 5.17 Borrowing Base. Giving effect to any Extensions of Credit to be made --------- ----- as of the date hereof under this Agreement, the aggregate amount of all Extensions of Credit under this Agreement does not exceed the Borrowing Base on the date hereof. 5.18 Bank Accounts. Etc. All depository, disbursement and other accounts ---- --------- --- maintained by the Borrower with any financial institution, and all institutions that have issued certificates of deposit or similar evidences of Indebtedness to the Borrower thereof, are listed in Schedule A to this Agreement or (in the case -------- - of any accounts established after the date hereof) in a writing to the Bank. -9- Section 6 Affirmative Covenants. --------- --------------------- The Borrower covenants and agrees that for so long as this Agreement is in effect and until the Extensions of Credit, together with all interest thereon and all other Obligations of the Borrower to the Bank are paid or satisfied in full: 6.1 Maintenance of Existence. The Borrower will maintain its existence and ----------- -- --------- comply with all applicable statutes, rules and regulations and to remain duly qualified as a foreign corporation, licensed and in good standing in each jurisdiction where such qualification or licensing is required by the nature of its business, the character and location of its property, business. or the ownership or leasing of its property, except where such noncompliance or failure to so qualify would not have a Material Adverse Effect, and the Borrower will maintain its properties in good operating condition, and continue to engage in the same line of business as currently conducted or one reasonably related thereto. 6.2 Taxes and Other Liens. The Borrower will, and will cause each of its ----- --- ----- ------ Subsidiaries to, pay when due all taxes, assessments, governmental charges or levies imposed by U.S. Taxing Authorities which, if unpaid. might become a Lien against the Borrower or such Subsidiary or on its property, except liabilities being contested in good faith and by proper proceedings, as to which adequate reserves are maintained on the books of the Borrower or its Subsidiaries, in accordance with GAAP. 6.3 Insurance. The Borrower will maintain insurance with financially sound ---------- and reputable insurance companies in such amounts and against such risks as is usually carried by owners of similar businesses and properties in the same general areas in which the Borrower operate, provided that in any event the Borrower shall maintain or cause to be maintained (a) insurance against casualty, loss or damage covering all property and improvements of the Borrower in amounts and in respect of perils usually carried by owners of similar businesses and properties in the same general areas in which Borrower operates; (b) comprehensive general liability insurance against claims for bodily injury, death or property damage; and (c) workers' compensation insurance to the extent required by applicable law. In the case of policies referenced in clauses (a) and (b) above, all such insurance shall (i) name the Bank as a loss payees and an additional insured as its interests may appear; (ii) provide that no termination, cancellation or material reduction in the amount or material modification to the extent of coverage shall be effective until at least 30 days after receipt by the Bank of notice thereof; and (iii) be reasonably satisfactory in all other respects to the Bank. 6.4 Financial Statements. Etc. The Borrower will furnish to the Bank: --------- ----------- ---- (a) within thirty-five (35) days after the end of each calendar month (45 days with respect to the last month of the first three fiscal quarters of each fiscal year and 90 days with respect to the last month of the fiscal year), the unaudited consolidated balance sheet and income statement of the Borrower and its Significant Subsidiaries (if any) as at the end of, and for, such month (provided, however, that in the case of financial statements for the last month of any fiscal quarter, such financial statements shall include an income statement for such fiscal quarter), accompanied by a certificate of the chief financial officer of the Borrower (or other Authorized Officer) to the effect that such financial statements fairly present the consolidated financial condition of the Borrower and its Significant Subsidiaries (if any) as of the end of such month, and the consolidated results of their operations for such month, in each case in accordance with GAAP (except for the absence of footnotes) consistently applied (subject to normal year-end audit adjustments); (b) within ninety (90) days after the last day of each fiscal year of the Borrower, the audited consolidated balance sheet and income statement and statement of cash flows of the Borrower and its Subsidiaries as at and for the fiscal year then ended, certified by the Accountants -10- (the substance of such report to be reasonably satisfactory to the Bank), together with a certificate of the chief financial officer or other Authorized Officer of the Borrower to the effect that such financial statements fairly present the consolidated financial condition of the Borrower and its Subsidiaries as of the end of such fiscal year, and the consolidated results of their operations for such fiscal year, in each case in accordance with GAAP. The Borrower shall indicate on said financial statements all Guarantees or material and unusual forward or long-term commitments made by the Borrower or any Subsidiary thereof; (c) at the time of the delivery of the monthly and yearly financial statements required by Sections 6.4(a) and 6.4(b) above. a Compliance Certificate signed by the chief financial officer, the president or other Authorized Officer of the Borrower in the form attached to this Agreement as Exhibit E, appropriately completed; - --------- (d) within twenty-five (25) days after the end of each fiscal month of the Borrower, (i) a list of the accounts receivable aging for the Borrower as of the end of such month in such form as the Bank may prescribe, all in reasonable detail. Provided, however, that the receivables aging for the last month of --------- -------- any fiscal quarter shall be net of inter-company receivables, and (ii) a Borrowing Base Certificate signed by the chief financial officer, the president or other Authorized Officer of the Borrower in the form attached to this Agreement as Exhibit F, appropriately completed; --------- (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports, proxy statements and other materials; (f) promptly upon request by the Bank, copies of any management letter provided by the Accountants, provided that the Borrower shall promptly advise the Bank in the event the Borrower receives any such letter; (g) promptly upon the filing thereof by the Borrower with the SEC (and in any event within five (5) days of such filing), copies of any registration statements and reports on Forms 10-K, 10-Q and 8-K (or their equivalents if such forms no longer exist); (h) promptly upon becoming aware of any litigation or other proceeding against the Borrower or any Subsidiary thereof that may have a Material Adverse Effect, notice thereof; (i) within thirty (30) days after the beginning of each fiscal year of the Borrower (commencing with fiscal year 1996), a copy of the operating budget, including, without limitation, projections of the anticipated cash flow of the Borrower for such fiscal year and a statement of the assumptions on which such budget was prepared; and (j) promptly following the request of the Bank, such further information concerning the business, affairs and financial condition or operations of the Borrower as the Bank may reasonably request. 6.5 Notice of Default. As soon as practicable, and in any event, within ------ -- ------- three (3) Banking Days of becoming aware of the existence of any condition or event which constitutes a Default, the Borrower will provide the Bank with written notice specifying the nature and period of existence thereof and what action the Borrower is taking or proposes to take with respect thereto. 6.6 Environmental Matters. --------------------- (a) The Borrower and each of its Subsidiaries shall comply with all terms and conditions of all applicable Governmental Approvals and all applicable Environmental Laws, except where failure to comply would not have a Material Adverse Effect. -11- (b) The Borrower shall promptly notify the Bank should the Borrower become aware of: (i) any spill, release, or threat of release of any Hazardous Substance at or from any Borrower Property or by any Person for whose conduct the Borrower or any Subsidiary thereof is responsible, to the extent the Borrower is required by Environmental Laws to report such to any Governmental Authority; (ii) any action or notice with respect to a civil, criminal or administrative action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending or threatened against the Borrower or any Subsidiary thereof relating in any way to the Environmental Laws, or any Lien of any Governmental Authority or any other Person against any Borrower Property relating in any way to the Environmental Laws; (iii) any claim made or threatened by any Person against the Borrower or any Subsidiary thereof or any property of the Borrower or any Subsidiary thereof relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Substance pertaining to such property or the business or operations of the Borrower or such Subsidiary; and (iv) any occurrence or condition on any real property adjoining or in the vicinity of any Borrower Property known to the officers or supervisory personnel of the Borrower or any Subsidiary thereof or other employees having responsibility for the compliance by the Borrower or any Subsidiary thereof with Environmental Laws, without any independent investigation, which does cause, or could cause, such Borrower Property, or any part thereof, to contain Hazardous Substances in violation of any Environmental Laws, or which does cause, or could cause, such Borrower Property to be subject to any restrictions on the ownership, occupancy, transferability or use thereof by the Borrower or any Subsidiary thereof. (c) The Borrower will, and will cause each of its Significant Subsidiaries to, at its own cost and expense, and within such period as may be required by applicable law or regulation, initiate all remedial actions and thereafter diligently prosecute such action as shall be required by law for the cleanup of such Borrower Property, including all removal, containment and remedial actions in accordance with all applicable Environmental Laws and shall further pay or cause to be paid, at no expense to the Bank, all cleanup, administrative, and enforcement costs of applicable Government Authorities which may be asserted against such Borrower Property, provided, however, the Borrower may delay initiating and prosecuting such remedial actions if (i) it is contesting such requirements in good faith by appropriate proceedings; (ii) adequate reserves have been established; (iii) no criminal liability or punitive damages would result therefrom; and (iv) no Liens have been or are reasonably anticipated to be imposed on Borrower Property as a result thereof. 6.7 ERISA Information. If and when the Borrower or any member of the ----- ----------- Controlled Group (a) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, (b) receives notice of complete or partial withdrawal liability under Title IV of ERISA or (c) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer the Plan, the Borrower shall in each such instance promptly furnish to the Bank a copy of any such notice. 6.8 Inspection. The Borrower will, upon the request of the Bank, permit a ----------- representative of the Bank (including any field examiner or auditor retained by the Bank) to inspect and make copies of the Borrower's books and records, and to discuss its affairs, finances and -12- accounts with its officers and designated employees and, with your participation, the Accountants, at such reasonable times and as often as the Bank may reasonably request and cause each of its Significant Subsidiaries which becomes a party to this Agreement to do so, provided, however, until an Event of Default occurs and is continuing. the Bank shall not conduct more than two inspections of the Borrower's books and records between the date hereof and the Commitment Expiration Date fiscal year. 6.9 Use of Proceeds. The Borrower shall use the proceeds of the --- -- --------- borrowings under the Line of Credit Note for the general business purposes of the Borrower; provided that the initial advance under the Note may be used to repay Indebtedness of the Borrower to Bank of New York incurred prior to the date hereof. Without limiting the foregoing, no part of such proceeds will be used for the purpose of purchasing or carrying any "margin security" as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System. 6.10 Further Assurances. The Borrower will execute and deliver to the Bank ------- ----------- any writings and do all things necessary, effectual or reasonably requested by the Bank to carry into effect the provisions and intent of this Agreement or any other Loan Document. 6.11 Depository Accounts. The Borrower shall maintain an operating deposit ---------- --------- account at the offices of the Bank, and shall deposit some portion of its excess cash with the Bank in either a demand deposit account, a money market deposit account, or certificates of deposit, or a combination thereof. 6.12 Subsidiaries. The Borrower shall immediately notify the Bank of the ------------ organization of any additional foreign or domestic Subsidiaries of the Borrower after the date hereof. The Bank may require that any such additional Significant Subsidiaries become parties to any of the Loan Documents as guarantors or sureties and/or that the Borrower pledge the stock of any such additional Significant Subsidiaries as collateral for the Obligations of the Borrower. 6.13 Intellectual Property. The Borrower will promptly inform the Bank of ------------ -------- all applications filed by the Borrower for trademarks and copyrights and of all trademarks, patents and copyrights granted or issued on or after the date of this Agreement, and, upon the request of the Bank, will promptly execute and deliver such forms of conditional assignment, mortgage, pledge and similar documents as the Bank may reasonably require so as to ensure that the security interests granted pursuant to the Security Instruments extend to and are perfected in respect of such additional trademarks, patents and copyrights. Section 7 Negative Covenants. --------- -------- --------- The Borrower covenants and agrees that for so long as this Agreement is in effect and until the Extensions of Credit, together with all interest thereon and all other Obligations of the Borrower to the Bank are paid or satisfied in full, without the prior written consent of the Bank: 7.1 ERISA. The Borrower will not permit any Plan maintained by the ----- Borrower or by any member of a "Controlled Group" (ERISA (Section) 210(c) or ERISA 3210(d)) of which the Borrower is a member to: (a) engage in any "prohibited transaction" (ERISA (Section) 2003(c)); (b) fail to report to the Bank a "reportable event" (ERISA (Section) 4043) within 30 days after its occurrence or as to any reportable event as to which the 30-day notice period requirement of Section 4043(b) of Title IV of ERISA has been waived by the PBGC, within 30 days of such time as the Borrower is requested to notify the PBGC of such reportable event; (c) incur any accumulated funding deficiency" (ERISA (Section) 302); (d) terminate its existence at any time in a manner which could result in the imposition of a Lien on the property of the Borrower or any Subsidiary thereof; or (e) fail to report to the Bank any "complete withdrawal" or "partial withdrawal" by the Borrower or an affiliate from a "multiemployer plan" (ERISA (Sections) 4203, 4205, and 4001, respectively). The quoted terms are defined in the respective sections of ERISA cited above. -13- 7.2 Transactions with Affiliates. The Borrower will not, and will not ------------ ---- ---------- permit any of its Significant Subsidiaries to, directly or indirectly, pay any funds to or for the account of, make any Investment in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, or engage in any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate of the Borrower, unless such transaction is otherwise permitted under this Agreement, or is in the ordinary course of the Borrower's or such Significant Subsidiary's business, and is upon fair and reasonable terms no less favorable to the Borrower or such Significant Subsidiary than those that could be obtained in a comparable arm's length transaction with a Person not an Affiliate. 7.3 Consolidation Merger or Acquisition. The Borrower will not, and will ------------- ------ -- ----------- not permit any Significant Subsidiaries to. merge or consolidate with or into any other Person, or make any acquisition of the business of any other Person unless it obtains the prior written consent of the Bank; Provided that any -------- Significant Subsidiary may merge into Borrower or any wholly-owned Significant Subsidiary of the Borrower, provided, further, however, the Borrower or any Significant Subsidiary may merge with or acquire another party without the prior written consent of the Bank as long as (a) the Borrower or the Significant Subsidiary is the surviving party, (b) the other party is engaged in the same or in a related line of business, (c) not more than one-half of the senior management positions of the Borrower change as a result thereof and (d) no Event of Default has occurred and is continuing or would arise as a result of such merger, consolidation or acquisition. 7.4 Disposition of Assets. The Borrower will not, and will not permit any ----------- -- ------- of its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, accounts receivable and leasehold assets), whether now owned or hereafter acquired, except. (a) obsolete, excess or worn out property disposed of in the ordinary course of business; (b) the sale or other disposition of any property in the ordinary course of business, Provided that the aggregate book value of all assets (other than -------- inventory) so sold or disposed of in any period of twelve consecutive months shall not exceed 10% of the consolidated total assets of the Borrower and its Subsidiaries as at the beginning of such twelve month period; and (c) the sale of inventory in the ordinary course of business. 7.5 Indebtedness. The Borrower will not create, incur, assume or suffer to ------------- exist any Indebtedness, except: (a) Indebtedness payable to the Bank; (b) existing Indebtedness, including Subordinated Debt, if any, listed on Schedule A hereto; - -------- - (c) Purchase Money Indebtedness; provided that, giving effect to the -------- incurrence of such Purchase Money Indebtedness and to the receipt and application of the proceeds thereof, no Default shall have occurred and be continuing; and (d) Subordinated Debt incurred by the Borrower after the date hereof; provided that, giving effect to the incurrence of such Subordinated Debt and to - -------- the receipt and application of the proceeds thereof, no Default shall have occurred and be continuing. 7.6 Liens. The Borrower will not create, incur, assume or suffer to exist ------ any Lien on any of its properties or assets, except the following (collectively, "Permitted Liens"): --------- ----- -14- (a) Liens for taxes (i) not delinquent or (ii) being contested in good faith and by proper proceedings, as to which adequate reserves are maintained on the books of the Borrower in accordance with GAAP; (b) carriers', warehousemen's. mechanics', materialmen's or similar liens imposed by law incurred in the ordinary course of business in respect of obligations not overdue, or being contested in good faith and by proper proceedings and as to which adequate reserves with respect thereto are maintained on-the books of the Borrower in accordance with GAAP; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other types of social security legislation; (d) security deposits made to secure the performance of leases, licenses and statutory obligations incurred in the ordinary course of business; (e) Liens in favor of the Bank; (f) existing Liens. if any, listed on Schedule A hereto; provided that no -------- - -------- such Lien is spread to cover any additional property after the date hereof, and that the amount of the Indebtedness secured thereby is not increased; and (g) Purchase Money Security Interests securing Purchase Money Indebtedness permitted under Section 7.5(c) above. 7.7 Restricted Payments. The Borrower will not declare or make any ---------- -------- Restricted Payment, except upon ten (10) days prior written notice to the Bank and only as long as no Default or Event of Default has occurred and is continuing or is can be reasonably anticipated to occur as a result thereof. 7.8 Investments. The Borrower will not, and will not permit any of its ------------ Significant Subsidiaries to, make, maintain or acquire any Investment in any Person other than: (a) Investments of the type falling within the Investment Guideline attached hereto as Schedule B which have been approved by the Borrower's Board -------- - of Directors; (b) additional forms of Investment approved through amendments to the Investment Guidelines hereafter approved by the Borrower's Board of Directors, subject to the prior written approval of the Bank, which approval shall not be unreasonably withheld; (c) certificates of deposit, eurodollar time deposits, commercial paper or any other obligations of the Bank or of any other bank or trust company organized or licensed to conduct a banking business under the laws of the United States or any State thereof and which has (or which is a Subsidiary of a bank holding company which has) publicly traded debt securities rated A or higher by Standard & Poor's Corporation or A-2 or higher by Moody's Investors Service, Inc.; (d) stock or obligations issued to the Borrower or any Subsidiary thereof in settlement of claims against others by reason of an event of bankruptcy or a composition or the readjustment of debt or a reorganization of any debtors of the Borrowers or such Subsidiary; (e) loans or advances to officers and employees of the Borrower not exceeding in aggregate principal amount of $1,500,000 at any one time outstanding during fiscal year 1995 and $500,000 during fiscal year 1996 and thereafter; -15- (f) investments by the Borrower in its Subsidiaries, and Investments by such Subsidiaries in the Borrower; provided that the sum of (i) the aggregate -------- amount of all Investments made after the date hereof by the Borrower in its Subsidiaries and (ii) the outstanding aggregate amount of any Indebtedness of any Subsidiary of the Borrower that is Guaranteed by Borrower, may not exceed $1,000.000 at any time, provided further, however, nothing herein shall prohibit the Borrowers from converting Indebtedness of a Subsidiary to equity of such Subsidiary; and (g) Investments by the Borrower in joint ventures or partnerships with third parties, provided that such joint venture or partnership is engaged in the same or a related line of business and provided that the sum of (i) the aggregate amount of all Investments made or committed to be made after the date hereof by the Borrowers in such joint ventures or partnerships and (b) the outstanding aggregate amount of any Indebtedness of such joint venture or partnership that is guaranteed pursuant to clause (i) of this subparagraph (e), may not exceed $2,500,000 at any time. 7.9 Sale and Leaseback. The Borrower shall not, except upon 14 days prior ---- --- ---------- written notice to the Bank, enter into any arrangement. directly or indirectly, whereby it shall sell or transfer any property owned by it in order to lease such property or lease other property that the Borrower intends to use for substantially the same purpose as the property being sold or transferred . 7.10 Current Ratio. The Borrower will not permit the Current Ratio at the ------- ------ end of any of the following fiscal months to be less than the ratio set forth below opposite such month: Minimum Fiscal Month Ending Current Ratio - ------------------- ------------- 5/31/94 1.0 to 1 and thereafter 7.11 Minimum Profitability. The Borrower will not permit Net Loss for ------- -------------- any of the following fiscal quarters to be greater than the amount set forth opposite such fiscal quarter: Fiscal Quarters Ending Maximum Net Loss - ---------------------- ---------------- 5/31/94 $ 1 00,000 8/31/94 $1,000,000 11/30/94 and thereafter $ 100,000 In addition, the Borrower shall not incur Net Losses in any two consecutive fiscal quarters. 7.12 Leverage. The Borrower will not permit the ratio of Total Senior --------- Liabilities to Tangible Net Worth at the end of any of the following fiscal months to be greater than the ratio set forth below opposite such fiscal month: Maximum Fiscal Month Ending Permitted Ratio ------------------- --------------- 5/31/94 through 1/31/95 2.0 to 1 2/28/95 and thereafter 1.8 to 1 7.13 Tangible Net Worth. The Borrower will not permit its Tangible Net -------- --- ----- Worth at the end of any fiscal month to be less than the amount set forth below opposite such fiscal month: -16- Minimum Fiscal Month Tangible Net Worth - ------------ ------------------ 5/31/94 through 1/31/95 $9,000,000 2/28/95 and thereafter $9,750,000 7.14 Receivables from Subsidiaries. The Borrower will not permit ----------- ---- ------------- receivables from its Subsidiaries which are not Significant Subsidiaries at the end of any fiscal quarter to exceed $4,500,000 in the aggregate. Section 8 Events of Default. - ------- - ------ -- -------- 8.1 Events of Default. The occurrence of any of the following events shall ------ -- ------- be an "Event of Default" hereunder: (a) The Borrower shall default in the due and punctual payment of principal or interest on the Note, or shall default in the payment of any other amount due under any Loan Document; or (b) Any representation, warranty or statement made herein or in any other Loan Document, or in any certificate or statement furnished pursuant to or in connection herewith or therewith, shall prove to be incorrect, misleading or incomplete in any material respect on the date as of which made or deemed made: or (c) The Borrower shall default in the performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to Sections 7.3, and 7.10 through 7.13; or (d) The Borrower shall default in the performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any of the provisions of this Agreement or any other Loan Document (other than those referred to in paragraphs 8.1(a) through 8.1(c) above) and such default shall continue unremedied for a period of twenty (20) days after the occurrence of such default; or (e) Any obligation of the Borrower or any Significant Subsidiary thereof in respect of any Indebtedness (other than the Note) or any Guarantee in an aggregate amount in excess of $300,000 shall be declared to be or shall become due and payable prior to the stated maturity thereof, or such Indebtedness or Guarantee shall not be paid as and when the same becomes due and payable, or there shall occur and be continuing any default under any instrument, agreement or evidence of indebtedness relating to any such Indebtedness the effect of which is to permit the holder or holders of such instrument, agreement or evidence of indebtedness, or a trustee, agent or other representative on behalf of such holder or holders, to cause such Indebtedness to become due prior to its stated maturity provided, however, the aforementioned circumstance shall not constitute an Event of Default as long as (i) the Borrower is contesting the Indebtedness in good faith by proper proceedings; (ii) adequate reserves have been established and are maintained; and (iii) assuming that the Borrower would be required to pay such Indebtedness in full without setoff or counterclaim, the Borrower would at all times continue to be in compliance with the provisions of Sections 7.10 through 7.13 above; or (f) The Borrower or a Significant Subsidiary thereof shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to -17- bankruptcy, insolvency, reorganization, winding-up. or composition or readjustment of debts. (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Borrower or any Significant Subsidiary thereof in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Borrower or such Significant Subsidiary or of all or any substantial part of its assets, or (iii) similar relief in respect of the Borrower or such Significant Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 days; or an order for relief against the Borrower or such Significant Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (h) Any of the events and circumstances described in subparagraphs (f) and (9), which if involving or relating to the Borrower or a Significant Subsidiary would constitute an Event of Default under such subparagraphs, occur with respect to a Subsidiary which is not a Significant Subsidiary, and (i) such --- occurrence has resulted in a Material Adverse Effect; or (ii) in the reasonable judgment of the Bank such occurrence can be reasonably anticipated to result in a Material Adverse Effect or Event of Default. (i) A judgment or judgments for the payment of money in excess of $300,000 (net of insurance proceeds) in the aggregate shall be rendered against the Borrower and any such judgment or judgments shall not have been vacated, discharged, stayed or bonded pending appeal within thirty (30) days from the entry thereof; or (j) The Borrower or any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of $300,000 which it is obligated to pay to the PBGC or to a Plan under Title IV of ERISA; or a notice of intent to terminate a Plan or Plans having aggregate Unfunded Liabilities in excess of $300,000 shall be filed under Title IV of ERISA by the Borrower or any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Borrower or any member of the Controlled Group to enforce Sections 515 or 421 9(c)(5) of ERISA; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or there shall occur a complete or partial withdrawal form, or a default, within the meaning of Section 421 9(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause the Borrower or one or more members of the Controlled Group to incur a current payment obligation in excess of $300,000; or (k) The Borrower or any Significant Subsidiary thereof shall default in the performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any of the provisions of any agreement with the Bank or any instrument delivered in favor of the Bank (other than, in either case, a Loan Document), and such default shall continue unremedied beyond the grace period (if any) provided for therein; or (l) Any Security Instrument shall, as a result of any action or failure to act on the part of the Borrower, cease for any reason to be in full force and effect or shall cease to be -18- effective to grant a perfected security interest in the collateral described in such Security Instrument with the priority stated to be granted thereby; or (m) Borrower shall make any payment on account of the Subordinated Debt identified in Schedule A and additional Subordinated Debt hereinafter -------- - incurred. except to the extent such payment is expressly permitted by Section 7.7 or under any subordination agreement entered into with the Bank. 8.2 Remedies Upon an Event of Default. If any Event of Default shall -------- ---- -- ----- -- -------- have occurred and be continuing, the Bank may (a) declare the Line of Credit Commitment terminated (whereupon the Line of Credit Commitment shall be terminated) and/or (b) declare the principal amount then outstanding of, and the accrued interest on, the Note and commitment fees and all other amounts payable hereunder and under the Note to be forthwith due and payable, whereupon such amounts shall be and become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower; provided that in the case of the occurrence of -------- an Event of Default with respect to the Borrower referred to in clauses 8.1 (f) and 8.1(9) of Section 8.1, the Line of Credit Commitment shall be automatically terminated and the principal amount then outstanding of, and the accrued interest on, the Note and commitment fees and all other amounts payable hereunder and under the Note shall be and become automatically and immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. Section 9 Definitions. ------- - ------------ 9.1 Certain Definitions. ------- ------------ "Accountants" means KPMG Peat Marwick, or another accounting firm of ----------- national reputation or other certified public accountants selected by the Borrower and approved by the Bank. "Affiliate" means, with respect to any specified Person (the --------- "Specified Person"), any Person directly or indirectly controlling, controlled ---------------- by or under direct or indirect common control with, the Specified Person and, without limiting the generality of the foregoing, includes (i) any director or officer of the Specified Person or any Affiliate of the Specified Person, (ii) any such director's or officer's parent, spouse, child or child's spouse (a "relative"), (iii) any group acting in concert, of one or more such directors, -------- officers, relatives or any combination thereof (a "group"), (iv) any Person ----- controlled by any such director, officer, relative or group in which any such director, officer, relative or group beneficially owns or holds 5% or more of any class of voting securities or a 5% or greater equity or profits interest and (v) any Person or group which beneficially owns or holds 5% or more of any class of voting securities or a 5% or greater equity or profits interest in the Specified Person. For the purposes of this definition, the term "control" when used with respect to any Specified Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Specified Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall mean this Credit Agreement. ---------- "Applicable Margin" shall have the meaning set forth in Section 2.1. ---------- ------ "Banking Day" shall mean any day, excluding Saturday and Sunday and ----------- excluding any other day which in the Commonwealth of Massachusetts or the State of California is a legal holiday or a day on which banking institutions are authorized by law to close. "Borrowing Base" shall have the meaning specified in Section 1.4. -------------- -19- "Borrower Property" means any real property owned, occupied or operated by the -------- -------- Borrower or any of its Subsidiaries which is located in the United States. "Code" means the Internal Revenue Code of 1986, as amended, or any successor ---- statute. "Collateral" shall have the meaning given that term in the Security Agreement. ---------- "Commitment Expiration Date" shall have the meaning specified in Section 1.1. ---------- ---------- ---- "Contractual Obligation" means, as to any Person, any provision of any ----------- ---------- security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Controlled Group" means all members of a controlled group of corporations and ---------- ----- all trades or businesses (whether or not incorporated) under common control which. together with the Borrower, are treated as a single employer under Section 414 of the Code. "Copyright Mortgage" shall mean the meaning set forth in Section 3.1 (b). --------- -------- "Current Assets" means, at any time, assets of the Borrower at such ------- ------ time, on a non-consolidated basis, that would be classified as current assets in accordance with GAAP, including without limitation, cash and inventory (but in no event in excess of $10,500,000 in net book value, of inventory) and receivables. "Current Liabilities" means, at any time. all liabilities of the Borrower at ------- ----------- such time, on a nonconsolidated basis. that would be classified as current liabilities in accordance with GAAP, including, without limitation, all Indebtedness of the Borrower payable on demand or maturing within one year of such time, or renewable at the option of the Borrower for a period of not more than one year from such time, and all serial maturity and periodic or installment payments on any Indebtedness, to the extent such payments are required to be made within one year from such time. "Current Ratio" means, at any time, all Current Assets divided by the ------- ----- aggregate of all Current Liabilities at such time. "Default" means any condition or event that constitutes an Event of ------- Default or that with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Eligible Acceptance" means an acceptance (i) against the liability -------- ---------- for which the Bank is not required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System in effect from time to time, or under any other law or regulation, and (ii) which is eligible for discount by Federal Reserve Banks. "Eligible Domestic Accounts Receivable" means an account receivable -------- -------- -------- ---------- owing to the Borrower which met the following specifications at the time it came into existence and continues to meet the same until it is collected in full: (a) The original stated maturity of the account is not more than 90 days after the invoice date thereof, and the account (regardless of its stated maturity date) does not remain unpaid more than 90 days after such invoice date. (b) The account arose from the performance of services or an outright sale of goods by Borrower, such goods have been shipped to the account debtor, and Borrower has possession of, or has delivered to Bank. shipping and delivery receipts evidencing such shipment or performance of services. -20- (c) The account is owned solely by the Borrower, and is not subject to any assignment, claim, lien, or security interest. other than a security interest in favor of the Bank. (d) The account is not subject to set-off, credit, allowance or adjustment by the account debtor, except discount allowed for prompt payment: the account is not one as to which the account debtor disputes liability or makes any claim with respect thereto or as to which the Bank believes. in its sole reasonable discretion, that there is a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or which involves an account debtor subject to any insolvency proceeding, or becomes insolvent, or goes out of business. (e) The account arose in the ordinary course of Borrower's business and did not arise from the performance of services or a sale of goods to a supplier or employee of the Borrower. (f) No notice of bankruptcy or insolvency of the account debtor has been received by or is known to the Borrower. (g) The Borrower has pledged any instrument or chattel paper evidencing the account to the Bank pursuant to the provisions of the Security Agreement. (h) Not more than 50% of the aggregate receivables of the account debtor have remained unpaid for a period of more than ninety (90) days from the invoice date. (i) The aggregate accounts receivables from the account debtor (including its Subsidiaries and any other Affiliates which are known as such by any member of senior management of the Borrower) do not exceed 25% of the total Eligible Accounts Receivable of the Borrower; that portion of the account over the 25% level will be disqualified. (j) The account does not relate to goods placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional. (k) The account debtor is not a Subsidiary, officer, employee, agent of the Borrower or any other Affiliate of the Borrower who is known as such by a member of senior management of the Borrower. (i) The account debtor is not a Governmental Authority. (m) The Borrower does not owe any amounts to the account debtor for goods sold, services rendered or otherwise; to the extent that any amounts are so owed, the accounts of such account debtor in an amount equal to the amounts owed by the Borrower to the account debtor shall be disqualified. (n) The Bank has not notified the Borrower that the Bank has determined that an account or account debtor is unsatisfactory for credit reasons (which determination shall not be made unreasonably). (o) The account debtor is a person or entity located in the United States or Canada and the account arose out of services rendered or goods delivered in the United States or Canada. "Eligible International Accounts Receivable" means an account receivable owing -------- ------------- -------- ---------- to the Borrower which met the requirements set forth in clauses (a) through (n) for Eligible Domestic -21- Accounts Receivable and also the following specifications at the time it came into existence and continues to meet the same until it is collected in full: (a) The account debtor is a Person located outside the United States and the account arose out of services rendered or goods delivered outside the United States: and (b) The obligations of the account debtor under such account are supported either (i) by a transferable commercial letter of credit or standby letter of credit issued for the account of the account debtor and for the benefit of the Borrower by a bank or other financial institution approved by the Bank in writing, that (A) is payable in the United States. (B) provides for the full payment to the Borrower or its transferee of such account receivable, either (x) upon shipment of goods or the provision of services and upon presentation of documentation that such goods have been shipped or that such services have been provided, or (y) upon default in payment of such account receivable in accordance with its terms, and (C) has been delivered and pledged to the Bank; or (ii) by insurance covering such obligations with terms that have been approved by the Bank in writing and underwritten by an insurer that has been approved by the Bank in writing. The Bank reserves the right in its sole discretion to disapprove a bank, other financial institution or insurer (even if previously approved) by notice to the Borrower, provided, however, such disapproval shall not apply to accounts receivable previously included in the Borrowing Base but only to accounts receivable arising after the effective date of the notice of disapproval. "Environmental Laws" means all federal. state, local and foreign laws, ------------- ---- and all regulations, notices or demand letters issued, promulgated or entered thereunder, relating to pollution or protection of the environment and to occupational health and safety, including, without limitation, laws relating to emissions, discharge-s, releases or threatened releases of pollutants, contaminants, chemicals, or Hazardous Substances into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use. treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or Hazardous Substances. "ERISA" means the Employee Retirement Income Security Act of 1974, ----- as amended, or any successor statutes. "Event of Default" has the meaning set forth in Section 8.1. ----- -- ------- "Extension of Credit" shall have the meaning set forth in Section 1.4. --------- -- ------ "Financial Statements Date" means May 31, 1993. --------- ---------- ---- "GAAP" means accounting principles generally accepted in the United ---- States applied on a consistent basis. "Governmental Approvals" shall mean any authorization, consent, order, ------------ --------- approval, license, lease, ruling, permit, tariff, rate, certification, validation, exemption, filing or registration by or with, or notice to, any Governmental Authority. "Governmental Authority" shall mean any federal, state, municipal or ---------------------- other governmental department, commission, board, bureau, agency, court, tribunal or other instrumentality, domestic or foreign, and any arbitrator. "Guarantee by any Person means any obligation, contingent or --------- otherwise, of such Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality Gf the foregoing, any obligation, direct or indirect, contingent or otherwise of such Person (a) to purchase or pay (or advance or supply funds for the purchase or -22- payment of) such Indebtedness or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or (b) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall -------- not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" shall mean all hazardous and toxic substances, --------- ---------- wastes or materials, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, urea formaldehyde insulation. radioactive materials. biological substances, PCBs, pesticides, herbicides and any other kind and/or type of pollutants, or contaminates and/or any other similar substances or materials which, because of toxic, flammable, explosive, corrosive, reactive, radioactive or other properties that may be hazardous to human health or the environment, are included under or regulated by any Environmental Laws. "Indebtedness" of any Person at any date shall mean, la) all ------------- indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (excluding current trade liabilities Incurred in the ordinary course of business and payable in accordance with customary practices, but including any class of capital stock of such Person with fixed payment obligations or with redemption at the option of the holder), or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under leases that should be treated as capitalized leases in accordance with GAAP, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, and all reimbursement obligations (contingent or otherwise) of such Person in respect of any letters of credit issued for the account of such Person, and (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. "Intellectual Property" shall have the meaning specified in Section ------------ --------- 5.16. "Investments" means, with respect to any Person (the "Investor"), (a) ----------- any investment by the Investor in any other Person, whether by means of share purchase, capital contribution, purchase or other acquisition of a partnership or joint venture interest, loan, time deposit, demand deposit or otherwise and (b) any Guarantee by the Borrower of any Indebtedness or other obligation of any other Person. "Letter of Credit" means any commercial letter of credit or standby ------ -- ------ letter of credit issued by the Bank for the account of the Borrower as provided in this Agreement. "Letter of Credit Usage" means, at any time. the aggregate at such ------ -- ------ ----- time of (a) the maximum amount then available to be drawn under all outstanding Letters of Credit, and (b) all then unreimbursed drawings under any Letters of Credit. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit ---- arrangement, encumbrance, lien (statutory or other). or preference, priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any lease that should be capitalized in accordance with GAAP, and the filing of a financing statement under the Uniform Commercial Code or comparable law of any jurisdiction), together with any renewal or extension thereof. "Line of Credit Commitment" shall have the meaning specified in ---- -- ------ ---------- Section 1.1. "Line of Credit Loans" shall have the meaning specified in Section ---- -- ------ ----- 1.1. -23- "Loan Documents" means, collectively, this Agreement, the Note. the ---- --------- Financing Statements, the Security Instruments, and all other agreements and instruments that are from time to time executed in connection with this Agreement, as each of such agreements and instruments may be amended, modified or supplemented from time to time. "Material Adverse Effect" means a material adverse effect on (a) the -------- ------- ------ business, operations, property, condition (financial or otherwise) or prospects of the Borrower, (b) the ability of the Borrower to perform its obligations under this Agreement, the Note or any of the other Loan Documents, (c) the validity or enforceability of this Agreement, the Note or any of the other Loan Documents, or the rights or remedies of the Bank hereunder or thereunder. or (d) the right of the Bank to enforce the payment of accounts against account debtors in any particular state. "Multiemployer Plan" means at any time an employee pension benefit ------------- ----- plan within the meaning of Section 4001 (a)(3) of ERISA to which the Borrower or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. including for these purposes any Person which ceased to be a member of the Controlled Group during such five year period. "Net Income" or "Net Loss" for any period in respect of which the --- ------ --- ---- amount thereof shall be determined, shall mean the aggregate of the consolidated net income (or net loss) after taxes for such period (taken as a cumulative whole) of the Borrower and its Significant Subsidiaries (if any), determined in accordance with GAAP. "Obligations" shall have the meaning given the term "Secured ----------- Obligations" in the Security Agreement. "Office of the Bank" shall mean the banking office of the Bank located ------ -- --- ---- at 3000 Lakeside Drive, Santa Clara, California 95054, or such other location of which the Bank shall notify the Borrower. "Patent and Trademark Assignment shall have the meaning set forth in ------ --- --------- ---------- Section 3.1 (b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Permitted Liens" shall have the meaning set forth in Section 7.6. --------- ------ "Person" shall mean and include any individual, firm, corporation, ------ trust or other unincorporated organization or association or other enterprise or any government or political subdivision, agency, department or instrumentality thereof. "Plan" means any employee pension benefit plan which is covered by ---- Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a~ maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Borrower or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions . "Prime Rate" shall mean the per annum rate of interest from time to ---------- time announced and made effective by the Bank as its Prime Rate (which rate may or may not be the lowest rate available from the Bank at any given time). -24- "Purchase Money Indebtedness" shall mean Indebtedness incurred to -------- ----- ------------ finance the acquisition of assets or the cost of improvements on real property or leaseholds, in each case in an amount not in excess of the lesser of (a) the purchase price or acquisition cost of said assets or the cost of said improvements and (b) the fair market value of said assets or said improvements on the date of acquisition of said assets or contract for said improvements. "Purchase Money Security Interest" shall mean (a) a security interest -------------------------------- securing Purchase Money Indebtedness, which security interest applies solely to the particular assets acquired with the Purchase Money Indebtedness that said Purchase Money Security Interest secures, and (b) the renewal, extension and refunding of such Purchase Money Indebtedness in an amount not exceeding the amount thereof remaining unpaid immediately prior to such renewal, extension or refunding. "Rate Reduction Event" means an event that occurs when the following ---- --------- ----- conditions are satisfied: (a) the Borrower shall, in any two consecutive fiscal quarters commencing with the fiscal quarter ending May 31, 1994, have Net Income (on a non-consolidated basis) in excess of One Dollar ($1.00) for each of such quarters; and (b) the Borrower shall have furnished to the Bank financial statements of the Borrower (on a non-consolidated basis) demonstrating satisfaction of the condition referred to in clause (a) above. Once a Rate Reduction Event occurs, ------ --- the reduced rate shall remain in effect until the Commitment Expiration Date. "Restricted Payment" means, with respect to the Borrower, (a) any ---------- ------- dividend or other distribution on any shares of capital stock of the Borrower (except dividends payable solely in shares of capital stock or rights to acquire capital stock of the Borrower, (b) any payment on account of the purchase, redemption, retirement or acquisition of (i) any shares of the capital stock of the Borrower or (ii) any option, warrant, convertible security or other right to acquire shares of the capital stock of the Borrower, other than, in either case, payments made solely to the Borrower, and (c) any required or optional payment of any principal of, or premium [or interest] on, or any required or optional purchase, redemption or other retirement or other acquisition of any Subordinated Debt. "SEC" means the Securities and Exchange Commission. --- "Security Agreement" shall have the meaning set forth in Section -------- --------- 3.1 (a). "Security Instruments" means, collectively. the Security Agreement, -------- ----------- the Copyright Mortgage, the Patent and Trademark Assignment, and each other instrument or agreement that purports to secure the Obligations of the Borrower to the Bank. "Significant Subsidiary" means any Subsidiary of the Borrower which is ----------- ---------- organized under the laws of, or has its principal place of business in, a state or commonwealth of the United States. "Subordinated Debt" means Indebtedness of the Borrower that is ------------ ---- subordinated to the Indebtedness of the Borrower owing to the Bank either (a) pursuant to a subordination agreement in form and substance satisfactory to the Bank between the Bank and the holder(s) of such Indebtedness, or (b) pursuant to the terms thereof, where the Bank has confirmed in writing that such terms are satisfactory to it. "Subsidiary" means, with respect to any Person, any corporation or ---------- other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board -25- of directors or other Persons performing similar functions are at the time directly or indirectly owned by such Person. "Tangible Net Worth" means, at any time, the consolidated -------- --- ----- stockholders' equity of the Borrower and its Significant Subsidiaries. if any. at such time determined in accordance with GAAP, less all assets that are ---- reflected on the consolidated balance sheet of the Borrower at such time that would be treated as intangibles under GAAP (including. but not limited, to goodwill, capitalized software development costs and excess purchase costs as well as all inter-company notes receivable and all Investments in Subsidiaries), plus all then outstanding Subordinated Debt and all inter-company trade - ---- receivables. "Total Senior Liabilities" means, at any time, the consolidated ----- ------ ----------- liabilities of the Borrower and its Significant Subsidiaries, if any, at such time, determined in accordance with GAAP, less all then outstanding Subordinated ---- Debt. "UCC" shall have the meaning given such term in the Security --- Agreement. "Unfunded Liabilities" means, with respect to any Plan, at any time. -------- ----------- the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of the Borrower or any member of the Controlled Group to the PBGC or such Plan under Title IV of ERISA. Section 10 Miscellaneous. ------- -- -------------- 10.1 Accounting Terms and Definitions. Unless otherwise specified ---------- ----- --- ------------ herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be delivered hereunder shall be prepared, in accordance with GAAP; provided that if any change in GAAP in itself materially affects the calculation - -------- of any financial covenant in this Agreement, the Borrower may by notice to the Bank. or the Bank may by notice to the Borrower, require that such covenant thereafter be calculated in accordance with GAAP as in effect, and applied by the Borrower, immediately before such change in GAAP occurs. If such notice is given, the compliance certificates delivered pursuant to Section 6.4(c) after such change occurs shall be accompanied by reconciliations of the difference between the calculation set forth therein and a calculation made in accordance with GAAP as in effect from time to time after such change occurs. To enable the ready determination of compliance with the covenants set forth in this Agreement, the Borrower will not change the date on which its fiscal year or any of its fiscal quarters end without the prior consent of the Bank. 10.2 Amendments. Etc. No amendment or waiver of any provision of this ----------- --- Agreement or the Note, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank and the Borrower and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 10.3 Notices. Etc. All notices and other communications provided for -------- --- hereunder shall be in writing and shall be delivered by hand, by a nationally recognized commercial overnight delivery service, by certified, return receipt requested. first class mail or by telecopy, delivered, addressed or transmitted, if to the Borrower, at its address at 60 Silvermine Road, Seymour, Connecticut 06483, Attention David Osowski, Telecopy No. (203) 881-5370 with a copy to the Borrower at 8500 Cameron Road. Austin, Texas 78754, Attention: David Osowski and Clifford Maxwell, Telecopy No. (512) 339-1490; and if to the Bank, at its address at Wellesley Office Park, 45 Williams Street, Wellesley, Massachusetts 02181, Attention: James C. Maynard, Assistant Vice President, Telecopy No. (617) 431-9906; or, as to each party. at such other address as shall be -26- designated by such party in a written notice to the other party. All such notices and communications shall be deemed effective. (a) in the case of hand deliveries. when delivered; (b) in the case of an overnight delivery service, on the next Banking Day after being placed in the possession of such delivery service, with delivery charges prepaid: (c) in the case of mail, upon delivery of the signed receipt to the sender; and (d) in the case of telecopy notices, when electronic indication of receipt is received, except that notices to the Bank pursuant to the provisions of Section 1.6 shall not be effective until received by the Bank. 10.4 No Waiver; Remedies. No failure on the part of the Bank to -- ------- --------- exercise, and no delay in exercising, any right hereunder or under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder or under the Note preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 10.5 Right of Set-off. (a) Upon the occurrence and during the ----- -- -------- continuance of any Event of Default, the Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special. time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and the Note, irrespective of whether or not the Bank shall have made any demand hereunder and although such obligations may be contingent or unmatured. (b) The Bank agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not -------- affect the validity of such set-off and application. The rights of the Bank under this Section 10.5 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Bank may have. 10.6 Expenses; Indemnification. (a) The Borrower shall pay on demand --------- --------------- (i) the reasonable fees and disbursements of counsel to the Bank in connection with the preparation of this Agreement and the preparation or review of each agreement, opinion, certificate and other document referred to in or delivered pursuant hereto; (ii) all reasonable out-of-pocket costs and expenses of the Bank in connection with the administration of this Agreement and the other Loan Documents, and any waiver or amendment of any provision hereof or thereof, including without limitation, the reasonable fees and disbursements of counsel for the Bank, and of any field examiner or auditor retained by the Bank as contemplated in Section 6.8; and (iii) if any Event of Default occurs, all reasonable costs and expenses incurred by the Bank, including the reasonable fees and disbursements of counsel to the Bank, and of any appraisers, environmental engineers or consultants, or investment banking firms retained by the Bank in connection with such Event of Default or collection, bankruptcy, insolvency and other enforcement proceedings related thereto. The Borrower agrees to pay, indemnify and hold the Bank harmless from, any and all recording and filing fees, and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise or other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of or the consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement or the other Loan Documents, or any documents delivered pursuant hereto or thereto. (b) The Borrower agrees to indemnify the Bank and its officers and directors and hold the Bank and its officers and directors harmless from and against any and all liabilities, losses. damages, costs and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel for the Bank in connection with any investigative, administrative or judicial proceeding initiated by a third party and involving the Bank in any way, whether as a party defendant, a deponent or as a source of records and information, which may be incurred by the Bank, relating to or arising out of this Agreement or any other Loan Document, or the existence of -27- any Hazardous Substance on, in, or under any Borrower Property, or any violation of any applicable Environmental Laws for which the Borrower or any Subsidiary thereof has any liability or which occurs upon any Borrower Property, or the imposition of any Lien under any Environmental Laws, provided that the Bank -------- shall not have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. (c) The agreements in this Section 10.6 shall survive the repayment of the Note, and all other amounts payable under this Agreement and the other Loan Documents. 10.7 Binding Effect. This Agreement shall become effective when it ------- ------- shall have been executed by the Borrower and the Bank (provided. however, in no event shall any Extension of Credit be available until this Agreement is signed by an officer of the Bank in California) and thereafter shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. The Bank may assign to any financial institution all or any part of, or any interest (undivided or divided) in, the Bank's rights and benefits under this Agreement or the Note, and to the extent of that assignment such assignee shall have the same rights and benefits against the Borrower hereunder as it would have had if such assignee were the Bank making the Line of Credit Loans hereunder. 10.8 Severability. Any provision of this Agreement which is ------------- prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction . 10.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED --------- --- IN ACCORDANCE WITH, THE LAWS Of THE COMMONWEALTH Of MASSACHUSETTS. 10.10 WAIVER Of JURY TRIAL. THE BANK AND THE BORROWER AGREE THAT ------ -- ---- ----- NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE BANK AND THE BORROWER, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE BORROWER HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 10.11 VENUE, CONSENT TO SERVICE OF PROCESS. THE BORROWER ACCEPTS FOR ------ ------- -- ------- -- -------- ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE Of CALIFORNIA OR THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT, THE NOTE, ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, -28- THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION. THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. 10.12 Headings. Section headings in this Agreement are included herein --------- for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 10.13 Counterparts. This Agreement may be signed in one or more ------------ counterparts each of which shall constitute an original and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written., SUMMAGRAPHICS CORPORATION By: /s/ Clifford Maxwell ----------------------------- Name: Title: Assistant Treasurer SILICON VALLEY EAST, a Division of Silicon Valley Bank By: /s/ James C. Maynard ----------------------------- Name: James C. Maynard Title: Asst. Vice President SILICON VALLEY BANK By: /s E. Guiels ----------------------------- Name: E. Guiels Title: Operations Officer (Signed at Santa Clara, California) Schedule A to the Credit Agreement Restricted Payments - reference 5.6(c) -- the Borrower has retired $2.5 million of Subordinated Debt since the Financial Statements Date Subsidiaries -- reference 5.10 -- See list below Taxes -- reference 5.14 -- the Borrower is currently undergoing a federal income tax audit by the Internal Revenue Service for the fiscal year ended May 31, 1991. No Material Adverse Effect is anticipated. Intellectual Property - reference 5.16 See attachment A. The Borrower also owns a 50% interest in U.S. Patent #4,839,634 in the name of More, et al. The interest is not transferable without the approval of the owner of the other 50% interest. Existing Indebtedness--reference 7.5 (b) capital lease obligations (at 6/30/94)--$835k (c) letters of credit (at 7/18/94) $423K Existing Liens - reference 7.6(f) -- See Liens identified in Perfection Certificate search List of Subsidiaries: Summagraphics, N.V. Corporation organized under the laws of and headquartered in Belgium. European manufacturing and distribution company. Summagraphics Europe, N.V. Corporation organized under the laws of and headquartered in Belgium. European sales company. Summagraphics, Ltd. Corporation organized under the laws of and headquartered in Belgium. Provides repair and support services to European customers. Summagraphics, Gmbh. Corporation organized under the laws of and headquartered in Germany. German sales company. EX-10.24 4 SECURITY AGREEMENT DATED DECEMBER 13, 1994 EXHIBIT 10.24 SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT (hereinafter referred to as "Agreement" or " Security Agreement"), made this 13th day of December, 1994, by and between Summagraphics Corporation, a Delaware corporation ("Debtor") whose business address is 8500 Cameron Road, Austin, Texas 78754 and Heller Financial, Inc., a Delaware corporation, ("Secured Party") whose address is Heller Financial, Inc., Commercial Equipment Finance Division, 900 Circle 75 Parkway, Suite 1600, Atlanta, Georgia 30339. WITNESSETH: 1. Secure Payment. To secure payment of indebtedness in the principal sum of up ------ -------- to two million five hundred thousand dollars ($2,500,000) as evidenced by one or more note or notes (the "Notes"), which Debtor has executed and delivered and will execute and deliver to Secured Party and also to secure any other indebtedness or liability of Debtor to Secured Party, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including all future advances or loans which may be made at the option of Secured Party (all the foregoing hereinafter called the "Indebtedness"), Debtor hereby grants and conveys to Secured Party a first superior continuing lien and security interest in the property described below and/or on the Schedule(s) attached hereto (the "Schedules"), all products and proceeds (including insurance proceeds) thereof, if any, and all increases, substitutions, replacements, attachments, additions, and accessions thereto, all or any of the foregoing hereinafter called the "Collateral" . (DESCRIPTION OF COLLATERAL ON ATTACHED SCHEDULES. THE SCHEDULES MAY BE SUPPLEMENTED FROM TIME TO TIME TO EVIDENCE THE COLLATERAL, SUBJECT TO THIS AGREEMENT.) Secured Party will make up to two million five hundred thousand dollars ($2,500,000) in financing available. There will be no more than ten (10) fundings, with all fundings to occur by May 31, 1995. Ten days prior to each funding, Debtor must submit to Secured Party the Loan Request Certificate that sets forth there is no default hereunder, and that each of the covenants and conditions contained herein have been satisfied. Second Party has no obligation to make additional advances if there is an Event of Default hereunder. 2. Warranties and Representations. Debtor warrants, represents, and agrees as ---------- --- ---------------- follows: (a) Perform Obligations. Debtor shall pay all of the Indebtedness secured by ------- ----------- this Agreement and perform all of the obligations contained in this Agreement according to its terms. Debtor shall use the loan proceeds primarily for business uses and not for personal, family, household, or agricultural uses. (b) Defend the Collateral. Debtor shall defend the title to the Collateral ------ --- ----------- against all persons and against all claims and demands whatsoever, which Collateral, except for the security interest granted hereby, is lawfully owned by Debtor and is now free and clear of any and all liens, security interests, claims, charges, encumbrances, taxes, and assessments of any kind, except as may be set forth on the Schedules. At the request of Secured Party, Debtor shall furnish adequate assurance of title, execute any written agreement or do any other acts reasonably necessary to 1 effectuate the purposes and provisions of this Agreement, execute any instrument or statement required by law or otherwise in order to perfect, continue, or terminate the security interest of Secured Party in the Collateral and pay all reasonable costs of filing in connection therewith. (c) Keep Possession of the Collateral. Debtor shall retain possession of the ---- ---------- -- --- ----------- Collateral until the Indebtedness is fully paid and performed and shall not sell, exchange, assign, loan, deliver, lease, mortgage, or otherwise dispose of the Collateral or any part thereof without the prior written consent of Secured Party. Debtor shall keep the Collateral at the location specified on the Schedules and shall not remove same (except in the usual course of business for temporary periods) without the prior written consent of Secured Party. (d) Collateral Free and Clear. Debtor shall keep the Collateral free and clear ---------- ---- --- ------ of all liens, charges, encumbrances, assessments, and other security interests of any kind and shall pay, when due, all taxes, assessments, and license fees relating to the Collateral. (e) Collateral in Good Operating Order. All of the Collateral is in good ---------- -- ---- --------- ------ operating order, condition and repair and is used or useful in the business of Debtor. Debtor shall keep the Collateral, at Debtor's sole cost and expense, in good repair and condition and not misuse, abuse, waste, or allow it to deteriorate except for normal wear and tear. Debtor shall make the Collateral available for inspection by Secured Party at all reasonable times, and Debtor will use and maintain the Collateral in a lawful manner in accordance with all applicable laws, regulations, ordinances, and codes. (f) Insurance. Debtor shall insure the Collateral against loss by fire --------- (including extended coverage), theft and other hazards, for its full insurable value including replacement costs, with a deductible not to exceed $50,000.00 per occurrence and without co-insurance. The insurance policy shall name Secured Party as loss payee and additional insured. In addition, Debtor shall, if Secured Party so requests, obtain liability insurance, including automobile if the Collateral includes motor vehicles, respecting the Collateral covering liability for bodily injury, including death and property damage, in an amount of at least $5,000,000 per occurrence or such greater amount as may comply with general industry standards. Policies shall be in such form, amounts, and with such companies as Secured Party may approve; shall provide for at least thirty (30) days prior written notice to Secured Party prior to any modification or cancellation thereof; shall be payable to Debtor and Secured Party as their interests may appear; shall waive any claim for premium against Secured Party; and shall provide that no breach of warranty or representation or act or omission of Debtor shall terminate, limit or affect the insurers' liability to Secured Party. Certificates of insurance or policies evidencing the insurance required hereby, shall be delivered to Secured Party who is authorized, but under no duty, to obtain such insurance upon failure of Debtor to do so. Debtor shall give immediate written notice to Secured Party and to insurers of loss or damage to the Collateral and shall promptly file proofs of loss with insurers. Debtor hereby irrevocably appoints Secured Party, after an Event of Default, as Debtor's attorney-in-fact, coupled with an interest, for the purpose of obtaining, adjusting and canceling (cancellation relating to policies assigned Heller) any such insurance and endorsing settlement drafts. Debtor hereby assigns to Secured Party, as additional security for the Indebtedness, all sums which may become payable under such insurance, including return premiums and dividends. 2 (g) Complete Information. The information set forth herein and on the Schedules -------- ----------- is complete and accurate, and Debtor shall immediately notify Secured Party in writing of any material change in the information set forth herein and on the Schedules. (h) If Collateral Attaches to Real Estate. If the Collateral or any part thereof -- ---------- -------- -- ---- ------ has been attached to or is to be attached to real estate, a description of the real estate and the name and address of the record owner is set forth on the Schedules. If said Collateral is attached to real estate prior to the perfection of the security interest granted hereby, Debtor will, on demand of Secured Party, furnish Secured Party with a disclaimer or waiver of any interest in the Collateral satisfactory to Secured Party and signed by all persons having an interest in the real estate. Notwithstanding the foregoing, the Collateral shall remain personal property and shall not be affixed to realty without the prior written consent of Secured Party. (i) Financial Statements. Debtor shall deliver to Secured Party its 10-K and --------- ----------- independent outside audited annual financial statements, compliance certificate, and covenant calculation worksheet within one hundred twenty (120) days after the end of Debtor's fiscal years and shall furnish, within sixty (60) days after the end of each quarter, its lO-Qs and quarterly uncertified financial statements of Debtor, compliance certificate, and covenant calculation worksheet. Debtor shall within twenty (20) days of any filing, provide Secured Party with any material SEC filings. Debtor shall certify that all financial information and statements provided to Secured Party fairly present the financial condition of Debtor at the date thereof. (j) Perfection. This Agreement creates a valid and first priority security ---------- interest in the Collateral, securing the payment and performance of the Indebtedness and all actions necessary to perfect and protect such security interest have been duly taken. Without limitation of the foregoing, all Collateral which, under applicable law, is required to be registered is properly registered in the name of Debtor; and all Collateral the ownership of which, under applicable law, is evidenced by a certificate of title, is properly titled in the name of Debtor. On or before the date hereof, Debtor shall have caused all certificates of title and registrations evidencing Debtor's ownership of such Collateral then in existence to have been noted to indicate the existence of Secured Party's first priority security interest thereon and returned to Secured Party, together with appropriate applications or similar documents, for recordation or re-registration, as appropriate. Hereafter, if, as and to the extent Debtor acquires any such Collateral in the nature of substitutions for, or replacements of, Collateral existing on the date hereof, to the extent authorized or permitted hereby, in which its ownership is likewise to be evidenced by a certificate of title or similar registration, Debtor shall cause such notation to appear thereon forthwith upon its issuance and forthwith deliver same to Secured Party, together with appropriate applications or similar documents, for recordation or re-registration, as appropriate. (k) Authorization. Debtor is now, and will at all times remain, duly licensed, ------------- qualified to do business and in good standing in every jurisdiction where failure to be so licensed or qualified and in good standing would have a material adverse effect on its business, properties or assets. Debtor has the power to authorize, execute and deliver this Security Agreement, the Notes and the other documents relating thereto (the Security Agreement, Notes and other documents, all as amended from time to time, are hereafter collectively referred to as the "Loan Documents"), to incur and perform obligations hereunder and thereunder, and to grant the security interests 3 created hereby. The Loan Documents have been duly authorized, executed, and delivered by or on behalf of Debtor, and constitute the legal, valid, and binding obligations of Debtor and are enforceable against Debtor in accordance with their respective terms. Debtor will preserve and maintain its existence and will not wind up its affairs or otherwise dissolve. Debtor will not, without thirty (30) days prior written notice to Secured Party, (l) change its name or so change its structure such that any financing statement or other record notice becomes misleading or (2) change its principal place of business or chief executive or accounting offlces from the address stated herein. (I) Litigation. There are no actions, suits, proceedings, or investigations ----------- ("Litigation") pending or, to the knowledge of Debtor, threatened against Debtor that would have a material adverse effect on the company, and no litigation other than as disclosed in public filings or, in any event, nothing since those filings that to the knowledge of Debtor would have a material adverse effect on the company . Debtor is not in violation of any material term or provision of its by-laws, or of any material agreement or instrument, or of any judgment, decree, order, or any statute, rule, or governmental regulation applicable to it. The execution, delivery, and performance of the Loan Documents do not and will not violate, constitute a default under, or otherwise conflict with any such term or provision or result in the creation of any security interest, lien, charge, or encumbrance upon any of the properties or assets of Debtor, except for the security interest herein created. Debtor will promptly notify Secured Party in writing of Litigation against it if: (l) the outcome of such Litigation may materially or adversely affect the finances or operations of Debtor or (2) such Litigation questions the validity of any Loan Document or any action taken or to be taken pursuant thereto. Debtor shall furnish to Secured Party such information regarding any such Litigation as Secured Party shall reasonably request. For the purpose of this Section 2(1) Litigation, one million dollars ($1,000,000) shall be deemed material. (m) Compliance with Laws. Debtor shall comply in all material respects with all ---------- ---- ---- applicable laws, rules, and regulations and duly observe all valid requirements of all governmental authorities, and all statutes, rules and regulations relating to its business, including, without limitation, those concerning public and employee health, safety, and social security and withholding taxes and those concerning employee benefit plans and as such may be required by the Internal Revenue Code, as amended from time to time ("the Code") and the Employees Retirement Income Security Act of 1974 as amended from time to time ("ERISA"). With respect to any "multiple employer plan" or "single employer plan" as defined in ERISA (collectively, "Plans"), Debtor will not knowingly: (i) incur any liability to the Pension Benefit Guaranty Corporation ("PBGC"); (ii) participate in any prohibited transaction involving any of such Plans or any trust created thereunder which would subject Debtor to a tax or penalty on prohibited transactions imposed under the Code or ERISA; (iii) fail to make any contribution which it is obligated to pay under the terms of such Plan; (iv) allow or suffer to exist any occurrence of a "reportable event", or any other event or condition which presents a risk of termination by the PBGC of any such Plan; or (v) incur any withdrawal liability with respect to any Plan which is not fully bonded. (n) Taxes. Debtor has timely filed all tax returns (federal, state, local, and ------ foreign) required to be filed by it and has paid or established reserves for all taxes, assessments, fees, and other governmental charges upon its properties, assets, income and franchises. Debtor does not know 4 of any actual or proposed additional tax assessments for any fiscal period against it which would have a material adverse effect on it. Debtor will promptly pay and discharge all taxes, assessments, and other governmental charges prior to the date on which penalties are attached thereto, establish adequate reserves for the payments of such taxes, assessments, and other governmental charges, make all required withholding and other tax deposits, and, upon reasonable request, provide Secured Party with receipts or other proof that any or all of such taxes, assessments, or governmental charges have been paid in a timely fashion; provided, however, that nothing contained herein shall require the payment of any tax, assessment, or other governmental charge so long as its validity is being contested in good faith and by appropriate proceedings diligently conducted. Should any stamp, excise, or other tax, including mortgage, conveyance, deed, intangible, or recording taxes become payable in respect of this Security Agreement, the Notes, or any other Loan Documents, Debtor shall pay the same (including interest and penalties, if any) and shall hold Secured Party harmless with respect thereto. (o) Labor Laws. Debtor is in compliance with the Fair Labor Standards Act. ----- ----- Debtor is not engaged in any unfair labor practice which would have a material adverse effect on it. There are: (l) no unfair labor practice complaints pending or, to the best knowledge of Debtor, threatened against Debtor before the National Labor Relations Board and no grievance or arbitration proceedings arising out of or under collective bargaining agreements are pending or, to the best knowledge of Debtor, threatened; (2) no strikes, work stoppages, or controversies pending or threatened between Debtor and any of its employees; and (3) no union organizing activities known to be taking place. (p) Environmental Laws. Debtor has complied and will comply in all material ------------- ----- respects with all Environmental Laws applicable to the transfer, construction on, and operations of its property and business. Debtor has (l) not received any summons, complaint, order, or similar notice that it is not in compliance with, or that any public authority is investigating its compliance with, any Environmental Laws and (2) no knowledge of any material violation of any Environmental Laws on or about its assets or property. Debtor will comply, in all material respects with all Environmental Laws and provide Secured Party, upon reasonable request, copies of any correspondence, notice, complaint, order, or other document that it receives asserting or alleging a circumstance or condition which requires or may require a cleanup, removal, remedial action or other response by or on the part of Debtor under Environmental Laws, or which seeks damages or civil, criminal or punitive penalties from Debtor for an alleged violation of any Environmental Laws. Debtor will advise Secured Party in writing as soon as Debtor becomes aware of any condition or circumstance that makes the environmental representations or warranties contained in this Agreement inaccurate in any material respect. For purposes of this Security Agreement, "Environmental Laws" means all federal, state, and local laws, rules, regulations, orders, and decrees relating to health, safety, hazardous substances, and environmental matters, including, without limitation, the Resource Recovery and Reclamation Act of 1976, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Toxic Substances Control Act, the Clean Water Act of 1977, and the Clean Air Act, all as amended from time to time. (q) Setoff. Without limiting any other right of Secured Party, whenever Secured ------ Party has the right to declare any Indebtedness to be immediately due and payable (whether or not it has so declared), Secured Party is hereby authorized at any time and from time to time to the fullest 5 extent permitted by law, to set off and apply against any and all of the Indebtedness, any and all monies then or thereafter owed to Debtor by Secured Party in any capacity, whether or not the obligation to pay such monies owed by Secured Party is then due. Secured Party shall be deemed to have exercised such right of set-off immediately at the time of such election even though any charge therefor is made or entered on Secured Party's records subsequent thereto. (r) Regulations. No proceeds of the loans or any other financial accommodation ------------ hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, as that term is defined in Regulations G, T, U, X of the Board of Governers of the Federal Reserve System. (s) Books and Records. Debtor shall maintain, at all times, true and complete ----- --- -------- books, records and accounts in which true and correct entries are made of its transactions in accordance with GAAP and consistent with those applied in the preparation of Debtor's financial statements. At all reasonable times, upon reasonable advance notice, and during normal business hours, Debtor will permit Secured Party or its agents to audit, examine and make extracts from or copies of any of its books, ledgers, reports, correspondence, and other records relating to the Equipment. Secured Party may verify any Collateral in any reasonable manner which Secured Party may consider appropriate, and Debtor shall furnish all reasonable assistance and information and perform any acts which Secured Party may reasonably request in connection therewith. (t) Indemnity. Debtor shall indemnify, defend, protect and hold Secured Party, ---------- its parent, officers, directors, agents, employees, and attorneys harmless from and against any loss, expense (including reasonable attorneys' fees and costs), damage or liability arising directly or indirectly out of (i) any breach of any representation of the Debtor, warranty or covenant contained herein and in the other Loan Documents, (ii) any claim or cause of action that would deny Secured Party the full benefit or protection of any provision herein and in the Loan Documents, and (iii) the ownership, possession, lease, operation, use, condition, sale, return, or other disposition of the Collateral. If after receipt of any payment of all or any part of the Indebtedness, Secured Party is for any reason compelled to surrender such payment to any person or entity, because such payment is deterrnined to be void or voidable as a preference by an entity having legal jurisdiction over such matters, impermissible set-off, or a diversion of trust funds, or for any other reason having the effect or force of law, this Security Agreement and the Loan Documents shall continue in full force and effect and Debtor shall be liable to Secured Party for the amount of such payment surrendered. The provisions of the preceding sentence shall be and remain effective notwithstanding any contrary action which may have been taken by Secured Party in reliance upon such payment for a period of one year from the date of such payment, and any such contrary action so taken shall be without prejudice to Secured Party's rights under this Security Agreement and shall be deemed to have been conditioned upon such payment having become final and irrevocable. Additionally, Debtor will pay or reimburse Secured Party for any and all reasonable costs and expenses incurred in connection herewith, including, but not limited to, attorneys' fees, filing fees, search fees, and lien recordation. The provisions of this paragraph shall survive the termination of this Security Agreement and the Loan Documents. 