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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended June 30, 1995
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED] for the transition period from to
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Commission file No. 0-12641
[LOGO OF PERSONAL COMPUTER PRODUCT, INC.]
PERSONAL COMPUTER PRODUCTS, INC.
(Name of small business issuer in its charter)
DELAWARE 33-0021693
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
10865 Rancho Bernardo Road
San Diego, California 92127
(619) 485-8411
(Address of principal executive offices and issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.005 par value
(Title of Class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- ------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Registrant's total consolidated revenues for the fiscal year ended June 30, 1995
were $14,394,000.
At September 22, 1995, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $4,533,800, based on the
average bid and asked prices in the over-the-counter market as reported by
Nasdaq.
At September 22, 1995, there were 17,428,934 shares of common stock, $0.005 par
value, of the registrant issued and outstanding.
Information required by Part III of this Form 10-KSB is incorporated therein by
reference from the Company's definitive Proxy Statement with respect to its 1995
annual meeting of stockholders to be filed pursuant to Regulation 14A within 120
days after June 30, 1995.
Transitional Small Business Disclosure Format
Yes No X
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Part I
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Item 1.
Description of Business
Personal Computer Products, Inc. was incorporated in March, 1982 under the laws
of the State of California, and reincorporated in May, 1983 under the laws of
the State of Delaware. Laser Printer Accessories Corporation, a Delaware
corporation ("LPAC"), and Prima, Inc., a California corporation doing business
as Prima International ("Prima"), are all wholly-owned subsidiaries of Personal
Computer Products, Inc. (collectively "PCPI" or the "Company").
PCPI and its subsidiaries (1) develop and license laser printer technology; (2)
manufacture, market, and distribute laser printer controllers and accessories;
and (3) market and distribute internationally a variety of personal computer
accessory products. The following diagram illustrates the organization of the
Company.
PCPI
PCPI TECHNOLOGY DISTRIBUTION
--------------- ------------
Controller Printer Products
Development PC and Mac Products
Technology Transfer Imaging Products
R&D
Engineering Direct Sales
Tiered Distribution
Adobe PostScript International Trading
Imaging Technologies
Through its technology division ("PCPI Technology"), the Company designs,
develops, and markets firmware (software embedded in memory chips), circuit
boards, application-specific integrated circuits ("ASICs") and software for use
in personal computer imaging devices. The Company's technology and products are
used primarily in laser printers and multifunction devices (combined printer,
scanner, copier, and facsimile). The Company sells these controllers separately
to sellers of laser printers, and licenses its controller board technology to
other producers of laser printer engines and/or controllers. Recent PCPI
Technology customers have included: Xerox Corporation, Matsushita Electric
Company, Ltd. (Panasonic), Hypertec, Inc., Integrated Device Technology, Inc.,
Samsung Electronics Company, Ltd., Seiko Instruments and Minolta Company Ltd.
Through its distribution division (the "Distribution Division"), which is
composed of the Company's LPAC and Prima subsidiaries, the Company provides
enhancement and accessory products to the personal computer and printer markets
both in the U.S. and overseas. The Distribution Division markets and distributes
value-added personal computer accessory products, including memory products such
as floppy and hard disk drives from SyQuest(TradeMark) and Fujitsu(TradeMark),
tape drives, and CD-ROM drives; and PCMCIA products that include miniaturized
accessories such as memory devices and fax/modems for laptop and notebook
computers.
Industry Overview
Page printers, especially laser printers, have become an established means of
printing data generated by computers. The market for laser printers has grown
significantly over the past several years. In 1993, overall industry figures
revealed page printer (laser, LED, inkjet, etc.) sales accounting for 58 percent
of total worldwide printer sales - 14 million units. The worldwide installed
base of such devices is expected to grow to over 21 million units by 1997, 76
percent of all printers sold. PostScript-compatible printers accounted for
approximately 20% of the market in 1993. This share is expected to be 22% by
1995.
According to industry analysts including International Data Corporation,
InfoCorp, and BIS Strategic Decisions, the worldwide printer market in 1992
comprised approximately 21.4 million units with a projected compound annual
growth rate (CAGR) of 7.3% from 1993 through 1996. Generally, demand is
2
driven by first-time general business purchases outside the U.S. market, as well
as replacement and first-time small business purchases in the domestic U.S.
market. The worldwide printer market is dominated by the U.S., which is expected
to continue through 1997. The U.S. is expected, however, to account for less
market share over time due to market maturation.
Inkjet printers were introduced in the late 1970's. In the last two years,
inkjet has become the fastest growing technology, setting new growth records due
to its relatively low cost and good quality reproduction in both monochrome and
color. Speed is the greatest concern at this time. Most inkjet printers produce
output at 3 pages per minute. If speed is to be increased, ink drying times will
have to improve. Higher end inkjet models, particularly color models, typically
incorporate Adobe PostScript functionality.
Laser printers continue to be the dominant technology in use for page printing
and high-end imaging. PostScript functionality makes up approximately 20% of
this market. Laser technology is the only printer technology that is primarily
sourced from Japan. Many impact and inkjet printers are manufactured in France,
Singapore, Korea, and Taiwan, among others. Currently, over 75% of all laser
printer engines are derived from Japan.
At present, the leading printer manufacturer worldwide is Hewlett Packard, with
leadership positions in both laser and inkjet technologies. Hewlett Packard is
followed by Japanese manufacturers Epson, Panasonic, and Star. Other than
Hewlett Packard, Apple, and Lexmark, Japanese printer companies occupy the other
six positions in the top nine.
[GRAPH APPEARS HERE]
Features that tend to differentiate printers, particularly in the high volume/
high growth page printer technologies such as inkjet and laser, include the
presence of the PostScript page description language, high resolution
capability, network-ready connectivity, and output at rated engine speed.
Color capability is an important issue in desktop printing. Of the 750,000
inkjet units forecast to sell in the U.S. for 1993, over 650,000 were color-
capable. For color capability on other technologies such as laser, dye
sublimation, and thermal transfer, PostScript Level 2 (the latest iteration of
the PostScript page description language) capability is important for graphics
compatibility and high quality reproduction.
An additional component to the market has been recently introduced:
multifunctionality. There is new emphasis on the development of desktop printing
solutions that provide the end-user printer/copier/facsimile functionality in
the same device. As many as 40 vendors are already involved in the development
and marketing of over 150 such devices, with many more on the horizon.
Color copiers have been on the market for about 20 years. They have evolved from
stand-alone, walk-up machines in central reproduction departments to ultra-
sophisticated, multiple-function products. U.S. sales of color copiers have
concentrated on pay-for-print centers, copy outlets and professional users of
color machines. Installations in the United States totaled more than 31,360
color electrophotographic copiers, including analog and digital machines, with
Canon commanding approximately 55% of the installed base. Xerox follows with
slightly more than 11%. The U.S. color copier market reached a volume of $185
million in 1993 and is projected to be over $1.2 billion by 1998.
Color laser printers began entering the U.S. marketing during 1994. It is
anticipated that many models of desktop color laser printers will offer many of
the document-finishing features of color copiers, such as document sorting,
collating, and stapling. Multiple input trays will accommodate network users and
enhance printer versatility. It is additionally anticipated that such devices
will offer scanning and facsimile functions in addition to printing as a way to
overcome price sensitivity.
3
In order to be successful in the future, copier and printer vendors will have to
adopt new product strategies to differentiate themselves and to provide more
features to offset the growth of the color laser printer market. The key element
of this strategy is multifunctionality so that high-quality, high-performance
machines can be used by computer networks in the office.
Business Strategy
PCPI Technology's strategy is focused on the continued development and
implementation of laser printer technology. The Company's development resources
are directed toward the development of Adobe PostScript controllers and Adobe
CPSI software implementations of PostScript. This technology will be directed
toward the development of controllers that support multifunction devices
(combining printer, facsimile/modem, copier, scanner) on the low-end
("LaserImage/TM/"); and development of controllers that support high-
functionality color digital copier/printers on the high-end (ColorImage/TM/).
The Company's mission has been the development of intelligent board-level
devices that would add value to personal computers and peripheral devices.
Since 1983, the Company has been an active licenser and/or OEM provider of its
LaserImage(R) printer controller technology to a number of companies throughout
the world. These include or have included: AEG Olympia (Germany), Elebra
(Brazil), Fujitsu (Japan), Goldstar (Korea), HyperTek (Korea), Matsushita
Electric Company -Panasonic (Japan), Mita (Japan), Ricoh (Japan), Samsung
Electronics Company (Korea), Tandy Corporation (United States), Tokyo Electric
Company (Japan), Xerox (United States), and others. In order to accommodate the
manufacturing requirements of its licensees, the Company also has preferred
relationships for off-shore manufacturing. Such relationships allow PCPI to
provide manufacturing capabilities without the need to invest and build an
extensive manufacturing infrastructure. The Company's facilities easily
accommodate the needs for integration and testing.
The Company had extensive technical relationships that enable it to offer the
latest technology to its customers. These have included arrangements for joint
development of ASIC semiconductor components for laser printer controllers with
Motorola and DP-Tek; authorized developer relationships with Adobe and Hewlett
Packard; and font licensing with Agfa Compugraphic and The Company (URW).
In November 1993, PCPI consummated its arrangement with Adobe Systems
Incorporated as an authorized co-developer for the implementation of the
PostScript page description language on printers. Adobe, in the past year, has
invested approximately $99 million in research and development related to its
products, such as PostScript. Adobe in order to accommodate the needs of printer
companies who wish to incorporate the PostScript language into their products,
has appointed a few third-parties to provide some of the custom engineering
resources required to integrate PostScript on printer controllers. The
PostScript integration process on printer controllers is complex, requiring
considerable expertise in hardware design and firmware development and
implementation. Adobe and PCPI have agreed that PCPI is uniquely suited to serve
the needs of printer companies who desire to include PostScript on these
products. PCPI serves a critical function in providing the latest technology and
rapid time-to-market to those companies who wish to remain competitive in the
printer market by offering features that meet the standards of the computer
industry.
PCPI Technology
The principal business of PCPI Technology has been the development, licensing,
and marketing of imaging technology and products; principally desktop printing
and publishing.
PCPI Technology's strategy has been to attempt to adjust to the evolving
personal computer market by developing and/or implementing technology that will
enable it and its licensees to compete with, or supplement, the products of the
industry's dominant manufacturers.
PCPI sells and licenses, usually on a non-exclusive basis, its printer
controller technology and its proprietary software. Its typical customers are
manufacturers of laser printers and controllers. In the majority of cases, PCPI
transfers existing technology, or modifies that technology to meet the
specifications of the customer. Typically, the licensing fees derived from these
activities are based on the number of units sold by the licensee that
incorporate the licensed technology. In addition, PCPI receives, in most cases,
initial engineering fees for adapting its technology to the requirements of the
particular purchaser or licensee, and mini-mum license fees to keep the license
in effect.
The widespread availability of laser printers spawned a new class of
applications software for desktop publishing. Using this soft-ware, a user can
create, on a personal computer, a finished, high-quality,
4
printed document that incorporates a variety of type sizes, styles, and fonts
previously available only through a commercial printer.
As printers become more capable and sophisticated, it has become more difficult
for users to know exactly what combination of features is best or most
appropriate. At the most basic level, however, users want a printer that creates
great looking documents; and they want one that works with their computer
system, regardless of the software on that system. Only one kind of printer
meets all the criteria of the end-user -- a printer that comes with genuine
Adobe PostScript software. Unlike printers using other software (including
PostScript clones), printers that use genuine Adobe PostScript place no limits
on how the user's information may be displayed; nor what kind of document can be
created or printed. This means that whether users are employing DOS, Windows,
OS/2/TM/, UNIX(R), Macintosh, a mini or mainframe computer system, or any
combination of these platforms, they can output work on any printer that has
Adobe PostScript. PostScript is the most dependable way to print for business
users. And, PostScript files can also be sent over networks, including those
from Novell, 3Com, and others.
The Company's Adobe PostScript Interpreter ("APSI") project, which includes its
Millennium Series controllers) includes the implementation of Adobe PostScript
for OEM customers. These controllers are based on IDT RISC (reduced instruction
set circuit) processors or the AMD-29200 processor. Associated ASIC chips are to
be implemented as dictated by functionality. The features and functions of APSI
are defined as follows:
. Adobe platform
. Adobe PostScript Level 2
. PCL5 (LaserJet4) emulation
. Parallel and Appletalk/TM/ (Macintosh) communications
Additional features/functions to be implemented, depending on customer demand,
include GDI (Microsoft Windows) support, doubleRES (resolution increase), PCPI
PhotoImage/TM/ (resolution/grayscale enhancement), serial I/O
(communications), multifunctionality (fax, scanning, etc.) and Novell (network)
connectivity.
Customer targets are OEMs who wish to market PostScript printers to resellers
and end-users. The OEM must also be an Adobe licensee in order to be authorized
to purchase APSI technology.
To enhance its ability to market its technology, PCPI has entered into a sales
agreement with Nippo, Ltd. of Japan for the promotion of licensing of the
Company's Adobe PostScript controllers. Nippo has also made an equity investment
in PCPI in the amount of approximately $1.7 million. Japanese laser printer
developers represent the dominant customer base for the Company's technology.
Nippo is currently a supplier of copier and laser printer engine mechanical
parts to the Japanese copier and laser printer industry.
Integrated Device Technology, Inc. represents PCPI's first design partnership to
incorporate Adobe PostScript in a new generation of printer controllers. IDT
offers state-of-the-art, high-performance RISC (reduced instruction set
computing) chips that maximize the performance of controllers that incorporate
PostScript functionality. This is particularly significant in markets that
require the best possible printer performance, such as color printing,
electronic pre-press graphics applications, etc. IDT's worldwide sales force
will supplement PCPI's sales effort by representing the PCPI/IDT/PostScript
solution to its customer and prospect base. IDT, with over 2,600 employees
worldwide, has annual revenues that exceed $300 million.
In July 1994, PCPI signed a controller development agreement with Matsushita
Electric Company, Ltd. of Japan for a new Panasonic brand multifunction device
that will feature printing, scanning, facsimile, and copier functionality. The
new controller will be based upon PCPI's LaserImage technology.
PCPI's LaserImage Series of controllers are available in a variety of different
configurations. They typically provide, either as part of the controller, or
through add-on boards or plug-in cartridges, industry-standard printer
emulations, such as PCL from Hewlett Packard. The controller boards have been
designed to minimize the use of microchip and memory components, thereby
enabling production of each controller at a cost lower than would otherwise be
the case. Its relationship with Motorola, Inc., for example, resulted in the
development of a family of specialty circuits (ASICs) that are designed
specifically for laser printer controllers. Through its license of DP-Tek's
patented TrueImage/TM/ technology, PCPI is able to provide doubleRES (the unique
ability to quadruple the amount of dots per square inch that a laser printer
engine can place on paper. In this way, a 300 dpi laser printer may be
transformed into a 600 dpi printer, which would otherwise require an
alternative, more expensive
5
engine.) As part of this technology, the Company provides Microsoft Windows/TM/
compatibility to laser printers.
PCPI's ColorImage series of controllers also feature the integration of
Adobe/TM/ PostScript. The support of high-performance desktop printing requires
considerable processing power. PCPI's ColorImage models employ IDT MIPS RISC
processors along with supporting ASICs. The result is a controller that fully
supports the latest features and functions of Adobe PostScript. ColorImage is a
stand-alone controller, located at the workstation, to support high-
performance/functionality color printers. The result is a product that
significantly out-performs other controllers.
The ColorImage system includes a robust color management system that has been
designed to provide complete control over the color calibration of any input or
output device including scanners, monitors, digital cameras, photo CD, printers,
film recorders, proofing devices, etc. ColorImage software is, in effect, a
color engine that makes every input device see a target profile that matches the
objectives of the user. The quality and consistence of documents created using
the ColorImage system is assured through a comprehensive, user-controlled
calibration process.
PCPI projects considerable growth in technology sales, largely on the strength
of its relationship with Adobe.
Distribution
In October 1993, PCPI acquired Prima International, a world-wide distributor of
high technology products. Prima provides manufacturers with international
distribution and marketing capabilities, as well as offering U.S. purchasing
facilities for international buyers. Prima functions in three basic areas:
product distribution and representation, buying office/commodity sales, and
international management.
PCPI organized its LPAC distribution subsidiary in 1989 to take advantage of the
growing market for laser printer accessories such as its ImageFont/TM/,
ImageScript/TM/, LaserImage/TM/ and doubleRES/TM/ lines of cartridges,
emulations, and other products that add functionality and value to the basic
laser printer. The products previously marketed through LPAC could be marketed
through Prima.
Prima has been active in the international market for over 12 years, and
understands the multi-cultural, multilingual requirements of this business. It
has developed a network of highly qualified resellers located in every country
of significance. In addition, its headquarters location, in the heart of Silicon
Valley, California, provides access to the premier suppliers of disk and tape
drives, controllers, scanners, terminals, network boards, modems, fax cards, and
graphics products, as well as relationships with manufacturers developing new
technologies.
Prima offers international market penetration for U.S. high-technology
manufacturers through use of their extensive sales channels including sub-
distributors and resellers; and also representing products to the OEM and end-
user communities. Prima tailors international sales and distribution programs
suited to specific product needs. For many international buyers, locating a
trustworthy, reliable source to purchase U.S. products on an "as needed" basis
is essential to their ability to build systems and maintain a complete product
offering to their customers. Prima offers these customers in-depth knowledge of
the high technology market, proximity to the major producers of high technology
products, and industry associations which date back to the 1960's. Through close
relationships with many manufacturers, U.S. distributors, and representatives,
Prima provides immediate access to hardware, software, firmware, media,
accessories, and components for its international clients. Prima offers its
international clients a vast network of Prima associates which results in
increased marketing opportunities and options -- and decreased "time-to-market."
Prima's domestic (U.S.) business focuses on direct sales to end-users via its
Peripherals Direct operating unit, formed in early 1994. The purpose of this
operating unit is to add incremental sales of the company's products at margins
higher than would be possible through multi-tier distribution. Prima serves as a
corporate-wide focal point for sales of products to resellers (dealers and
distributors) worldwide as well as a conduit for products to end-users at
competitive price points on high-demand computer peripheral products such as
disk drives.
Prima exports and imports a variety of high technology products with an emphasis
on peripherals and accessories compatible with IBM, Apple Macintosh, the leading
brands of small business computers, and UNIX and Novell. The focus on these
markets has afforded Prima the ability to develop the technical expertise needed
to fully support suppliers and customers.