6 (u) Collateral Documentation. Debtor shall deliver to Secured Party prior to ---------- -------------- each funding and prior to any and all advances or loans, satisfactory documentation regarding the Collateral to be financed, including, but not limited to, such invoices, canceled checks and cost verifications evidencing payments, current financial statements, or other documentation as may be reasonably requested by Secured Party. Debtor shall deliver, prior to the first funding, a fully executed copy of Debtor's current Lending and Banking Agreement, current financial statements consistent with the covenants of this Agreement, and any Landlord Waivers or Consents that Secured Party may reasonably request. Prior to any funding in excess of five hundred thousand dollars ($500,000), Debtor will deliver to Secured Party the first quarter of fiscal 1995 lO-Q for period ending August 31, 1994. Debtor will permit Secured Party to perform a physical site inspection of the Collateral prior to each funding and from time to time thereafter, as reasonably requested by Secured Party. Additionally, prior to each funding Debtor must satisfy Secured Party with current financial statements and compliance certificates restating each of the warranties and representations herein, and that they are true and correct on the date thereof and that Debtor's business and financial information is as has been represented and there has been no material change in Debtor's business, financial condition, or operations. (v) Financial Covenants. (i) Debtor will maintain a Consolidated Net Worth of --------- ---------- not less than twenty million dollars ($20,000,000)at the end of each fiscal quarter; (ii) Debtor will at all times maintain a Debt Service Coverage Ratio of not less than 1.5 to 1.0 on a rolling twelve (12) month basis measured at the end of each fiscal quarter. Debt Service Coverage Ratio is defined as the ratio of EBITDA to Total Debt Service. EBITDA is defined as earnings before interest, income, tax, depreciation and amortization. Total Debt Service is defined as total interest expense plus the current maturities of long-term debt and current portion of obligations under capital leases. Consolidated Net Worth shall have the meaning found in GAAP. (w) Prohibition on Dividends and Distributions. Debtor will not, as long as ----------- -- --------- --- -------------- there is an Event of Default hereunder, or if such distribution or dividend would create an Event of Default hereunder, make, directly or indirectly, any distribution, advance, or dividend to any shareholder, officer, director, or affiliate of Debtor. Debtor is permitted, in the ordinary course of business, to make travel or other advances up to $100,000 in the aggregate without Secured Party's consent. 3. Prepayment. Debtor may prepay the Indebtedness in whole upon forty-five (45) ---------- days prior written notice to Secured Party, provided, however, that Debtor pays a prepayment fee as liquidated damages and not as a penalty, a sum equal to the following percentages of the principal amount prepaid; 2% in Loan Year 1 and 1% in Loan Years 2 and 3. The phrase "Loan Year" as used herein shall mean each twelve (12) consecutive months commencing on the date of the initial funding of each Note. In addition, Debtor shall pay the amount equal to the present value, as of the date of the prepayment, of all installments of principal and interest which are avoided by such prepayment, determined by discounting such payments of principal and interest at a rate per annum equal to the T-Note at the time of prepayment plus 325 (3.25%) basis points, minus the principal amount to be prepaid. 4. Events of Default. If any one of the following events (each of which is ------ -- -------- herein called an "Event of Default") shall occur: (a) Debtor defaults in the payment, when due, of any Indebtedness after ten (10) days written notice from Secured Party, or (b) any warranty or representation of Debtor 7 is untrue or inaccurate or Debtor breaches any warranty or representation hereunder, and said event remains uncured or unremedied for ten (10) days thereafter, or (c) Debtor breaches or defaults in the performance of any other agreement or covenant hereunder, and said event remains uncured or unremedied for ten (10) days thereafter, or (d) Debtor shall default in the payment or performance of any debt or other obligation owed by it, under that certain Credit Agreement with Silicon Valley Bank, its successors or assigns, including any amendments, substitutions, or replacement financings with other financial institutions or (e) Debtor becomes insolvent, makes an assignment for the benefit of creditors or ceases to continue as a going business, or (g) Debtor shall file a voluntary petition in bankruptcy or answer-seeking liquidation, reorganization arrangement or readjustment of its debts, or for any other relief under the Bankruptcy Code, or any other act or law pertaining to insolvency or Debtor relief where there has been filed against Debtor, an involuntary petition of bankruptcy, seeking liquidation, reorganization, arrangement, or readjustment of its debts, or for any other relief under the Bankruptcy Code or under any other act or law pertaining to insolvency or Debtor relief, unless in such case of an involuntary action, the appointment of process is fully bonded against, vacated or dismissed within thirty (30) days of its effective date, but not less than twenty (20) days prior to any proposed disposition of assets pursuant to such proceeding, or (h) a petition is filed by or against Debtor under the Bankruptcy Code or any amendment thereto or under any other insolvency law or laws providing for the relief of debtors, or (i) if there is a material adverse change in the business or financial condition of Debtor then, and in any such event, Secured Party shall have the right to exercise any one or more of the remedies hereinafter provided. 5. Remedies. If an Event of Default shall occur, in addition to all rights and -------- remedies of a secured party under the Uniform Commercial Code, Secured Party may, at its option, at any time (a) declare the entire unpaid Indebtedness to be immediately due and payable; (b) without demand or legal process, enter into the premises where the Collateral may be found and take possession of and remove the Collateral, all without charge to or liability on the part of Secured Party; and (c) require Debtor to assemble the Collateral, render it unusable, and crate, pack, ship, and deliver the Collateral to Secured Party in such manner and at such place as Secured Party may require, all at Debtor's sole cost and expense. DEBTOR HEREBY EXPRESSLY WAIVES ITS RIGHTS IF ANY TO (l) PRIOR NOTICE OF REPOSSESSION AND (2) A JUDICIAL OR ADMINISTRATIVE HEARING PRIOR TO SUCH REPOSSESSION. Secured Party may, at its option, ship, store, and repair the Collateral so removed and sell any or all of it at a public or private sale or sales. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party will give Debtor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made, it being understood and agreed that Secured Party may be a buyer at any such sale and Debtor may not, either directly or indirectly, be a buyer at any such sale. The requirements, if any, for reasonable notice will be met if such notice is sent pursuant to paragraph 10 hereof to Debtor at its address shown above, at least five (5) days before the time of sale or disposition. Debtor shall also be liable for and shall upon demand pay to Secured Party all reasonable expenses incurred by Secured Party in connection with the undertaking or enforcement by Secured Party of any of its rights or remedies hereunder or at law, including, but not limited to, all expenses of repossessing, storing, shipping, repairing, selling or otherwise disposing of the Collateral and legal expenses, including reasonable attorneys' fees, all of which costs and expenses shall be additional Indebtedness hereby secured. After any such sale 8 or disposition, Debtor shall be liable for any deficiency of the Indebtedness remaining unpaid, with interest thereon at the rate set forth in the related Note. 6. Cumulative Remedies. All remedies of Secured Party hereunder are cumulative, ---------- -------- are in addition to any other remedies provided for by law or in equity and may, to the extent permitted by law, be exercised concurrently or separately, and the exercise of any one remedy shall not be deemed an election of such remedy or to preclude the exercise of any other remedy. No failure on the part of Secured Party to exercise, and no delay in exercising any right or remedy, shall operate as a waiver thereof or in any way modify or be deemed to modify the terms of this Security Agreement and the other Loan Documents or the Indebtedness, nor shall any single or partial exercise by Secured Party of any right or remedy preclude any other or further exercise of the same or any other right or remedy. 7. Assignment. Secured Party may transfer or assign this Security Agreement, the ----------- Note, or the Indebtedness and the other Loan Documents either together or separately without releasing Debtor or the Collateral, and upon such transfer or assignment the assignee or holder shall be entitled to all the rights, powers, privileges and remedies of Secured Party to the extent assigned or transferred. The obligations of Debtor shall not be subject, as against any such assignee or transferee, to any defense, set-off, or counter-claim available to Debtor against Secured Party and any such defense, set-off, or counter-claim may be asserted only against Secured Party. 8. Time is of the Essence. Time and manner of performance by Debtor of its ---- -- -- --- -------- duties and obligations under this Security Agreement, the Notes, and the other Loan Documents is of the essence. If Debtor shall fail to comply with any provision of this Security Agreement and the other Loan Documents, Secured Party shall have the right, but shall not be obligated, to take action to address such non-compliance, in whole or in part, and all moneys reasonably spent and expenses reasonably incurred and reasonable obligations incurred or assumed by Secured Party shall be paid by Debtor upon demand and shall be added to the Indebtedness. Any such action by Secured Party shall not constitute a waiver of Debtor's default. 9. ENFORCEMENT. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE ----------- WITH THE LAWS AND DECISIONS OF THE STATE OF ILLINOIS. AT SECURED PARTY'S ELECTION AND WITHOUT LIMITING SECURED PARTY'S RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, DEBTOR HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR LOCAL) HAVING SITUS WITHIN THE STATE OF ILLINOIS, EXPRESSLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED POSTAGE PREPAID, DIRECTED TO THE LAST KNOWN ADDRESS OF DEBTOR, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF. 10. Further Assurance; Notice. Debtor shall, at its expense, do, execute and ------- ---------- ------- deliver such further acts and documents as Secured Party may from time to time reasonably require to assure and confirm the rights created or intended to be created hereunder to carry out the intention or facilitate the performance of the terms of this Security Agreement and the Loan Documents or to assure the validity, perfection, priority or enforceability of any security interest created hereunder. Debtor agrees, after an Event of Default, to execute any instrument or instruments necessary or expedient for filing, recording, perfecting, notifying, foreclosing, and/or liquidating of Secured 9 Party's interest in the Collateral upon request of, and as determined by, Secured Party, and Debtor hereby specifically authorizes Secured Party to prepare and file Uniform Commercial Code financing statements and other documents and to execute same for and on behalf of Debtor as Debtor's attorney- in-fact, irrevocably and coupled with an interest, for such purposes. All notices required or otherwise given by either party shall be deemed adequately and properly given if sent by certified mail, return receipt requested, or by overnight courier with a copy by facsimile to the other party at the addresses stated herein or at such other address as the other party may from time to time designate in writing. 11. Waiver of Jury Trial. DEBTOR AND SECURED PARTY HEREBY WAIVE THEIR RESPECTIVE ------ -- ---- ------ RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS SECURITY AGREEMENT, THE NOTES, OR THE OTHER LOAN DOCUMENTS. THIS WAIVER IS INFORMED AND FREELY MADE. DEBTOR AND SECURED PARTY ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. DEBTOR AND SECURED PARTY FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. Complete Agreement. This Security Agreement and the other Loan Documents are -------- ---------- intended by Debtor and Secured Party to be the final, complete, and exclusive expression of the agreement between them. This Security Agreement and the other Loan Documents may not be altered, modified or terminated in any manner except by a writing duly signed by the parties hereto. Debtor and Secured Party intend this Security Agreement and the other Loan Documents to be valid and binding and no provisions hereof and thereof which may be deemed unenforceable shall in any way invalidate any other provisions of this Security Agreement and the other Loan Documents, all of which shall remain in full force and effect. This Security Agreement and the other Loan Documents shall be binding upon the respective successors, legal representatives, and assigns of the parties. The singular shall include the plural, the plural shall include the singular, and the use of any gender shall be applicable to all genders. If there be more than one Debtor, the warranties, representations and agreements herein are joint and several. The Schedules on the following page[s] are a part hereof. Sections and subsections headings are included for convenience of reference only and shall not be given any substantive effect. IN WITNESS WHEREOF, Secured Party and Debtor have each signed this Security Agreement as of the day and year first above written. HELLER FINANCIAL, INC. SUMMAGRAPHICS CORPORATION By: /s/ David West By: /s/ Clifford Maxwell Title: Assistant Vice President Title: ASSISTANT TREASURER SUMMAGRAPHICS CORP. EX-10.25 5 AMENDMENT DATED JUNE 1, 1995 OF SECURITY AGRMNT EXHIBIT 10.25 [LETTERHEAD OF HELLER FINANCIAL] June 1, 1995 Mr. Clifford Maxwell Assistant Treasurer Summagraphics Corporation 8500 Cameron Road Austin, TX 78754 Dear Cliff: This letter will confirm that Heller Financial, Inc. has extended the commitment to Summagraphics Corporation until August 31, 1995, subject to no material adverse change or no events of default. Sincerely, HELLER FINANCIAL, INC. /s/ Thomas J. Gordhamer Thomas J. Gordhamer Assistant Vice President cc: David West SIGNATURE PAGE FOR COMMITMENT EXTENSION May 26, 1995 Approval is recommended for an extension of the Summagraphics commitment until August 31, 1995 by: COMMERCIAL EQUIPMENT FINANCE - EASTERN REGION /s/ David West - --------------------------------------- E. David West, Assistant Vice President /s/ Dominick J. Masciantonio - ---------------------------------------- Dominick J. Masciantonio, Vice President /s/ La d M. Boulden - ------------------------------------------ La d M. Boulden, Senior Vice President EX-10.26 6 ASSET PURCHASE AGREEMENT DATED NOV. 10, 1994 EXHIBIT 10.26 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT (the "Agreement"), executed on November 10, 1994 to be effective as of October 31, 1994, among CAD Warehouse, Inc., a Nevada corporation ("Purchaser"), Summagraphics Corporation, Inc., a Delaware corporation ("Issuer"), CAD Warehouse, Inc., a Delaware corporation ("Seller"), and the shareholders of Seller named on the signature page of this Agreement (collectively, "Shareholders"), for the acquisition by Purchaser of substantially all the assets of Seller. 1. TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES; PURCHASE PRICE. (a) On -------- -- ------------------ -- --------------------- ----- the terms and subject to the conditions herein expressed, Seller agrees to sell, convey, transfer, assign, and deliver to Purchaser, and Purchaser agrees to purchase, good and marketable title to all of the assets, properties, and business of Seller of every nature, kind, and description, whether tangible or intangible, real or personal, contingent or otherwise, wherever so located and whether or not reflected on the books and records of Seller, including, without limitation all furniture, fixtures, furnishings, vehicles, equipment, copyrights, trademarks, and trade names and associated goodwill, work-in- process, raw materials inventories, finished goods inventories, receivables and notes, customer lists, sales data, proprietary information, trade secrets, supplies, materials, catalogs, cash, securities, bank and investment accounts, and all office supplies, books, files, records, journals, ledgers, disks, reels, and all other written or electronic depositories of information of Seller, machinery, supply agreements, claims and causes of action against third parties whether or not pending, vendor credits, payments and other items in transit, know how, patents, patent applications, rebates, refunds, material and manufacturing specifications, drawings, designs, warranties, computer software and systems, leasehold interests and improvements (including any prepaid rent, security deposits and options to renew or repurchase thereunder), and all other property and materials used in the manufacture or distribution of Seller's products or otherwise in its business (together, the "Transferred Assets"), in each case as the same shall exist as of the date of this Agreement, together with such changes in the Transferred Assets as are permitted by this Agreement on and prior to the Closing Date (as defined in Section 8). Without limiting --------- the generality of the foregoing, it is agreed that the Transferred Assets shall include, without limitation, all of the assets listed on Schedule 1(a) to this ------------- Agreement. -1- (b) Notwithstanding anything to the contrary contained in Section l(a), the ------- ---- Transferred Assets shall not include the minute books, the corporate seal, and the stock records of Seller or the assets described on Schedule l(b) to this -------- ---- Agreement (the "Excluded Assets"); (c) Purchaser shall assume all Liabilities of Seller existing as of the Closing, other than the Excluded Liabilities set forth on Schedule l(c) (the -------- ---- "Assumed Liabilities"). For purposes of this Agreement, "Liabilities" means all liabilities, liens, claims, obligations, and encumbrances disclosed on (i) the September 30, 1994 or October 31, 1994 Balance Sheets included in the Financial Statements (as defined in Section 2(d)), together with any increase or decrease ------- ---- in Seller's accounts payable and accrued liabilities as disclosed thereon which occur in the ordinary course of business from October 31, 1994 to the Closing Date, (ii) Schedule 2(n) and (iii) Schedule 2(q), which Seller and Shareholders -------- ---- -------- ---- have represented and warranted to Purchaser and Issuer to be all of the liabilities, liens, claims, obligations and encumbrances applicable to Seller or the Transferred Assets as of the Closing Date. (d) The Purchaser shall purchase the Transferred Assets on the Closing Date in exchange for the consideration described below in a transaction that is intended by each of the parties to qualify as a non-taxable reorganization under Section 368(a)(1)(C) of the Internal Revenue Code of 1986. The purchase price (the "Purchase Price") for the Transferred Assets shall be equal to the following amounts: (i) 510,129 shares of Issuer's Common Stock, $.01 par value per share (the "Common Stock"), valued at $7.825 per share (the "Share Price") which shall be increased or reduced by a number of Shares (the "Adjustment Shares") having a value equal to any amount by which the stockholders' equity of Seller, determined as of the Effective Date, is greater than (the "Positive Net Worth Difference") or less than (the "Negative Net Worth Difference") $406,123 (a "Net Worth Difference"), the number of Adjustment Shares to be determined by dividing the Net Worth Difference by the Share Price (as so adjusted, the "Shares"); and (ii) assumption of the Assumed Liabilities. The Purchaser will determine the stockholders' equity of Seller as of the Effective Date, in good faith and in accordance with generally accepted accounting principles as consistently applied by Seller, within ninety (90) days of the Closing Date and will notify Seller and Shareholders of any Net Worth Difference. In the event a Negative Net Worth Difference is determined, Seller and Shareholders, jointly -2- and severally, shall return to Purchaser a number of shares of Common Stock equal to the Adjustment Shares. In the event a Positive Net Worth Difference is determined, Purchaser shall deliver to Seller a number of shares of Common Stock equal to the Adjustment Shares. (e) This Agreement has been executed on November 10, 1994 (the "Closing Date") to be effective as of the close of business on October 31, 1994 (the "Effective Date"). It is the intention of the parties that all transactions of Seller occurring after the Effective Date and until the Closing Date will, upon completion of the Closing, be deemed to have been undertaken and recorded for the benefit of Purchaser and that, effective as of the Closing Date, such transactions are to be recorded on the books and records of Purchaser for purposes of financial accounting, and state, federal and local income tax reporting. However, the Assumed Liabilities are intended to be the Liabilities, other than the Excluded Liabilities, of Seller as they exist as of the Closing Date, and the Purchased Assets are intended to be the Purchased Assets of Seller as they exist as of the Closing Date. Purchaser has undertaken no responsibility for, nor has Seller granted Purchaser any right to direct, the conduct of Seller's business from the Effective Date until the Closing Date, and in no event will Purchaser be liable for any act or obligation of Seller incurred or arising prior to the Closing Date other than the Assumed Liabilities.. 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS. Seller and --------------------------------------------------------- the Shareholders each, jointly and severally, represent and warrant to Purchaser and Issuer, all of which representations and warranties shall be true as of the Effective Date and as of the Closing Date, and shall survive the Closing for a period of three (3) years from the Closing Date, the following: (a) Seller is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware and has the corporate power to own its property and carry on its business as and where it is now being conducted. Schedule 2(a) sets forth each jurisdiction in which the nature of -------- ---- the business conducted by Seller or the assets owned by Seller would require Seller to qualify to do business as a foreign corporation. Except as set forth on Schedule 2(a), Seller does not own any capital stock, partnership interest, -------- ---- trust interest, loan, note, advance or other ownership of or investment in any other person or entity. Except as disclosed on Schedule 2(a), neither the -------- ---- Seller nor any Shareholder owns any shares of Issuer's Common Stock or securities convertible into Issuer's Common Stock. -3- (b) The execution, delivery, and performance of this Agreement and the other agreements set forth on Schedule 2(b) (the "Other Agreements") by Seller -------- ---- and Shareholders have been duly authorized by all necessary action (corporate or otherwise) on the part of Seller and its shareholders, and this Agreement and the Other Agreements to which they are respective parties, have been duly executed and delivered and constitute legal, valid, and binding agreements of Seller and Shareholders, enforceable in accordance with their terms. (c) Except as set forth in Schedule 2(c), neither the execution and -------- ---- delivery of this Agreement and the Other Agreements, nor the consummation of any of the transactions contemplated hereby or thereby, will (i) require any consent, waiver, approval, authorization or permit of, or filing with or notification to, any person or Governmental Entity (as defined in Section 2(f)) ------- ---- (other than any such requirements applicable only to Purchaser and Issuer), or (ii) result in the breach or violation of any term or provision of, constitute a default under, or result in the termination of, any right, privilege, license or agreement of Seller or to which the Transferred Assets are subject, or any loss or disadvantage to, or the creation of a lien on, any of the Transferred Assets under any charter provision, bylaw, organizational or constituent document, agreement, mortgage, deed of trust, note, bond, license, lease, indenture, instrument, order, writ, judgment, injunction, decree, award, statute, law, rule or regulation to which Seller or the Shareholders are parties or that is otherwise applicable to Seller or the Shareholders or any of the Transferred Assets. (d) The financial statements of the Seller audited by KPMG Peat Marwick, Certified Public Accountants, for the years ended December 31, 1993 and the nine months ended September 30, 1994; financial statements of the Seller prepared by Seller, for the years ended December 31, 1991 and 1992; and for the one (l) month period ended October 31, 1994, each attached hereto as Schedule 2(d) -------- ---- (together, the "Financial Statements"), constitute true and correct statements as of such dates of the financial condition of Seller, and fairly present the financial position, assets, liabilities, revenues and expenses of Seller at the dates and for the periods indicated, and have been prepared in accordance with generally accepted accounting principles consistently applied. All expenses of Seller during the periods covered by the Financial Statements and any subsequent period until Closing have been appropriately recorded on the books and records of Seller and have not been paid directly or indirectly by Shareholders or any other person. The Shareholders have delivered or caused to be delivered to Seller all funds paid to them or any affiliate (as defined in Section 2(t)) by ------- ---- any third party with respect to the business of Seller since the Effective Date. -4- Seller and Shareholders have taken all actions necessary in order to permit the purchase of the Transferred Assets to be accounted for by Purchaser and Issuer as a pooling of interests in accordance with Accounting Principles Board Opinion No. 15, the interpretative releases issued pursuant thereto, and the pronouncements of the Securities and Exchange Commission, and none of the Shareholders and Sellers have taken any action that would prevent such treatment or failed to take any action that is necessary to permit such treatment, nor are any of them aware of any facts or circumstances that would prevent such treatment. (e) Since December 31, 1993, there has not occurred or arisen, and the Seller has not suffered, a material adverse change in the business of Seller and Seller has not engaged in any transaction that is illegal or not in the ordinary and usual course of its business consistent with past practice. (f) Except as disclosed in Schedule 2(f), there are no actions, suits, -------- ---- proceedings, arbitrations or investigations pending or, to the best knowledge of Seller and the Shareholders, threatened against Seller or affecting the business of Seller before any court, agency or other governmental authority or instrumentality, domestic or foreign (a "Governmental Entity") or arbitrator, nor is any order, writ, judgment, injunction, or decree of any Governmental Entity outstanding against the Seller. The business of Seller is not being, and has not since its organization been, conducted in violation of any applicable law, ordinance, rule, regulation, judgment, writ, decree, injunction, or order of any Governmental Entity or arbitrator. (g) Seller has, and the Bill of Sale with respect to the Transferred Assets will be sufficient to convey to Purchaser, good and indefeasible title to the Transferred Assets (including any trade names, trademarks, service marks and other names and marks included within the Transferred Assets), which Transferred Assets will be delivered to Purchaser free and clear of any and all liens, encumbrances or restrictions, other than any liens, encumbrances or restrictions reflected on Schedule 2(g). -------- ---- (h) Seller and Shareholders have timely filed with the appropriate governmental agencies, and in correct form, all federal, state and local tax returns, reports and estimates which were required to be filed by it and them for all periods in which such were due; its and their federal and state income tax returns have not been selected for examination, or been examined, by the Internal Revenue Service or other taxing authority; there are no unpaid assessments nor proposed assessments of additional federal or state income, franchise, sales or use taxes pending against Seller or Shareholders; and -5- Seller and Shareholders have granted no extensions of any limitation periods with respect to its federal and state income tax returns. All taxes shown as due on filed federal, state and local tax returns have been paid or the liability therefor to their respective dates has been provided for in the financial statements for the periods ending September, 30, 1994 attached as Schedule 2(d) -------- ---- hereto, and all federal, state and local income or franchise taxes for periods subsequent to September 30, 1994 likewise have been paid or adequately accrued. All withholding and other employment and other taxes Seller is obligated to collect have been withheld or collected and if due have been duly paid over to the taxing authority. Seller has made all deposits required by law to be made with respect to employees' withholding and other employment taxes. There are no tax liens on any of the assets or properties of Seller or Shareholders, and Seller and Shareholders have not been notified of any audit or proposed adjustment of its or their filed returns by any federal, state or local taxing authority. Seller and Shareholders have delivered to Purchaser and Issuer true and correct copies of its and their federal, state and local income tax returns and all related correspondence and filings for the period commencing January 1, 1990 and ending on the Closing Date. On the date that Seller and Shareholders elected S Corporation status under the Code there existed no built-in gain as defined in Code Section 1374. (i) The inventories of Seller as reflected in the financial statements in Schedule 2(d) accurately reflect the value of such inventories at their - -------- ---- respective dates, and there has been no change or diminution in value of the inventory as reflected in Seller's financial statements for the nine months ended September 30, 1994, except for changes resulting from operations in the ordinary course of business since that date. (j) Schedule 2(j) sets forth all (i) employment, severance, compensation, -------- ---- consulting, indemnification and other agreements (the "Employee Agreements") between the Seller and its present employees, officers, directors and consultants, and any employees, officers, directors and consultants terminated by Seller in the twelve months prior to the execution date hereof, (ii) agreements which provide for aggregate future payments by or to the Seller of more than $10,000 (other than purchase orders entered into in the ordinary course of business), (iii) agreements containing covenants limiting the freedom of the Seller to compete with any person in any line of business or in any area or territory, (iv) license agreements, (v) leases with respect to real property and (vi) each indenture, mortgage, note, lien, license, government registration, contract, lease, agreement or other instrument or obligation to which the Seller is a -6- party which is material to the conduct of its business (collectively, the "Contracts"). True, complete and correct copies of all Contracts have previously been made available to Issuer and Purchaser. Seller and Shareholders have in all material respects performed all obligations to be performed by them under all contracts, agreements and commitments to which Seller and Shareholders are parties and that relate to the Transferred Assets or the business conducted by Seller therewith, including the Contracts, and there is not under any thereof any existing default or event of default or event that, with notice or lapse of time or both, would constitute a default or event of default by any of the parties thereto. (k) Seller has provided to Purchaser and Issuer in Schedule 2(k) a true and -------- ---- complete list of each bonus, deferred compensation, incentive compensation, stock purchase, stock option, severance or termination pay, hospitalization or other medical, life or other insurance, supplemental unemployment benefits, profit-sharing, pension, or retirement plan, program, agreement or arrangement, and each other material employee benefit plan, program, agreement or arrangement, maintained or contributed to or required to be contributed to by the Seller or by any trade or business, whether or not incorporated (an "ERISA Affiliate"), that together with the Seller would be deemed a "single employer" within the meaning of Section 4001 of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder ("ERISA"), for the benefit of any employee or former employee of the Seller or any ERISA Affiliate, whether formal or informal and whether legally binding or not (the "Plans"). No Plan is subject to Title IV of ERISA. Neither the Company nor any ERISA Affiliate has any formal plan or commitment, whether legally binding or not, to create any additional plan, program, agreement or arrangement or modify or change any existing Plan that would affect any employee or former employee of the Seller or any ERISA Affiliate. All records of benefits paid to or for the benefit of employees of Seller under the Plans since January 1, 1993 have been provided to Purchaser and Issuer and are true and correct. Seller and Shareholders are not aware of any circumstance that would cause the expenses incurred by Purchaser after the Closing under any such Plans to exceed the amounts incurred since January 1, 1993. (l) Schedule 2(1) sets forth a complete list of all federal, state and ------------- local licenses, permits, authorizations and approvals (collectively, the "Permits') required for the conduct of Seller's business and operations conducted with the Transferred Assets. Seller is not in violation of any of the requirements for such Permits and all such Permits are in full force and effect. -7- (m) Seller's relationships with its employees are good, Seller is presently in compliance with all applicable federal and state labor laws, regulations, and agreements, and there is not any pending, or to the knowledge of Seller and Shareholders threatened, labor grievance, strike, work stoppage, or other action by any employee or employees that could have a material adverse effect on the Transferred Assets or the business of Purchaser conducted therewith. The Seller is not bound by or subject to (and none of its properties or assets is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and, since January 1, 1989, no labor union has requested or, to the best knowledge of the Seller, has sought to represent any of the employees, representatives or agents of the Seller, nor is the Seller aware of any labor organization activity involving its employees. To the best knowledge of the Seller and the Shareholders, no officer or key employee of the Seller has any plans to terminate his employment with the Seller or refuse to accept employment with Purchaser after Closing. (n) Except as set forth on Schedule 2(n), as of September 30, 1994, the ------------- Seller had no liabilities or obligations (absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise) material to the business of the Seller other than as disclosed on the audited balance sheet of the Seller as at September 30, 1994 delivered pursuant to Section 2(d). Except as set forth in ------------ Schedule 2(n), since December 31, l993, the Seller has not incurred any - ------------- liabilities or obligations (absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise) material to the business of the Seller, except liabilities incurred in the ordinary course of business consistent with past practice. (o) The Seller owns or is licensed to use all trademarks, trade names, assumed names, service marks, logos, patents, copyrights (including those relating to computer software and data bases), trade secrets, technology, know- how and processes which are material to the business of the Seller as heretofore conducted (collectively, the "Proprietary Rights", if owned by Seller, and the "License" if licensed to the Seller) free and clear of all liens, and all of such Proprietary Rights and Licenses are included in the Transferred Assets. with respect to Proprietary Rights which are registered or as to which application for registration has been made, the Seller is the beneficial owner thereof and is the record owner thereof, or documentation to make the Seller the record owner thereof has been filed. A list of all such registrations and applications and all Licenses is set forth in Schedule 2(o). No Proprietary ------------- Rights or Licenses used by the Seller, and no services or products sold by the Seller, conflict with or infringe upon any proprietary rights -8- available to any third party. The Seller has not entered into any consent, indemnification, forbearance to sue or settlement agreement with respect to Proprietary Rights or Licenses except as disclosed in Schedule 2(o). No claims ------------- have been asserted in writing by any person with respect to the validity of or the Seller's ownership or right to use the Proprietary Rights or Licenses and, to the best knowledge of the Seller, there is no reasonable basis for any such claim. The Proprietary Rights are valid and enforceable and no registration relating thereto has lapsed, expired or been abandoned or canceled or is the subject of a cancellation proceeding. Schedule 2(o) sets forth all of the ------------- material licenses to which the Seller is a party relating to the licensing of Proprietary Rights. The Seller has complied with, in all material respects, its respective contractual obligations relating to the protection of the Proprietary Rights used pursuant to licenses. Except as set forth in Schedule 2(o), the ------------- consummation of the transactions contemplated hereby will not alter or impair any Proprietary Rights. Seller has not infringed upon or violated the Proprietary Rights of any person and, to the best knowledge of the Seller, no person is infringing on or violating the Proprietary Rights owned or used by the Seller. Schedule 2(o) sets forth each trade name, corporate name or assumed name ------------- under which Seller has conducted any business or owned any property at any time since January 1, 1990. (p) No information provided by or on behalf of the Seller or the Shareholders to Issuer or Purchaser in connection with this Agreement and the Other Agreements and the transactions contemplated hereby and thereby contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (q) None of the Seller, the Shareholders nor any of their officers, directors or employees has employed any broker or finder or incurred any liability for brokerage fees, commissions or finder's fees in connection with the transactions contemplated by this Agreement. (r)(i) Except as set forth in Schedule 2(r)(i), the Seller is in compliance ---------------- with all Environmental Laws (as hereinafter defined), which compliance includes, but is not limited to, the possession by the Seller of all permits and other governmental authorizations required under applicable Environmental Laws, and compliance in all respects with the terms and conditions thereof. Except as set forth in Schedule 2(r)(i), the Seller has not received any communication ---------------- (written or oral), whether from a governmental authority, citizens group, employee or otherwise, that alleges that the -9- Seller is not in such compliance, and, to the best knowledge of the Seller and the Shareholders, there are no circumstances that may prevent or interfere with such compliance in the future. Except as set forth in Schedule 2(r)(i), there ---------------- are no permits or other governmental authorizations currently held by the Seller pursuant to the Environmental Laws. (ii) Except as set forth in Schedule 2(r)(ii) there are no Environmental ----------------- Claims (as hereinafter defined) pending or, to the best knowledge of the Seller and the Shareholders, threatened against the Seller, or, to the best knowledge of the Seller and the Shareholders, against any person or entity whose liability for any Environmental Claim the Seller has retained or assumed either contractually or by operation of law. (iii) Except as set forth in Schedule 2(r)(iii), there are no past or ------------------ present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence, use, generation, storage, transportation or disposal of any Material of Environmental Concern (as hereinafter defined), that could form the basis of any Environmental Claim against the Seller or, to the best knowledge of the Seller, against any person or entity whose liability for any Environmental Claim the Seller has retained or assumed either contractually or by operation of law. (iv) Without in any way limiting the generality of the foregoing, (l) all on-site and off-site locations where the Seller has stored, disposed of or arranged for the disposal of Materials of Environmental Concern are identified in Schedule 2(r)(iv)(1), (2) any underground storage tanks and the capacity and -------------------- contents of such tanks, located on property owned or leased by the Seller are identified on Schedule 2(r)(iv)(2), (3) except as set forth in Schedule -------------------- -------- 2(r)(iv)(3), there is no asbestos contained in or forming part of any building, - ----------- building component, structure or office space owned or leased by the Seller, and (4) except as set forth in Schedule 2(r)(iv)(4), no polychlorinated biphenyls -------- ----------- (PCBs) or PCB-containing items are used or stored at any property owned or leased by the Seller. (v) For purposes of this Agreement: (A) "Environmental Claim" means any claim, action, cause of action, investigation or notice (written or oral) by any person or entity alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based upon or -10- resulting from (x) the presence, transportation or release into the environment, of any Material of Environmental Concern at any or from location, whether or not owned or operated by the Seller or (y) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. (B) "Environmental Laws" means all federal, state, local and foreign laws and regulations relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern. (C) "Materials of Environmental Concern" means chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products. (s) Neither Seller nor Shareholders have any knowledge of any termination or cancellation of, or any modification or change in, the business relationship of Seller with any customer or vendor or any existing condition or state of facts or circumstances affecting the business of Seller generally which has adversely affected or might adversely affect in any material way, the business relationships of Seller with its customers, or has prevented or will prevent such business relationships from being carried on by Purchaser subsequent to the Closing in essentially the same manner as currently carried on. (t) Except as set forth on Schedule 2(t), no affiliate of Seller or any ------------- Shareholder owns, directly or indirectly, any interest in (excepting not more than a 5% holding for investment purposes in securities of publicly held and traded companies), or is an officer, director, employer or consultant of or otherwise receives remuneration from, any person which is, or is engaged in business as, a competitor, lessor, lessee, customer or supplier of Seller. Seller does not have, and no officer or director or shareholder of Seller or any affiliate of Seller or any Shareholder has, nor during the period beginning July 1, 1991 to and including the Closing Date had, any interest in any property, real or personal, tangible or intangible, used in or pertaining to the business of Seller. None of the Shareholders has any claim or right against Seller except as set forth in Schedule 2(t). Schedule 2(t) and the footnotes to the -------- ---- -------- ---- financial statements disclose all related party transactions between Shareholders and their affiliates and the Seller occurring since January 1, 1993. As -11- used in this Section 2(t), "affiliate" means (i) any grandparent, parent, child ------------ or grandchild of a natural person or that person's spouse, together with any of their lineal descendants, and (ii) any person that, directly or indirectly, controls, or is controlled by or under common control with, another person. "Control" means the power to direct or cause the direction of the management and policies of a person, directly or indirectly, whether by ownership of voting securities, by contract or otherwise. (u) The Liabilities described in Section l(c) are all of the liabilities, ----------- liens, claims, obligations and encumbrances applicable to Seller or the Transferred Assets as of the Closing Date. Since September 30, 1994, except as disclosed on Schedule 2(u), (i) Seller has and the Shareholders have caused ------------- Seller to, operate its business consistently with the standards set forth in Section 7(a), (ii) and Seller and Shareholders have not taken any action described in Section 7(b)(i)-(xv) of this Agreement. ------------ 3. Representations and Warranties of Purchaser and Issuer. Purchaser and Issuer each, jointly and severally, represent and warrant to Seller and Shareholders, all of which representations and warranties shall be true as of the Effective Date and as of the Closing Date, and shall survive the Closing for a period of three (3) years from the Closing Date, the following: (a) Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and has the corporate power to own or lease the properties and assets it purports to own or lease and to carry on its business as now being conducted. (b) Issuer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power to own or lease and to carry on its business as now being conducted, and has authorized capital stock consisting of 20,000,000 shares of Common Stock of the par value of $.01 per share, of which, as of August 31, 1994, 4,042,501 shares were issued and outstanding, fully paid and non-assessable. (c) The execution, delivery, and performance of this Agreement and the other agreements set forth on Schedule 2(b) (the "Other Agreements") by Issuer ------------- and Purchaser have been duly authorized by all necessary action (corporate or otherwise) on the part of Issuer and Purchaser, and this Agreement and the Other Agreements to which they are respective pa ties have been duly executed and delivered and constitute legal, valid, and binding agreements of Issuer and Purchaser, enforceable in accordance with their terms. -12- (d) None of the execution and delivery of this Agreement and the Other Agreements, the delivery of the Shares, and the performance, observance or compliance with the terms and provisions of this Agreement will violate any provision of law, any order of any court or other governmental agency, the Certificate of Incorporation or By-laws of Purchaser or Issuer or any indenture, agreement or other instrument to which either Purchaser or Issuer is a party, or by which either Purchaser or Issuer is bound or by which any of their respective properties are bound, provided that a written consent of Silicon Valley Bank, Issuer's Lender, will be required to permit the consummation of the transactions contemplated by this Agreement. (e) The Shares will, upon delivery in accordance with the terms hereof, be validly issued, fully paid, non-assessable and free and clear of all liens, encumbrances and claims of any kind. (f) Issuer has heretofore delivered to Seller and Shareholders true and complete copies of Issuer's Form 10-K Report for the fiscal year ended May 31, 1994, Issuer's Form 10-Q Report for the fiscal quarter ended August 31, 1994, Issuer's Annual Report to Stockholders and Issuer's Proxy Statement for its annual stockholders' meeting held on September 27, 1994. Such reports constitute true and correct statements as of such dates of the financial condition of Issuer at the dates and for the periods indicated, prepared in accordance with generally accepted accounting principles consistently applied. Since August 31, 1994, there has been no material adverse change in Issuer's condition, financial or otherwise. (g) Except as disclosed in Issuer's Annual Report for the year ended May 31, 1994 previously delivered to Seller and Shareholders, there are no actions, suits, proceedings, arbitrations or investigations pending or, to the best knowledge of Purchaser and Issuer, threatened against Purchaser or Issuer or affecting the business of Purchaser or Issuer before any Governmental Entity or arbitrator, nor is any order, writ, judgment, injunction, or decree of any Governmental Entity outstanding against Purchaser or Issuer. 4. Conditions to the Obligations of Purchaser and Issuer. Purchaser and ----------------------------------------------------- Issuer will have no obligation to close the transactions called for by this Agreement to be completed on the Closing Date unless all of the following conditions have been fulfilled or waived by them (or the failure to fulfill any such condition is caused by Purchaser or Issuer): -13- (i) Seller and Shareholders shall in all material respects have performed all obligations and agreements, and complied with all covenants and conditions, contained in this Agreement to be performed or complied with by them on or prior to the Closing Date. (ii) The representations and warranties made by Seller and Shareholders herein shall be true and correct in all material respects on the Closing Date as if made on and as of the Closing Date. (iii) There shall have been no material adverse change in the condition, financial, business or otherwise, of Seller from September 30, 1994 to the Closing Date, including, without limitation, any material adverse change in the business or assets of Seller as of the result of any fire, explosion, earthquake, flood, accident, strike, lockout, taking of any such assets by any governmental authorities, riot, activities of armed forces, or acts of God or of public enemies. (iv) No suit, action, investigation, inquiry or other proceeding by any governmental authority or other person or legal or administrative proceeding shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereby, and on the Closing Date, there shall not be an effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them are not to be consummated as so provided or imposing any conditions on the consummation of the transactions contemplated hereby which Issuer and Purchaser deem unacceptable, in their sole discretion. (v) Issuer shall have received all necessary consents to the transactions contemplated by this Agreement from Silicon Valley Bank. 5. CONDITIONS TO THE OBLIGATIONS OF SELLER AND SHAREHOLDERS. Seller and -------------------------------------------------------- Shareholders will have no obligation to close the transactions called for by this Agreement to be completed on the Closing Date unless all of the following conditions have been fulfilled or waived by them (or the failure to fulfill any such condition is caused by Seller or Shareholders): (i) Purchaser and Issuer shall, in all material respects, have performed all obligations and agreements, and complied with all covenants and conditions, contained in this -14- Agreement to be performed or complied with by them on or prior to the Closing Date. (ii) The representations and warranties made by Purchaser and Issuer herein shall be true and correct in all material respects on the Closing Date as if made on and as of the Closing Date. (iii) There shall have been no material adverse change in the condition, financial, business or otherwise, of Issuer from the date of its Form 10-K report for the year ended May 31, 1994 to the Closing Date, including, without limitation, any material adverse change in the business or assets of Issuer as of the result of any fire, explosion, earthquake, flood, accident, strike, lockout, taking over of any such assets by any governmental authorities, riot, activities of armed forces, or acts of God or of the public enemies . (iv) No suit, action, investigation, inquiry or other proceeding by any governmental authority or other person or legal or administrative proceeding shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereby, and on the Closing Date, there shall not be an effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them are not to be consummated as so provided or imposing any conditions on the consummation of the transactions contemplated hereby which Seller and the Shareholders deem unacceptable, in their sole discretion. 6. COVENANTS OF PURCHASER AND ISSUER. Purchaser and Issuer covenant and --------------------------------- agree that: (a) Without the prior written consent of Seller and the Shareholders, Purchaser and Issuer shall not take any action that would cause or tend to cause the conditions to the obligations o~ the parties hereto to effect the transactions contemplated hereby not to be fulfilled, including, without limitation, taking, or causing to be taken, or permitting or suffering to be taken or to exist any action, condition or thing that would cause the representations and warranties made by Purchaser and Issuer herein not to be true, correct and accurate as of the Closing. (b) Purchaser and Issuer shall promptly file or submit and diligently prosecute any and all applications or notices with public authorities, federal, state or local, domestic or foreign, and all other requests for approvals to any private persons, the filing or granting of which is necessary, or is -15- deemed necessary or appropriate by any party hereto, for the consummation of the transactions contemplated hereby. (c) Purchaser and Issuer shall take all reasonable steps which are within their power to cause to be fulfilled those of the conditions precedent to the obligation of Seller and Shareholders to consummate the transactions contemplated hereby which are dependent upon the actions of Purchaser and Issuer. (d) Without the prior written consent of Seller or Shareholders holding not less than 50% of the issued and outstanding shares of Common Stock of Seller, Purchaser and Issuer will not, and will not permit any director, officer, employee, or adviser to, disclose to any person (other than persons actively employed in advising them in connection with the transactions contemplated hereby) any information regarding the transactions contemplated by this Agreement and the Confidentiality and Competition Agreement, except disclosures required by law, regulation or order of a court and disclosures of matters which are or become publicly known other than as a result of any breach of this covenant. 7. COVENANTS OF SELLER AND SHAREHOLDERS. Seller and the Shareholders, ------------------------------------ jointly and severally, covenant and agree that: (a) From the date of execution of this Agreement until Closing Seller will, and the Shareholders will cause Seller to, operate in accordance with its current methods of transacting business and use its best efforts to preserve its business organizations, keep available the services of its employees, maintain good relationships with providers, suppliers, lessors, governmental authorities, distributors, employees, customers and others having business relationships with Seller, and maintain the condition of the Transferred Assets as represented in this Agreement; make all normal and customary repairs, replacements and improvements to its facilities and to the Transferred Assets; deliver to Purchaser and Issuer, promptly after they are prepared, monthly management operating reports setting forth Seller's revenues and expense for each month, on a basis consistent with Seller's monthly management reports as prepared prior to the Closing Date; and to promptly notify Issuer and Purchaser of any event, occurrence or emergency material and adverse to, or not in the ordinary course of business or consistent with the past practice of, Seller. (b) Without limiting the generality of Subsection (a) above, from the date of execution of this Agreement until Closing, Seller will not, and Shareholders will not permit the Seller to, without the prior written consent of Issuer and Purchaser: -16- (i) Change its organizational or constituent documents or merge or consolidate with or into any entity or obligate itself to do so, other than as required by this Agreement; (ii) Declare, set aside or pay any dividend or other distribution on or in respect of shares of its capital stock, or any redemption, retirement or purchase by them with respect to such shares or make any repayment of indebtedness to the Shareholders, or make any other payment to any Shareholder for any purpose other than regular payment of employment compensation in accordance with past practices; (iii) Discharge or satisfy any lien, charge, encumbrance or indebtedness owing by Seller or to Seller outside of the ordinary course of business, or waive any claims or rights of substantial value; (iv) Sell, transfer or otherwise dispose of any of the Transferred Assets other than sales of inventory in the ordinary course of business and on consistent terms with Seller's prior practice; (v) Dispose of or permit to lapse any right to the use of any Proprietary Rights or License or dispose of or disclose to any person any Proprietary Rights or Licenses; (vi) Authorize, guarantee or incur any indebtedness for borrowed money; (vii) Make (A) any capital expenditures or capital additions or betterments, or commitments therefor, or (B) any non capital expenditures, or commitments therefor, that are not in the ordinary course of business, or (C) any non-capital expenditures, or commitments therefor, in the ordinary course of business (other than purchases of inventory in the ordinary course of business) if any such expenditure or commitment exceeds $5,000.00; (viii) Loan funds to any person; (ix) Institute, settle or agree to settle any litigation, action or proceeding before any court or governmental body; (x) Mortgage, pledge or subject to any other encumbrance, any of its properties or assets, tangible or intangible; -17- (xi) Authorize or pay any bonuses or special compensation of any kind whatsoever for any employee or officer, or increase the rate of compensation, bonuses or other benefits provided to officers or employees not consistent with past practice; (xii) Enter into any contract, agreement, commitment or other understanding or arrangement other than in the ordinary course of business; (xiii) Perform, take any action, incur or permit to exist any acts, transactions, events or occurrences which are inconsistent with the representations and warranties set forth herein or which would prevent the performance of any covenant set forth herein; (xiv) Modify any of its insurance coverage or fail to include Issuer and Purchaser as additional insureds with respect to liability insurance wherever possible; or (xv) Agree, whether in writing or otherwise, to do any of the foregoing. (c) Without the prior written consent of Purchaser, neither Seller nor Shareholders shall take any action which would cause or tend to cause the conditions upon the obligations of the parties hereto to effect the transactions contemplated hereby not to be fulfilled, including, without limitation, taking, causing to be taken, or permitting or suffering to be taken or to exist any action, condition or thing which would cause the representations and warranties made by Seller and/or Shareholders herein not to be true, correct and accurate as of the Closing. (d) Seller shall promptly file or submit and diligently prosecute any and all applications or notices with public authorities, federal, state or local, domestic or foreign, and all other requests for approvals to any private persons, the filing or granting of which is necessary, or is deemed necessary or appropriate by any party hereto, for the consummation of the transactions contemplated hereby. (e) Seller and Shareholders shall take all reasonable steps which are within their power to cause to be fulfilled those of the conditions precedent to the obligations of Purchaser and Issuer to consummate the transactions contemplated hereby which are dependent upon the actions of Seller or Shareholders or any of them. (f) Seller shall, upon reasonable notice, afford Issuer, Purchaser, their counsel, accountants and other representatives full access during normal business hours -18- throughout the period prior to the Closing Date to all of Seller's respective properties and all of its books, contracts, commitments and records relating thereto and to the Transferred Assets. Seller shall consult with Issuer and Purchaser with respect to the financial condition, operations, assets and liabilities on a regular basis if requested by Issuer and Purchaser. After Issuer and Purchaser have completed their planned investigation of the business of Seller to their satisfaction, Issuer and Purchaser shall be provided a reasonable opportunity, in the presence of an officer of Seller, to consult with representatives of customers and vendors of Seller regarding any agreement, commitment or relationship with any such customer or vendor. (g) From time to time prior to the Closing, Seller shall promptly notify Purchasers of the development of any facts or events in connection with its business which, had any such fact existed or event occurred at the date of this Agreement, would have been required to be set forth or described in any schedule hereto. No supplement or amendment of any schedule delivered by Seller and Shareholder pursuant to this Agreement shall be deemed to cure or waive any breach of any representation or warranty made by Seller and Shareholder in this Agreement, unless Issuer and Purchaser specifically agree to such cure or waiver in writing. (h) Seller and Shareholders shall use their best efforts to preserve, and shall assist Issuer and Purchaser in retaining, intact the goodwill of Seller, its relationships with employees being retained by Purchaser their suppliers, customers, and other persons or entities having business relationships with Seller or related to the Transferred Assets. Seller and Shareholders each agree to use their best efforts to cause to be completed each of the transactions contemplated by this Agreement and to effect the transfer of the Transferred Assets to Purchaser. Seller covenants and agrees to pay all amounts owed by Seller to suppliers and vendors with respect to the Transferred Assets and not expressly assumed by Purchaser as an Assumed Liability hereunder promptly after each Closing. (i) Seller and Shareholders shall take all such actions as are necessary to change the name of Seller effective as of the Closing Date to a name acceptable to Purchaser and to prepare and file such evidence of such name change as may be required by any jurisdiction. (j) Seller and the Shareholders will not, and will not permit any of their respective officers, employees, representatives or agents to, directly or indirectly, (i) encourage, solicit or initiate discussions or negotiations with, or provide any information to, any person other than -19- Purchaser and Issuer concerning any merger, sale of assets (other than in the ordinary course of business consistent with past practice) or sale or issuance of equity interests of the Seller or other transaction relating to any thereof (together, an "Alternative Transaction"), or (ii) otherwise solicit, initiate or encourage inquiries or the submission of any proposal contemplating an Alternative Transaction. Shareholders and Seller will promptly communicate to Purchaser and Issuer the terms of any inquiry or proposal which they or it may receive in respect of an Alternative Transaction, and will promptly advise Purchaser and Issuer if they or the Seller participate in any such discussion or negotiation or provide any information to any person proposing an Alternative Transaction. (k) This Agreement will evidence the approval by the Shareholders of the sale of the Transferred Assets pursuant to this Agreement in accordance with Section 228 of the Delaware General Corporation Law and shall be effective as a unanimous written consent of the shareholders of Seller under that provision. (l) Without the prior written consent of Purchaser and Issuer, Seller and the Shareholders will not, and will not permit any director, officer, employee, or adviser to, disclose to any person (other than persons actively employed in advising them in connection with the transactions contemplated hereby) any information regarding the transactions contemplated by this Agreement and the Other Agreements except disclosures required by law or regulation or an order of a court and disclosures of matters which are or become publicly known other than as a result of any breach of this covenant. (m) Seller and Shareholders will not (i) take any action that would jeopardize, or fail to take any action necessary in order to permit, the treatment of the purchase of the Transferred Assets as a "pooling of interests" for accounting purposes; (ii) take any action that would jeopardize, or fail to take any action necessary in order to permit, the qualification of the purchase of the Transferred Assets as a reorganization within the meaning of Section 368(a)(1)(C) of the Code; or (iii) enter into any contract, agreement, commitment or arrangement with respect to either of the foregoing. Seller will concurrently with the Closing distribute Issuer's Common Stock to the Shareholders as part of a plan of reorganization qualifying under Section 368(a)(1)(C) of the Code. 8. Closing. (a) The closing occurred on November 10, 1994, the date on ------- which all conditions to the Closing set forth in Sections 4 and 5 were satisfied ---------------- (the "Closing Date"), -20- at 10:00 o'clock a.m., at the offices of Hughes & Luce, L.L.P., 1717 Main Street, Suite 2800, Dallas, Texas 75201. (b) At the Closing, Seller and Shareholders delivered to Purchaser and Issuer (each such delivery constituting an condition additional precedent to the obligation of Purchaser and Issuer to consummate the Closing): (i) a duly executed omnibus assignment, conveyance and bill of sale to Purchaser (the "Bill of Sale") for the Transferred Assets in substantially the form of Schedule 8(b)(i) attached hereto; -------- ------- (ii) such other good and sufficient instruments of conveyance, assignment, and transfer (including, without limitation, duly endorsed certificates of title for all motor vehicles included in the Transferred Assets and assignment and assumption agreements with respect to the Assumed Liabilities and the Contracts included in the Transferred Assets or Assumed Liabilities to be assumed on the Closing Date, in form and substance satisfactory to Purchaser's counsel, as shall be necessary or desirable to vest in Purchaser good and marketable title to the Transferred Assets; (iii) employment agreements executed by the individuals named on Schedule -------- 8(b)(iii) in substantially the form attached hereto as Schedule 8(b)(iii); - --------- ------------------ (iv) an opinion of counsel satisfactory to Purchaser and its counsel; (v) evidence of any approvals or consents referred to by Section 2(c); ------- ---- (vi) evidence of all necessary corporate action having been taken by Seller and the Shareholders to approve this Agreement and the transactions contemplated hereby; (vii) a Competition and Confidentiality Agreement executed by Seller and Shareholders in substantially the form attached hereto as Schedule 8(b)(vii) -------- --------- (the "Competition and Confidentiality Agreement"); (viii) a certificate signed by the chief executive officer and chief financial officer of Seller and each Shareholder, dated the Closing Date, attesting that, to the best of their knowledge after due inquiry, all the representations and warranties made by Seller and Shareholders herein are true and correct on the Closing Date as if made on and as of the Closing Date; -21- (c) At the Closing, Purchaser delivered to Seller (each such delivery constituting an additional condition precedent to the obligations of Seller): (i) duly issued certificates in such names and quantity of shares as Seller may request prior to the Closing evidencing the Shares issued pursuant to Section 1(d); - ------------ (ii) an opinion of counsel satisfactory to Seller, Shareholders and their counsel; (iii) evidence of any approvals and consents referred to by Section 3(d); ------- ---- (iv) evidence of all necessary corporate action having been taken by Purchaser and Issuer to approve this Agreement and the transactions contemplated hereby; and (v) a certificate signed by officers of Purchaser and Issuer, dated the Closing Date, attesting that, to the best of their knowledge after due inquiry, all the representations and warranties made by Purchaser and Issuer herein are true and correct on the Closing Date as if made on and as of the Closing Date. 9. Expenses. Seller and Shareholders and Purchaser and Issuer shall, -------- respectively, pay their own expenses and costs incident to the preparation of this Agreement and to the consummation of the transactions contemplated herein, provided that Shareholders and Purchaser will each pay one-half of the cost of an audit of Seller's financial statements for the year ended December 31, 1993 and the nine months ended September 30, 1994 by KPMG Peat Marwick. Seller's expenses incurred in connection with this Agreement will either be paid by the Shareholders or will be paid by Seller from cash contributions to Seller by the Shareholders, and none of such expenses will be included in the Assumed Liabilities or will reduce the amount of the Transferred Assets to be received by Purchaser. 10. Restrictions on Transfer of Shares and Agreement to Register Shares. ------------------------------------------------------------------- Seller and the Shareholders acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the "Securities Act") in reliance upon the exemption provided by Section 4(2) of said Act for transactions by an issuer not involving any public offering and, in connection therewith, it is agreed by the parties that: (a) Seller and Shareholders each acknowledge receipt of a copy of Issuer's Form 10-K Report for its fiscal year ended May 31, 1994, Issuer's Form 10-Q Report for its fiscal quarter ended August 31, 1994 a copy of Issuer's Annual Report to Stockholders and Proxy Statement for its annual stockholders' -22- meeting held on September 27, 1994, and that they have had an opportunity to ask any questions they might have concerning the operations and financial condition of Issuer. (b) The certificates for the Shares will bear a restrictive legend in substantially the following form: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE SECURITIES ACT OF 1933, OR AN OPINION OF COUNSEL FOR THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED." (c) Seller and the Shareholders hereby confirm that the Shares will be acquired for investment for their accounts, not as nominees or agents, and not with a view to the resale or distribution of any part thereof in a manner which would require registration under the Securities Act or any applicable state securities laws, and that Seller and the Shareholders have no present intention of selling, granting any participation in, or otherwise distributing the same. Seller and Shareholders covenant and agree that they will not sell, hypothecate or take any other action to dispose of any Shares or to reduce their risk of holding the Shares, directly or indirectly, until such time as Issuer has published consolidated financial statements of the Issuer reflecting at least thirty (30) days of combined operation of Issuer and Purchaser after the Closing. (d) Seller and the Shareholders agree that the Shares distributed, if sold in market transactions, will not be sold by them, or any person acquiring Shares from them (other than in a market transaction) (a "Transferee"), in an aggregate amount on any day in excess of the greater of 3000 shares or twenty percent of the average daily trading volume of Issuer's Common Stock 'or the ten preceding trading days, and that any Transferee will be required to provide a written undertaking to Issuer evidencing the Transferee's agreement to be bound by the restrictions of this Section 10 as a condition to the Issuer's obligation to register the transfer shares of Common Stock to such Transferee. Issuer has no obligation to take any action or to waive in any respect full compliance by Seller and Shareholders with this Section 10 in order to facilitate any transfer of Shares to a nominee or brokerage account. (e)(i) Issuer shall after the Closing use its reasonable best efforts to cause 133,323 Shares (the "Registrable Shares") to be registered for resale under the Securities Act (the proposed registration statement being referred to herein as the "Registration Statement"). -23- (ii) Issuer may, if it concludes based upon the advice of its counsel or financial advisors that the registration and sale of the Shares cannot be undertaken without violating the Securities Act or damaging any interest of the Issuer, by written notice to the Shareholders, defer the registration of the Shares for a period of up to ninety (90) days. (f) Issuer shall use its reasonable best efforts to cause the Registration Statement to become effective as promptly after filing as is practicable, and will use its reasonable best efforts to keep such registration statement current for a period not exceeding ninety (90) days after it becomes effective. Issuer may include shares of other shareholders having registration rights in the Registration Statements. (g) The Shareholders will cooperate with Issuer in the preparation and filing of the Registration Statement and any amendments thereto, and WILL KEEP ISSUER ADVISED OF THE SALE of any shares under such Registration Statement. Issuer shall pay all costs and expenses incidental to preparing and filing the Registration STATEMENT and any amendments and supplements thereto, except that each Shareholder will pay (i) underwriting discounts or selling commissions respecting sales of such shares, (ii) all applicable stock transfer taxes relating to any Shares transferred, and (iii) all fees and expenses of their counsel, if any. (h) Issuer and each Shareholder selling Shares under the Registration Statement (severally and not jointly) agree that it or they will indemnify and hold harmless the other and any underwriter (as defined in the Securities Act), if any, against any losses, claims, damages or liabilities), joint or several, to which it or they may become subject, whether under the Securities Act or otherwise, insofar as such are caused by an untrue statement or alleged untrue statement of any material fact contained in a Registration Statement filed pursuant to Section 10(e), or any omission or alleged omission to state therein ------- ----- a material fact required to be stated therein or necessary to make the statements contained therein not misleading, to the extent that the inclusion or omission was with respect to data relating to Issuer, for which Issuer shall be responsible, or a selling Shareholder or his or her stock holdings, for which such selling Shareholder shall be responsible, as the case may be. (i) Issuer and each Shareholder agree that prior to the filing of the Registration Statement, they will enter into an agreement providing for cross indemnity upon terms customarily found in underwriting agreements between issuers of securities and underwriters offering the same to the public. -24- 11. Indemnification. (a) Seller and Shareholders. On and after the Closing --------------- Date, Seller and Shareholders shall, and hereby do, jointly and severally, indemnify and hold harmless Issuer and Purchaser from and against and shall defend Purchaser against all liabilities, damages, costs, charges, legal fees, judgments, expenses or other losses ("Indemnifying Losses"): (i) Arising from any misrepresentation by Seller or Shareholders in or pursuant to this Agreement or the Other Agreements or delivered to Purchaser or Issuer on or before the Closing Date; or (ii) Resulting from breach of any warranty of Seller or Shareholders hereunder or under the Other Agreements, or breach or default in the performance of any of the covenants which Seller and Shareholders are required to perform under this Agreement or the Other Agreements; (iii) Arising from or relating to any liability or obligation of Seller or Shareholders not expressly assumed by Purchaser pursuant to this Agreement, including without limitation the Excluded Liabilities and any federal, state or local income tax payable by Seller or any Shareholder as a consequence of the transactions described in this Agreement; or (iv) Arising from, relating to the facts alleged in that certain litigation matter filed in the United States District Court, Northern District of Ohio, Eastern Division, Case No. 5:94CV692 styled CAD Warehouse, Inc., Plaintiff v. --------------------------------- Hewlett-Packard Co., et al., Defendant, which has been dismissed by Order dated - -------------------------------------- November 3, 1994. (b) Purchaser and Issuer. On and after the Closing Date, Purchaser and -------------------- Issuer shall, and hereby do, jointly and severally, indemnify and hold harmless Seller and Shareholders from and against, and shall defend them against, all Indemnifying Losses sustained by Seller or Shareholders: (i) Arising from any misrepresentation by Purchaser or Issuer in or pursuant to this Agreement or the Other Agreements delivered to Seller or Shareholders on or before the Closing Date; (ii) Resulting from breach of any warranty by Purchaser or Issuer hereunder or breach or default in the performance of any of the covenants which Purchaser or Issuer is required to perform under this Agreement or any Other Agreement; or (iii) Arising from or in connection with the operation of or use of the Transferred Assets by Purchaser on or after the Closing Date. -25- (c) Procedure. --------- (i) If any claim or demand shall be made or liability asserted against any party being indemnified ("Indemnitee") or if any suit, action, or administrative or legal proceedings shall be instituted or commenced in which any Indemnitee is involved or shall be named as a defendant either individually or with others, and if such claim, demand, liability, suit, action or proceeding, if successfully maintained, will result in any Indemnifying Losses, such Indemnitee shall give the party making the indemnification ("Indemnitor") written notice within thirty (30) days of the pendency of the same. If, within thirty (30) days after the giving of such notice, the Indemnitee receives written notice from Indemnitor stating that Indemnitor disputes or intends to defend against such claim, demand, liability, suit, action or proceeding, then Indemnitor shall have the right to select counsel of its choice and to dispute or defend against such claim, demand, liability, suit, action or proceeding at its expense, and such Indemnitee shall fully cooperate with Indemnitor in such dispute or defense so long as Indemnitor is conducting such dispute or defense diligently and in good faith; provided, however, that Indemnitor shall not be permitted to settle such dispute or claim without the prior written approval of Indemnitee, which shall not be unreasonably withheld. (ii) Even though Indemnitor selects counsel of its choice, Indemnitee shall have the right to additional representation by counsel of its choice to participate in such defense at Indemnitee's sole cost and expense. If no such notice of intent to dispute or defend is received by Indemnitee within the aforesaid thirty (30) day period, or if diligent and good faith defense is not being, or ceases to be, conducted, Indemnitee shall have the right to dispute and defend against the claim, demand or other liability at the sole cost and expense of Indemnitor and to settle such claim, demand or other liability, and in either event to be indemnified as provided for herein; provided, further, that Indemnitee shall not be permitted to settle such dispute or claim without the prior written approval of Indemnitor, which shall not be unreasonably withheld. (d) Limitations on Indemnification. Notwithstanding any other provision of ------------------------------ this Section 11, (i) the aggregate liability of Seller and the Shareholders (and ---------- any successor or affiliate thereof) under this Section 11 shall not exceed the ---------- amount of the Purchase Price; and (ii) no indemnity shall be owing under this Section 11 unless the amount of the Indemnifying Loss, in any single case or - ---------- related series of cases, exceeds $20,000, or if the aggregate amount of all Indemnifying Losses exceeds $40,000. -26- 12. Arbitration. ----------- (a) Any controversy or claim arising out of this Agreement or breach thereof other than a claim for injunctive relief, (an "Arbitrable Claim") shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (b) If an Arbitrable Claim arises, the Purchaser, Issuer, Seller or a majority in interest of the Shareholders may demand arbitration by filing a written demand with the other parties. (c) The Seller, a majority in interest of the Shareholders and the Purchaser and Issuer may agree on one (l) arbitrator. If they cannot agree on one (l) arbitrator, there shall be three (3) arbitrators; one (1) named in writing by the Seller and a majority in interest of the Shareholders, and one (l) named in writing by the Purchaser and Issuer. The written notification of the name(s) of the arbitrator(s) shall be given to the other parties within five (S) days after demand for arbitration is given, and a third arbitrator shall be chosen by the two (2) arbitrators so chosen. Should the Seller and a majority in interest of the Shareholders or the Purchaser and Issuer refuse or neglect to name an arbitrator, or refuse or neglect to furnish the arbitrator(s) with any papers or information demanded following a reasonable opportunity to respond, the arbitrator(s) may proceed ex parte. (d) A hearing on the matter to be arbitrated shall take place before the arbitrator(s) in the city of Dallas, County of Dallas, State of Texas, at the time and place selected by the arbitrator(s). The arbitrator(s) shall select the time and place promptly and shall give the Seller, Shareholders, Purchaser and Issuer written notice of the time and place at least thirty (30) days before the date selected. At the hearing, any relevant evidence may be presented by any party hereto, and the formal rules of evidence applicable to judicial proceedings shall not govern. Evidence may be admitted or excluded in the sole discretion of the arbitrator(s). The arbitrator(s) shall hear and determine the matter and shall execute and acknowledge the award in writing and cause a copy of the writing to be delivered to the Seller, Shareholders, Purchaser, and Issuer. (e) If there is only one (1) arbitrator, his or her decision shall be binding and conclusive on the parties, and if there are three (3) arbitrators, the decision of any two (2) shall be binding and conclusive. The submission of an Arbitrable Claim to the arbitrator(s) and the rendering of a -27- decision by the arbitrator(s) shall be a condition precedent to any right of legal action on the dispute. A judgment confirming the award may be given by any court having jurisdiction. (f) If three (3) arbitrators are selected, but no two (2) of the three (3) are able to reach an agreement regarding the determination of the dispute, then the matter shall be decided by three (3) new arbitrators who shall be appointed and shall proceed in the same manner, and the process shall be repeated until a decision is agreed on by two (2) of the three (3) arbitrators selected. (g) The costs of the arbitration shall be borne by the losing party or shall be borne in such proportions as the arbitrator(s) determine(s). 13. Miscellaneous. ------------- (a) This Agreement is to be governed by and construed and enforced in accordance WITH THE SUBSTANTIVE LAWS of the State of Texas. (b) The rights and obligations of the parties under this Agreement are not assignable by any party without the prior written consent of the other parties. (c) All paragraph headings herein are inserted for convenience only. This Agreement may be executed in several counterparts, each of which shall be deemed an original, which together shall constitute one and the same instrument. (d) This Agreement and the Other Agreements set forth the entire understanding of the parties, there being no terms, conditions, warranties or representations other than those contained herein and therein. No amendment to this Agreement will be valid unless made in writing and signed by the parties hereto. (e) This Agreement shall be binding upon, and shall inure to the benefit of, the heirs, executors, administrators, successors and assigns of Seller and Shareholders, and the successors and assigns of Purchaser and Issuer, provided, however, that nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. (f) In the event attorneys' fees or other costs are incurred to secure performance of any of the obligations provided for in this Agreement, to establish damages for the breach of this Agreement, or to obtain any other appropriate -28- relief, whether by way of prosecution or defense, the prevailing party will be entitled to recover reasonable attorneys' fees and costs incurred therein. (g) All notices, demands, requests, and other communications required or permitted by any party to this Agreement shall be in writing and shall be sent by certified mail, return receipt requested to the following addresses, or such other addresses as any party may request by notice delivered to the other party as set forth in this Subsection (g): If to Purchaser: CAD Warehouse, Inc. 8500 Cameron Road Austin, Texas 78754 Attention: Robert B. Sims, General Counsel with copies to: Michael W. Tankersley, Esq. Hughes & Luce, L.L.P. 1717 Main Street Suite 2800 Dallas, Texas 75201 If to Issuer: Summagraphics Corporation 8500 Cameron Road Austin, Texas 78754 Attention: Robert B. Sims, General Counsel with a copy to: Michael W. Tankersley, Esq. Hughes & Luce, L.L.P. 1717 Main Street Suite 2800 Dallas, Texas 75201 If to Seller: CAD Warehouse, Inc. 1939 East Aurora Road Twinsburg, Ohio 04487 with copies to: Larry Zink Zink, Zink & Zink 3711 Whipple Avenue N.W. Canton, Ohio 44718 If to Shareholders: The individuals and at the addresses set forth on Schedule 13(g) -------- ----- (h) This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. -29- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. PURCHASER: CAD WAREHOUSE, INC., a Nevada corporation By: /s/ Michael S. Bennett ----------------------- Its: President ---------------------- ISSUER: SUMMAGRAPHICS CORPORATION - ------------- ----------- By: /s/ Michael S. Bennett ----------------------- Its: President ---------------------- SELLER: CAD WAREHOUSE, INC., a Delaware corporation By: /s/ John G. Panutsos ----------------------- Its: V.P. & C.E.O. ---------------------- SHAREHOLDERS: /s/ John G. Panutsos - ------------------------- John G. Panutsos /s/ Rosemary Wollet - ------------------------- Rosemary Wollet /s/ David C. Hoffer - ------------------------- David C. Hoffer EX-10.27 7 AMENDMENT NO. 1 TO FORM S-3 EXHIBIT 10.27 As filed with the Securities and Exchange Commission on April 3, 1995. Registration No. 33-89120 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 SUMMAGRAPHICS CORPORATION (Exact name of registrant as specified in its charter) MICHAEL S. BENNETT COPIES TO: ROBERT B. SIMS MICHAEL W. TANKERSLEY PRESIDENT & CHIEF EXECUTIVE OFFICER SENIOR VICE PRESIDENT HUGHES & LUCE, L.L.P. SUMMAGRAPHICS CORPORATION AND GENERAL COUNSEL SUITE 2800 8500 CAMERON ROAD SUMMAGRAPHICS CORP. 1717 MAIN STREET AUSTIN, TEXAS 78754 8500 CAMERON ROAD DALLAS, TEXAS 75201 (512) 835-0900 AUSTIN, TEXAS 78754 (Name, address, including zip code, and telephone number, including area code, of agent for service)