6
Principal product lines include: (1) PDQ memory devices (principally removable
SyQuest-brand disk drives) for PCs and Macintosh computers and (2) PCMCIA
products, which represent new technology in media and value-added computer
accessories for notebook and palmtop devices.
Five well-defined domestic (U.S.) markets are represented: these include among
others (1) the installed user base of PC-compatible storage; (2) the installed
user base of Macintosh-compatible storage; and (3) users of notebook and palmtop
computers that are compatible with the PCMCIA standard.
Production and Sources of Supply
PCPI presently contracts for the manufacture of its products with a number of
suppliers located in the San Diego and San Jose, California areas. The suppliers
assemble products, utilizing components purchased by the Company from other
sources. The terms of supply contracts are negotiated separately in each
instance. The Company is satisfied that its present assembly contractors have
sufficient capacity to meet projected market demand for the Company's products,
or that alternate sources are available without undue disruption. PCPI has not
experienced any significant difficulty over the past several years in engaging
contractors, or in purchasing components.
PCPI contract suppliers generally perform a multi-step quality control test
prior to shipping their products to the Company. PCPI, in turn, performs
additional tests on the products, adds appropriate software, and then packages
and ships the products to customers. In addition to buying such items as printed
circuit boards and other components from outside suppliers, the Company
purchases software programs, in the form of floppy disks, from vendors who have
licenses to sell such software to the Company from the originators of such
software, and has, from time to time, directly licensed system software used in
certain PCPI products.
Marketing
Marketing and sales activities are conducted by approximately 8 Company
employees. Each of the divisions and subsidiaries utilizes dedicated sales
personnel.
Research and Development
Despite the fact that there can be no assurance that PCPI can successfully
produce new products, nor that such products will be profitable, the Company
will be required to continue to spend substantial sums on research and
development in the foreseeable future in order to enhance existing products, and
to develop new products. New technology developed, or products introduced, by
other entities, including major computer companies, could adversely affect the
marketability of the Company's products. Consequently, the Company is compelled
to continue development of new technologies, and implementation of new
technologies, in order to remain competitive.
Competition
The markets for computer hardware and software have been characterized by rapid
and continuing technological change, and by intense competition. The Company
provides differentiation in the laser printer controller/accessories marketplace
through the capability of its controllers, the quality and extent of
accompanying printer emulation software, and the ability of these controllers to
provide added-value through image enhancement technologies such as increased
resolution and image enhancement. Printer and computer accessories are often
commodities that do not provide significant differentiation. The Company,
through its Prima subsidiary, strives to differentiate itself by providing
superior customer service, timely delivery of product to its customers, and
competitive pricing.
Proprietary Protection
PCPI's software is copyrighted; however, such protection as the copyright laws
provide does not prevent other companies from emulating the effects achieved by
such software. PCPI owns no patents, but has obtained registration of several of
its trade-names or trademarks, including: PCPI, LaserImage, ImageScript, and
ImageFont.
7
Employees
The Company, including its Prima, and LPAC subsidiaries, employed a total of 41
persons (all full-time) at June 30, 1995, of whom 8 were in corporate
administration and finance, 16 in engineering and research and development, 4 in
production, and 13 in sales and marketing.
Other
The costs and effects of compliance with Federal, state, and local environmental
laws and other existing or probable governmental regulations are not, and are
not expected to be, material. In certain cases, government (Federal
Communications Commission) approval is required with respect to PCPI's
controller products.
Item 2.
Description of Property
The Company, and its LPAC subsidiary, occupy approximately 23,000 square feet of
space in a facility located at 10865 Rancho Bernardo Road, San Diego, California
92127, at a monthly rental rate of $11,500. The lease expires on August 31,
1996. The Company owns no real property.
Prima International occupies 5,000 square feet of space in a facility located at
3350 Scott Boulevard, Building No. 7, Santa Clara, California 95054, on a month-
to-month basis at a monthly rental rate of $4,745.
Item 3.
Legal Proceedings
The Company, because of the nature of its business, is from time to time
involved in legal actions. The Company, after discussion with legal counsel,
does not consider that any of these legal actions now pending will result in a
material adverse effect on the consolidated financial position or results of
operations of the Company and, further, does not consider that any such
proceedings fall outside ordinary, routine litigation incidental to the business
of the Company.
Item 4.
Submission of Matters To a Vote of Security Holders
Not applicable.
8
Part II
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Item 5.
Market for Common Equity and Related Stockholder Matters
The Company's common stock is traded in the over-the-counter market, and quoted
on Nasdaq (symbol: PCPI).
The following table sets forth the high and low bid quotations of the Company's
common stock for the periods indicated as reported by Nasdaq. Prices shown in
the table represent inter-dealer quotations, without adjustment for retail
markup, markdown, or commission, and do not necessarily represent actual
transactions.
High Low
------------------------------------------------
Year ended June 30, 1994
First quarter $ 1.31 $ .72
Second quarter 1.28 .69
Third quarter 1.31 .56
Fourth quarter 1.13 .56
Year ending June 30, 1995
First quarter $ .88 $ .50
Second quarter .78 .41
Third quarter .59 .25
Fourth quarter .56 .19
------------------------------------------------
The listing requirements under The Nasdaq SmallCap Market are that a company
maintain at least $1,000,000 of public market float, maintain at least
$1,000,000 of capital and surplus and maintain a bid price of $1.00 for 10
consecutive trading days within a ninety day period for the publicly traded
shares. If a company maintains at least $2,000,000 of capital and surplus, there
is no minimum bid price requirement.
The Company was notified that it was not in compliance with the above minimum
bid requirements based on its then capital and surplus. The Company presented a
plan to Nasdaq to achieve compliance with said requirements and has been granted
an exception from these listing requirements until September 30, 1995. Should
the Company be unsuccessful in satisfying the above requirements, its common
stock could become subject to delisting from The Nasdaq SmallCap Market. If the
Company's common stock is delisted, it would be quoted only on the NASD OTC
Bulletin Board and the Company could reapply for listing once the Nasdaq listing
requirements are satisfied.
The number of stockholders of record of common stock, $.005 par value, of the
Company was 313 at June 30, 1995.
PCPI has never declared, or paid, any cash dividends on the PCPI Common Stock.
PCPI currently intends to retain earnings, if any, after any payment of
dividends on its 5% Convertible Preferred Stock and 5% Series B Convertible
Preferred Stock, for use in its business, and, therefore, does not anticipate
paying any cash dividends on the PCPI Common Stock.
Holders of the 5% Convertible Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, but only out of amounts legally available
for the payment thereof, cumulative cash dividends at the annual rate of $50.00
per share, payable semi-annually, and commencing on October 15, 1986. PCPI has
never declared, or paid, any cash dividends on the PCPI 5% Convertible Preferred
Stock. Dividends in arrears at June 30, 1995 were $1,673,000.
Holders of the 5% Series B Convertible Preferred Stock are entitled to receive,
when and as declared by the Board of Directors, but only out of amounts legally
available for the payment thereof, cumulative cash dividends at the annual rate
of $500 per share, payable annually.
9
Item 6.
Management's Discussion and Analysis or Plan of Operations
Results of Operations
Overview
The Company had a net loss from continuing operations of $2,510,000 for fiscal
1995 compared to a net loss of $3,588,000 for fiscal 1994. Total revenues from
continuing operations were $14,394,000 for fiscal 1995 versus $10,832,000 for
fiscal 1994.
The Company's recent focus of its business efforts on the development of
Adobe/TM/ PostScript/TM/-based controllers and other controllers featuring
PCPI's ImageBase/TM/ software platform, has resulted in the recognition during
fiscal 1995, of approximately $1,097,000 in revenues associated with contracts
to adapt the Company's software products to controllers that will be integrated
with the hardware products of various OEM customers, including Integrated Device
Technology, Inc. (IDT), Matsushita Electric Company, Ltd. (Panasonic), Samsung
Electronics Company, Seiko Instruments and Minolta Company, Ltd. PCPI's strategy
has required the Company to alter its focus away from some of its traditional
revenue sources and to make expenditures in support of these efforts. As a
result, the Company's business continues to be in a significant transition and
there are important short-term operational and liquidity challenges.
Accordingly, year-to-year financial comparisons may be of limited use due to
these important changes in the Company's business and also due to the Company's
strategic acquisition of Prima in October 1993.
As described in Note 2 to the financial statements, effective March 24, 1995,
the Company sold 81% of the common stock of ImageSoft Incorporated. The
operations of ImageSoft were not significant. The Company had inadequate working
capital to invest additional funds in ImageSoft and has not provided any
significant funding to ImageSoft operations for the past few years. The disposal
of ImageSoft resulted in a gain of $227,000 as the result of ImageSoft's excess
liabilities over assets on that date.
As described in Note 5 to the financial statements, in January 1995, the Company
converted certain outstanding notes payable into 1,117,197 unregistered shares
of the Company's common stock. The Company recognized an extraordinary gain on
the issuance of these shares of approximately $209,000 representing the
difference in the aggregate conversion price and the market value of the shares.
Fiscal 1995 includes non-recurring non-cash gains of $227,000 on the sale of
ImageSoft, $234,000 on the settlement of license agreements and an extraordinary
gain on the conversion of notes payable into common stock of $209,000 and a non-
cash accounting loss of $204,000 on the conversion of the 5% Notes into common
stock.