---------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the Registration Statement becomes effective. ---------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following line. ___ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following line. X --- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. Page 1 of 15 sequentially numbered pages. Index to Exhibits appears on 15. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL 3, 1995 SUMMAGRAPHICS CORPORATION 133,323 SHARES OF COMMON STOCK This Prospectus relates to an offering of up to 133,323 shares of common stock, par value $.01 per share (the "Common Stock"), of Summagraphics Corporation, a Delaware corporation (the "Company" or "Summagraphics''), that were issued pursuant to the Asset Purchase Agreement, executed on November 10, 1994, by and among the Company, CAD Warehouse, Inc., a Nevada corporation and wholly owned subsidiary of the Company ("CAD Nevada"), CAD Warehouse, Inc., a Delaware corporation ("CAD Delaware") and the shareholders of CAD Delaware (the "Selling Shareholders"). The Common Stock being registered is being offered for the accounts of the Selling Shareholders. See "Selling Shareholders." The Selling Shareholders have agreed with the Company that, without the Company's prior consent, they will not sell on any trading day an aggregate number of shares of Common Stock in excess of the greater of 3,000 shares or 20% of the average daily trading volume of the Common Stock for the preceding ten trading days. See "Plan of Distribution." The Company will not receive any proceeds from the sale of the shares of Common Stock offered hereby. The shares may be offered in transactions on the Nasdaq National Market, in negotiated transactions, or through a combination of such methods of distribution, at prices relating to the prevailing market prices or at negotiated prices. See "Plan of Distribution." The Common Stock is quoted on the Nasdaq National Market under the symbol "SUGR." The shares of Common Stock being offered by this Prospectus have been approved for listing on the Nasdaq National Market. On March 29, 1995, the last sale price of the Common Stock, as reported by the Nasdaq National Market, was $5.25 per share. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. No dealer, salesman or any other person has been authorized to give any information or to make any representations in connection with this offering other than those contained in this Prospectus and, if given or made, such other information and representations must not be relied upon as having been authorized by the Company or the Selling Shareholders. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the registered securities to which it relates. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, such securities in any circumstances in which such offer or solicitation is unlawful. -------------------- The date of this Prospectus is April 3, 1995. AVAILABLE INFORMAT10N The Company is subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements, information statements, and other information filed by the Company with the Commission pursuant to the requirements of the Exchange Act may be inspected and copied at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549-1004 and at the following Regional Offices of the Commission: New York Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048; and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company is a publicly held corporation and its Common Stock is traded on the Nasdaq National Market under the symbol "SUGR." Reports, proxy statements, information statements, and other information can also be inspected at the offices of the Nasdaq Stock Market, Inc. The Company intends to furnish its shareholders with annual reports containing audited financial statements and such other periodic reports as it may determine to furnish or as may be required by law. The Company has filed with the Commission a Registration Statement on Form S-3 (referred to herein, together with all exhibits, as the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all information set forth in the Registration Statement. Certain parts of the Registration Statement have been omitted in accordance with the rules and regulations of the Commission. For further information, reference is made to the Registration Statement which can be inspected at the public reference rooms at the offices of the Commission. DOCUMENTS INCORPORATED BY REFERENCE The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, including any beneficial owner, upon the written or oral request of such person, a copy of any or all of the documents incorporated by reference herein (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates). Requests should be directed to: Summagraphics Corporation 8500 Cameron Road Austin, TX 78754 Attention: Robert B. Sims, Secretary Telephone Number: (512) 835-0900 The Company's (i) Annual Report on Form lO-K which contains audited financial statements for the fiscal year ended May 31, 1994 (the "1994 lO-K"), (ii) Report on Form lO-Q for the quarter ended August 31, 1994, (iii) Report on Form lO-Q for the quarter ended November 30, 1994, (iv) Current Report on Form 8-K dated November 23, 1994, as amended by Amendment No. 1 on Form 8-K dated January 23, 1995, containing supplemental consolidated financial statements for the fiscal years ended May 31, 1992, 1993 and 1994, and reporting the Company's merger with CAD Delaware (collectively referred to herein as the "CAD Delaware 8-K"), (v) other reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act since the 1994 lO-K and (vi) Form 8-A, dated July 27, 1987, containing a description of the Company's Common Stock (Commission File No. 0- 16071), and including any amendment or report filed for the purpose of updating such description, are hereby incorporated by reference into this Prospectus. All documents filed with the Commission by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering relating to this Prospectus shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing of such documents. Any statement incorporated or deemed to be incorporated by reference herein shall be deemed to be modified, replaced, or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE COMPANY The Company is engaged in the manufacture and sale of digitizing tablets, pen plotters, ink jet plotters, thermal transfer printers, and wide format graphic cutters. The Company's products are used in applications with high-performance computer graphics systems, including computer-aided design, manufacturing, engineering, publishing and graphic arts. The Company's products are sold by its sales force primarily through distributors and also to OEMs which incorporate the Company's products into their own computer products. The Company's products may be integrated with most personal computers, including IBM-compatible personal computers and Apple personal computers, workstations from Sun Microsystems and Digital Equipment, and publishing systems from Scitex, and are compatible with over four hundred applications including software such as AutoCAD, Corel Draw, Adobe Illustrator, Microsoft Windows and Aldus Freehand. The Company's strategy is to pursue sales and market share growth for its existing product lines, through product enhancements and new product introductions, to devote substantial resources to research and development, including the development of new products for use in connection with pen-based computing and computer graphics, and, as and if appropriate opportunities arise, to acquire or develop one or more complementary product lines or businesses serving the computer graphics markets. The Company is seeking to make acquisitions of related or complementary businesses primarily in exchange for additional shares of the Company's Common Stock and/or cash. Effective October 31, 1994, the Company's wholly owned subsidiary, CAD Nevada, acquired the assets and liabilities of CAD Delaware in exchange for approximately 510,129 shares of Common Stock in a transaction accounted for as a pooling of interests. CAD Nevada is engaged in the mail order distribution of computer peripheral equipment used in computer assisted design and related applications, including products manufactured by the Company. The Company is continually evaluating potential acquisition candidates. However, no assurance can be given at this time that any acquisitions will become probable or that any material acquisitions will be consummated. The Company is a Delaware corporation formed in 1972. The Company's principal executive offices are located at 8500 Cameron Road, Austin, Texas 78754, and its telephone number is (512) 835-0900. -2- RISK FACTORS The following facts should be considered carefully in evaluating an investment in the Common Stock. Product Concentration. - ---------------------- Digitizers account for approximately 50% of the sales revenues of the Company. The Company anticipates that digitizers will continue to account for a substantial portion of its sales for the foreseeable future. If for any reason sales of digitizers were to decline, the Company's business would be adversely affected. Competition and Technological Change. - ------------------------------------ The markets in which the Company sells its products are competitive and are subject to changes as technology advances. The Company faces actual and potential competition from a number of established manufacturers, both domestic and international, including the Company's largest competitors, CalComp, Inc., a subsidiary of Lockheed Corporation, and Hewlett-Packard Co., which have significantly greater financial, technical, manufacturing and marketing resources than the Company; and Kurta Corporation, Wacom Company, Ltd., Encad, Inc., and Oce Vandegrinten. CalComp competes primarily with the Company's digitizer and plotter products; Kurta competes primarily with the Company's digitizer products; and HewlettPackard competes primarily with the Company's output products (plotters). The Company's digitizer products face competition from manufacturers of mice, including Logitech, Inc. The Company believes that its competitive ability also depends on the quality, pricing, performance and support of its products, manufacturing costs and the Company's technical capability and successful introduction of new products and product enhancements. Inability to match product introductions and enhancements or price/performance of competitors' products could adversely affect the Company's market share and profitability. In 1994, the Company encountered delays in company shipments of its SummaJet 2 inkjet plotter associated with patent analysis and the speed of manufacturing ramp up which adversely affected its financial results for the fiscal quarter ended February 28, 1995. This product began shipment in January 1995. Recent Losses. - -------------- The Company incurred a net loss of $16,425,552 for the year ended May 31, 1993, compared to net income of $2,786,685 for the year ended May 31, 1994. The Company's net income for the six months ended November 30, 1994 was $687,325 compared to a net income of $201,572 for the six months ended November 30, 1993. The 1993 loss was attributable to a number of factors, including adverse operating conditions in general of the Company's markets, the incurrence of an $8.5 million restructuring charge, $1.95 million of expenses attributable to a patent lawsuit subsequently settled, a write-down of $698,000 of intangible assets related to an acquisition, a $547,000 increase in the Company's reserve for bad debts attributable to a large foreign customer and to costs to replace the Company's CEO, increased promotional expenses, and expenses associated with increased rent expense after the sale and leaseback of the Company's Austin, Texas facility. The Company has continued to incur a high level of R&D and marketing costs as it has sought to design and introduce new products in order to remain competitive in its markets. Gross margins continue to encounter pressure from competitive products. While management believes that the Company will continue to be profitable and will avoid large operating losses of the magnitude incurred in 1993, the Company continues to face competitive pressures that -3- can have a substantial adverse impact on its profitability. Significant dclays in developing and introducing new products, or a failure to control manufacturing costs, could contribute to losses in the future, which could be material to the Company's business. There can be no assurance that the Company's profitable operations in recent quarters will continue. Protection of Proprietary Information. - ---------- -- ----------- ------------ The Company relies in part upon trade secrets, know-how and patents to develop and maintain its competitive position. There can be no assurance that others will not develop or patent similar technologies or that the confidentiality agreements upon which the Company relies to protect its trade secrets and know-how will be enforced by the courts. There can be no assurance that the Company has established or will be able to maintain a patent position sufficient to protect its processes or products. Other companies have obtained, and can be expected to obtain in the future, patents covering a variety of configurations and processes related to the Company's products, which could require the Company to obtain licenses. There can be no assurance that the Company will be able to obtain such licenses, if required, upon commercially reasonable terms. The Company has from time to time been involved in litigation to defend its rights in proprietary information which has required the expenditure of substantial amounts. There can be no assurance that the Company will not in the future incur additional expenses in this regard. International Sales and Currency Exchange. - ------------- ----- --- -------- --------- During 1993 and 1994, international sales and operations represented approximately 44.5% and 45.7%, respectively, of the Company's net revenues. At May 31, 1994, the Company had identifiable foreign assets of $18.8 million. Export sales to foreign countries from the United States totaled $9.8 million in 1993 and $12.1 million in 1994. In addition, the Company sells products to systems integrators located within the United States which market the Company's products worldwide. International sales and operations are subject to inherent risks, including unexpected changes in regulatory requirements, tariffs and other trade barriers, costs and risks of localizing products for foreign countries, difficulties in staffing and managing foreign operations, potential difficulties in repatriation of earnings, and the burdens of complying with a wide variety of foreign laws. The Company is also at risk of adverse currency fluctuations. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in foreign markets. As the Company increases its international sales, its net revenues may also be affected to a greater extent by seasonal fluctuations resulting from lower levels of business activity which typically occur during the summer months in Europe. The Company's results in Western Europe during 1993 and 1994 were negatively affected by the recession there, and sales to China have decreased as a result of currency fluctuations and changes in regulatory requirements affecting certain customers. There can be no assurance that these factors will not have a material adverse effect on the Company's future international sales and operations, and, consequently, on the Company's business. Potential Fluctuations in Quarterly Results. - --------- ------------ -- --------- -------- The Company achieved profitable operations on a quarterly basis commencing with the first fiscal quarter of 1994. Because of the rate of technological change and competition generally there can be no assurance that such profitability will continue on a quarterly basis in the future or that levels of profitability may not vary over any such quarterly periods. The Company operates with relatively small backlog and substantially all of its net sales in each quarter result from orders booked within a generally short cycle between order and shipment (typically less than 45 days). Accordingly, if near-term demand for the Company's products -4- weakens or if significant anticipated sales in any quarter are not realized as expected, the Company's net sales for that quarter could be adversely affected. The Company's net sales may fluctuate as a result of other factors, including increased competition, variations in the net sales mix, announcements of new products by the Company or its competitors, delays in shipment of existing or new products and capital spending patterns of the Company' s customers. Dependence on Key Employees. - ---------- -- --- ---------- The Company's success if dependent in large measure on key technical, sales and management personnel, the loss of one or more of whom could adversely affect its business. The Company does not have employment agreements with any of its officers or key personnel, except its President. The future success of the Company will depend in large part on its continuing ability to attract and retain talented, qualified employees. While the Company to date has not experienced any difficulty in attracting and retaining qualified employees, there can be no assurance that the Company can retain its key employees or that it can attract, assimilate and retain its key employees or that it can attract, assimilate and retain other skilled technical personnel. Limited Sources of Supply. - ------- ------- -- ------- Certain components used in, and certain of the Company's products, are currently available from only one or a limited number of sources. The Company has no long-term contracts with these suppliers. The Company's inability to obtain sufficient supplies of sole or limited-source components or to develop alternative sources as needed has in the past and could in the future result in delays or reductions in product shipments. Operating results also could be materially adversely affected by receipt of defective components or an increase in component prices. Because the Company believes innovation is important to its strategy, Company products under development may incorporate third-party components that are under development, often with the assistance of the Company. Typically, these component parts are not available until a short time before the scheduled commercial shipment of the Company's products. Components may not become available, may be delayed or may have quality problems, which could result in production and sales delays or cancellations of orders for Company products. Such factors would have a material adverse effect on the Company's operating results. Possible Anti-Takeover Effects of Certain Charter and Bylaw Provisions. - ----------------------------------------------------------------------- The Company's Third Restated Certificate of Incorporation (the "Charter") and Bylaws contain provisions that may discourage acquisition bids for the Company. The Company has a substantial amount of authorized but unissued capital stock available for issuance. The Company's Charter contains provisions which authorize the Board of Directors, without the consent of the shareholders, to issue additional shares of Common Stock and issue shares of Preferred Stock in series, including establishment of the rights, powers and preferences, including voting rights, of holders of the Preferred Stock, and grant authority to the Board to amend the Company's Bylaws. Additionally, the Company's Bylaws empower the Board to increase or decrease the number of directors, subject to certain limitations, and specify that directors will generally hold office until the next annual meeting of shareholders. These provisions may have the effect, either alone or in combination with each other, of (i) limiting the price that certain investors might be willing to pay in the future for shares of the Common Stock, (ii) delaying, deferring or otherwise discouraging an acquisition or change in control of the Company deemed undesirable by the Board of Directors or (iii) adversely affecting the voting power of shareholders who own Common Stock. -5- SELLING SHAREHOLDERS The Selling Shareholders listed in the following table have agreed to sell the number of shares of Common Stock set forth opposite their name. The table sets forth information with respect to the beneficial ownership of the Company's Common Stock by the Selling Shareholders immediately prior to this offering and as adjusted to reflect the sale of shares of Common Stock pursuant to the offering. All information with respect to the beneficial ownership has been furnished by the Selling Shareholders:
BENEFICIAL OWNERSHIP BENERLCIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING (l) ---------------------- ---------------------- SHARES TO NUMBER OF PERCENT OF BE OFFERED NUMBER OF PERCENT OF NAME OF BENEFICIAL OWNER SHARES CLASS FOR SALE SHARES CLASS - ------------------------ --------- ---------- ---------- --------- ---------- JOHN G. PANUTSOS 255,065 5.6% 66,661 188,404 4.1% ROSEMARY WOLLET 127,532 2.8% 33,331 94,201 2.1% DAVID C. HOFFER 127,532 2.8% 33,331 94,201 2.1%
(l) Assumes all the shares of Common Stock that may be offered are sold. PLAN OF DISTRIBUTION The sale of the Common Stock offered hereby may be effected from time to time directly or by one or more broker-dealers or agents, in one or more transactions (which may involve crosses and block transactions) on the Nasdaq National Market, in negotiated transactions, or through a combination of such methods of distribution, at prices related to prevailing market prices or at negotiated prices. In the event one or more broker-dealers or agents agree to sell the Common Stock, they may do so by purchasing the Common Stock as principals or by selling the Common Stock as agent for the Selling Shareholders. Any such broker- dealers may receive compensation in the form of discounts, concessions, or commissions from the Selling Shareholders and/or the purchasers of the shares of Common Stock for which such broker-dealer may act as agent or to whom they sell as principal, or both (which compensation as to a particular broker-dealer may be in excess of customary compensation). The Company may be required to enter into indemnity agreements with any such broker-dealers or agents providing assurances as to the accuracy of this Prospectus and providing indemnity to any such broker-dealer or agent in the event of any material misstatement or omission of fact in this Prospectus. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of the Common Stock may not simultaneously engage in market-making activities with respect to the Company's Common Stock for a period of two business days prior to the commencement of such distribution. In addition and without limiting the foregoing, the Selling Shareholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Rule lOb-6. In order to comply with certain states' securities laws, if applicable, the Common Stock will be sold in such jurisdictions only through registered or licensed brokers or dealers. In certain states, the Common Stock may not be sold unless the Common Stock has been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. The shares offered hereby are being registered pursuant to rights granted the Selling Shareholders in the Asset Purchase Agreement providing for the acquisition of CAD Delaware. The Asset Purchase Agreement requires the Company to indemnify the Selling Shareholders -6- against liabilities, including liabilities under the Securities Act of 1933, that may arise as a consequence of any material misstatement or omission of fact in this Prospectus. The Asset Purchase Agreement provides that the Selling Shareholders will not, without the Company's prior consent, sell on any trading day an aggregate number of shares of Common Stock in excess of the greater of 3,000 shares or 20% of the average daily trading volume of the Common Stock for the preceding ten trading days. All of the proceeds generated from the sale of the shares of Common Stock offered hereby will be immediately deposited into the accounts of the Selling Shareholders. USE OF PROCEEDS The Company will not receive any proceeds from the offering. LEGAL MATTERS The validity of the Common Stock offered hereby has been passed upon for the Company by Robert B. Sims, Senior Vice President and General Counsel of the Company. EXPERTS The historical consolidated financial statements and schedules of Summagraphics Corporation and subsidiaries as of May 31, 1993 and 1994, and for each of the years in the three-year period ended May 31,1994, and the supplemental consolidated financial statements of Summagraphics Corporation and subsidiaries as of May 31, 1993 and 1994, and for each of the years in the three-year period ended May 31, 1994, have been incorporated by reference herein and in the Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The reports of KPMG Peat Marwick LLP covering the May 31, 1994 historical and supplemental consolidated financial statements refer to a change in the method of accounting for income taxes in 1993. In addition, the report of KPMG Peat Marwick LLP on the supplemental consolidated financial statements indicates that the supplemental consolidated financial statements give retroactive effect to the merger of Summagraphics Corporation and CAD Warehouse, Inc. on November 10, 1994, which has been accounted for as a pooling of interests. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These supplemental financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Summagraphics Corporation and subsidiaries after financial statements covering the date of consummation of the business combination are issued. The financial statements of CAD Warehouse, Inc. as of September 30, 1994 and December 31, 1993 and for the nine-month period and the year then ended have been incorporated by reference herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. -7- PART 11 Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration fee $ 345 Accounting fees and expenses 10,000 Legal fees and expenses 10,000 Miscellaneous expenses 500 ------- Total $20.845 =======
* Estimated All of the above expenses will be paid by the Company. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant's Third Restated Certificate of Incorporation and Bylaws provide, consistent with the provisions of the Delaware General Corporation Law, that no director of the Registrant will be personally liable to the Company or any of its shareholders for monetary damages arising from the director's breach of fiduciary duty as a director. However, this does not apply with respect to any action in which the director would be liable under Section 174 of Title 8 of the Delaware General Corporation Law nor does it apply with respect to any action in which the director (i) has breached his duty of loyalty to the Company and its shareholders, (ii) does not act in good faith or, in failing to act, does not act in good faith, (iii) has acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, has acted in a manner involving intentional misconduct or a knowing violation of law, or (iv) has derived an improper personal benefit. Pursuant to the provisions of Section 145 of the Delaware General Corporation Law, every Delaware corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, against any and all expenses, judgments, fines and amounts paid in settlement and reasonably incurred in connection with such action, suit or proceeding. The power to indemnify applies only if such person acted in good faith and in a manner he reasonably believed to be in the best interest, or not opposed to the best interest, of the corporation and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The power to indemnify applies to actions brought by or in the right of the corporation as well, but only to the extent of defense and settlement expenses and not to any satisfaction of a judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication unless the court, in its discretion, believes that in light of all the circumstances indemnification should apply. To the extent any of the persons referred to in the two immediately preceding paragraphs is successful in the defense of the actions referred to therein, such person is entitled, pursuant to Section 145, to indemnification as described above. II-1 The directors and officers of the Registrant are insured under a directors' and officers' liability insurance policy insuring directors and officers against liabilities for which they are entitled to indemnity as described above in the event the Registrant is unable or fails to make payment. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. ITEM 16. EXHIBITS. The Exhibits to this Registration Statement are listed in the Index to Exhibits on page II-5 of this Registration Statement, which Index is incorporated herein by reference. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes: (l) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section lO(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, kowever, that paragraphs (I)(i) and (I)(ii) do not apply if --------- -------- the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) and 15(d) of the Exchange Act (and, where applicable, each filing of an II-2 employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Austin, State of Texas, on March 27, 1995. SUMMAGRAPHICS CORPORATION By: /s/ Michael S. Bennett ------------------------------------- Michael S. Bennett President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment has been signed below by the following persons on behalf of the Registrant in the capacities indicated on March 27, 1995. SIGNATURE TITLE --------- ----- /s/ Michael S. Bennett President, Chief Executive Officer and - -------------------------- Director (Principal Executive Officer) Michael S. Bennett /s/ David G. Osowski Senior Vice President, Controller and Treasurer - -------------------------- (Principal Financial and Accounting Officer) David G. Osowski - -------------------------- Director Ken Draeger /s/ Andrew Harris* Director - -------------------------- Andrew Harris /s/ G. Glenn Henry* Director - -------------------------- G. Glenn Henry /s/ Stephen J. Keane* Director - -------------------------- Stephen J. Keane /s/ Dennis G. Sisco* Director - -------------------------- Dennis G. Sisco *By /s/ Michael S. Bennett - ------------------------------------ Michael S. Bennett, Atforney-in-Fact II-4 CONSENT OF INDEPENDENT AUDITORS The Board of Directors of Summagraphics Corporation: We consent to the use of our reports incorporated herein by reference and to the reference to our Firm under the heading "Experts" in the prospectus. Our report on the historical May 31, 1994 consolidated financial statements is incorporated by reference from the Company's 1994 Annual Report on Form lO-K; our report on the supplemental May 31, 1994 consolidated financial statements is incorporated by reference from the Company's January 23, 1995 Amendment No. 1 on Form 8-K; and our report on September 30, 1994 CAD Warehouse, Inc. financial statements is incorporated by reference from the Company's November 23, 1994 Form 8-K. Our reports covering the historical and supplemental consolidated financial statements of Summagraphics Corporation and subsidiaries refer to a change in the method of accounting for income taxes in 1993. Our report with respect to the supplemental consolidated financial statements indicates that the supplemental consolidated financial statements give retroactive effect to the merger of Summagraphics Corporation and CAD Warehouse, Inc. on November 10, 1994, which has been accounted for as a pooling of interests. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These supplemental financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Summagraphics Corporation and subsidiaries after financial statements covering the date of consummation of the business combination are issued. KPMG PEAT MARWICK LLP Austin, Texas March 27, 1995 II-5 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBITS Page - ------ ----------- -- -------- ---- 4.1 Specimen of Common Stock Certificate (incorporated by -- reference from Exhibit 4.3 to the Company's Registration Statement on Form S-l (Registration No. 33-15658)). 4.2 Asset Purchase Agreement (incorporated by reference -- from Exhibit 2.1 to the Company's Report on Form 8-K dated November 23, 1994). **5.1 Opinion of Robert B. Sims, Senior Vice President and -- General Counsel of the Registrant. **23.1 Consent of Robert B. Sims, Senior Vice President and -- General Counsel of the Registrant (contained in Exhibit 5). *23.2 Consent of Independent Auditors (included in Part II -- on page II-5 of this Registration Statement). **24.1 Power of Attorney. -- - ---------- * Filed Herewith. ** Previously Filed. EX-10.28 8 FORM 8 AMENDMENT NO. 1 TO FORM 8-K EXHIBIT 10.28 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8 AMENDMENT TO APPLICATION OR REPORT Filed Pursuant to Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 SUMMAGRAPHICS CORPORATION (Exact name of registrant as specified in its charter) AMENDMENT NO. 1 The undersigned registrant hereby amends the following items, financial statements, exhibits or other portion of its current report on Form 8-K as set forth in the pages attached hereto. (List all such items, financial statements, exhibits or other portions amended) Financial Statements Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SUMMAGRAPHICS CORPORATION Registrant 1/23/95 /s/ Robert B. Sims - ------------------------------- ------------------------------- Date: ROBERT B. SIMS Senior Vice President Legal Counsel & Corporate Secretary SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 Amendment No. 1 To FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported November 23,1994) SUMMAGRAPHICS CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-16071 06-0888312 - -------------------------------------------------------------------------------- (State or other (Commission File (IRS Employer jurisdiction of Number) Identification No.) incorporation) 8500 Cameron Road Austin, Texas 78754 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 873-1540 Not Applicable - -------------------------------------------------------------------------------- (Former name or former address, if changes since last report) Item 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Supplemental Consolidated Financial Statements are attached hereto as an amendment to Form 8-K dated November 23, 1994. (b) Pro-Forma Financial Information The registrant has filed Form 10-Q for the second quarter ended November 30, 1994, reflecting historical financial statements which include CAD Warehouse, Inc. In addition the supplemental consolidated financial statements attached hereto reflect the historical financial statements of Summagraphics Corporation and CAD Warehouse, Inc. Therefore the filing of pro-forma financial statements as noted in the previous Form 8-K is no longer required. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. SUMMAGRAPHICS CORPORATION By: /s/ Robert B. Sims -------------------------- Robert B.Sims Senior Vice President Secretary and General Counsel Dated: January 23, 1994 SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
May 31, 1993 1994 - ------- ------------- ----------- Assets Current assets: Cash $ 2,648,635 $ 818,733 Accounts receivable (less allowance for doubtful accounts of $1,118,515 in 1993 and $1,089,944 in 1994) 18,007,933 17,914,496 Inventories: Materials 4,477,873 5,268,551 Work-in-process 1,271,577 1,043,386 Finished goods 6,557,373 5,223,825 ------------- ----------- 12,306,823 11,535,762 Prepaid expenses and other current assets 1,152,520 1,117,440 ------------- ----------- TOTAL CURRENT ASSET 34,115,911 31,386,431 ------------- ----------- Fixed assets: Land 299,000 290,000 Building 1,301,000 1,319,000 Machinery and equipment 10,816,418 12,133,009 Furniture and fixtures 1,267,029 1,227,762 Leasehold improvements 1,017,115 1,009,171 Construction-in-progress 422,394 186,372 ------------- ----------- 15,122,956 16,165,314 Less: accumulated depreciation and amortization (7,364,913) (9,724,663) ------------- ----------- Net fixed assets 7 758,043 6,440,651 ------------- ----------- Intangible and other assets, net of accumulated amortization (note 3) 10 401,590 9,508,739 ------------- ----------- $ 52,275,544 $47,335,821 ============= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 5,102,321 $ 9,582,737 Accrued liabilities (notes 2 and 4) 14,137,686 9,273,696 Notes payable (note 5) 2,805,000 - Current portion of long-term debt (note 5) 232,000 148,019 Current obligations under capital leases 510,247 458,022 ------------- ----------- TOTAL CURRENT LIABILITIES 22,787,254 19,462,474 ------------- ----------- Long-term liabilities, less current portion: Long-term debt (note 5) 3,627,000 947,306 Capital lease obligations 878,893 534,863 Deferred gain on sale of building 544,149 510,139 Restructuring charges (note 2) 2,124,528 1,803,844 ------------- ----------- Total long-term liabilities 7,174,570 3,796,152 ------------- ----------- Commitments and contingencies (note 9) Stockholders' equity (note 6): Preferred stock, $.01 par value, authorized 5,000,000 shares Common stock, $.01 par value, authorized 20,000,000 shares, issued 4,480,405 shares in 1993 and 4,545,692 shares in 1994 44,804 45,457 Additional paid-in capital 38,397,288 38,639,427 Retained earnings (accumulated deficit) (15,660,892) (13,830,207) Cumulative translation adjustment 7,064 (302,938) ------------- ----------- 22,788,264 24,551,739 ------------- ----------- Less: Treasury stock, at cost - 48,720 shares in 1993 and 1994 (465,044) (465,044) Stockholder note receivable (9,500) (9,500) ------------- ----------- TOTAL STOCKHOLDERS' EQUITY 22,313,720 24,077,195 ------------- ----------- $ 52,275,544 $47,335,821 ============= ===========
See accompanying notes to supplemental consolidated financial statements. SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1992 1993 1994 - ------------------- ----------- ------------ ---------- Net sales $77,295,442 $ 81,403,985 $77,755,350 Cost of sales 43,834,023 51,771,743 50,526,127 ----------- ------------ ----------- GROSS PROFIT 33,461,419 29,632,242 27,229,223 Selling, general and administrative 24,050,888 29,892,137 18,933,930 Research and development 7,476,842 8,002,614 5,630,796 Restructuring and other charges (note 2) 1,124,000 8,487,461 - ----------- ------------ ----------- OPERATING INCOME (LOSS) 809,689 (16,749,970) 2,664,497 ----------- ------------ ----------- Other income (expense): Interest income 97,621 124,494 104,870 Interest expense (633,329) (429,420) (421,375) Miscellaneous, net (445,726) 220,097 (206,429) ----------- ------------ ----------- (981,434) (84,829) (522,934) ----------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD (171,745) (16,834,799) 2,141,563 Provision for income taxes (note 8) 1,058,981 - - ----------- ------------ ----------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD (1,230,726) (16,834,799) 2,141,563 Extraordinary gain (note 5) - - 645,122 Cumulative effect of change in method of accounting for income taxes - 411,247 - ----------- ------------ ----------- NET INCOME (LOSS) $(1,230,726) $(16,423,552) $ 2,786,685 Net income (loss) per common share: Income (loss) before extraordinary gain and cumulative effect of change in accounting method $(0.30) $(3.89) $ 0.47 Extraordinary gain - - 0.14 Cumulative effect of change in method of accounting for income taxes - 0.09 - ----------- ------------ ----------- NET INCOME (LOSS) PER COMMON SHARE $(0.30) $(3.80) $ 0.61 =========== ============ =========== Weighted average share used in computing net income (loss) per common share 4,113,458 4,323,325 4,519,096 =========== ============ ===========
See accompanying notes to supplemental consolidated financial statements. SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS REPRESENTING INCREASES (DECREASES) IN CASH YEARS ENDED MAY 31, 1992 1993 1994 - ------------------- ---- ---- ---- Cash flows from operating activities: $ (1,230,726) $ (16,423,552) $ 2,786,685 Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on retirement of debt - - (645,122) Cumulative effect of change in accounting method - (411,247) - Depreciation and amortization 5,287,421 5,536,187 3,579,741 Restructuring charges 660,832 8,487,461 - (Gain) loss on sale of fixed assets 31,348 253,268 (3,994) Compensation in form of stock 44,837 110,088 35,135 Changes in assets and liabilities: Accounts receivable (3,838,002) 2,359,708 34,438 Inventories (152,133) (1,111,469) 644,061 Prepaid and other current assets (83,971) 125,506 (7,755) Accounts payable 100,701 (1,424,087) 4,465,416 Accrued liabilities 993,713 (197,639) (4,828,368) Other liabilities (11,001) - (320,683) ------------- ------------- ------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 1,803,019 (2,695,776) 5,739,554 ------------- ------------- ------------- Cash flows from investing activities: Capital expenditures (1,967,348) (2,781,865) (1,527,561) Proceeds from sale of fixed assets 6,133,450 28,761 54,850 Intangible assets, principally patent costs (614,882) (516,405) 37,979 ------------- ------------- ------------- NET CASH (USED IN) PROVIDED BY INVESTMENT ACTIVITIES 3,551,220 (3,269,509) (1,434,732) ------------- ------------- ------------- Cash flows from financing activities: Cash dividends paid - (450,000) (956,000) Proceeds from long-term borrowings - 983,000 - Proceeds from short-term borrowings - 2,805,000 - Proceeds from sales of common stock 378,600 354,206 207,657 Purchases of treasury stock (106,552) (369,420) - Repayment of short-term debt - - (2,805,000) Repayment of long-term debt and capital lease obligations (373,640) (2,864,320) (2,623,379) ------------- ------------- ------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (101,592) 458,466 (6,176,722) ------------- ------------- ------------- Effect of exchange rate changes on cash (471,154) (321,691) 41,998 ------------- ------------- ------------- Net change in cash 4,781,493 (5,828,510) (1,829,902) Cash at beginning of year 3,695,652 8,477,145 2,648,635 ------------- ------------- ------------- Cash at end of year $ 8,477,145 $ 2,648,635 $ 818,733 ============= ============= =============