Revenues
Sales of products from continuing operations were $13,043,000 for fiscal 1995
versus $10,526,000 for fiscal 1994. Sales of products by the Company's Prima
subsidiary were $12,487,000 for the year ended June 30, 1995. Prima sales were
$9,482,000 for the year ended June 30, 1994, which only included sales from the
date of acquisition in October 1993. Prima's business consists of product
distribution and integration, including sales of its PDQ(TM) line of memory
devices featuring SyQuest(TM) removable cartridge technology.
A shortage of working capital during fiscal 1995 imposed limitations on the
Company's operations, including Prima's business.
The Company's sales of products from continuing operations, other than Prima
sales, for the year ended June 30, 1995 were $556,000 compared to $1,044,000 for
the year ended June 30, 1994, both of which are far lower than the Company's
historic product sales.
During the year ended June 30, 1995, PCPI sold, to a single customer, $231,000
of laser printer engines.
Sales of printer products marketed through the Company's Laser Printer
Accessories Corporation ("LPAC") subsidiary, were $243,000 during fiscal 1995
and were $286,000 during fiscal 1994.
During fiscal 1995, the Company performed work on engineering projects that were
funded by OEM customers under non-recurring engineering contracts (NRE). NRE
revenue for the year ended June 30, 1995 was $1,097,000, which was recognized
during the course of development based on the percentage of completion method.
10
Licensing and royalties for the year ended June 30, 1995 were $254,000 versus
$306,000 for the year ended June 30, 1994. In the past, licensing and royalty
revenue has shown significant year-to-year fluctuation. PCPI has submitted
several proposals to prospective customers in order to develop Adobe PostScript-
based controllers and other controllers based upon its ImageBase technology.
While the Company has entered into some contracts with OEM customers for
controller development, there can be no assurance that additional contracts will
be obtained for the development of such controllers, or that the existing
contracts will be completed, or that products will then be shipped by the
customer in order to generate future royalty and license revenues.
Cost of Products Sold
Cost of products sold from continuing operations for the year ended June 30,
1995 and 1994 was $11,883,000 and $10,128,000, respectively, representing a
gross margin of 8.9% and 3.8%, respectively. The increased margin is attributed
to a change in the product mix at Prima between the periods and reduced
amortization of prepaid license and royalties. In addition, the product sales
during the year ended June 30, 1995 resulted in lower royalty charges compared
to the previous year's product sales.
Selling, General and Administrative
Selling, general and administrative expenses from continuing operations for
fiscal 1995 were $3,149,000 versus $3,324,000 for fiscal 1994. The decrease is
due to (1) reductions in selling expenses due primarily to the Company's working
capital shortage, (2) the permanent reduction in the Company's rent on its San
Diego facilities (from approximately $27,000 to $11,500 per month) during the
second quarter of fiscal 1995, (3) reductions in force due to attrition and (4)
general reductions in overhead expenses. These were partially offset by (1)
increases in sales commissions as the result in increased product and technology
sales during the year (2) the absence of Prima expenses in the first quarter of
fiscal 1994 (the Company acquired Prima in the second quarter of fiscal 1994),
and 3) the effect of temporary reductions of wages and salaries for the first
quarter of fiscal 1994.
Research and Development
Research and development expenditures from continuing operations for fiscal 1995
were $1,283,000 versus $546,000 for fiscal 1994. These expenditures consist of
engineering expenses associated with the development of controller technologies
and designs for PCPI technology customers. During fiscal 1995 the Company did
not capitalize any costs pursuant to Statement of Financial Accounting Standard
No. 86 ("Accounting for Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed") as the Company did not have any qualifying expenditures.
The Company capitalized $674,000 of such costs in fiscal 1994. The Company's
current development projects have been funded by OEM customers under development
contracts.
Other Income and Loss
Interest expense from continuing operations was $114,000 for fiscal 1995 versus
$103,000 for fiscal 1994. Interest expenses were due to outstanding debt
balances.
The year ended June 30, 1995 includes non-recurring non-cash gains of $234,000
on the settlement of license agreements and $227,000 on the disposal of
ImageSoft (discontinued operations) and a non-cash accounting loss in accordance
with Statement of Financial Accounting Standards No. 84 ("Induced Conversions of
Convertible Debt") of $204,000 on the conversion of the 5% Notes into common
stock. The Company also recognized an extraordinary non-cash gain of $209,000 on
the conversion of notes payable into common stock representing the difference in
the aggregate conversion price of the shares issued and their market value at
the date of conversion.
The year ended June 30, 1994 includes non-recurring gains of $11,000 as the
result of the sale of investment securities.
Discontinued Operations
Effective March 24, 1995, the Company sold 81% of its ImageSoft subsidiary.
The Company's discontinued ImageSoft subsidiary (software distribution and
publishing) had sales for the year ended June 30, 1995 of approximately $93,000
compared to sales of $261,000 for the year ended June 30, 1994.
11
Total ImageSoft operating expenses for the year ended June 30, 1995 and 1994
were $164,000 and $657,000, respectively.
Liquidity and Capital Resources
During fiscal 1995, the Company experienced operating difficulties due to its
lack of working capital. The shift in focus toward Adobe co-development projects
presents continuing liquidity problems because, in the short-term, these
activities are net users of working capital. The Company believes its current
working capital and anticipated operating cash flows may not be sufficient to
meet its financial resource requirements. Adequate working capital is necessary
to continue the Company's operations, develop its technology licensing business
and to deliver the resulting products to contract customers in an efficient and
timely manner. Shareholders should note the Company's weak cash position and
negative working capital, and the possibility of continuing operating losses. In
addition, the Company's auditors have stated, in their audit report, that
certain factors raise substantial doubt about the Company's ability to continue
as a going concern.
During the year ended June 30, 1995 PCPI's liquidity improved slightly, despite
operating losses during the year, as the result of converting approximately
$2,535,000 of liabilities into common and preferred stock of the Company.
Despite the conversion, at June 30, 1995 the Company had a negative balance of
working capital of $649,000, an improvement from the negative working capital of
$1,155,000 as of June 30, 1994.
The Company is currently seeking additional financing in order to meet its
short-term and long-term liquidity requirements. However, there can be no
assurance that such financing will be available. In addition, the Company will
continue to pursue opportunities to convert existing liabilities of the Company
into equity in order to improve its working capital position.
As of June 30, 1995, Prima's unused special purpose line of credit was $214,000.
PCPI has no material commitments for capital expenditures.
12
Item 7.
Financial Statements
PAGE
----
Report of independent accountants............................................ 14
Consolidated balance sheet as of June 30, 1995............................... 15
Consolidated statement of operations for the year ended
June 30, 1995 and 1994............................................. 16
Consolidated statement of cash flows for the year ended
June 30, 1995 and 1994............................................. 17
Consolidated statement of shareholders' equity for the year ended
June 30, 1995 and 1994............................................. 18
Notes to consolidated financial statements................................... 19
13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Personal Computer Products, Inc.
We have audited the consolidated balance sheet of Personal Computer Products,
Inc. and its subsidiaries as of June 30, 1995 and the related consolidated
statements of operations, cash flows, and shareholders' equity for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated statements of operations, cash
flows, and shareholders' equity for the year then ended June 30, 1994, were
audited by other auditors whose report dated October 24, 1994, expressed an
unqualified opinion on those financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Personal Computer Products, Inc. and its subsidiaries as of June 30, 1995, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As indicated in the accompanying
financial statements and as described in Note 1, the Company has suffered
recurring losses from continuing operations, has negative working capital of
$649,000, has a net investment in new software products of $1,719,000, and
remaining shareholders' equity of $1,216,000. These factors raise substantial
doubt about the Company's ability to continue as a going concern and recover its
investment in new software products. Management's plans to raise additional
financing and execute a growth strategy to capitalize on the Company's
investment in new software products are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BOROS & FARRINGTON APC
San Diego, California
September 25, 1995
14
PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1995
- -------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------
Current assets:
Cash $ 322,000
Accounts receivable, net 1,250,000
Inventories 521,000
Other current assets 268,000
-----------
Total current assets 2,361,000
Capitalized software, net 1,193,000
Prepaid licenses and royalties, net 526,000
Property and equipment, net 146,000
-----------
$ 4,226,000
-----------
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,719,000
Accrued expenses 269,000
Deferred revenues 21,000
Notes payable 1,001,000
-----------
Total current liabilities 3,010,000
-----------
Commitments - Note 12
Shareholders' equity:
5% convertible preferred stock
$1,000 par value, 7,500 shares authorized,
2,318 issued and outstanding 2,318,000
5% Series B convertible preferred stock
$1,000 par value, 117 shares authorized,
116.2 issued and outstanding 1,162,000
Preferred stock
$1,000 par value, 2,383 authorized,
no shares issued and outstanding
Common stock
$.005 par value, 50,000,000 shares
authorized, 17,428,934 shares issued
and outstanding 87,000
Paid-in capital 18,019,000
Accumulated deficit (20,370,000)
-----------
Total shareholders' equity 1,216,000
-----------
$ 4,226,000
-----------
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15
PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------
For the year ended June 30,
1995 1994
- -----------------------------------------------------------------------------------
Revenues:
Sales of products $ 13,043,000 $ 10,526,000
Engineering fees 1,097,000
License fees and royalties 254,000 306,000
------------- --------------
14,394,000 10,832,000
------------- --------------
Costs and expenses:
Cost of products sold 11,883,000 10,128,000
Selling, general and administrative 3,149,000 3,324,000
Amortization of capitalized software
development costs 499,000 322,000
Research and development 1,283,000 546,000
------------- --------------
16,814,000 14,320,000
------------- --------------
Loss from operations (2,420,000) (3,488,000)
------------- --------------
Other income (expense):
Interest, net (109,000) (96,000)
Settlement of license agreements 234,000
Loss on conversion of convertible debt (204,000)
Other (3,000) 14,000
------------- --------------
(82,000) (82,000)
------------- --------------
Net loss from continuing operations before
provision for income taxes (2,502,000) (3,570,000)
Provision for taxes 8,000 18,000
------------- --------------
Net loss from continuing operations (2,510,000) (3,588,000)
Discontinued operations:
Loss from operations of
discontinued subsidiary (71,000) (396,000)
Gain on disposal of subsidiary 227,000
------------- --------------
Net loss before extraordinary item (2,354,000) (3,984,000)
Extraordinary gain on the conversion of
notes payable into common stock 209,000
------------- --------------
Net loss $ (2,145,000) $ (3,984,000)
------------- --------------
Primary loss per common share from
continuing operations $ (0.18) $ (0.31)
------------- --------------
Primary loss per common share
before extraordinary item $ (0.17) $ (0.34)
------------- --------------
Primary loss per common share $ (0.15) $ (0.34)
------------- --------------
Weighted average common shares outstanding $ 14,799,800 $ 12,027,000
- -----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
16
PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------
For the year ended June 30,
1995 1994
- -----------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (2,145,000) $ (3,984,000)
------------ ------------
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation and amortization of equipment 121,000 140,000
Amortization of software development costs 499,000 322,000
Amortization of prepaid licenses and royalties 219,000 274,000
Gain on disposal of subsidiary (227,000)
Loss on conversion of convertible debt 204,000
Extraordinary gain on conversion of notes
payable into common stock (209,000)
Changes in assets and liabilities:
Accounts receivable 133,000 1,035,000
Inventories 691,000 266,000
Other current assets (1,000) 235,000
Accounts payable and accrued expenses 211,000 722,000
Deferred revenues (154,000) 175,000
------------ ------------
Net cash used by operating activities (658,000) (815,000)
------------ ------------
Cash flows from investing activities:
Capitalized software development costs (674,000)
Prepaid licenses and royalties (68,000) (420,000)
Capital expenditures (67,000) (19,000)
------------ ------------
Net cash used by investing activities (135,000) (1,113,000)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 761,000 700,000
Repayment of notes payable (407,000) (760,000)
Proceeds from line of credit 329,000
Repayment of line of credit (43,000)
Principal payments under capital
lease obligations (50,000) (39,000)
Net proceeds from exercise of employee
options and warrants 275,000 72,000
Net proceeds from sale of common stock 88,000 1,846,000
Proceeds from shareholder loans 9,000 170,000
Net proceeds from sale of warrants 50,000
------------ ------------
Net cash provided by financing activities 962,000 2,039,000
------------ ------------
Net increase in cash 169,000 111,000
Cash at the beginning of the period 153,000 42,000
------------ ------------
Cash at the end of the period $ 322,000 $ 153,000
============ ============
Non-cash financing activities:
Conversion of notes payable to
common stock $ 1,186,000
------------
Conversion of accounts payable to
preferred stock $ 1,162,000
------------
Common stock options exercised with
accounts payable $ 479,000
------------
Conversion of preferred to common stock $ 93,000 $ 200,000
------------ ------------
Conversion of accrued interest to
common stock $ 38,000
------------
Conversion of accrued interest to
principal on notes payable $ 54,000
------------
Fixed assets acquired under capital leases $ 7,000 $ 25,000
------------ ------------
Prima International assets acquired
through debt assumption $ 1,279,000
------------
Conversion of accounts payable to
common stock $ 487,000
------------
Conversion of accounts payable
to notes payable $ 180,000
------------
Common stock exercised with loans $ 9,000
Supplemental disclosure of cash ------------
flow information:
Cash paid during the period for
interest $ 19,000 $ 95,000
------------ ------------
Cash paid during the period for
income taxes $ 11,000 $ 17,000
============ ============
- -----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
5% Series B
Common Stock 5% Convertible Convertible
------------ Preferred Stock Preferred Stock
Paid-in --------------- --------------- Shareholder Accumulated
Shares Amount Capital Shares Amount Shares Amount Loans Deficit Total
------ ------ ------- ------ ------ ------ ------ ----- ------- -----
Balance at June 30, 1993 10,444,413 $54,000 $13,232,000 2,611 $2,611,000 $(170,000) $(14,241,000) $1,486,000
Exercise of stock options 146,925 1,000 80,000 (9,000) 72,000
Conversion of preferred
stock 57,143 200,000 (200) (200,000)
Common stock issued as
settlement of accounts
payable 577,772 3,000 484,000 487,000
Private sales of common
stock 2,225,000 11,000 1,835,000 1,846,000
Warrants issued 50,000 50,000
Repayment of shareholder
loans 170,000 170,000
Net loss (3,984,000) (3,984,000)
---------- ------- ----------- ----- ---------- ----- ---------- --------- ------------ -----------
Balance at June 30, 1994 13,451,253 69,000 15,881,000 2,411 2,411,000 (9,000) (18,225,000) 127,000
Exercise of employee stock
options 166,500 1,000 84,000 85,000
Exercise of employee
warrants 1,125,366 6,000 664,000 670,000
Conversion of preferred
stock 26,427 93,000 (93) (93,000)
Common stock issued on
conversion of notes
payable 1,959,388 8,000 1,192,000 1,200,000
Preferred stock issued on
conversion of accounts
payable 116.2 $1,162,000 1,162,000
Private sales of common
stock 700,000 3,000 105,000 108,000
Repayment of shareholder
loans 9,000 9,000
Net loss (2,145,000) (2,145,000)
---------- ------- ----------- ----- ---------- ----- ---------- --------- ------------ -----------
Balance at June 30, 1995 17,428,934 $87,000 $18,019,000 2,318 $2,318,000 116.2 $1,162,000 $ 0 $(20,370,000) $ 1,216,000
========== ======= =========== ===== ========== ===== ========== ========= ============ ===========
See accompanying notes to consolidated financial statements.
18
PERSONAL COMPUTER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
The Company and Its Capital Resources
Personal Computer Products, Inc., a Delaware corporation, and its subsidiaries
("PCPI" or the "Company"), (1) develop and license laser printer technology;
(2) manufacture, market, and distribute laser printer controllers and
accessories; and (3) market and distribute internationally a variety of
personal computer accessory products.
The Company has incurred net losses from continuing operations of $2,510,000
and $3,588,000 in 1995 and 1994, respectively; and, as of June 30, 1995 had
remaining shareholders' equity of $1,216,000 and negative working capital of
$649,000. The Company's negative working capital position has resulted from
both its net losses and an aggregate investment in new software products of
$1,581,000 in 1994 and 1993. Management plans to continue to pursue a growth
strategy in fiscal 1996 that will capitalize on the Company's investment in new
software products. The Company is dependent on additional financing in order to
continue as a going concern and to realize this investment in new software
products through the execution of management's strategy. Management is actively
seeking additional funding to support and grow the Company's operations,
however, there can be no assurance that this financing will be obtained.
Summary of Significant Accounting Policies
.Principles of Consolidation
The consolidated financial statements include the accounts of PCPI and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated.
.Inventories
Inventories are valued at the lower of cost or market; cost being determined by
the first-in, first-out method.
.Capitalized Software Costs
The Company has developed software technology and capitalized qualifying direct
labor and related fringe, facilities, and other overhead costs pursuant to the
provisions of Statement of Financial Accounting Standards No. 86 "Accounting
for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". The
capitalized software development costs primarily related to software contained
in laser printer controllers and add-on products for laser printer controllers.
Capitalized software includes emulations of existing software printer control
languages currently in the marketplace, as well as software included in laser
printer controllers for existing laser printers. The Company's software
emulation products are generally offered in different combinations that are
designed to provide more value than its competitors' products. Its printer
controller products are generally designed to allow existing laser printers to
operate at higher performance levels than originally configured. While the
Company believes its new products will be accepted in the marketplace and that
it will recover its investment in capitalized software, the ultimate
realization of this investment is dependent on such acceptance and the
Company's ability to market these new products.
Costs incurred prior to the establishment of technological feasibility, or
subsequent to the release to customers, are expensed as research and
development costs as incurred. Capitalized software costs are amortized on a
product-by-product basis. The annual amortization is the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product, or
(b) the straight-line method over the estimated economic life of the product,
generally three years. Amortization begins when the product is available for
general release to customers.
.Prepaid Licenses and Royalties
Up-front payments for licenses of software and royalties are recorded as
prepaid licenses and royalties. Amortization is recorded on a straight-line
basis over estimated useful lives generally ranging from three to five years,
commencing from the date the underlying technology is available for use by the
Company.
19
.Property and Equipment
Property and equipment are recorded at cost. Depreciation, including
amortization of assets recorded under capitalized leases, is generally computed
on a straight-line basis over the estimated useful lives of assets ranging from
three to five years. Amortization of leasehold improvements is provided over
the initial term of the lease, on a straight-line basis.