See accompanying notes to supplemental consolidated financial statements. SUMMARGRAPHICS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Retained Treasury ------------------ Additional Earnings Cumulative Stock and Number of Paid-in (Accumulated Translation Stockholder Stockholders' Years ended May 31, 1992, 1993 and 1994 Shares Amount Capital Deficit) Adjustment Note Equity --------- ------- ----------- ------------ ----------- ----------- ------------- Balance at May 31, 1991 4,090,913 $40,909 $37,485,194 $ 2,443,387 $(266,463) $(184,717) $ 39,518,310 Sale of common stock 121,000 1,210 48,519 - - - 49,729 Sale of common stock pursuant to the 1987 Employee Stock Plan 14,047 140 84,142 - - - 84,282 Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan 36,656 367 244,222 - - - 244,589 Awards granted pursuant to the 1987 stock plan 5,400 54 44,783 - - - 44,837 Tax benefit from the exercise of options below fair market value - - 14,403 - - - 14,403 Net loss - - - (1,230,726) - - (1,230,726) Purchase of treasury stock at $7.10 per share - - - - - (106,552) (106,552) Unrealized translation gain - - - - 420,219 - 420,219 --------- ------- ----------- ------------ --------- --------- ------------ Balance at May 31, 1992 4,268,016 42,680 37,921,263 1,212,661 153,756 (291,269) 39,039,091 --------- ------- ----------- ------------ --------- --------- ------------ Sale of common stock 145,929 1,460 58,540 - - - 60,000 Sale of common stock pursuant to the 1987 Employee Stock Plan 3,000 30 17,970 - - - 18,000 Imputed benefit from the granting of options below fair market value - - 75,000 - - - 75,000 Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan 58,610 586 275,620 - - - 276,206 Awards granted pursuant to the 1987 stock plan 4,850 48 35,040 - - - 35,088 Net loss - - - (16,423,553) - - (16,423,553) Sale of treasury stock at $8.00 per share - - 13,855 - - 186,145 200,000 Purchase of treasury stock at $7.69 per share - - - - - (369,420) (369,420) Unrealized translation gain - - - - (146,692) - (146,692) Dividends paid to stockholders' of CAD Warehouse, Inc., an S-corporation - - - (450,000) - - (450,000) --------- ------- ----------- ------------ --------- --------- ------------ Balance at May 31, 1993 4,480,405 44,804 38,397,288 (15,660,892) 7,064 (474,544) 22,313,720 --------- ------- ----------- ------------ --------- --------- ------------ Sale of common stock pursuant to the 1987 Employee Stock Plan 11,333 113 42,219 - - - 42,332 Sale of common stock pursuant to the 1988 Employee Stock Purchase Plan 46,854 469 164,856 - - - 165,325 Awards granted pursuant to the 1987 stock plan 7,100 71 35,064 - - - 35,135 Net income - - - 2,786,685 - - 2,786,685 Unrealized translation gain - - - - (310,002) - (310,002) Dividends paid to stockholders' of CAD Warehouse, Inc., an S-corporation - - - (956,000) - - (956,000) --------- ------- ----------- ------------ --------- --------- ------------ Balance at May 31, 1994 4,545,692 $45,457 $38,639,427 $(13,830,207) $(302,938) $(474,544) $ 24,077,195 ========= ======= =========== ============ ========= ========= ============
See accompanying notes to supplemental consolidated financial statements. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS May 31, 1992, 1993 and 1994 Summagraphics Corporation and Subsidiaries NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The Company is primarily engaged in the manufacture and sale of digitizing tablets (computer input devices), and plotters (computer output devices). These products are used in applications with high performance computer graphics systems such as computer-aided design. The Company also engages in the manufacture and sale of cutters. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated. Cash Equivalents. For the purpose of cash flows, the Company considers all highly liquid investments which maturities of three months or less to be cash equivalents. The Company had no cash equivalents at May 3l, 1993 and 1994. Inventories. Inventories are stated at the lower of cost or market. Cost is applied on a first-in. first-out (FIFO) basis; market is determined on the basis of estimated net realizable value. Fixed Assets. Fixed assets acquired are stated at cost. Equipment and furniture under capital leases are stated at the lower of the present value of future minimum lease payments or fair value are the inception of the lease. Building depreciation is provided on the straight-line method ova a period of 15 years, depreciation of furniture and fixtures and machinery and equipment (including amortization of assets covered by capital leases) is provided on the straight-line method, based on estimated useful lives ranging from 3 to 10 years. Amortization of leasehold improvements is provided over the lesser of estimated useful life of the improvement or the life of the lease. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized. Intangible Assets. Goodwill represents the amount by which the cost to purchase Houston Instrument exceeded the fair market value of the related net assets. Goodwill is being amortized over 40 years using the straight-line method. Other acquired identifiable intangible assets are amortized using the straight-line method over lives not exceeding 7.5 years. Other intangibles consist of patent application costs which are amortized on a straight-line basis over the lesser of the lives of the applicable patents or estimated life of the product utilizing the patent. Revenue Recognition. The Company recognizes revenue when product is shipped to customers. Under contract, certain customers may return a small percentage of the prior quarter's net purchases provided the product is in resale condition and a new order of equal value is placed for delivery within 30 days. The Company carries reserves for these and other returns based on historical trends. Income Taxes. Effective June 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which 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 this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Prior to June 1, 1992 the Company recorded taxes under the provisions set forth in Statement of Financial Accounting Standards No. 96. Per Share Data. Net income (loss) per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and warrants, calculated by using the Treasury Stock method, and are included when their effect is not antidilutive. Foreign Exchange. Assets and liabilities of foreign subsidiaries generally are translated into U.S. dollars at exchange rates in effect at the end of the year whereas revenues and expenses are translated using average exchange rates that prevailed during the year. Gains and losses that result from this process are shown as an adjustment in stockholders' equity. Reclassifications. Certain reclassifications have been made to conform prior years' data to the current presentation. Basis of Presentation. The supplemental consolidated financial statements of the Company have been prepared to give retroactive effect to the merger with Cad Warehouse, Inc., an S-Corporation, on November 10, 1994. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation, however, they will become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the business combination are issued. NOTE 2: RESTRUCTURING AND OTHER CHARGES In the fourth quarter of 1993, the Company incurred an $8,487,461 restructuring charge in response to the difficult worldwide economic conditions as well as to maximize cost efficiencies. The restructuring charge was provided to cover costs of reductions in workforce and the relocation of the Company's Connecticut manufacturing operations to its Texas facility. The charge included a provision of $248,000 for fixed asset write downs due to the consolidation. $2,606,000 of lease and leasehold improvement costs for the unused portion of its Connecticut facility, S2,629,127 for severance and related charges due to a 15% reduction of workforce in June 1993 and $l,636,334 for manufacturing consolidation costs consisting of moving, relocation, and severance. In the third quarter of 1992, the Company incurred a $1,124,000 restructuring charge as a result of implementing a computer system allowing the management and administrative processes of the Connecticut and Texas operations to be consolidated. The charge included a provision of $70,000 for asset write downs. $702,000 for severance and related charges and $352,000 for consolidation costs. NOTE 3: INTANGIBLE AND OTHER ASSETS Significant components of intangible and other assets at May 31, 1993 and 1994 are as follows: 1993 1994 ---- ---- Goodwill $ 9,570,084 $ 9,570,084 Other acquired intangibles 3,149,191 2,788,776 ----------- ----------- 12,719,275 12,358,860 Less accumulated amortization 2,703,829 3,232,121 ----------- ----------- 10,015,446 9,126,739 Other assets 386,144 382,000 =========== =========== $10,401,590 $ 9,508,739 NOTE 4: ACCRUED LIABILITIES Significant components of accrued liabilities at May 31, 1993 and 1994 are as follows: 1993 1994 ---- ---- Payroll and other compensation $ 2,048,649 $ 1,460,817 Federal, state, foreign and payroll withholding taxes 1,367,516 774,286 Sales returns and allowances 409,900 1,040,343 Restructuring costs 6,115,091 2,081,346 Other 4,196,530 3,916,904 ----------- ----------- $14,137,686 $ 9,273,696 =========== =========== NOTE 5: INDEBTEDNESS a. Long-Term Debt. Long-term debt at May 31, 1993 and 1994 consists of the following: 1993 1994 ---- ---- Convertible subordinated note (i) $ 2,500,000 $ - Other (ii) 1,359,000 1,095,325 ----------- ----------- 3,859,000 1,095,325 Less current maturities 232,000 148,019 ----------- ----------- $ 3,627,000 $ 947,306 =========== =========== The aggregate maturities of long-term debt are as follows: 1995 $ 148,019 1996 148,017 1997 88,810 1998 88,810 1999 and thereafter 621,669 ----------- $ 1,095,325 =========== i. Convertible Subordinated Note. In connection with the acquisition of Houston Instrument, the Company issued to the seller an 8%, five-year, interest only, $5,000,000 convertible subordinated note due on May 1, 1995. The note was convertible at any time after May 1, 1991 into 333,333 shares of common stock of the Company at $15.00 per share, subject to adjustment, through the exercise of attached warrants. In July 1992, the Company exercised its option to prepay $2,500,000, thereby reducing the remaining note balance to $2,500,000. In May 1994, the Company repurchased the note (with a remaining balance of $2,500,000) for $1,800,000 resulting in an extraordinary gain, net of related costs, of $645,122. In connection with the more repayment, the Company cancelled the existing 333,000 warrants. The Company then issued 300,000 warrants to purchase shares of the Company's common stock (150,000 of which are exercisable at $15.00 a share, subject to adjustment, and expire on May 1, 1995 and 150,000 of which are exercisable at $9.00 a share, subject to adjustment, and expire on May 1, 1997). ii. Other. Consists primarily of local borrowings of a Belgian subsidiary, including a $1,065,600 mortgage due in the year 2005, on the subsidiary's facility in Gistel, Belgium. Interest rates on this debt range from 7.55% to 10% per annum. b. Revolving Credit Agreements. On May 25. 1992, the Company entered into an $8,000,000 Revolving Credit Agreement which was amended in May 1994, reducing the credit line to $6,000,000 and extending the expiry to November 30, 1994. Borrowings under this agreement may be in the form of various bank instruments at rates based on either the bank's base rate or the London Inter-Bank Offered Rate ("LIBOR"), at the Company's option, and are secured by substantially all of the Company's North American assets. Under the terms of the agreement the Company is subject to certain covenants and restrictions. At May 31, 1994, the Company was in compliance with all covenants and restrictions. At May 31, 1994, $5,560,239 was available under this agreement, net of outstanding letters of credit of $439,761. In July 1994, the Company entered into an $8,000,000 Credit Agreement with a new bank replacing the $6,000,000 facility in place at May 31, 1994. Under the terms of the agreement the Company is subject to certain covenants and restrictions. Borrowings under this agreement may be in the form of various bank instruments at rates based on the bank's base rate and are secured by substantially all of the Company's North American assets. On October 12, 1992, one of the Company's Belgian subsidiaries entered into a $4,000,000 Credit Agreement. This agreement has no defined expiry date and requires the bank to give six months notice of termination, if no defaults exist. Borrowings under this agreement may be in the form of various bank instruments, in various currencies and at various rates, at the Company's option, and are secured by essentially all of the subsidiary's assets except real property. Under the terms of the agreement the subsidiary is subject to certain covenants and restrictions. As of May 31, 1994 the subsidiary was in compliance with all covenants and restrictions. At May 31, 1994, $4,000,000 was available under this agreement. The following table sets forth the Company's borrowing activity and financing rates under bank note agreements during the years ended May 31, 1993 and 1994: 1993 1994 ---- ---- Average of daily balances outstanding $1,055,462 $ 260,422 Maximum amount outstanding $6,004,100 $2,805,000 Weighted average daily interest rate 5.78% 5.22% a. Common Stock Reserved. The following amounts of shares of common stock are reserved for issuance at May 31, 1994: Stock Option Plans: Employee stock plan 1,274,914 Non-employee director stock option plan 75,000 Performance unit plan 50,000 --------- 1,399,914 Warrants 300,000 Employee stock purchase plan 72,138 --------- 1,772,052 ========= b. Stock Option Plans. The Company's 1987 Stock Plan was amended at a Special Meeting of Stockholders held on May 25, 1994 increasing the number of shares authorized for issuance from 750,000 to 1,350,000. This plan provides for the granting of options to purchase a total of 1,350,000 shares of common stock to directors, consultants, officers and other employees. The Company's 1988 Non-Employee Director Stock Option Plan ("Directors' Plan") for outside directors provides for the issuance of options for 75,000 shares of common stock exercisable for a period of ten years from date of the option grant. Under the Directors' Plan, each member of the Board of Directors ("Board") who is neither an employee nor an officer of the Company will be automatically granted on October 31 of each year an option to purchase 3,000 shares of the Company's common stock. In addition to these two plans the Board may also grant qualified and non-qualified options, stock purchase rights and stock awards. Any options, awards, etc. granted under these plans are required to be at prices which are not less than the fair market value per share of common stock on the date of grant. The options, awards, etc. shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Board may specify. Each option shall expire on the date specified by the Board, subject to earlier termination provisions, but not more than, under the 1987 Stock Plan, ten years and one day and, under the Directors' Plan, ten years, from the date of grant. A summary of changes in stock issuable under employee and non-employee option plans follows:
Range of Shares Exercise Prices - ----------------------------------------------------------------------------------------- Outstanding at May 31, 1991 471,026 S6.00-S14.25 Granted 129,800 7.00- 13.25 Exercised (19,847) 6.00- 13.25 Cancelled (80,079) 6.00- 14.25 - ----------------------------------------------------------------------------------------- Outstanding at May 31, 1992 500,900 6.00- 13.25 Granted 284,850 3.75- 9.00 Exercised (7,850) 4.00- 9.00 Cancelled (152,300) 7.00- 12.00 - ----------------------------------------------------------------------------------------- Outstanding at May 31, 1993 625,600 3.75- 13.25 Granted 543,673 .0l- 7.13 Exercised (18,233) 3.50- 7.13 Cancelled (201,937) 3.13- 11.50 - ----------------------------------------------------------------------------------------- Outstanding aa May 31,1994 949,103 $ .01-S13.25 - -----------------------------------------------------------------------------------------
At May 31, 1994, 308,962 options were exercisable at prices ranging from $.01 to $13.25 a share. c. Employee Stock Purchase Plan. The 1988 Employee Stock Purchase Plan which was approved by stockholders in 1989, provides that eligible employees may authorize payroll deductions between 2% and 10% of their regular pay to purchase up to a maximum of 2,000 shares of the Company's common stock in a fiscal year. The purchase price of the stock is the lesser of 85% of the average market price of the Company's common stock on either the first or last business day of the Payment Period. Payment Periods begin on June 1 and December 1 each year. The aggregate number of shares which may be purchased under this plan is 250,000, of which 177,862 have been purchased to date. d. Performance Unit Plan. The 1989 Performance Unit Plan which was approved by stockholders in fiscal 1990, provides that officers and key employees of the Company may be granted performance units by the Board or a committee comprised of at least three Board members (no such committee has been appointed). Performance units, which are the equivalent of $100 each, may be granted either in cash or shares of common stock or any combination thereof, to participants upon the attainment of certain achievement objectives as established by the Board. No performance units have been granted to date. e. Share Repurchase Plan. In January 1991, the Company announced a program to expend up to a maximum of $1 million to repurchase shares of the Company's common stock from time-to-time at current market prices. During 1992, 1993 and 1994 shares repurchased under this plan were 15,000, 48,037 and 0, respectively. Sales, operating income (loss) and identifiable assets of the Company by geographical area are as follows: NOTE 7: FOREIGN AND DOMESTIC OPERATIONS, EXPORT SALES AND MAJOR CUSTOMERS
Years Ended May 31, 1992 1993 1994 - --------------------------------------------------------------------------- Sales to unaffiliated customers: North America $39,701,057 $ 47,002,266 $43,667,203 Europe 25,086,598 21,881,239 21,435,080 Other 12,507,787 12,520,480 12,653,067 - --------------------------------------------------------------------------- $77,295,442 $ 81,403,985 $77,755,350 - --------------------------------------------------------------------------- Operating income (loss): North America $ (797,688) $(10,869,830) $ 1,451,220 Europe 1,375,853 (4,254,825) 954,297 Other 231,524 (1,625,314) 258,980 - --------------------------------------------------------------------------- $ 809,689 $(16,749,970) $ 2,664,497 - ---------------------------------------------------------------------------
Balance at May 31, 1992 1993 1994 ---- ---- ---- Identifiable assets: North America $45,589,053 $38,236,994 $35,081,750 Europe 19,161,252 20,066,457 18,751,166 Eliminations (3,664,005) (6,027,907) (6,497,095) ----------- ----------- ----------- $61,086,300 $52,275,544 $47,335,821 =========== =========== =========== During 1992, 1993 and 1994, export sales were $8,913,022, $9,751,641, and 12,089,444, respectively. No one customer accounted for greater than 10% or net sales in any of these years. NOTE 8: INCOME TAXES No provison for income taxes was recorded in 1994 due to the Company's tax net operating loss position. The provison (benefit) for income taxes consists of the following for 1992 and 1993: Year ended May 31, 1992 Current Deferred Total ------- -------- ----- Federal $ 413,658 $ - $ 413,658 State 115,623 - 115,623 Foreign 529,700 - 529,700 ---------- ---------- ---------- Total $1,058,981 $ - $1,058,981 ========== ========== ========== Year ended May 31, 1993 Current Deferred Total ------- -------- ----- Federal $ (411,247) $ 789,773 $ 378,526 State - (88,276) (88,276) Foreign - (290,250) (290,250) ---------- ---------- ---------- Total $ (411,247) $ 411,247 $ - ========== ========== ========== Effective June 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). SFAS 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 this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the net deferred tax asset (liability) as of May 31, 1994 were as follows: U.S. Federal & State Foreign ------------ ----------- Deferred tax assets: Other assets $ 328,125 $ - Inventory reserves 1,495,081 - Restructuring accruals 1,261,054 354,003 Other miscellaneous items 1,179,505 196,632 Tax credit carryforwards 1,985,988 - Net operating loss carryforwards 1,708,387 2,084,937 Valuation allowance (7,439,904) (900,669) ---------- ---------- Total deferred tax asset 518,236 1,734,903 Deferred tax liabilities: property, plant and equipment 518,236 - Tax deductible goodwill - 1,734,903 ---------- ---------- Total deferred tax liability 518,236 1,734,903 Net deferred tax asset (liability) $ - $ - ========== ========== The valuation allowance for deferred tax assets as of June 1, 1993 was $9,030,763. The net change in the valuation allowance for the year ended May 31, 1994 was a decrease of $690,190. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of May 31, 1994 will be allocated as follows: Income tax benefit that would be reported in the consolidated statement of operations $8,086,652 Goodwill 253,921 ---------- $8,340,573 ========== The provision for income taxes varies from the amounts computed by applying the U.S. Federal Income Tax Rate of 34% as follows: 1992 1993 1994 ---------------------------------------------------------------- Amount % Amount % Amount % ------ -- ------ -- ------ -- Computed "expected" tax expense (benefit) $ (58,393) (34.0) $ (5,723,832) (34.0) $ 947,473 34.0 Increase (reduction) resulting from: Benefit of Subchapter S Corporation status (45,656) (26.6) (169,573) (1.0) (333,520) (12.0) Utilization of capital loss (163,000) (94.9) - - - - Utilization of tax credits (763,000) (444.3) - - - - Change in the beginning of the year balance of the valuation allowance for deferred tax assets allocated to income tax expense - - 6,298,431 37.4 (690,190) (24.8) Tax effect of other expenses not deductible for income tax purposes 1,864,428 1085.7 - - - - Differing foreign tax rates 107,564 62.6 (166,204) (1.0) 57,217 2.1 State taxes-net of federal benefit 76,311 44.4 (223,487) (1.3) - - Amortization of goodwill 28,333 16.7 28,454 .2 25,614 .9 Other permanent differences 12,094 7.0 (43,789) (.3) (6,594) (.2) ---------- ------ ------------ ---- ---------- ---- $1,058,981 616.6 $ - - $ - - ========== ====== ============ ==== ========== ====
At May 31,1994, the Company had available NOL carryforwards of approximately $4,495,000 and $5,341,700 for U.S. and foreign tax reporting purposes, respectively. The NOL carryforwards for tax reporting purposes expire in varying amounts in the U.S. through the year 2008. The NOL's in foreign jurisdictions carryforward indefinitely. Further, the Company has general business credit carryforwards of approximately $674,300 which expire through the year 2007, foreign tax credits of $803,300 which expire through the year 2000, and alternative minimum tax carryforwards of $322,000 which have no expiration dates. U.S. and foreign income (loss) from operations before federal, state, and foreign income taxes are as follows: 1992 1993 1994 ---- ---- ---- U.S $(1,547,602) $(14,257,507) $1,344,314 Foreign 1,241,575 (3,076,037 461,431 ----------- ------------ ---------- $ (306,027) $(17,333,544) $1,805,745 =========== ============ ========== The Company is currently undergoing an audit of its 1991 through 1993 U.S. Federal income tax returns. The Company does not expect the results of this audit to have a material effect on its financial position. NOTE 9: COMMITMENTS AND CONTINGENCIES a. Leases. In May 1992, The Company concluded a sale and leaseback of its Austin, Texas facility. The Company recorded a $612,167 gain on the sale which was deferred and is being amortized over the lease term. The lease is an 18 year operating lease expiring in the year 2010. The lease provides for a fixed rental charge plus additional rent based on increases in the Consumer Price Index. Under the terms of the agreement, the Company is subject to certain covenants and restrictions. The Company leases various assets used in its operations, primarily buildings and equipment. Substantially all of the leases provide that the Company pay for maintenance and insurance. Future minimum lease payments for leased capital assets total $1,101,727 of which $108,842 represents interest. Capital leases and non-cancelable operating leases at May 31,1994 require the following annual minimum lease payments: Capital Operating leases leases ------- --------- 1995 $ 521,255 $ 1,826,351 1996 298,391 1,764,800 1997 260,381 1,740,944 1998 21,700 1,678,164 1999 - 1,385,908 Later years - 9,488,556 ---------- ----------- $1,101,727 $17,884,723 ========== =========== Rental expense on operating leases for 1992, 1993 and 1994 was $1,031,685, $1,783,999 and $1,510,958, respectively. The original cost and net book value of furniture and equipment under capital lease at May 31, 1994 was $2,675,871 and $1,136,611, respectively. b. SOURCING AGREEMENTS. On February 4, 1993, the Company entered into an eighteen-month (from date of first shipment) sourcing agreement with a foreign manufacturer, which requires minimum quantities of each of the covered products to be ordered and the total value of all ordered products must be at least $6,500,000. Under the agreement, the Company has the ability to inspect (and reject) all delivered products and retains its propriety position. c. Employee 401 (k) Plan. The Company's 401(k) Plan covers all full-time employees who have completed six months of continuous employment and are eighteen years of age or older. Under the terms of the plan an employee may contribute up to 20% of annual compensation, up to 5% of which will be matched by the Company at 25%, 50%, 75% or 100% of the employee contribution depending on years of service. Employee contributions vest fully upon contribution while employer contributions vest at 20% per year. Employer contributions for 1992, 1993 and 1994 were $322,426, $268,299 and $0, respectively. Additional contributions may be authorized by the Board of Directors predicated on Company performance. d. Litigation. In the second quarter of 1994 the Company entered into an agreement with California Computer Products and Sanders Associates, each of which is a subsidiary of Lockheed Corporation, that resolved all outstanding litigation between the parties. As part of the accord, the Company received a settlement amount which resulted in a gain being recorded in the second quarter of the year. The Company is party to various legal actions and administrative proceedings and subject to various claims arising in the normal course of business. The Company believes that the disposition of these matters will not have a material adverse effect on its financial position or results of operations taken as a whole. NOTE 10: SUPPLEMENTARY DATA Advertising expenditures for the years 1992, 1993 and 1994 were $5,197,273, $5,941,915 and $4,360,218, respectively. NOTE 11: SUPPLEMENTARY CASH FLOW INFORMATION For the years ended May 31, 1992, 1993 and 1994 certain supplementary cash flow information follows:
Cash paid during the year for: 1992 1993 1994 ---- ---- ---- Interest $702,420 $449,511 $421,375 Income taxes $168,736 $498,955 - Non-cash financing activities, capital leases $409,592 $693,268 $174,570
NOTE 1: ACQUISITION AND SUBSEQUENT EVENT On November 10, 1994 the Company merged with CAD Warehouse, Inc., an S-Corporation, (CAD Warehouse) in exchange for 510,129 shares of the Company's common stock. Under terms of the merger agreement each share of CAD Warehouse common stock was exchanged for 170.043 shares of the Company's common stock. The merger was accounted for using the pooling of interests method. Financial information for the periods prior to the business combination is summarized below. The combined financial statement amounts are based on the respective historical financial statements and the notes thereto. The combined revenues and net earnings summarized below combine the Company's historical revenues and net earnings for the years ended May 31, 1992, 1993, and 1994, with CAD Warehouse's historical revenues and net earnings for the same periods. Intercompany sales between the Company and CAD Warehouse, a distributor of the Company's products, have been eliminated.
1992 1993 1994 ---- ---- ---- Revenues: Summagraphics $ 73,894,603 70,337,420 64,670,079 CAD Warehouse 3,699,109 13,770,301 15,865,464 Elimination (298,270) (2,703,736) (2,780,193) ------------ ----------- ----------- Combined $ 77,295,442 81,403,985 77,755,350 ------------ ----------- ----------- Net Earnings (Loss): Summagraphics $ (1,365,008) (16,922,296) 1,805,745 CAD Warehouse 134,282 498,744 980,940 Combined $ (1,230,726) (16,423,552) 2,786,685 ------------ ----------- ----------- Combined net income (loss) per share $ (0.30) (3.80) 0.61 ------ ------ ----
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Summagraphics Corporation: We have audited the accompanying supplemental consolidated balance sheets of Summagraphics Corporation and subsidiaries as of May 31, 1993 and 1994. and the related supplemental consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 1994. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the merger of Summagraphics Corporation and CAD Warehouse, Inc. on November 10,1994, which has been accounted for as a pooling of interests as described in Note 12 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Summagraphics Corporation and subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summagraphics Corporation and subsidiaries as of May 31, 1993 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31,1994, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. As discussed in Note 8 to the supplemental consolidated financial statements, the Company changed its method of accounting for income taxes in 1993. KPMG Peat Marwick LLP Austin, Texas June 28, 1994, except as to Notes 5b and 12, which are as of July 18, 1994 and November 10, 1994, respectively. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Summagraphics Corporation: We have audited the accompanying supplemental consolidated balance sheets of Summagraphics Corporation and subsidiaries as of May 31, 1993 and 1994, and the related supplemental consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 1994. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We conducted our audits 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 examination 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 audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the merger of Summagraphics Corporation and CAD Warehouse Inc. on November 10, 1994, which has been accounted for as a pooling of interests as described in Note 12 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Summagraphics Corporation and subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summagraphics Corporation and subsidiaries as of May 31, 1993 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1994, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. As discussed in Note 8 to the supplemental consolidated financial statements, the Company changed its method of accounting for income taxes in 1993. /s/ KPMG Peat Marwick LLP Austin, Texas June 28, 1994, except as to Notes 5b and 12, which are as of July 18, 1994 and November 10, 1994, respectively. EX-10.29 9 AMEND. NO. 2 DATED APR. 12, 1995 OF THE LEASE AGRMNT EXHIBIT 10.29 April 12, 1995 Summagraphics Corporation 60 Silvermine Road Seymour, CT 06483 Re: Lease Agreement dated May 28, 1992 between QRS 10-12 (TX), Inc. and QRS 11-5 (TX), Inc., as Landlord, and Summagraphics Corporations, as Tenant, as Modified by Letter Agreements dated March 16, 1993 and August 27, 1993 ---------------------------------------------------------- Gentlemen: Reference is hereby made of the above-referenced lease (the "Lease"). Capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the lease (including all exhibits thereto). Effective as of February 28, 1995, the Lease is hereby amended as follows: 1. Section C.(i) of Exhibit E to the Lease is deleted in its entirety and replaced with amended text as follows: (i) Minimum Tangible Net Worth. Permit Consolidated Tangible Net Worth -------------------------- to be less than the amount set forth below at the end of any fiscal quarter during the indicated period: from 5/25/92 to 8/31/95 $10,000,000 from 9/1/95 to 5/31/96 $13,000,000 from 6/1/96 to 5/31/99 $17,000,000 from 5/1/99 and thereafter $22,000,000 2. Section C.(iii) of Exhibit E to the Lease is deleted in its entirety. 3. The following paragraphs are added to Section C of Exhibit E to the Lease: (x) Indebtedness Ratio. Permit the ratio of Funded Indebtedness (as ------------------ hereinafter defined) to Total Capitalization (as hereinafter defined) at any time to exceed .56:1. As used herein, "Funded Indebtedness" shall mean (a) all obligations of the Tenant or its consolidated Susidiaries for or on account of borrowed money, whether or not classified as current or long-term obligations in accordance with GAAP, less any Indebtedness represented by debt instruments ("Convertible Debt") issued by the Tenant which are convertible to shares of common stock of the Tenant, plus (b) all capitalized lease obligations of the Tenant or its consolidated Subsidiaries. As used herein, "Total Capitalization" shall mean the sum of (a) Consolidated Tangible Net Worth, plus (b) Funded Indebtedness, plus (c) Convertible Debt. (xi) Current Ratio. Permit the ratio of (a) current assets of the ------------- Tenant and its consolidated Subsidiaries determined on the consolidated basis in accordance with GAAP, to (b) the current liabilities of the Tenant and its consolidated Subsidiaries determined on the consolidated basis in accordance with GAAP, at any time to be less than 1.25:1. Tenant agrees to pay all of Landlord's attorneys' fees and costs in preparing this letter agreement and reviewing and preparing any modification of the loan documents. Tenant also agrees to pay all fees and costs of the lender's attorneys in effecting the above-described amendment. Landlord waives any default under the Lease which may have occurred as a result of non-compliance by the Tenant with the covenants amended by paragraphs 1-3 of this letter agreement. Except as amended hereby, the Lease shall remain in full force and effect. This letter agreement shall not be effective unless and until Creditanstalt-BankVerein has consented to the Landlord's execution of this letter agreement. Very truly yours, QRS 10-12 (TX), Inc. By /s/ H. Cabot Lodge III ------------------------ QRS 11-5 (TX), Inc. By /s/ H. Cabot Lodge III ------------------------ Accepted and agreed to: SUMMAGRAPHICS CORPORATION By /s/ Clifford Maxwell ------------------------ -2- CONSENT ------- The undersigned, as the holder of loan documents executed by Landlord to the undersigned evidencing or securing a loan in the original principal face amount of $3,700,000, consents to Landlord's execution of the foregoing letter agreement. CREDITANSTALT-BANKVEREIN By -------------------------- -3- EX-10.30 10 MANUFACTURING AGREEMENT DATED 09-13-95 EXHIBIT 10.30 MANUFACTURING AGREEMENT BETWEEN ------------------------------- SUMMAGRAPHICS CORPORATION ------------------------- AND HARVARD MANUFACTURING VENTURES, LLC --------------------------------------- This AGREEMENT is by and between SUMMAGRAPHICS CORPORATION ("Summagraphics"), a Delaware (U.S.A.) corporation, and HARVARD MANUFACTURING VENTURES, LLC ("HMV"), a Texas (U.S.A.) limited liability company. WHEREAS, Summagraphics has certain rights, title and interest in and to certain products which are set forth in Exhibit(s) attached hereto and made a part hereof, which Exhibit(s) may be amended from time-to-time to include other products of Summagraphics; and WHEREAS, HMV is to manufacture and supply such products for Summagraphics; and NOW, THEREFORE, in consideration of the mutual promises and undertakings hereinafter set forth, as well as other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE 1: DEFINITIONS - ---------------------- For purposes of this Agreement, the following words, terms and phrases, where written with an initial capital letter, shall have the meanings assigned to them in this Article 1. (a) "Agreement" means this Agreement, together with all of the terms and conditions ("Terms") hereof and Attachments and Product Exhibit(s) and Credit Terms appended hereto now or hereafter signed by the Parties, as the same may be modified, amended or supplemented from time to time. (b) "Components" shall mean elements of a Product referenced in the Agreement or attachments to it. (c) "Confidential Information" shall mean information (regardless of whether or not the information is recorded on, or embodied in, a physical object, such as a document, or other tangible medium and whether or not the information is clearly designated, labeled, marked or stated to be confidential) including but not limited to, the Technical Information, knowledge or data furnished by or belonging to Summagraphics relating to its inventions, discoveries, formulas, processes, machines, manufacturing processes, compositions, computer programs, accounting methods, information systems, business and financial plans and reports, or other matters which are and/or may reasonably be recognized as being of a secret or confidential nature. (d) "Credit Terms" shall mean the attachment A1 to this Agreement addressing funding and credit terms and conditions pertaining to this Agreement and the Product Exhibit(s) appended hereto. HMV MC Page 1 of 33 Summagraphics _____ September 13, 1995 (e) "Fit and/or Function" shall mean the capability of the Product to operate and be consistently manufactured in accordance with the Technical Information. (f) "FOB Point" shall have the meaning set forth in the then-current Uniform Commercial Code ("UCC"), made applicable to all modes of transport. In the case of international shipments, unless otherwise agreed in writing, the "FOB Point" shall be at the seaport or airport from which the Products are shipped; and the price does not include the cost of transporting Product(s) from HMV's factory to the seaport or the airport. In the case of local shipments, the FOB Point shall be at Seller's shipping dock, 600 Glen Avenue, Salisbury, Maryland 21801 or as otherwise agreed upon in a Product Exhibit(s) to this Agreement. (g) "Lead-time" shall mean the time elapsed from the date of issuance of Summagraphics' Purchase Order ("P.O.") notification through the Shipdate. (h) "On-time" shall mean on, or no more than five (5) days prior to or later than, Shipdate. (i) "Parties" means the two parties (Summagraphics and HMV) named in the heading of this Agreement. (j) "Parts" shall mean raw material (including kits) which Summagraphics may furnish to HMV to manufacture the Product. (k) The price ("Price") Summagraphics shall pay for Products(s) shall be that which is set forth in Article 4 hereof and Attachments to Product Exhibit(s) hereto. (l) "Product(s)" shall mean finished goods, Spare Parts, Components, and other materials supplied by HMV, referred to by part number in the attachments to the Product Exhibit(s) to this Agreement. (m) "Product Exhibit" shall mean the attachment(s) to this Agreement addressing additional terms and conditions particular to certain Products referenced in the Agreement or attachments to it. (n) "Reliability" shall mean the ability of the Product to operate according to the Technical Information without failure. (o) "Seller" shall mean HMV. (p) "Shipdate" shall mean the bill of lading date or the airway bill date for the purchased Product(s). (q) "Spare Parts" shall mean repair and replacement parts for Products as listed in the attachments to the Product Exhibit(s) to this Agreement. (r) "Specification(s)" shall include all Technical Information, Product requirements and Product characteristics. All such documents are included in this Agreement by reference to the part number listed in the attachments to the Product Exhibit of this Agreement. (s) "Standards" shall mean the applicable standards as detailed in the Technical Information, applicable government and regulatory agency requirements (such as UL, CSA, TUV, FCC, VDE), and other such Standards that apply to the design, manufacture, and sale of the Products. (t) "Technical Information" shall mean all technical knowledge, information, data, trade secrets, manufacturing and test data, and Technical Information involving or relating to the manufacture, production, maintenance and operation of the Products as have heretofore been or may hereafter be HMV MC Page 2 of 33 Summagraphics _____ September 13, 1995 disclosed to HMV. All such documents are included in the Agreement by reference to the part number listed in the attachments to the Product Exhibit(s) of the Agreement. (u) The term ("Term") and effective date ("Effective Date") of this Agreement is/are the Term(s) (including any extension of the initial term) and Effective Date(s) set forth in a Product Exhibit(s) appended to this Agreement relating to one or more Products defined therein. (v) "Term" see "Agreement" in Article 1. ARTICLE 2: AGREEMENT - -------------------- (a) This Agreement, and the Product Exhibit(s) and the Credit Terms appended hereto and incorporated herein by reference, sets forth the mutual understandings reached by the Parties to this Agreement during negotiations concerning the items and work listed herein. This Agreement is limited to the purchase of Products that are specifically identified in a Product Exhibit(s) to this Agreement. Such Product Exhibit(s), in combination with this Agreement, shall form the Terms of purchase/sale. In no way shall this Agreement be construed as an operative document for any Products not identified in a Product Exhibit(s) to this Agreement. (b) HMV hereby grants to Summagraphics a continuing option to procure the Products through the effective time period of this Agreement in accordance with the Terms herein. (c) If problems should be encountered with respect to any technical matters concerning the Products, or if Parties should encounter problems not specifically addressed by this Agreement, HMV and Summagraphics shall discuss them in a cooperative and sincere spirit and attempt to arrive at a mutual satisfactory resolution of the problem. (d) Summagraphics may from time to time, especially in the early phase of this Agreement, furnish Parts or other property ("Property") to HMV for HMV to use in the manufacture of the Product. HMV will not have any obligation to pay Summagraphics for those Parts, but the Product furnished by HMV to Summagraphics shall reflect a reduced Price from the Price reflected in the Agreement in an amount equivalent to Summagraphics' cost for those Parts which Summagraphics demonstrates to HMV by providing documentation evidencing Summagraphics' costs for those Parts. HMV