.Revenues
Revenue from the sale of products is recognized as of the date shipments are
made to customers. Revenue from long-term software and technology license fees
is recognized once the collection is made, or is "probable" as prescribed in
AICPA Statement of Position 91-1 "Software Revenue Recognition," and there are
no further contractual obligations under the license agreement. Royalties are
recognized upon the sale of such products by the licensee.
The Company currently has development contracts with original equipment
manufacturers ("OEMs") to adapt the Company's software products to the OEMs'
hardware products. Revenues under these contracts are recognized based on the
percentage-of-completion method. Deferred revenue comprises payments received
in advance of revenue to be recognized on such contracts.
.Research and Development
Research and development costs are charged to expense as incurred. The cost of
engineering fee revenue is included as a component of research and development.
.Income Taxes
The Company's provision for income taxes is accounted for in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). FAS 109 mandates the liability method for computing deferred
income taxes. The Company adopted FAS 109 in fiscal 1994 and adoption of the
new statement did not have a significant effect on the Company's financial
position or results of operations. Prior to fiscal 1994, the Company accounted
for income taxes in accordance with FAS 96.
.Earnings (Loss) Per Common Share
Earnings (loss) per common share is based on the weighted average number of
shares of common stock and dilutive common stock equivalents, if any,
outstanding during the period, and is computed after giving effect to the
dividend requirements of the 5% Convertible Preferred Stock ($118,000 and
$126,000 during fiscal 1995 and fiscal 1994, respectively) and the 5% Series B
Convertible Preferred Stock. The effect of the conversion privileges of
convertible preferred stock and convertible notes payable is antidilutive for
the periods presented. Accordingly, such effect is not reflected in the
calculation of primary loss per common share.
.Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" requires the disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. The carrying
value of the financial instruments on the consolidated balance sheet are
considered reasonable estimates of the fair value.
.Reclassifications
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform to the presentation in the 1995 consolidated financial
statements.
Note 2.
Discontinued Operations
Effective March 24, 1995, the Company sold 81% of the common stock of its then
wholly-owned subsidiary ImageSoft Incorporated ("ImageSoft"), to ImageSoft's
president in consideration of a $100,000 Promissory Note ("Note"). The Note is
secured by the assets and technologies of ImageSoft and matures on March 24,
2000. The Note bears interest at the annual rate of 7%, payable annually, and
calls for the principal to be
20
paid at maturity. The Note has not been reflected in the financial statements
and a gain will be recognized as the cash payments are received. As a result of
the sale, the Company will account for its investment in ImageSoft under the
cost method; accordingly, the results of ImageSoft's operations have been
excluded from the consolidated operations from the date of sale. The balance
sheet as of June 30, 1995 and statement of operations for the years ended June
30, 1995 and 1994 reflect the sale of ImageSoft. As of June 30, 1995, no assets
or liabilities of ImageSoft have been reflected in the Company's financial
statements and the Company's remaining 19% investment is recorded at zero.
Note 3.
Acquisition of Prima International
Effective October 1, 1993, the Company acquired all of the outstanding stock of
Prima, Inc. ("Prima") doing business as Prima International, a distributor of
computer peripherals and add-on products. The purchase price was $10 plus the
assumption of Prima's liabilities. The transaction was accounted for as a
purchase; accordingly, the results of Prima's operations have been included in
consolidated operations from the date of acquisition. The following are the
unaudited pro forma results of operations of the Company as though Prima was
acquired on July 1, 1993.
Year ended June 30,
---------------------------
1995 1994
----------- -----------
(UNAUDITED)
Revenues $14,394,000 $13,092,000
Net loss from continuing operations (2,510,000) (3,639,000)
Net loss before extraordinary item (2,354,000) (4,029,000)
Net loss (2,145,000) (4,029,000)
Primary loss per common share
from continuing operations (0.18) (0.31)
Primary loss per common share before
extraordinary item (0.17) (0.35)
Primary loss per common share (0.15) (0.35)
In conjunction with the acquisition, assets acquired and liabilities assumed
were each $1,279,000; no goodwill was recorded in connection with this
transaction.
Note 4.
Composition of Certain Financial Statement Captions
June 30, 1995
-------------
Accounts receivable:
Trade $1,292,000
Less allowance for doubtful accounts (205,000)
----------
1,087,000
Current license fees and royalties 163,000
----------
$1,250,000
==========
Inventories:
Materials and supplies $ 213,000
Work in progress 26,000
Finished goods 282,000
----------
$ 521,000
==========
Capitalized software, at cost:
Released products $1,730,000
Products under development 198,000
----------
1,928,000
Less accumulated amortization (735,000)
----------
$1,193,000
==========
21
June 30, 1995
-------------
Prepaid licenses and royalties $ 699,000
Less accumulated amortization (173,000)
----------
$ 526,000
==========
Property and equipment, at cost:
Computers and other equipment $ 664,000
Office furniture and fixtures 186,000
Leasehold improvements 134,000
----------
984,000
Less accumulated depreciation and amortization (838,000)
----------
$ 146,000
==========
Accrued liabilities:
Compensation and vacation $ 177,000
Accrued interest 29,000
Other 63,000
----------
$ 269,000
==========
Note 5.
Debt
5% Convertible Notes Payable
In January 1993, the Company issued 5% Convertible Notes to foreign lending
institutions, at par, due December 31, 1995, for an original principal amount
of $500,000. The notes bore interest at 5% simple interest per year, payable on
December 31st of each year and were convertible, at the option of the holder,
into shares of the Company's common stock at $1.50 per share. In January 1995,
the conversion rate under the 5% Convertible Notes was reduced from $1.50 to
$0.625. As a result of this reduction, the Company recognized a non-cash
accounting loss in the amount of $204,000 pursuant to FAS 84 (Statement of
Financial Accounting Standards No. 84 - "Induced Conversions of Convertible
Debt"). Subsequent to this, holders of the 5% Convertible Notes converted
outstanding debt and accrued interest of approximately $526,000 into 842,191
shares of the Company's common stock.
Notes Payable
Notes payable assumed in the Prima acquisition (Note 3) are unsecured and
amounted to $440,000 at the time of acquisition and matured in January 1995. As
of June 30, 1995, the outstanding balance of this Prima debt, owed to a private
investor, was $20,000. Interest on the note is 8% per annum.
In September 1993, the Company issued a Promissory Note in the principal amount
of $700,000 to a private investment group. The note bears interest at 10% per
annum, is payable semi-annually, and is secured by certain of the Company's
contracts receivable. The Note is due on September 17, 1995 and as of that date
the Company was in default under the original terms of the agreement. The
Company is negotiating an extension on the Note, however, there can be no
assurance that an extension can be obtained under acceptable terms and
conditions. The private investor group also purchased warrants in September 1993
(Note 8). As of June 30, 1995, the outstanding balance was approximately
$431,000.
In December 1993, the Company converted approximately $180,000 of trade
accounts payable into an unsecured two-year note payable bearing interest at
9.5% per annum. The note calls for minimum monthly principal and interest
payments of $5,000, with the balance of $86,000 due on December 15, 1995. At
June 30, 1995, the outstanding balance was approximately $170,000. In July,
1995 the Note was declared in default under the terms of the note.
In July and October 1994, the Company received an aggregate amount of $686,000
from one of its investors, Nippo, Ltd. and an affiliate (Note 7), under Notes
payable due in one year bearing interest ranging from 3% to 7%. In January
1995, the outstanding debt and accrued interest totaling $698,000 was converted
into 1,117,197 shares of the Company's common stock. The Company recognized an
extraordinary gain on the issuance of these shares of approximately $209,000
representing the difference in the aggregate conversion price and the market
value of the shares on the conversion date.
In March 1995, one of the Company's directors agreed to loan the Company a
gross aggregate amount of up to $100,000 with interest at the rate of 7% per
year. Advances under this Note are convertible into unregistered shares of the
Company's common stock at the market rate on that date. As of June 30, 1995,
borrowing under this Note
22
aggregated $75,000 which is included as a component of Notes Payable. In
September 1995, an additional $25,000 was advanced to the Company under this
Note.
4-3/4% Convertible Subordinated Notes
In November 1993, the Company repaid the outstanding balance of $98,000 under
its 4-3/4% convertible subordinated notes issued during fiscal 1989.
Bank Loan Payable
In April 1995, the Company's Prima subsidiary obtained a $500,000 line of
credit from a bank expiring on August 31, 1995. Under the terms of the line of
credit, borrowings are restricted to finance the inventory purchases for sales
to certain pre-qualified foreign customers of Prima. The line of credit is
payable on demand and bears interest at the banks prime rate of interest plus
1.5%, effectively 10.5% as of June 30 1995. The Note is guaranteed under an
agreement with the California Export Finance Office ("CEFO") and PCPI and is
secured by substantially all of the assets of Prima. As of June 30, 1995, total
borrowings outstanding were approximately $286,000. In August, 1995, the line
of credit was extended until August 1996.
Note 6.
Preferred Stock
5% Convertible Preferred Stock
During fiscal 1986 and 1987, the Company completed private offerings of an
aggregate of 6,050 shares of 5% convertible preferred stock at $1,000 per share
which, in the aggregate, generated net proceeds to the Company of $5,233,000.