shall purchase a sufficient amount of insurance to cover Summagraphics' ownership rights up to Summagraphics' cost. HMV shall take all necessary and appropriate action to protect Summagraphics' Parts in the same manner as HIV undertakes to protect its own property at the location where those Parts are located. Except for such Parts and Property as may be furnished by Summagraphics to HMV which shall be handled in the manner just described and as may be further addressed in Attachment F hereto, the Terms of this Agreement shall govern all Parts purchased by HMV from third party vendors. HMV MC Page 3 of 33 Summagraphics _____ September 13, 1995 ARTICLE 3: PURCHASE ORDERS - -------------------------- (a) This Agreement is not a purchase order ("P.O.") and does not authorize delivery of or payment for any Products and/or services as described herein. Such authority or order shall be evidenced by P.O.s issued at the discretion of Summagraphics pursuant to this Agreement. Each P.O. shall be in the form prepared by Summagraphics and shall include but is not limited to: Summagraphics' P.O. number(s), Summagraphics' part number, quantity ordered, requested Ship date and desired shipping destination. (b) On or about the tenth (lOth) day of every month, Summagraphics will provide an updated rolling forecast for Products to be ordered during the next six (6) months. Such forecast are provided for planning purposes only and are not purchase commitments. (c) In the event that HMV's production capacity is not sufficient to meet total customer demand, and allocation is required, HMV agrees to provide top preference to Summagraphics' requirements to the extent of forecasted demand. In the event HMV cannot maintain production capacity to meet Summagraphics' forecasted demand, HMV agrees to cooperate with Summagraphics in the development of alternate sources. (d) Any Terms and conditions printed on the face or reverse side of Summagraphics' P.O. form and/or HMV's acknowledgment form shall not be part of this Agreement or add to or modify terms in this Agreement unless both Parties hereto expressly agree in writing to include any such Terms or conditions. (e) For expediency purposes, Summagraphics may issue P.O.s by facsimile or electronic mail. HMV shall confirm the receipt of Summagraphics' P.O. notification, including the quantity and requested Ship date by facsimile or electronic mail, within two (2) working days after receipt of Summagraphics' P.O. notification. In the event such notification is not received by Summagraphics within five (5) working days of receipt by HMV, the P.O. shall be deemed to be accepted by HMV. (f) HMV will accept any P.O. that is in compliance with the Terms and conditions of this Agreement and its related Product Exhibit(s), insofar as the quantities ordered by Summagraphics are reasonably within Summagraphics' monthly rolling demand forecast and rescheduling privileges expressed in the Product Exhibit(s). (g) Summagraphics may periodically request HMV to verify all active P.O. delivery commitment quantities and schedules. HMV shall respond to such request within two (2) working days after receipt of request by Summagraphics. ARTICLE 4: PRICING AND PAYMENT - ------------------------------ (a) The initial agreed upon Price as fixed in U.S. dollars shall be as detailed in the Attachments to each of the Product Exhibit(s). HMV MC Page 4 of 33 Summagraphics _____ September 13, 1995 (b) Unless otherwise specified on individual P.O.s, all Prices are for Products delivered from the FOB Point to Summagraphics' assigned carrier or freight forwarder. (c) Except to the extent that relevant government laws prohibit, HMV represents to Summagraphics that Prices for Products sold hereunder shall be no less favorable than the Prices at which HMV is selling such Products or equivalent products at the same time to any other commercial customers in the same or similar quantities. If HMV reduces its prices to any other such customer below the price then in effect for Summagraphics, Summagraphics shall receive the benefit of such a lower Price for any quantity of Products not yet shipped from the FOB Point and for all future orders submitted during the time period the discounted Price is in effect. (d) HMV agrees to use all reasonable efforts to reduce Prices from time-to-time. To this end, the Parties agree to cooperate to identify cost reductions, followed by commercially reasonable efforts to quickly implement such reductions. The Parties will discuss in good faith the determination as to the initiating Party in any such cost reductions on a case-by-case basis, and upon approval of implementation by Summagraphics, such cost savings shall be shared, from incorporation in shipped Product, for the balance of the Agreement, on the following basis: (i) Changes originated by HMV: Any material or labor savings will be shared equally between Summagraphics and HMV. HMV shall promptly advise Summagraphics of any such savings and Summagraphics shall have the right to review costs for such savings and shall have access to information in HMV's possession in such detail as it reasonably deems appropriate. (ii) Changes originated by Summagraphics: Any material or labor savings will pass to Summagraphics. (e) Upon reasonable notice and at a mutually agreeable time, HMV agrees to participate in periodic Price reviews with Summagraphics, and, upon mutual agreement of the Parties hereto achieved through the exercise of their reasonable efforts, shall adjust pricing if appropriate based on market costs of components, benchmark market prices for same or similar Products from competitive sources, or significant change in forecasted purchase quantities. (f) Summagraphics may elect to re-negotiate prices, during the quarter on the basis of market conditions which significantly affect the price for the Product. The re-negotiated price will be agreed to by both Parties and incorporated into this Agreement; however, in no event will the unit price be higher than the unit price for the immediately preceding quarter other than as may be necessitated by market prices or significant changes in purchase order volumes. If the parties cannot agree on a renegotiated price, this Agreement shall remain in Full Force and affect at their current Prices. (g) Summagraphics and HMV acknowledge that Price(s) presented in this Agreement are predicated on market conditions at the Effective Date of this Agreement and that a material change in market conditions may impact HMV's cost structure and necessitate a change in Price(s). HMV shall have the burden of demonstrating to Summagraphics the materiality of changed HMV MC Page 5 of 33 Summagraphics _____ September 13, 1995 market conditions, whereupon the Parties agree to negotiate in good faith and exercising best efforts a modified mutually agreeable Price(s) for the Product(s). In the event the Parties are unable to reach agreement on Price after reasonable attempt to do so, Summagraphics shall undertake an analysis of competitive pricing for similar products from other vendors and provide HMV with the lowest price Summagraphics is willing to pay to another competent vendor and at which another competent vendor is willing to accept, and HMV shall have the right of first refusal to accept that Price(s), whereupon the Parties shall agree to that Price(s). If HMV rejects the Price(s), either party shall have the right to terminate this Agreement. (h) Payment shall be made as described in each Product Exhibit(s) to this Agreement. Payment does not constitute Product acceptance or evidence of Product acceptance. (i) Summagraphics assumes no liability for components or finished goods beyond that covered by fully authorized and approved P.O.s other than as set forth in Attachment C of a Product Exhibit hereto. ARTICLE 5: SHIPPING AND DELIVERY - -------------------------------- (a) Summagraphics reserves the right to designate a freight forwarder or carrier for the shipment of Products. In the event HMV uses a non-authorized means of transportation, Summagraphics reserves the right to debit HMV the cost difference between Summagraphics' authorized transit method and HMV's actual method used. (b) HMV shall use all reasonable efforts to ship Products to Summagraphics' designated freight forwarder On-time. (c) On-time delivery is of the essence. In the event Products are not expected to be shipped on the agreed Shipdate, and the delay is the fault of HMV, HMV shall immediately notify Summagraphics, and HMV shall bear the difference between shipping cost via normal transit and expedited transit, including air freight. (d) HMV shall package and ship Products in accordance with the applicable regulatory and carrier's requirements, as supplemented by the individual Product Technical Information. The Product Technical Information shall provide for packaging specifications and processing. (e) HMV agrees to arrange shipment of the Products to any mutually agreed upon location, insofar as no government restrictions, such as those described in this Article, apply to Summagraphics' requested destination. (f) Parties shall comply with all applicable export, import, and re-export laws and regulations. The Products covered by this Agreement may fall within the group of "strategic" electronic products or technical data specifically governed by either the U.S. or other governments, the export of which may be subject to export license controls. Prior to exportation, HMV is required to abide by any licenses and provide all documentation which may be required under the applicable laws of the U.S. (including the Export Administration Act and its Regulations), and any other applicable laws and regulations. HMV MC Page 6 of 33 Summagraphics _____ September 13, 1995 (g) HMV shall deliver Products at the FOB Point described in the Product Exhibit(s). Title and liability for loss and damage shall pass to Summagraphics at the FOB Point. (h) HMV shall consider Summagraphics a preferred customer, such that Summagraphics shall be accorded preferential treatment over HMV's other customers. Specifically, if the case arises whereby HMV's production capacity, force majeure conditions, or other limiting factors require that HMV determine an allocation of material and/or resources, Summagraphics' preferential status will assure that HMV will fulfill its obligations to Summagraphics prior to other HMV's customers, for the same or similar Products. ARTICLE 6: RESCHEDULING AND CANCELLATION - ---------------------------------------- (a) HMV shall accept Summagraphics' request to reschedule deliveries according to the provisions in the Product Exhibit(s) to this Agreement. (b) Notwithstanding the rescheduling privileges of the Product Exhibit(s) to this Agreement, Summagraphics reserves the right to reschedule without charge if the Products have unresolved quality problems related to work performed by HMV. (c) Should resale market conditions occur which both Parties agree are justifiable reasons for the cancellation of any P.O.s, the Parties agree to negotiate a just and equitable solution, including cancellation terms for such P.O.s. Unless otherwise agreed in writing by both Parties, such cancellation terms are limited to actual material costs, actual labor costs, and specifically identifiable overhead cost. HMV shall strive in good faith to disposition excess materials to production of other supplier products. If an agreement cannot be reached, this Agreement continues in full force and effect. ARTICLE 7: QUALITY - ------------------ (a) As it is Summagraphics' intent to improve its position as a quality leader, Summagraphics expects and HMV agrees to use all commercially reasonable efforts to supply 100% of the Products purchased herein free of any cosmetic, functional, or manufacturing discrepancies, and to be in compliance with all agreed upon drawings, Technical Information, Standards, and procedures, as detailed in this Agreement. (b) HMV agrees to follow the quality control procedures as specified by Summagraphics and to the specific attachments to the Product Exhibit(s). HMV agrees to follow such procedures during the qualification process and to assure that Products meet the requirements of the appropriate Technical Information, prior to each shipment. (c) Summagraphics reserves the right to process incoming Product dock-to-stock with no incoming inspection. Should the quality of the Products require inspection, Summagraphics retains the right to conduct, at Summagraphics' expense, and incoming inspection of Products at the designated destination in accordance with the inspection Standards and procedures set forth in the attachments to each Product Exhibit(s). Alternatively, upon prior written notice, Summagraphics shall have the HMV MC Page 7 of 33 Summagraphics _____ September 13, 1995 right to conduct, at Summagraphics' expense, source inspection at HMV's site, in accordance with the inspection Standards and procedures set forth in the attachments to each Product Exhibit(s). (d) Summagraphics shall use a commercially reasonable standard in determining whether to reject the Products. In case of Product rejection at Summagraphics' incoming inspection, upon mutual agreement, one of the following corrective actions shall be made: (i) HMV shall rework the rejected Products at a mutually agreed location, or (ii) The delivered Products will be returned to HMV at HMV's expense and HMV will repair or replace such Products, or (iii) HMV shall request Summagraphics to rework the rejected Products. In this case, HMV will furnish to Summagraphics repair or replacement parts for the rework of the rejected Products performed by Summagraphics and will agree to pay the labor costs incurred by Summagraphics, or (iv) HMV shall request Summagraphics to screen the rejected Products, and will pay the reasonable labor costs incurred by Summagraphics. All defective Products will be returned to HMV at HMV's expense. (e) In case of Product rejection during source inspection, HMV shall promptly perform a failure analysis, screening, rework and re-submission of the failed Products to a mutually agreed schedule. (f) If any Products (individual or lot) are rejected twice for the same cause during either Summagraphics' incoming or source inspection, Summagraphics reserves the right to return such rejected Products for either credit or replacement, at Summagraphics' option. (g) Upon request by Summagraphics, HMV shall perform a failure analysis of defective Product and shall advise detailed results of failure analysis and proposed corrective actions to prevent recurrence. Such analysis shall be provided no later than fifteen (15) working days of receipt of defective Product by HMV. ARTICLE 8: REGULATORY COMPLIANCE - -------------------------------- (a) Summagraphics is responsible for the procedures and expenses necessary to obtain approval of Standards. (b) HMV is responsible for associated costs to maintain approvals of Standards. which are described in the Technical Information as an alternate site. HMV is responsible for providing adequate technical Product information and assistance to Summagraphics for submittal of Products, in combination with Summagraphics' Products, to regulatory agencies, to the extent HMV has the right to do so. ARTICLE 9: ENGINEERING CHANGES - ------------------------------- (a) The Parties recognize that from time-to-time changes to the Product(s) may be desirable. HMV and Summagraphics agree to work cooperatively to expeditiously change Products and Technical Information in ways that will HMV MC Page 8 of 33 Summagraphics _____ September 13, 1995 reduce total costs and/or improve Product performance in accordance with the configuration control requirements in the Product Exhibit(s). (b) HMV shall provide Summagraphics with a schedule and cost estimate for implementing Engineering Change Notices ("ECN"); after which both Parties will discuss and determine the responsibilities for such cost. Upon mutual agreement of responsibilities, HMV shall supply supporting data prior to performing the change. (c) The disposition of HMV's existing stock of Products and Summagraphics' open P.O.s (including Spare Parts) affected by any ECN, and any associated replacement costs, will be reviewed by the Parties so as to determine the most equitable and lowest cost settlement possible. Disposition of existing stock will not be to the financial detriment of HMV. (d) Any expenses resulting from Summagraphics' required rework (rework unrelated to HMV's performance to this Agreement) will be negotiated in good faith on a case-by-case between the Parties and noted on an approved ECNs prior to the commencement of rework. Summagraphics will pay all related substantiated reasonable costs. ARTICLE 10: WARRANTY - -------------------- (a) HMV warrants that it will have title to the Products furnished directly to Summagraphics under this Agreement free and clear of any and all liens and encumbrances. (b) HMV further warrants the Products (except for Summagraphics' consigned material) delivered hereunder will meet Product Technical Information and Standards for a period as indicated in the specific Product Exhibit(s). (c) HMV warrants the workmanship and merchantability of the Product(s) it provides hereunder, excluding any warranty for defects in Products solely related to the specifications or design provided by Summagraphics; or due to user abuse or misapplication or due to hardware incompatibility, and HMV shall indemnify and hold harmless Summagraphics from any and all claims and liability to which Summagraphics may become exposed arising out of a condition evidencing a breach of warranty by HMV related to things under their control. (d) Summagraphics and HMV shall agree on who will serialize Products to track them. ARTICLE 11: REMEDIES FOR NON-CONFORMANCE WITH WARRANTY (a) Products found to be defective, determined in accordance with a commercially reasonable standard, within the first ninety (90) days of the warranty period beginning on FOB date will be considered to be Defective On Arrival ("DOA") and will be processed according to the Return Merchandise Authorization ("RMA") procedure referenced in the Product Exhibit(s). The following remedies shall be available. (i) Summagraphics shall give notice in writing to HMV of any Product in non-conformance to the warranty provided in Article 10 of this Agreement. In turn, HMV shall supply, to a mutually agreed schedule(s) and at no cost to Summagraphics, replacement parts necessary for the repair of such Products by Summagraphics. HMV MC Page 9 of 33 Summagraphics _____ September 13, 1995 (ii) The labor costs associated with such repair will be borne by HMV. (iii) HMV will arrange to repair the Products at a mutually agreed location, to a mutually agreed schedule, or HMV reserves the right to request that Summagraphics return any defective parts, freight collect. If HMV determines that the returned parts are not defective, HMV will so notify Summagraphics for appropriate disposition. Upon concurrence by Summagraphics, Summagraphics shall reimburse HMV for the actual freight charges and for all other reasonable direct labor expenses incurred in the receiving, inspecting, and testing of the parts. (iv) If for some reason, Summagraphics is unable to adequately repair the Products even after receipt of replacement parts from HMV, Summagraphics shall so notify HMV and HMV shall promptly arrange to repair or replace the defective Products at HMV's expense. (b) After the Products have shipped to Summagraphics' end-user customers, in the event that both Parties agree that a substantial number of Products are demonstrated to have the same defect, HMV will be responsible for correcting such defect so that the Products conform to the Technical Information and Standards for subsequent Product shipments. Unless otherwise agreed in writing by both Parties, such defects shall be considered epidemic in nature if Summagraphics demonstrates to HMV's reasonable satisfaction that at least two percent (2%) of the quantity of any Product shipped by HMV within any two (2) month period have the same defect. If, due to such epidemic failure, it is necessary to repair units installed in customer locations, HMV will bear reasonable expenses incurred in relocating, removing, repairing or replacing, and reinstalling units. (c) The warranty period will not continue to run during the time that HMV, Summagraphics or their properly authorized service agents repair such Products. Upon return of a repaired Product under warranty, the warranty will continue to apply for the longer of the remaining original warranty period or ninety (90) days . (d) With the exception of indemnity obligations detailed in Article 18 in this Agreement, IN NO EVENT WILL EITHER PARTY OR ITS LICENSORS BE LIABLE FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOSS OF PROFITS, LOSS OF USE OF DATA, OR INTERRUPTION OF BUSINESS, WHETHER SUCH ALLEGED DAMAGES ARE LABELED IN TORT, CONTRACT, OR INDEMNITY, EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. ARTICLE 12: SERVICE AND TECHNICAL SUPPORT - ------------------------------------------ (a) With the exception of the provisions outlined in Article 11 of this Agreement, aftersale service and maintenance of the Products for Summagraphics' customers shall be carried out at Summagraphics' or their contracted service provider's responsibility and expense. (b) HMV agrees to supply Summagraphics/Summagraphics' contracted service provider with Spare Parts for a minimum of three (3) years after the date of HMV MC Page 10 of 33 Summagraphics _____ September 13, 1995 the last shipment of Products, and such Spare Parts shall be supplied at the prices listed in the attachments to the Product Exhibit(s) or as otherwise negotiated in good faith if the Product Exhibit(s) has expired or is otherwise terminated. (c) Spare Parts will be provided by HMV to Summagraphics in conformance to the most recent revision level whenever applicable. Mandatory and nonmandatory changes will be called out on the ECN; class levels of engineering changes are described in Article 9 to this Agreement. (d) Spare Parts will be marked with Summagraphics' part number in both an English and bar-code format, or as otherwise defined in the Technical Information. If the Spare Part is of such nature that Summagraphics' part number marking is unnecessary or unreasonable, the individual pack for that part number will be clearly marked with Summagraphics' name and part number, in both an English and bar-code format. (e) HMV agrees to provide support to Summagraphics' service organization/provider as mutually agreed in the Product Exhibit(s). ARTICLE 13: NOTICE - ------------------ (a) All formal services, processes, or other notice required or allowed to be given hereunder shall be deemed effective and sufficient if made by either (1) delivery in person with signed receipt, (2) registered airmail, postage prepaid, return receipt requested, addressed to the parties as follows: If to HMV: Ed Urban Title 600 Glen Avenue Address Salisbury, Maryland 21801 If to Summagraphics: D.C. Power Title Senior Vice President Address 8500 Cameron Road Austin, Texas 78754-3999 or such other address as either Party may from time-to-time specify by written notice to the other Party. (b) Notices shall be effective upon actual receipt. ARTICLE 14: PUBLICITY - --------------------- Neither Party shall, without the prior written permission of the other, publicly announce or otherwise disclose the existence of the Agreement or the Terms hereof, or release any publicity regarding this Agreement (except to the U.S. Government when a P.O. references a U.S. Government contract or subcontract number or to the source Government or the U.S. government for import/export authorization procedure). This provision shall survive the expiration, termination, or cancellation of this Agreement. HMV MC Page 11 of 33 Summagraphics _____ September 13, 1995 (a) Unless otherwise agreed by the Parties, this Agreement shall be deemed to be made in, and in all respect shall be interpreted construed and governed by and in accordance with the laws of, the State of Texas, United States of America, applicable to contracts made and fully performed in Texas. The Parties consent to the jurisdiction of the federal and state courts sitting in the State of Texas. The Parties agree that the United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement, and its application is hereby expressly excluded. (b) This Agreement has been executed by the Parties hereto in the English language, and no translated version of this Agreement into any other language shall be controlling or binding upon the Parties hereto. (c) All disputes and controversies concerning this Agreement shall be determined by binding arbitration before a panel of three (3) arbitrators. One arbitrator will be selected by Summagraphics, one will be selected by HMV and a third will be selected by the two so selected. If arbitration occurs, it will be held in Travis County, Texas. The rules of the American Arbitration Association will apply and the Parties will share the expenses of such arbitration. ARTICLE 16: PROTECTION OF PROPRIETARY INFORMATION - ------------------------------------------------- (a) Neither Party will disclose any Confidential Information to a third party as required to execute this Agreement, except under the terms of the Nondisclosure Agreement executed by the Parties, and as may be periodically renewed and/or amended. (b) The Data Coordinator for the Products listed in each Product Exhibit(s) is specified in Product Exhibit(s). ARTICLE 17: INTELLECTUAL PROPERTY - --------------------------------- Nothing contained in this Agreement shall be construed as granting or implying any rights by license, estoppel or otherwise, to any Summagraphics or HMV ideas, inventions, or patents that are issued now or in the future, copyrights, trademarks, trade secrets, or any other intellectual property, either with respect to Products manufactured for Summagraphics under this Agreement or with respect to any other Summagraphics' Products, services, technologies or background technologies not covered by this Agreement. ARTICLE 18: INDEMNIFICATION - --------------------------- (a) HMV agrees to indemnify and to hold harmless Summagraphics, its officers, agents, employees, and customers (mediate and immediate) from any and all loss, expense, damage, liability, claims or demands either at law or in equity for actual or alleged infringement of any patent rights, mask work rights, design, trademark, or copyrights arising from the purchase, use, sale or other distribution of materials or goods required by a P.O. hereunder, except where such infringement or alleged infringement is caused by designs for such materials or goods originally furnished to HMV by Summagraphics, and also for Product defect causing personal injury or HMV MC Page 12 of 33 Summagraphics _____ September 13, 1995 property damage other than that solely related to the specification or design of Summagraphics, provided that HMV is: (i) given prompt notice of such claim; (ii) furnished a copy of communications, notices, and/or other actions relating to such claim and; (iii) given the sole authority and reasonable assistance (at HMV's expense) necessary to defend or settle such claim. (b) Summagraphics agrees to defend HMV against any action which alleges that the Products delivered hereunder infringe a United States patent or copyright and to pay all costs and damages finally awarded against HMV, provided that such infringement arises directly from the designs or goods furnished to HMV by Summagraphics, and also for a Product Defect causing personal injury or property damage solely related to the specifications or design of Summagraphics, provided that Summagraphics is: (i) given prompt notice of the claim; (ii) furnished a copy of communications, notices, and/or other actions relating to such claim and; (iii) given the sole authority and reasonable assistance (at Summagraphics' expense) necessary to defend or settle such claim. ARTICLE 19: TERMINATION - ----------------------- (a) In case either Party shall materially breach this Agreement, the non- infringing Party may terminate this Agreement and any or all Product Exhibit(s) after giving a thirty (30) day written notice to cure to the other Party and the breach has not been cured during the thirty (30) day period. (b) In the event of termination of this Agreement and any or all Product Exhibit(s) due to uncured material breach: (i) The terminating Party may at its sole discretion cancel or disregard, as the case may be, any P.O.s for the Products which are un-shipped at the date of such cancellation. In such case, HMV may sell or otherwise dispose of the Products so canceled by removing any Summagraphics' signs, marks, and labels from the Products. (ii) Each Party hereto shall promptly return to the other any materials or property in its possession or custody supplied by or belonging to the other Party in connection with the subject Product Exhibit(s). Notwithstanding the above, unless otherwise mutually agreed in writing, should termination result from Summagraphics' uncured material breach, Summagraphics agrees to purchase the Products already manufactured prior to the date of written notice, or to purchase any parts already procured by HMV prior to the date of written notice. (c) Either party may terminate this Agreement as provided in Article 4 (g) hereof. (d) Upon the termination of this Agreement, HMV shall promptly return to Summagraphics all documents, letters, records, notebooks, papers, writings, HMV MC Page 13 of 33 Summagraphics _____ September 13, 1995 designs, drawings, models, blueprints and all other materials and all copies thereof embodying or showing any of the Technical Information provided by Summagraphics or any Confidential Information disclosed by Summagraphics, then in HMV's possession or under its control, by whomever prepared, and all other tooling or property owned by Summagraphics shall be returned. (e) Except as is provided in this Agreement or in the Product Exhibit(s), both Parties have considered the possibility of expenditures necessary in preparing for the Agreement and Product Exhibit(s) and the possible losses and damage incident to each in the event of cancellation, and agree to bear their own expenses in such event. ARTICLE 20: ASSIGNMENT AND SUBCONTRACT - -------------------------------------- (a) Neither Party shall have the right to assign or otherwise transfer its rights and obligation under this Agreement except with the prior written consent of the other Party, and any attempt to do so shall be void and without effect. (b) HMV does not have the right to subcontract its performance contemplated under this Agreement without Summagraphics' prior written consent, except that HMV may subcontract a limited portion of HMV's performance obligations under this Agreement relating to material handling, manufacturing, assembly and shipment to Salisbury Technologies, LLC (a Maryland corporation) ("STL"), or Salisbury Supply Corporation ("SSC"), without Summagraphics' prior written consent. ARTICLE 21: HMV'S EMPLOYEES DEEMED NOT EMPLOYEES OF SUMMAGRAPHICS - ----------------------------------------------------------------- Both Parties agree that HMV is retained as an independent contractor and in no event will employees or agents hired by HMV be or be considered employees of Summagraphics. Matters governing the terms and conditions of employment of HMV's employees are entirely within the control of HMV. Summagraphics will have no right to control any of the actions of the employees of HMV. HMV's matters such as work schedules, wage rates, withholding income taxes, disability benefits or the manner and means through which the work under this Agreement will be accomplished are entirely within the discretion of HMV. ARTICLE 22: LIABILITY - --------------------- HMV is responsible for the acts of its employees. HMV will indemnify and hold Summagraphics harmless from and against any and all suits or claims of liability and/or property damage arising from the acts of HMV, its suppliers or anyone directly or indirectly employed by HMV arising out of, or in connection with, HMV's performance under this Agreement. Summagraphics is responsible for the acts of its employees. Summagraphics will indemnify and save Summagraphics harmless from and against any and all suits or claims of liability and/or property damage arising from the acts of Summagraphics, its suppliers or anyone directly or indirectly employed by HMV MC Page 14 of 33 Summagraphics _____ September 13, 1995 Summagraphics arising out of, or in connection with, Summagraphic's performance under this Agreement. ARTICLE 23: INSURANCE - --------------------- HMV shall, at its own cost and expense, procure and maintain throughout the Term of this Agreement and during all periods in which Summagraphics' Property (Product inventory, other property of Summagraphics furnished to HMV, etc.) is consigned to or stored by HMV or any entity affiliated with HMV, an insurance policy or policies which shall be in an amount not less than the total purchase price of such Property. ln the event of loss or damage to any of the Property, the purchase price thereof will become immediately due and payable. Any insurance proceeds received by HMV attributable to any loss or damage to Summagraphics' Property will be credited against such purchase price. ARTICLE 24: RELATIONSHIP WITH OTHER PARTIES - ------------------------------------------- Summagraphics' relationship under this Agreement is solely with HMV and HMV agrees that it may not make any representations or commitments for or on behalf of Summagraphics to any other party. If a third party initiates any action against Summagraphics based on an allegation of a third party that HMV made a representation or commitment for or on behalf of Summagraphics, HMV shall indemnify and hold harmless Summagraphics from and against any and all responsibility or liability of any nature related to the alleged conduct of HMV. ARTICLE 25: ORDER OF PRECEDENCE - ------------------------------- In the event of an inconsistency in the various documents which govern the Parties' performance, the order of precedence will be: (i) This Agreement; (ii) Attachments and Product Exhibit(s) to this Agreement; (iii) The face side of the P.O.; (iv) The reverse side of the P.O. ARTICLE 26: SEVERABILITY - ------------------------ The provisions of this Agreement are severable; if any provision shall be deemed invalid or unenforceable, the applicability or validity of any other provision of this Agreement shall not be affected and if any such provision shall be deemed invalid or unenforceable in any respect, such provisions shall be deemed limited to the extent necessary to render it valid and enforceable. ARTICLE 27: WAIVER - ------------------ No failure by either Party to take any action or assert any right hereunder shall be deemed to be a waiver of such right. No waiver, if given, shall be construed as a subsequent waiver in the event of the continuation or repetition of the circumstances giving rise to such right. HMV MC Page 15 of 33 Summagraphics _____ September 13, 1995 ARTICLE 28: INTEGRATION - ----------------------- (a) This Agreement, together with all attachments and Exhibit(s)s hereto, sets forth the entire Agreement and understanding of the Parties hereto with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings concerning the subject matter hereof. No amendment or modification of the Agreement or any of its attachments or Exhibit(s)s shall be effective unless in writing and signed by duly authorized representatives of each Party. (b) This Agreement applies only to the Parties hereto, namely SUMMAGRAPHICS and HARVARD MANUFACTURING VENTURES. Neither Party, including any subsidiary or affiliate company of either Party, may make any claim that a subsidiary, affiliate, group or division of the other Party is obligated by this Agreement or any subsidiary, affiliate, group or division of the other Party is one and the same entity for purposes of this Agreement. (c) Each attachment and Product Exhibit(s) of this Agreement shall constitute an integral part of this Agreement. (d) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instruments IN WITNESS WHEREOF, both Parties have signed and dated this document in the space provided below: SUMMAGRAPHICS HARVARD MANUFACTURING CORPORATION VENTURES, LLC /s/ M. Bennett M. Chavez - ------------------------------ --------------------------------- Signature of Officer Signature of Officer Michael Bennett Manny Chavez - ------------------------------ --------------------------------- Printed Name of Officer Printed Name of Officer 9-15-95 15 Sep 95 - ------------------------------ --------------------------------- Date Date HMV MC Page 16 of 33 Summagraphics _____ September 13, 1995 ATTACHMENTS: I. Product Exhibit(s) II. Credit Terms (Exhibit A1) HMV MC Page 17 of 33 Summagraphics _____ September 13, 1995 PRODUCT EXHIBIT I This Product Exhibit dated as of September 13, 1995 sets forth additional terms and conditions particular to certain Products as described herein, and shall be incorporated by reference into the Agreement ("Agreement") between SUMMAGRAPHICS CORPORATION ("Summagraphics") and HARVARD MANUFACTURING VENTURES, LLC ("HMV") dated as of September 13, 1995 to which this Product Exhibit is attached. Such Products shall be sold by HMV to Summagraphics as detailed herein and dated as of September 13, 1995 to which this Product Exhibit is attached. Such different or additional terms are applicable only to the Products described below and in no way alter the terms and conditions applicable to other Products incorporated into the Agreement by the addition of other Product Exhibit(s). Except as this Product Exhibit relates specifically to the Products referenced herein, all of the Terms of the Agreement shall govern by this Product Exhibit. ARTICLE 1-1: DEFINITIONS - ------------------------ Unless otherwise specifically defined, all the Terms used in this Product Exhibit shall retain the same meaning as defined in the Agreement and such definitions are incorporated herein by reference. ARTICLE 1-2: RIGHT TO THE PRODUCTS - ---------------------------------- (a) HMV shall not incorporate any of Summagraphics' unique features of the Products as defined in this Product Exhibit(s), including physical appearance and Specification, into any Products under any trademarks other than those of Summagraphics without the prior written consent of Summagraphics. (b) RIGHTS IN WORK PRODUCT: (i) In the manufacture of Summagraphics' Product, the work product of HMV's services, including results, and all ideas, developments, and inventions which HMV conceives or reduces to practice during the course of their performance under this Agreement shall be exclusive property of Summagraphics. This information, material, and any such inventions shall be deemed SUMMAGRAPHICS' PROPRIETARY INFORMATION and shall not be disclosed to anyone outside of Summagraphics or used by HMV or others without the prior written consent of Summagraphics. Any article, paper, treatise, computer program, or report prepared by HMV pursuant to this Agreement or which discusses the services performed hereunder or the results thereof (written data) and which qualifies as a "work for hire" under the copyright laws of the United States shall be the exclusive property of Summagraphics as "work for hire". (ii) In the event that HMV, during or after this Agreement but prior to HMV's execution of a similar agreement with a third party, develops additional ideas not investigated hereunder but within the scope of this Agreement, HMV shall communicate the ideas to Summagraphics HMV MC Page 18 of 33 Summagraphics _____ September 13, 1995 and allow Summagraphics the right of first refusal to utilize HMV's services to develop these additional ideas for Summagraphics. (c) Summagraphics may use, distribute, and sell Products on a worldwide basis without restriction by HMV. ARTICLE 1-3: SHIPPING AND DELIVERY - ---------------------------------- (a) Lead-times for Products are agreed as listed in Attachment A to this Product Exhibit, which are the number of calendar days After Receipt of Purchase Order ("ARO"). (b) HMV shall provide and advise Summagraphics of a Shipdate that is sufficient to meet Summagraphics' P.O. delivery date, via five (5) day deferred surface routing unless specified otherwise in the P.O. or other Summagraphics' documentation. (c) HMV shall pay and shall indemnify Summagraphics against all license fees, taxes, and other charges now or which shall hereinafter be levied or assessed by any public authority by reason of or in connection with Products shipped under this Agreement, up until the time that Products have been duly transferred to Summagraphics at the FOB Point. (d) Upon delivery to Summagraphics' Freight Forwarder or HMV's Freight Forwarder, HMV shall send a Shipping Notification and Commercial Invoice listing the information below. This shall be sent via fax or e-mail to the Summagraphics' Consignee for all export shipments for the purposes of Customs Clearance. Information required: (I) Transit Information: (i) Sea Freight: Vessel Name; Vessel Departure Date; Cargo Receipt Number; Estimated Arrival Time. (ii) Air Freight: Air Departure Date; Master Air Waybill Number; House Air Waybill Number; Estimated Arrival Time. (II) Product Information: Commercial Invoice Number; Summagraphics' P.O. Number; Summagraphics' Part Number and Description; Quantity; Box Count; Shipment Weight; Country of Origin. ARTICLE 14: PRICING AND PAYMENT - ------------------------------- (a) Prices for Products listed in Attachment B of this Product Exhibit(s) are fixed in U.S. dollars. Prices are based on the target quantities listed in Attachment A to this Product Exhibit(s). Target quantities are general in nature and should be used for general planning purposes only. Prices may not be changed under any circumstances for any open P.O. which has been duly accepted by HMV under the Terms of this Agreement. Any proposed cost increase must first be agreed to by both HMV and Summagraphics. (b) Payment shall be due sixty (60) days from the later of P.O. scheduled delivery date or date of receipt by Summagraphics of conforming products. In the event any Product is rejected, HMV shall issue either a credit or a refund to Summagraphics. Prices will be paid by Summagraphics in U.S. dollars, and the prices in Product Exhibit(s) include all excise, sales, use, and other taxes imposed by an federal, state, municipal or other authority, all of HMV MC Page 19 of 33 Summagraphics _____ September 13, 1995 which shall be paid by HMV to the extent that any such taxes and other charges are payable. Products will be shipped F.O.B. Maryland as detailed in monthly releases. Title and risk of loss shall pass to Summagraphics upon transfer to an authorized carrier or freight forwarder at the F.O.B. Point. (c) If requested by Summagraphics, HMV shall provide a facsimile copy of the commercial invoice and bill of lading (or airway bill) within two (2) working days from the Shipdate. The invoice documentation shall include, at a minimum: - Supplier Invoice Number - Name of Freight Carrier - Carrier Departure Date - Estimated Arrival Date - Summagraphics' P.O. Number - Summagraphics' Part Number and Description - Quantity and Box Count - Per-Unit Price and Total Invoice Value (d) Summagraphics' Contacts for Shipping and Invoice: Buyer: Traffic: A/P: ARTICLE 1-5: RESCHEDULING AND RE-CONFIGURATION - ---------------------------------------------- Summagraphics (i) may not cancel a P.O. covering the current calendar month or any of the next three calendar months; (ii) may not reschedule a P.O. covering the current or next following calendar month; may reschedule up to fifteen percent (15%) of a P.O. covering the second calendar month