Holders of the 5% convertible preferred stock are entitled to receive, when and
as declared by the Board of Directors, but only out of amounts legally
available for the payment thereof, cumulative cash dividends at the annual rate
of $50.00 per share, payable semi-annually, and commencing on October 15, 1986.
Dividends in arrears at June 30, 1995 were $1,673,000.
The 5% convertible preferred stock is convertible, at any time, into shares of
the Company's common stock, at a price of $3.50 per common share. This
conversion price is subject to certain antidilution adjustments, in the event
of certain future issuances of common stock, or payment of common stock
dividends. During fiscal years 1995 and 1994, a total of 93 and 200 shares,
respectively, were converted into 26,147 and 57,143 shares of common stock,
respectively.
The Company shall reserve, and keep reserved, out of its authorized but
unissued shares of common stock, sufficient shares to effect the conversion of
all shares of the 5% convertible preferred stock. At June 30, 1995, 662,286
shares of the Company's unissued common stock had been reserved for conversion.
In the event of any involuntary or voluntary liquidation, dissolution, or
winding up of the affairs of the Company, the 5% convertible preferred stock-
holders shall be entitled to receive $1,000 per share, together with accrued
dividends, to the date of distribution or payment, whether or not earned or
declared.
The 5% convertible preferred stock is callable, at the Company's option, at any
time beginning in April 1992, at call prices ranging from $1,050 to $1,100 per
share. No call on the 5% convertible preferred stock was made during fiscal
1995 or 1994.
5% Series B Convertible Preferred Stock
In January, 1995, the Company designated 117 shares of previously undesignated
Preferred Stock as 5% Series B Convertible Preferred Stock, par value $1,000
per share ("Series B"). Each share may be converted into 9,523 shares of the
Company's common stock at the conversion rate of $1.05. The holders of the
Series B have a liquidation preference of $10,000 per Series B share over the
common shareholders but are junior to the liquidation preference of the
existing 5% Convertible Preferred Stock shareholders. Holders of the Series B
are entitled to receive, when and as declared by the Board of Directors, but
only out of amounts legally available for the payment thereof, cumulative cash
dividends at the annual rate of $500 per share, payable annually.
23
In January 1995, the Company issued 116.2 shares of the 5% Series B Convertible
Preferred Stock as settlement of accounts payable totaling $1,162,000. As of
June 30 1995 there were no dividends in arrears under the Series B.
The Company shall reserve, and keep reserved, out of its authorized but
unissued shares of common stock, sufficient shares to effect the conversion of
all shares of the Series B. At June 30, 1995, 1,114,286 shares of the Company's
unissued common stock had been reserved for conversion.
Note 7.
Common Stock
The Company issued shares of its unregistered common stock during fiscal 1995
as follows: 1,117,197 shares to Nippo, Ltd. for the conversion of $698,000 of a
Note Payable and accrued interest; approximately 842,200 shares to three
holders of the Company's 5% Convertible Notes for the conversion of the notes
payable and accrued interest aggregating $526,000; and 700,000 shares issued to
a foreign investor for approximately $108,000.
The Company issued shares of its unregistered common stock during fiscal 1994
as follows: 1,000,000 shares to Nippo, Ltd. for $1,000,000; approximately
578,000 shares to three vendors for the conversion of accounts payable in the
aggregate amount of $487,000; and, 1,225,000 shares to various other private
investors for an aggregate of $846,000, net of issuance costs.
Note 8.
Common Stock Warrants
In March 1991, the Company issued to each of its then four directors five-year
warrants, fully exercisable immediately, to purchase an aggregate of 400,000
unregistered shares of common stock at $0.50 per share, the fair market value
of the Company's stock on the date the warrants were granted. All of these
warrants were exercised during fiscal 1995.
In August 1991, the Company issued to each of its then four directors five-year
warrants, fully exercisable immediately, to purchase an aggregate of 500,000
unregistered shares of common stock at $0.60 per share, the fair market value
of the Company's stock on the date the warrants were granted. During fiscal
1995, 497,000 of these warrants were exercised.
In October 1991, the Company issued to each of its then four directors
five-year warrants to purchase an aggregate of 1,650,000 unregistered shares of
common stock at $0.75 per share, the fair market value of the Company's stock
on the date the warrants were granted. Warrants to purchase 825,000 shares of
common stock were exercisable 6 months after the date of grant with the
remaining 825,000 shares vesting 18 months after the date of grant. During
fiscal 1995, 229,000 of these warrants were exercised, and approximately
1,421,000 were exercisable as of June 30, 1995.
In September 1993, the Company issued to an investor group that provided the
Company loan financing (Note 5), five-year warrants to purchase 250,000 shares
of the Company's unregistered common stock at $1.50 per share. Warrants to
purchase 62,500 shares were immediately exercisable; the remaining warrants
vest equally on a semi-annual basis over the next eighteen months. A second
five-year warrant was issued to this group in September 1993 to purchase
250,000 shares of the Company's unregistered common stock at $1.00 per share.
Warrants to purchase 137,500 shares were immediately exercisable; the remaining
warrants vest at the rate of 37,500 shares on a semi-annual basis. All of these
warrants were issued in exchange for cash consideration of $50,000, which
management believes approximates their fair market value.
In March 1994, the Company issued to three of its then four directors ten-year
warrants to purchase an aggregate of 425,000 unregistered shares of the
Company's common stock at $0.75 per share, the fair market value of the
Company's stock on the date the warrants were granted. In addition, the Company
also issued to four employees (two of whom were then officers) ten-year
warrants to purchase an aggregate of 151,000 unregistered shares of the
Company's common stock at $0.75 per share, the fair market value of the
Company's stock on the date the warrants were granted. Fifty percent of the
warrants were exercisable immediately and the remaining fifty percent became
exercisable in September 1994. None of these warrants have been exercised.
24
In September 1994, the Company granted 5-year warrants to an employee for the
purchase of 100,000 shares of common stock with an exercise price of $0.75 per
share, the fair market value of the Company's common stock on the date of
granted. Warrants to purchase 20,000 shares were immediately exercisable with
the remaining warrants vesting equally on an annual basis over the first four
years of the warrant term.
In September 1994, the Company also issued 3-year warrants to a consultant for
services rendered for the purchase of 150,000 shares of common stock with an
exercise price of $0.70 per share. Warrants to purchase 50,000 shares were
immediately exercisable; the remaining warrants vest equally on an annual basis
over the next two years.
Note 9.
Common Stock Options
In July 1984, and in November 1987, the Company adopted stock option plans,
under which incentive stock options and non-qualified stock options may be
granted to employees, directors, and other key persons, to purchase shares of
the Company's common stock, at an exercise price equal to no less than the fair
market value of such stock on the date of grant, with such options exercisable
in installments at dates typically ranging from one to not more than ten years
after the date of grant. A total of 1,060,000 shares of common stock are
authorized for issuance under the 1988 Stock Option Plan.
At June 30, 1995, options to acquire 276,208 shares were exercisable under the
1984 and 1988 Stock Option Plans. No shares are available for future issuance
under the 1984 Stock Option Plan due to the expiration of the plan during 1994.
Options to acquire 21,936 shares remained available for grant under the 1988
Plan.
The following is a summary of the stock option activity under the Plans:
Shares of
Common Stock
Option Prices Underlying
Per Share Options
-------------- -------------
June 30, 1993 $0.50 to $1.37 675,190
Options granted $0.75 to $1.02 133,000
Options exercised $0.50 to $0.82 (146,925)
Options canceled $0.50 to $1.37 (108,940)
--------
June 30, 1994 $0.50 to $1.02 552,325
Options granted $0.33 to $0.53 36,000
Options exercised $0.50 to $0.82 (166,500)
Options canceled $0.50 to $1.02 (61,950)
--------
June 30, 1995 $0.33 to $1.02 359,875
========
Under the terms of the 1988 Stock Option Plan, loans may be made to option
holders which permit the option holders to pay the option price, upon exercise,
in installments.
In October 1993, outside of existing stock option plans, the Company issued to
one of its directors options to purchase 150,000 unregistered shares of common
stock at $0.72 per share, the fair market value of the Company's stock on the
date the options were granted. 25,000 of the options were immediately
exercisable; the remaining options become exercisable on October 14, 1994, 1995
and 1996 in the amounts of 25,000, 50,000 and 50,000, respectively. The options
expire on December 31, 1999. None of these options have been exercised as of
June 30, 1995.
Also in October 1993, outside of existing stock option plans, the Company
issued to two officers of its newly acquired Prima International subsidiary and
one employee of PCPI, options to purchase an aggregate of 650,000 unregistered
shares of the Company's common stock at $0.72 per share, the fair market value
of the Company's stock on the date the options were granted. 25,000 of the
options were immediately exercisable; the remaining options became exercisable
on October 14, 1994 and annually thereafter over a five-year period in the
amounts of 125,000, 150,000, 150,000, 100,000, and 100,000 options,
respectively. All unexercised options immediately terminate if the individual
officer or employee ceases to be an employee
25
of the Company or any of its subsidiaries. The options expire on December 31,
1999. None of these options have been exercised as of June 30, 1995.
In March 1995, outside of the existing stock option plans, the Company issued
to two officers of its Prima subsidiary, five-year options to purchase an
aggregate of 100,000 unregistered shares of PCPI common stock at an exercise
price of $0.33 per share, the fair market value of the Company's common stock
on the date of grant. These options become exercisable one year after the date
of grant.