beyond the current month by thirty (30) days; and may reschedule up to thirty percent (30%) of a P.O. covering information for the third calendar month beyond the current month by thirty (30) to forty-five (45) days. The Production information furnished to HMV by Summagraphics covering the forth and fifth calendar months following the current month are forecasts only and may be changed at any time without penalty. Summagraphics may request Products already ordered pursuant to a P.O. to be reconfigured by HMV prior to delivery in respect to CPU, Hard Drive, and/or Display, and HMV agrees to respond in a timely fashion to such requests in good faith by quoting reasonable re-configuration costs to Summagraphics based upon actual additional expenses incurred by HMV for any such reconfiguration. ARTICLE 1-6: PROTECTION OF PROPRIETARY INFORMATION - -------------------------------------------------- The Data Coordinator for Summagraphics for all proprietary information regarding the Products specified in this Product Exhibit(s) is, by Title Senior Vice President, General Counsel & Secretary. The Data Coordinator for HMV for all proprietary information is, by Title Director of Human Resources and Administration. HMV MC Page 20 of 33 Summagraphics _____ September 13, 1995 ARTICLE 1-7: TERM OF THE PRODUCT EXHIBIT(S) - ------------------------------------------- This Product Exhibit(s) shall be deemed to come into force on the later of the two dates signed by both Parties and shall continue (unless earlier terminated in accordance with the provisions of this Agreement and Product Exhibit(s)) for three (3) years. Following the initial three year Term of this Agreement, this Product Exhibit(s) shall be automatically renewed for a one (1) year Term and thereafter from year-to-year, unless either of the Parties hereto gives the other Party at least four (4) months prior written notice to terminate this Product Exhibit(s) before the expiration of the initial or any renewed term of this Product Exhibit(s). If such prior written notice is made by either Party, then this Product Exhibit(s) shall terminate on the initial or, as the case may be, duly renewed expiration date hereof. ARTICLE 1-8: WARRANTY AND QUALITY: - ---------------------------------- HMV warrants Product for a period of fifteen (15) months from the Shipdate for performance, compliance to specification, quality, and reliability of all components, and agrees to repair or replace (at no cost to Summagraphics) any unit or subassembly which fails under this warranty term. HMV shall manage all third party component suppliers, and shall, except for actions by any affiliate of Summagraphics, ensure compliance to the same Terms and conditions as are included in this Agreement and Exhibit(s). ARTICLE 1-9: CONFIGURATION CONTROL: - ----------------------------------- (a) Each Product delivered under this Agreement will be uniquely identified by Summagraphics' serial number, unless otherwise agreed between the parties. HMV agrees to track changes to configurations using this serial number so that at any time the revision level of a Product can be determined by the serial number. (b) Any change in configuration that affects form, fit, function, packaging, servicing, reliability, safety, compatibility, appearance, dimensions, or regulatory compliance, is to be documented by HMV as a revision to the Product with serial number effectivity. Any such change must be communicated to Summagraphics no less than thirty (30) days in advance of receipt of Products which have been so changed. (c) Any proposed change which modifies the Technical Information of this Product Exhibit(s) must be communicated to Summagraphics no less than thirty (30) days prior to being executed to gain acceptance from Summagraphics. (d) HMV agrees to work cooperatively with Summagraphics on requested changes from Summagraphics to improve the Products and incorporate such changes into the product when appropriate. IN WITNESS WHEREOF, both Parties have signed and dated this Product Exhibit(s) in the space provided below: HMV MC Page 21 of 33 Summagraphics _____ September 13, 1995 SUMMAGRAPHICS HARVARD MANUFACTURING CORPORATION VENTURES, LLC /s/ Michael Bennett M. Chavez - ------------------------------ --------------------------------- Signature of Officer Signature of Officer Michael Bennett Manny Chavez - ------------------------------ --------------------------------- Printed Name of Officer Printed Name of Officer 9-15-95 15 Sep 95 - ------------------------------ --------------------------------- Date Date HMV MC Page 22 of 33 Summagraphics _____ September 13, 1995 ATTACHMENTS: Attachment A: Product Description Attachment B: Pricing Attachment C: Purchase Order Release Forecasting Provision Attachment D: Product Quality and Acceptance Attachment E: Materials Purchased from Summagraphics by HMV Attachment F: Summagraphics' Property in Possession of HMV Attachment G: Tooling Cost for New Items HMV MC Page 23 of 33 Summagraphics _____ September 13, 1995 ATTACHMENT A Product Description See Attachment A1 and A2 on following pages: 24(a) - 24(c) HMV MC Page 24 of 33 Summagraphics _____ September 13, 1995 SummaJet(TM) 2 Series [SPECIFICATION SHEET FOR COMPANY'S INK JET PLOTTER WITH PHOTOGRAPHS] INK JET PLOTTERS WITH UNMATCHED VERSATILITY The enhanced SummaJet 2 series low-cost large-format ink jet plotters not only offers more standard features at a lower price, but also gives you flexible upgrade paths to accommodate your changing business demands. The SummaJet 2 versatile feature set significantly lowers your overall cost of ownership and operation, and with this lower cost of operation, the SummaJet 2 series plotters become the value-rich choice to satisfy a range of color plotting requirements. Technological innovations enable the SummaJet 2 to operate faster, provide more flexible output options, and offers a broad range of upgrade enhancements. And, SummaJet 2 offers standard 600 dpi x 300 dpi resolution capability in color. The optional Ethernet adapter provides the network capability important for cost- effective operation in today's workgroups. SummaJet 2's other options, including memory enhancement and a roll feed upgrade will increase the return on your equipment investment and keep pace with even the most dynamic organization. . Best in plot resolution technology--SummaJet 2 offers 600 dpi x 300 dpi resolution in color along with support for 32 levels of gray . Cost-saving features include the unique refillable and interchangable ink cartridges . Lower acquisition cost and a significantly lower cost of operation . Upgrade paths include additional RAM and rail feed option . Optional Ethernet adapter that supports Novell and TCP/IP protocols . Compatibility in software Formats and hardware interfaces Summagraphics Page 24(a) of 33 September 13, 1995 SUMMAJET(TM) 2 SERIES [WARRANTY SYMBOL] VERSATILE INK JET PLOTTERS FROM SUMMAGRAPHICS DRAMATICALLY LOWERS OWNERSHIP COSTS The SummaJet 2's combination of lower acquisition price and reduced operating expense significantly lowers your overall ownership cost. The SummaJet 2 lowers operating expense by using specially designed, refillable ink cartridges that achieve the highest mileage from costly ink supplies. FLEXIBLE UPGRADE OPTIONS MEET CHANGING DEMANDS With a SummaJet 2 plotter on-line, each member of the workgroup can customize output for specific project requirements. Using the HI(R) Queue software bundled with each SummaJet 2, individuals can attach configuration commands to each plot file from either DOS or Macintosh(R) computers. As plotting requirements change, these upgrade options are available: . Memory is upgradable with industry-standard 1-, 4-, and 16MB SIMMs . Optional roll feed adapter . Optional color upgrade kit for monochrome models HARDWARE COMPATIBILITY SummaJet 2 hardware connectivity features include: . RS-232C compatible serial port and high-speed Centronics parallel port . Optional Ethernet adapter supports Novell and TCP/IP protocols BUILDS PRODUCTIVITY WITH COST-EFFECTIVE PERFORMANCE Higher performance is an important measure of a plotter, but cost-effective operation is even more vital in today's competitive environments. Summagraphics gives you the tools you need to excel. SummaJet 2's features, which enable more efficient output, include: . Two-cartridge system . Bi-directional printing . Draft mode for fast review plots and final mode for presentation-quality drawings . Summagraphics interchangable cartridge design allows use of two black ink cartridges for faster, draft-mode plotting, use of one black and one color cartridge for targeted, economical color use, and use of two color cartridges to create final, presentation plots SUMMASUPPORT Each SummaJet 2 plotter is covered by a one-year limited Priority Response(TM), 48-Hour Replacement Warranty and Summagraphics offers several additional service options. IN THE BOX Each SummaJet 2 plotter comes complete and ready to operate. The standard unit includes: . Plotter . ADI(R) and Microsoft(R) Windows(TM) drivers . HI Queue plot management/configuration program . Parallel cable . Power cord . Two refillable ink cartridges, with refills . Sample media . Operations manual SUMMAJET 2 SPECIFICATIONS PERFORMANCE: Technology: Monochrome ink jet (upgradable to color) Three-color ink jet (CMY, CMYK) Resolution: . Draft Mode: 150dpi/6dpmm . Normal Mode: 300dpi/12dpmm . Final Mode: 300dpi/12dpmm . Hi-Res Mode: 600 x 300dpi/24dpmm x 12dpmm Accuracy +/-0.10" (0.25mm) or 0.1% of vector length, whichever is greater on 3mil (75 micron) double-matte, ink-jet polyester film at 23 degrees C (73 degrees F), 50 to 60% RH VECTOR PLOTTING: Plot Languages: HP-GL/2, HP-GL, DM/PL RASTER PLOTTING: Raster File Formats: HP RTL, CALS Group 4 PLOTTING MATERIALS: Media: Bond; translucent bond; vellum; double-matte, ink jet polyester film MEDIA SIZES: 1324M 1336M 1324C 1336C . Engineering: A,B,C,D A,B,C,D,E,F . Architectural: A,B,C,D,Legal A,B,D,E,F,Legal, 30" x 42" . DIN: A4,A3,A2,A1 A4,A3,A2,A1,A0 . Oversize DIN: A4,A3,A2,A1 A4,A3,A2,A1,A0 MAXIMUM PLOT AREA: Arch.D-size Arch.E-size 34.2" x 23.2" 46.2" x 35.2" (868 x 589mm) (1173 x 894mm) INTERFACES: Standard: Asynchronous serial RS232-C compatible Centronics Parallel OPTIONAL INTERFACE: Ethernet NETWORK CAPABILITY: Optional Ethernet interface supports EtherTalk, TCP/IP, and Novell; Built-in job-control language HI Queue plotter configuration from DOS or Macintosh computers Automatic I/O switching between two communication ports Plotter I/O Connectors: DB-9P (serial), DB-25P (parallel) Baud Rate: 2400, 4800, 9600, 19.2K and 38.4K (selectable) MECHANICAL: Drives: Servo Buffer Size (RAM): . Standard: 2MB (2M Series, monochrome) 4MB (2C Series, color) . Maximum: 32MB (Accepts 1MB, 4MB, & 16MB SIMMs) OPTIONS: Stand . Ethernet adapter . Automatic rollfeed adapter . Serial cable kit 1, 4 and 16 MB Single inline memory modules (SIMMs) Refillable, high-capacity black and color cartridges Opaque bond, translucent paper, vellum, double-matte ink jet film OPERATING ENVIRONMENT: . Temperature: 50 degrees F to 95 degrees F (10 degrees C to 35 degrees C) . Relative Humidity: 20% to 80% non-condensing STORAGE ENVIRONMENT: . Temperature: -40 degrees F to 158 degrees F (-40 degrees C to 70 degrees C) . Relative Humidity: 5% to 95% non-condensing ELECTRICAL: Power Requirements: . Power: 50W max while operating; less than 25W in standby mode . Source: 100/120/220/240 VAC . Frequency: 48-62Hz Fuse Ratings: 75 Amp (100-120 VAC) 375 (220-240 VAC) Certification: FCC Class A, CSA, TUV PLOTTER HARDWARE: 1324C WITH 1336C WITH OPTIONAL STAND OPTIONAL STAND Height: 44" (1118mm) 53" (1346mm) Width: 52.5" (1334mm) 63.5" (1613mm) Depth: 31" (787mm) 31" (787mm) Weight: 96 lbs (43.6kg) 124 lbs (56.4kg) FOR THE NAME OF THE RESELLER IN YOUR AREA, CALL: 800-33-SUMMA North, South and 8500 Cameron Road, Austin, TX 78754 Central America, (512) 835-0900 FAX: (512) 873-1FAX Asia-Pacific Technical Support 800-444-3425, menu option 2 email: techsupport@summagraphics.com BBS 512-873-1477 1200 to 14,400 baud 8,N,1;ANS1 emulation Europe Brussels/Zaventem, Belgium +32-2-715-0600 Fax: +32-2-721-5289 (c)1995 Summagraphics corporation All rights reserved SUMMAGRAPHICS(R) Page 24(b) of 33 September 13, 1995 ATTACHMENT A2 "D" SIZE UNITS "E" SIZE UNITS -------------- -------------- 1324M-1 EU 1336M-lEU 1324C-1 EU 1336C-lEU 1324M-2 1336M-2 1324C-2 1336C-2 428-lOOM 428-lOlM 428-lOOC 428-lOlC 1324M-1M 1336M-1M 1324C-1M 1336C -1M HMV MC Page 24(c) of 33 Summagraphics ______ September 13, 1995 ATTACHMENT B Pricing Products Material Labor Wrap Total Unit Costs Hours Rate Cost See Product Description (1)(4) 7.3 (1) $25 (1) $(1)(3) in Attachment A hereto (2)(4) 7.3 (2) $26 (2) $(2)(3) 1. When Product is furnished to HMV in kit form. 2. When ordering, receiving and inspection of product is performed by HMV. 3. This number is based on the standard cost of material as of August 25, 1995 measured by the configuration of Products on August 25. 4. This dollar amount shall be based on material overhead charges not to exceed 3.75% of standard cost as determined by note 3 of this Attachment B. Spare parts purchased by Summagraphics from HMV will be at cost plus overhead expenses not to exceed five percent (5%). Summagraphics agrees to pay HMV a material handling charge of three and three quarter percent (3 3/4%) while HMV purchases balanced sets of parts from Summagraphics. Summagraphics agrees to pay HMV a material handling charge for all materials purchased by HMV from third party vendors, payable monthly by Summagraphics, not to exceed five percent (5%). This handling charge shall decrease to four percent (4%) for all materials purchased when additional volumes and/or models than existed on August 25, 1995. "Wrap rate" charge: This is HMV's rate per hour for manufacturing the above listed products. This rate includes all HMV costs of manufacturing, exclusive of material handling charges as noted above, incoming and outgoing freight, and any material financing charges as defined herein. HMV MC Page 25 of 33 Summagraphics ______ September 13, 1995 ATTACHMENT C Purchase Order Release Forecasting Provision See Product Exhibits, Article 1 - 5: Rescheduling and Re-Configuration. HMV MC Page 26 of 33 Summagraphics ______ September 13, 1995 ATTACHMENT D Product Quality and Acceptance 1.0 PURPOSE - ----------- This Attachment defines Summagraphics' requirements for HMV's quality program, HMV's responsibilities for manufacturing, inspecting, testing, and supplying Product(s), to Summagraphics and HMV's obligations to maintain high-quality production outputs. 2.0 APPLICABLE DOCUMENTS - ------------------------ 2.1 HMV will provide Products in conformance with the following documents which are included herein, by reference: Source Description Date Summa SummaJet Product Inspection Plan 07/15/95 Summa Part Appearance Spec. No. 7026 Summa Mil-Std-105D Rev D Summa Station One Assembly Instructions 12/17/94 Summa Station Two Assembly Instructions 12/08/94 Summa Station Three Assembly Instructions 12/10/94 Summa Station Four Assembly Instructions 12/08/94 Summa Station Five Assembly Instructions 12/08/94 Summa Station Six Assembly Instructions 12/08/94 Summa Station Seven Assembly Instructions 12/08/94 Summa Station Eight Assembly Instructions 12/08/94 Summa Station Nine Assembly Instructions 03/08/95 Summa Carriage Assembly Instructions 01/11/95 Summa Calibration Procedure Summa Capping Station Assembly Procedures 12/17/95 HMV RMA Procedure No. 026 06/15/95 2.2 Such documents may be modified by Summagraphics from time-to-time, but any actual changes to HMV's production of the Product(s) will be subject to the ECN process, as described in Article 9 of the Agreement. 3.0 PROCESS REQUIREMENTS - ------------------------ HMV shall adhere to a quality/manufacturing plan, including a data collection/tracking/reporting system ("Process"), that will ensure compliance with the requirements of the Terms and conditions of this Agreement, and ISO 9000. The Process and procedures developed by HMV shall be documented. Summagraphics may review the Process at any time. HMV is solely responsible for the quality of the Product(s) procured or manufactured for Summagraphics. Approval of HMV's Process by Summagraphics does not relieve HMV of this responsibility. HMV MC Page 27 of 33 Summagraphics ______ September 13, 1995 4.0 PART NUMBERING - ------------------ HMV shall use Summagraphics' part numbers and part numbering scheme on all documents, component, Product and transactions. 5.0 WORK IN PROCESS FAILURES - ---------------------------- Regardless of HMV's quality Process, Summagraphics recognizes that, from time- to-time, specific components or sub-assemblies will fail during testing prior to shipment. 5.1 Such failures will be handled pursuant to the Terms of Article 11 of the Agreement. Summagraphics expects that most such parts failures will be on one-by-one basis-- "Incidental Failures". There is a possibility that parts failures will be due to fundamental production, Process, or design problems, such that unusually high failure rates ensue--"Chronic Failure". 5.2 For the case of Chronic Failures, HMV agrees to make best efforts to supply replacement parts and immediate failure analysis. In the event of Chronic Failure, HMV agrees to notify Summagraphics and implement a corrective action plan within no more than five (5) working days after Summagraphics' notification. 5.3 So as to help assure that the quality of the Products is continually being improved, HMV will respond to failure reports and/or evaluate returned parts in a timely manner. HMV will then make a failure analysis and suggest a corrective action plan for the purpose of better assuring that such failures are less likely to occur in the future. 5.4 As part of the Process, HMV shall implement a program which constantly reduces Product defects. This program will insure the performance of effective corrective actions, based upon information derived from failure reporting and analysis. HMV will maintain records of corrective actions indicating the frequency of defects, (both those reported by Summagraphics and those found during HMV's production), the proposed corrective change in the process, evaluation of its effectiveness, and the date of implementation after Summagraphics' approval. Such records are subject to review by Summagraphics. 6.0 PACKAGING REQUIREMENTS - -------------------------- HMV will package each Product according to the Summagraphics' specification as referenced herein. In packaging Products, HMV will also take such additional steps as a reasonably prudent person would take to ensure maximum protection from damage due to rough handling and other hazards which it is reasonably foreseeable might occur to Product(s) up to the point of delivery to the carrier. 7.0 RELIABILITY TEST PLAN - ------------------------- 7.1 Prior to mass production, HMV shall perform Reliability testing as described by the "Reliability Test Plan" for the Products. 7.2 After mass production has started, HMV shall continuously maintain an ongoing program to test Reliability. HMV will periodically supply reports HMV MC Page 28 of 33 Summagraphics ______ September 13, 1995 to Summagraphics regarding the results of such Reliability testing. Summagraphics reserves the right to reasonably require additional or different Reliability testing by HMV. HMV MC Page 29 of 33 Summagraphics ______ September 13, 1995 ATTACHMENT E Materials Purchased from Summagraphics by HMV HMV MC Page 30 of 33 Summagraphics ______ September 13, 1995 ATTACHMENT F SUMMAGRAPHICS' PROPERTY IN POSSESSION OF HMV This Attachment F sets forth the terms and conditions applicable to all Summagraphics' Properties which will be located at HMV's facility or in HMV's possession. HMV will be requested to acknowledge receipt of each item of Summagraphics' Property by signing on itemized listing of Property, if and when such item(s) is(are) to be placed in the possession of HMV. HMV MC Page 31 of 33 Summagraphics ______ September 13, 1995 ATTACHMENT G Tooling Cost FOR NEW ITEMS: 1. Burn-in fixtures and final functional test equipment will be either provided by Summagraphics or a separate tooling cost for those items will be negotiated between the Parties. 2. All tools paid for by Summagraphics shall remain the property of Summagraphics. Summagraphics shall furnish a list of these tools to HMV, set forth in Attachment G1 on page 32(a) and 32(b) hereof. 3. Tooling costs shall be paid fifty percent (50%) due upon placement of order and the balance due after acceptance of first article production, or as otherwise may be negotiated between the Parties. HMV MC Page 32 of 33 Summagraphics ______ September 13, 1995 SHEET 1 PART NUMBER DESCRIPTION QTY U/M DATE ----------- ----------- --- --- ---- MC-3545 POWER CORDS 50 EA. 8/17/95 MH-1518 DBL SIDED TAPE 1 RL. 8/17/95 MC-3545 POWER CORDS 10 EA. 8/18/95 MH-1518 DBL SIDED TAPE 1 RL. 8/18/95 S-152 TRUARC PLIERS SM. 2 EA. 8/18/95 L-152 TRUARC PLIERS LG. 2 EA. 8/18/95 INTERNAL RING PLIERS 1 EA. 8/18/95 CR-018,DIS C-RING APPLICATOR 1 EA. 8/18/95 TK25 E-RING APPLICATOR 1 EA. 8/18/95 428-615 ADAPTER MKII 20 EA. 8/21/95 V-LET ARM PART 1 EA. 8/18/95 MODEL 808 SEALED AIR UNIT SERIAL 01558 1 HMV MC Page 32(a) of 33 Summagraphics ______ September 13, 1995 SHEET 2 FXT NUMBER DESCRIPTION QTY U/M SHIP DATE - ------------------------------------------------------------------------------ 3151 X DRIVE DRUM ASSY 1 EA. 8/11/95 3272 WOOD STAND TO HOLD UP PLOTTERFOR COVER FEET INSTALL 2 EA. 8/11/95 3281 SETTING SOLINOID LOCATION FOR CAPPING STATION 1 EA. 8/11/95 3288 FLEX CABLE FOLDING,RIGHT,ADJUSTABLE SIDE 1 EA. 8/11/95 3294 FLEX CABLE FOLDING,LECT,FIXED SIDE 1 EA. 8/11/95 3249 CARRIAGE WHEEL ASSY 1 EA. 8/11/95 2853 BLOCK TO PRESS SHAFT INTO IDLE PULLEY 1 EA. 8/11/95 2446 GAUGE TO SET .005 ESNA NUT SPACING 1 EA. 8/11/95 2447 GAUGE TO SET .015 ESNA NUT SPACING 1 EA. 8/11/95 3180 LOCATING PAPER EDGE SENSOR 1 EA. 8/11/95 2681 GAUGE, SPACING PULLEY OFF SLMM,X&Y 3 EA. 8/11/95 3208 TOOK, INSERTING .06 DIA.ROLLPIN INTO PLATEN 1 EA. 8/11/95 3227 SETTING CARRIGAGE WHEEL HEIGHT 15 EA. 8/11/95 2683 PRESING MB-275 BEARING INTO PINCH ROLLER 2 EA. 8/11/95 2704 SOLDING(ROLL & MAIN)PAPER SENSORS TO CIRCUIT BOARD 3 EA. 8/11/95 2717 INSTALLING PIVOT PIN IN SLPR 1 SET. 8/11/95 3188 PRESSING BUSHINGS INTO CARRIAGE 1 EA. 8/11/95 2817 PRESSING BUSHING INTO PIILOW BLOCK 1 EA. 8/11/95 3209 GAUGE,SPACING PILLOW BLOCK ROM DRIVE SEGMENT 4 EA. 8/11/95 3210 PRESING ROLL PIN INTO SOLINOID PLUNGER 1 EA. 8/11/95 3221 VLET MAPPING FIXTURE 2 EA. 8/11/95 3252 CARRIAGE SUPPORT,FIXED SIDE 1 EA. 8/11/95 3253 CARRIAGE SUPPORT,ADJUSTABLE SIDE 1 EA. 8/11/95 3170 2 PIECE STYLE PLATEN TO ENDPLATE ASSY 1 SET. 8/11/95 3338 PEN BAR HEIGHT GO-NO 60 GAUGE 2 EA. 8/18/95 3180 CARRIAGE SENSOR HEIGHT GAUGE 1 EA. 8/18/95 3337 DRILL END COVERS 1 EA. 8/18/95 3339 WIPER HEIGHT GAUGE 2 SET. 8/18/95 2872 LOCATOR FOR NAME PLATE 1 EA. 8/21/95 3338 PEN BAR HEIGHT 3 EA. 8/24/95 3155 FOR DRIVESHAFT TO PLATEN ASSY. 1 EA. 8/11/95 Page 32(b) of 33 September 13, 1995 EXHIBIT A1 Credit Terms This Exhibit A1 is appended to an agreement ("Agreement") by and between Summagraphics Corporation ("Sumrnagraphics") and Harvard Manufacturing Ventures, L.L.C. ("HMV") dated as of August 25, 1995, and sets forth the funding and credit terms and conditions pertaining to the Agreement. The terms and conditions in this Exhibit Al ("Credit Terms") may be changed from time to time by mutual consent of the parties to the Agreement. The Credit Terms are as follows: (1) As of the signing of the Agreement on September 13, 1995, HMV has extended Summagraphics a credit of six hundred thousand dollars ($600,000). (2) The State of Maryland has approved a five (5) year term loan to Salisbury Supply Corporation ("SSC") in the amount of five hundred thousand dollars ($500,000) which will be funded in approximately two to three weeks, and Salisbury will in turn buy from Summagraphics or other vendors parts to an inventory limit of $500,000. Collateral for the loan will consist of a like amount of component inventories ("Parts", as defined in the Agreement) held by SSC as well as accounts receivable from STL plus cash on hand in SSC. Prior to any funding by the State of Maryland, Summagraphics will provide HMV with a reference letter from Summagraphics' bank (Silicon Valley Bank). (3) Nations Bank has stated that if Summagraphics has a strong fiscal quarter and if Summagraphics' financials otherwise justify it, it will make a loan in the amount of one million dollars ($1,000,000) to Summagraphics, secured by a like amount of inventory of Parts, and that the State of Maryland will guarantee the loan. (4) HMV will exercise its best efforts to obtain from the State of Maryland reimbursement of Summagraphics' costs incurred for training and other actions associated with implementing and maintaining the rnanufacture of the Product by HMV. (5) On the first, second and third anniversaries of the Agreement, HMV will consider, in its sole discretion, upgrades in its line of credit to one million dollars ($1,000,000), two million dollars ($2,000,000), and three million dollars ($3,000,000), respectively. HMV MC Page 33 of 33 Summagraphics ______ September 13, 1995 EX-10.31 11 LICENSE AGRMNT DATED JULY 31, 1995 EXHIBIT 10.31 LICENSE AGREEMENT ----------------- This Agreement is made and entered into as of May 26, 1995, by and between SUMMAGRAPHICS CORPORATION (hereinafter referred to as "LICENSOR"), a corporation organized and existing under the laws of the State of Delaware, having an office at 8500 Cameron Road, Austin, Texas 78754, and SHARP CORPORATION (hereinafter referred to as "LICENSEE"), a corporation organized and existing under the laws of Japan, having an office at 22-22 Nagaike-cho, Abeno-ku, Osaka 545, Japan. WHEREAS, LICENSOR has the sole and exclusive right to grant licenses under U.S. Patent Nos. 4,839,634 and 5,194,852 relating to combined display and input panels, and under all counterpart patents and patent applications in other countries; WHEREAS LICENSEE possesses expertise with respect to the design, development, programming and manufacture of combined displays and input panels in general; WHEREAS LICENSEE would like to increase its product base by adding thereto combined displays and input panels according to said patents; WHEREAS, LICENSEE desires a nonexclusive right and license under said patents to make, use and sell combined display and input panels and products incorporating such display and input panels throughout the world; and WHEREAS, LICENSOR is willing to grant such a license under the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants, terms and conditions hereinafter set forth, the parties hereto mutually covenant and agree as follows. 1 1. DEFINITIONS ----------- (a) "Licensed Patent(s)": any or all of the patents and patent ------------------- applications set forth in Schedule 1 hereto, and any continuations, divisions and reissues thereof. (b) "Licensed Product(s)": any display which employs digitizer ----------------- technology combined with an input panel, and any product incorporating same, covered by a claim of any registered or issued (hereinafter referred to as "Enforceable") Licensed Patent. (c) "Subsidiary": any corporation or other entity of which a party ---------- hereto owns or controls directly or indirectly more than fifty percent (50%) of the voting stock entitled to vote for the election of the members of the board of directors or persons performing similar functions, or, in the case of entities not having voting stock, equivalent ownership or control thereof; a corporation which a party, by reason of national laws or regulations, does not own or control more than fifty percent (50%) of the shares thereof shall nevertheless be considered a Subsidiary so long as such party has and exercises the right and power to cause such corporation to comply with all obligations of such party under this Agreement; a corporation or other entity shall be considered a Subsidiary of a party only so long as such Subsidiary shall be owned or controlled as herein before set forth. 2. LICENSE ------- (a) Subject to the terms and conditions set forth in this Agreement, LICENSOR grants to LICENSEE, and LICENSEE accepts, a non-exclusive, non- transferable, non-divisible right and license under the Licensed Patents, without the right to sublicense, except for sublicenses to LICENSEE's Subsidiaries, to make, have made, use and sell Licensed Products throughout the world, provided that all royalties for the license and sublicense under this Article are paid by the LICENSEE to LICENSOR. 2 (b) No license with respect to any patent, or patent application, either express or implied, is granted by LICENSOR to LICENSEE hereunder except as specifically stated in paragraph 2(a) hereof. (c) No license, either express or implied, is granted hereunder to use as a trademark or otherwise the word "SUMMAGRAPHICS" or any other trademark or trade or product name of LICENSOR. or any word or mark similar thereto. 3. ROYALTY ------- (a) LICENSEE agrees to pay and does pay LICENSOR within sixty (60) days of the effective date of this Agreement a non-refundable fee of $100,000.00. This fee shall consist of a non-refundable license fee of $40,000.00 and a non-refundable advance against future royalties of $60,000.00. (b) LICENSEE agrees to pay LICENSOR the royalty for Class 1, Class 2, Class 3, Class 4 and Class 5 Licensed Products stated in the table immediately below made by or on behalf of LICENSEE or its Subsidiary in a country in which a Licensed Patent is Enforceable, or shipped by or on behalf of LICENSEE or its Subsidiary to a country in which a Licensed Patent is Enforceable. A royalty accrues for a Licensed Product manufactured in a country in which a Licensed Patent is Enforceable, or shipped to a country in which a Licensed Patent is Enforceable. Royalties for Enforceable Licensed Patents accrue as of the month following LICENSOR's notice to LICENSEE that a Licensed Patent becomes registered or issued. 3
Royalty Fee Per Class Minimum Size (Pixels) Maximum Size (Pixels) Module (U.S.$) - ----- -------------------- --------------------- --------------- 1 not applicable Less than 480x320 $0.75 2 480x320 Less than 640x480 $0.75 3 640x480 Less than 1024x768 $1.00 4 1024x768 Less than 1280x1024 $1.50 5 1280x 1024 no limit $2.00
(c) No further royalty shall be due LICENSOR for a Licensed Product for which LICENSEE paid LICENSOR a royalty and which LICENSEE, its Subsidiary or customer thereof subsequently incorporates into a product. (d) LICENSEE shall pay interest to LICENSOR at a rate of the lesser of (i) two percent (2%) per annum over the current U.S. federal discount rate and (ii) the maximum permitted by law, on any and all royalty amounts that are at any time overdue and payable to LICENSOR under this Agreement, such interest being calculated on each such overdue amount from the date when such amount became overdue to the date of actual payment thereof. The payment of such interest shall be in addition to and not in lieu of LICENSOR's other rights under this Agreement resulting from LICENSEE's default by failure to pay any amounts due hereunder. (e) At any time during this Agreement, upon LICENSEE's request, both parties will discuss an adjustment of royalty fees which are presented in this Article when such royalty fees become, in LICENSEE's opinion, unreasonably high due to price reductions or other changes of circumstances of the Licensed Product. 4. TERM ---- This Agreement shall be effective as of the date first written above and shall continue in full force and effect until the expiration of the last of the Licensed Patents (the "Term") unless sooner terminated under the provisions of this Agreement. 4 5. STATEMENTS AND PAYMENTS ------------------------ (a) LICENSEE agrees to forward to LICENSOR within sixty (60) days after the end of each fiscal half year of LICENSEE (ending on September 30 and March 31) during the Term of this Agreement, a statement showing the number of Licensed Products sold by it or otherwise disposed of by it during the preceding fiscal half year period together with a computation of the royalties due and payment for the royalties due, provided that the obligation to furnish these royalty reports shall not commence until the first Licensed Product is introduced into the market. (b) Payment shall be made in United States currency. In the event that the Japanese Government imposes any income tax on payments by LICENSEE to LICENSOR and requires LICENSEE to withhold such tax from such payments, LICENSEE may deduct any income tax imposed on such payments and required to be withheld by the Japanese Government. LICENSEE shall furnish LICENSOR with certified statements for such deduction. LICENSEE shall be responsible for all other taxes, charges and duties imposed by governments and authorities in connection with manufacture, sale and use of Licensed Products, except for LICENSOR's income taxes imposed by the United States federal and local governments. (c) LICENSOR shall be responsible for obtaining all approvals required, if any, of the Japanese Government for this Agreement to become effective, and this Agreement shall not be effective until any such approvals are obtained. 5 6. BOOKS OF ACCOUNT (a) LICENSEE shall keep accurate and up-to-date records, files and books of account containing all the data necessary for the full computation and verification of the royalties to be paid to LICENSOR, and the information to be given in the statements herein provided for, and such other particulars as may be reasonably required to determine LICENSEE's compliance with this Agreement. At all reasonable times (but not to exceed one inspection during each calendar year) LICENSEE shall permit any independent certified public accountant, appointed by LICENSOR and acceptable to LICENSEE, to inspect the records, files and books of account to the extent reasonably necessary to establish the accuracy of the accounting thereunder, and any such inspection shall be made at LICENSEE's facilities during normal business hours within two years following the end of the calendar year involved and if not made within such time the right to make such inspection shall be deemed waived. Acceptance of the LICENSOR's independent certified public accountant by LICENSEE shall not be withheld without good reason. The cost of any inspection shall be borne by LICENSOR, except that the LICENSEE shall bear the cost of any inspection which reveals that royalties were underpaid by 10% or more of the total amount due for the time period which the inspection covered. (b) No termination of this Agreement shall affect the right of LICENSOR to receive royalties and statements of account from LICENSEE covering the manufacture and sale of Licensed Products subject to royalty under this Agreement. 7. TERMINATION ----------- (a) Should LICENSEE be in default as to the payment of any royalties or other payments payable to LICENSOR as provided herein or should LICENSEE fail to render reports or 6 otherwise fail to abide by the conditions set forth herein, LICENSOR may, but shall not be required to, terminate this Agreement by written notice thereof to LICENSEE. Unless said default shall be corrected by LICENSEE within sixty (60) days of said notice, then this Agreement and the license and rights granted by it to LICENSEE shall automatically terminate. Termination of this Agreement shall be in addition to any other remedies that LICENSOR may have at law or equity. (b) No termination of this Agreement shall relieve LICENSEE's obligations to LICENSOR, including LICENSEE's obligation to pay all royalties accrued to the termination date. Upon early termination of this Agreement under this Article, LICENSEE shall have the right to sell all of the Licensed Products it has on hand and has parts for on said date of termination, provided that such sales are completed within one year from the date of termination, it being clearly understood and agreed that upon termination of this Agreement, LICENSEE will immediately terminate manufacture and purchase of Licensed Products. Sales and use of all of Licensed Products after said date of termination shall carry the same royalty as theretofore. (c) In the event that LICENSEE is unable to meet its debts as they fall due, is declared bankrupt or insolvent by any competent court or tribunal, or makes any general assignment of assets for the benefit of creditors, or enters into liquidation, or a receiver or trustee is appointed with respect to all or a part of its property, this Agreement may be terminated by LICENSOR effective upon written notice thereof to LICENSEE. Such termination shall be without prejudice to any other rights or claims that LICENSOR may have against LICENSEE. 7 8. ASSIGNMENT ---------- (a) Neither this Agreement nor any interest herein may be assigned, licensed or transferred in any way, in whole or in part, by LICENSEE without the prior written consent of LICENSOR. (b) This Agreement and any interest therein may be assigned by LICENSOR without the consent of LICENSEE together with LICENSOR's business relating to the Licensed Patents, provided that LICENSOR shall promptly notify LICENSEE in writing of such assignment. (c) This Agreement shall be binding and inure to the benefit of the permitted assigns and successors of LICENSEE and shall be binding and inure to the benefit of the assigns and successors of LICENSOR. 9. NOTICES ------- Any notices, election, demand or report permitted or required to be given hereunder shall be in writing and sent by registered or certified mail, return receipt requested, courier, or by facsimile to the respective party at the address stated below, or to such other address as the respective parties may designate to the other in writing in the manner provided in this paragraph 9, and shall be effective when received, or if not received, when diligent efforts to transmit have been made. Notices to LICENSOR shall be sent to: Summagraphics Corporation 8500 Cameron Road Austin, Texas 78754 Attention: Robert B. Sims Senior Vice President, Secretary and General Counsel 8 Notices to LICENSEE shall be sent to: Sharp Corporation 22-22 Nagaike-cho, Abeno-ku, Osaka 545, Japan Attention: Mr Masaru Umeda Group General Manager, Law Group 10. REPRESENTATIONS AND WARRANTIES ------------------------------ (a) LICENSOR represents that: (i) LICENSOR is the co-owner of all right, title and interest in and to More et al. U S. Patent Nos. 4,839,634 and 5,194,852 and the counterpart patent applications thereof set forth in Schedule 1. (ii) LICENSOR is authorized and has the sole right to grant licenses under the Licensed Patents. (b) LICENSOR makes no other warranties, express or implied. LICENSOR has made no representation to LICENSEE regarding the validity, scope or enforceability of the Licensed Patents, and does not warrant that any Licensed Product manufactured or sold under this Agreement will not infringe rights of others or other rights of LICENSOR other than under the Licensed Patents. (c) LICENSEE represents that LICENSEE is authorized to and has the right to enter into this Agreement. 11. INFRINGEMENT BY THIRD PARTIES ------------------------------ (a) LICENSOR shall not be obligated to sue infringers and shall, if it sues, have the right to dismiss or settle at any time any suit, and shall be entitled to all of any amounts awarded. 9 (b) If at any time LICENSEE becomes aware of any facts or information indicating that any third party is or may be infringing a Licensed Patent, LICENSEE. shall promptly inform LICENSOR of such facts and information. LICENSEE shall not have any obligation, right or authority to institute any legal action against third parties under the Licensed Patents on account of any such infringement. LICENSOR will determine whether the apparent infringing condition justifies taking an appropriate legal action to protect the affected Licensed Patent(s) but shall not be required to do so if business reasons make taking such action impractical. 12. SEVERABILITY ------------ Should any part or provision of this Agreement be held invalid, unenforceable or in conflict with the law of any jurisdiction, the validity and enforceability of the remaining parts or provisions shall not be affected by such holding. 13. MOST FAVORABLE TERMS -------------------- LICENSOR represents that it shall endeavor to keep the terms and conditions under this Agreement as favorable to LICENSEE as are the terms and conditions LICENSOR may include in any agreements similar in nature and content to this Agreement which LICENSOR may enter into with other parties who are in like circumstances as LICENSEE, and in the event LICENSOR subsequently enters into such other agreement under terms and conditions more favorable than those provided in this Agreement during the term of this Agreement, LICENSOR shall make such favorable terms and conditions available to LICENSEE, to be accepted or rejected at LlCENSEE's option within sixty (60) days after notice of such grant by LICENSOR. 14. LIMITATION ON EFFECT OF WAIVER ------------------------------- Failure of either party to insist upon the strict performance of any provision hereof or to exercise any right or remedy shall not constitute a continuing waiver of such provision and shall 10 not be deemed a waiver of any right or remedy with respect to any existing or subsequent breach or default; the election by either party of any particular right or remedy shall not be deemed to exclude any other; and all rights and remedies of either party shall be cumulative. 15. COMPLETE AGREEMENT ------------------ This Agreement contains the entire and complete understanding between the parties and merges all prior and contemporaneous understandings with respect to the subject matter covered herein. There are no warranties or representations made by either party other than contained herein. 16. GOVERNING LAW ------------- This Agreement shall be governed by, and for all purposes be, construed and deemed to be a contract made under and pursuant to the laws of the State of Texas, U.S.A. 17. DUPLICATE ORIGINALS ------------------- This Agreement shall be executed in duplicate, and each executed copy shall for all purposes be deemed an original. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates written below. SHARP CORPORATION (LICENSEE) Date: 9/27/95 By: /s/ M. Umeda --------------------- ----------------------------------- Signature of Authorized Officer Masaru Umeda ----------------------------------- Corporate Seal Printed Name Group General Manager of Law Group ----------------------------------- Title 11 SUMMAGRAPHICS CORPORATION (LICENSOR) Date: July 31, 1995 By: /s/ Robert S. Sims ----------------------------------- Signature of Authorized Officer Robert S. Sims ----------------------------------- Printed Name Corporate Seal Senior Vice President ----------------------------------- Title 12 AGREEMENT BETWEEN SUMMAGRAPHICS CORPORATION and SHARP CORPORATION Schedule 1 More et al. U.S. Patents - ------------------------ 4,839,634 5,194,852 Counterpart Patents and Patent Applications In Other Countries - -------------------------------------------------------------- European Patent: Office Application No. 416176 Japan: Application No. 2-153823 13 EX-22.1 12 SUBSIDIARIES EXHIBIT 22 SUBSIDIARIES ------------ Name Country/State Name for Doing Business - ---- ------------- ----------------------- Summagraphics N.V. Belgium Same Summagraphics (Europe) N.V. Belgium Same Summagraphics Ltd. United Kingdom Same Summagraphics GmbH Germany Same CAD Warehouse Nevada Same EX-27 13 FINANCIAL DATA SCHEDULES
5 1,000 YEAR MAY-31-1995 MAR-01-1995 MAY-31-1995 560 0 18,039 954 19,383 39,118 18,495 13,188 53,601 33,505 1,861 46 0 0 14,358 53,601 78,494 78,494 58,188 58,188 30,929 0 609 (11,412) 187 (11,599) 0 0 0 (11,599) (2.56) (2.56)
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