In April 1995, outside of the existing stock option plans, the Company issued
to four employees (two of whom were then officers), ten-year options to
purchase an aggregate of 450,000 unregistered shares of PCPI common stock at an
exercise price of $0.52 per share, the fair market value of the Company's
common stock on the date of grant. The options become exercisable over a three
year period beginning April 24, 1996 in installments of 170,000, 140,000 and
140,000, respectively.
Note 10.
Significant Customers, Revenue Data, and Concentration of
Credit Risk
As of and during the year ended June 30, 1995, Computer 2000 accounted for 27%
of consolidated accounts receivable and 24% of total consolidated revenues;
Modo SRL accounted for 14% of consolidated accounts receivable and 7% of total
consolidated revenues; and Xerox Corporation accounted for 10% of consolidated
accounts receivable and less than 1% of total consolidated revenues.
As of and during the year ended June 30, 1994, Computer 2000 accounted for 14%
of consolidated accounts receivable and 20% of total consolidated revenues;
Modo SRL accounted for 12% of consolidated accounts receivable and 3% of total
consolidated revenues; and Xerox Corporation accounted for 39% of consolidated
accounts receivable and 2% of total consolidated revenues.
The majority of the Company's sales in fiscal 1995 and 1994 were to European
distributors (denominated in U.S. dollars) in the computer peripherals and
accessories market through its wholly-owned subsidiary, Prima.
During the years ended June 30, 1995 and 1994, 77% and 68% of total
consolidated revenues, respectively, were from foreign customers, as reflected
in the following table:
Year ended June 30,
-------------------------
1995 1994
---- ----
Europe $ 8,622,000 $6,772,000
Far East 1,742,000 338,000
Others 733,000 238,000
----------- ----------
$11,097,000 $7,348,000
=========== ==========
The Company typically has not required collateral for its sales. However, it
has required letters of credit or prepayment from time-to-time as deemed
necessary.
Note 11.
Income Taxes
The Company elected to adopt Statement of Financial Accounting Standard No. 109
- - "Accounting for Income Taxes" on a prospective basis, effective July 1, 1993.
FAS 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under the FAS 109 asset and liability
method, deferred tax assets and liabilities are determined based upon the
difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is then provided
for deferred tax assets which are more likely than not to not be realized.
There was no effect on the Company's financial statements upon adoption of FAS
109.
26
The provision for income taxes for the years ended June 30, 1995 and 1994
comprises:
Year ended June 30,
-------------------
1995 1994
---- ----
Current:
State $4,000 $ 1,000
Federal
Foreign 4,000 17,000
------ -------
$8,000 $18,000
====== =======
The components of deferred income taxes at June 30, 1995 are as follows:
Deferred tax assets:
Federal net operating loss carryforward $ 4,783,000
State net operating loss carryforward 230,000
Book reserves and accrued liabilities 558,000
Federal general business and other tax credits 517,000
State R&D and other credits 102,000
-----------
6,190,000
===========
Deferred tax liabilities:
Capitalized software (140,000)
-----------
6,050,000
Valuation allowance (6,050,000)
-----------
Deferred taxes $ 0
===========
The Company's Federal and state net operating loss carryforwards expire in 1999
through 2010. Additionally, the Company's Federal and state research and
development credits expire in 1998 through 2009. During 1991 the Company
sustained a change in ownership as defined in Section 382 of the Internal
Revenue Code; as a result, there is an annual limitation of approximately
$350,000 on the utilization of the net operating loss carryforwards generated
prior to the date of change. Subsequent to the date of the ownership change in
1991, there have been numerous additional equity issuances; as a result, the
Company may have experienced, or could experience in the future, similar
ownership changes, which could result in additional limitations on the annual
utilization of the Company's net operating loss carryforwards generated prior
to the new change in ownership.
The provision for income taxes results in an effective rate which differs from
the Federal statutory rate. A reconciliation between the actual tax provision
and taxes computed at the statutory rate follows:
Year ended June 30,
-------------------
1995 1994
---- ----
Benefit at Federal statutory income tax rate $(729,000) $(1,394,000)
Losses for which no current benefit is available 729,000 1,394,000
Foreign income taxes 4,000 17,000
State income taxes 4,000 1,000
--------- ----------
$ 8,000 $ 18,000
========= ==========
Note 12.
Lease Commitments
The Company leases certain equipment under non-cancelable capital leases, which
are included in property and equipment. As of June 30, 1995, the cost and
accumulated amortization of such equipment was $142,000 and $102,000,
respectively.
The Company entered into a non-cancelable agreement to lease its operating
facilities in San Diego, California, for 6 years, commencing September 1, 1990.
In January 1995, the Company renegotiated the terms of the lease reducing the
monthly base to $11,500 over the remaining term of the lease.
27
Future minimum rental commitments under non-cancelable leases are reflected in
the following table:
Capital Operating
Year ended June 30, Leases Leases
------------------- ------- ---------
1996 $ 13,000 $138,000
1997 8,000 15,000
1998 6,000
1999 4,000
--------
Total minimum lease payments 31,000 $153,000
========
Amount representing interest (11,000)
--------
Net present value of minimum lease pmts. $ 20,000
========
Total rental expense was approximately $202,000 in fiscal 1995 and $356,000 in
fiscal 1994.
Note 13.
Supplementary Income Statement Information
Year ended June 30,
------------------
1995 1994
---- ----
Royalty expense $ 78,000 $124,000
-------- --------
Advertising expense $107,000 $157,000
-------- --------
Note 14.
Related Party Transactions
A director receives compensation as a consultant to the Company on corporate
matters and investment banking issues. These consulting fees amounted to
$108,000 and $69,000 during fiscal 1995 and 1994, respectively. On April 1,
1994, the Company and the director entered into a five-year consulting
agreement for the director to continue to provide these services payable in
monthly installments of $9,000. During fiscal 1995, approximately $63,000 owed
to the Director was converted into common stock through the exercise of
outstanding options.
As discussed in Notes 5 and 7, one of the Company's shareholders, Nippo, Ltd.
and its affiliate, loaned the Company an aggregate of $686,000. In January,
1995, the outstanding principal balance and accrued interest totaling $698,000
was converted into the Company's common stock.
As discussed in Note 5, in March 1995, one of the Company's directors agreed to
loan the Company a gross aggregate amount of up to $100,000 with interest at
the rate of 7% per year. As of June 30, 1995, borrowing under this Note
aggregated $75,000. In September 1995, an additional $25,000 was advanced to
the Company under this Note.
28
Item 8.
Changes In and Disagreements With Accountants On Accounting
and Financial Disclosure
(a) Previous independent accountants
(i) On August 25, 1995, Personal Computer Products, Inc. ("PCPI")
dismissed Price Waterhouse LLP as its independent accountants.
(ii) The reports of Price Waterhouse LLP on the financial statements
for the past two fiscal years contained no adverse opinion
or disclaimer of opinion and were not qualified or modified
as to audit scope or accounting principle, except that the
report for the fiscal year ended June 30, 1994 did contain
an explanatory paragraph with regard to PCPI's ability to
continue as a going concern.
(iii) The Registrant's Board of Directors participated in an approved
the decision to change independent accountants.
(iv) In connection with its audits for the two most recent fiscal
years and through August 25, 1995, there have been no
disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements
if not resolved to the satisfaction of Price Waterhouse LLP
would have caused them to make reference thereto in their report
on the financial statements for such years.
(v) In connection with its audit of the 1993 financial statements,
Price Waterhouse LLP issued a letter to the Company identifying
material weaknesses in the Company's internal controls. This
matter was discussed with the Company's Board of Directors.
(vi) The Registrant has requested that Price Waterhouse LLP furnish
it with a letter addressed to the SEC stating whether or not
it agrees with the above statements. A copy of such letter,
dated August 19, 1995, was filed as Exhibit 16 to the Form
8-K filed on August 29, 1995.
(b) New independent accountants
(i) The Registrant engaged Boros & Farrington, CPAs, APC as its
new independent accountants as of August 25, 1995. During the
two most recent fiscal years and through August 25, 1995, the
Registrant has not consulted with Boros & Farrington on items
which (1) were or should have been subject to SAS 50 or (2)
concerned the subject matter of a disagreement or reportable
event with the former auditor, (as described in Regulation
S-B Item 304(a)(2)).
29
Part III
- -------------------------------------------------------------------------------
Pursuant to General Instruction E(3) to Form 10-KSB, the information required
by Items 9, 10, 11, and 12 of Part III is incorporated by reference from the
Company's definitive Proxy Statement with respect to its 1995 annual meeting of
stockholders, to be filed pursuant to Regulation 14A within 120 days after June
30, 1995.
Item 13.
Exhibits, List, and Reports on Form 8-K
(a) The following exhibit list states, in the case of certain exhibits, a prior
SEC filing which contains the exhibit and from which it is incorporated by
reference.
3(a) Certificate of Incorporation of the Company, as amended, and
currently in effect. See also Item 4(a). (Incorporated by reference
to Exhibit 3(a) to 1988 Form 10-K.)
3(b) Certificate of Amendment of Certificate of Incorporation of the
Company, filed February 8, 1995, as amended, and currently in effect.
See also Item 4(b).
3(c) By-Laws of the Company, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K)
4(a) Amended Certificate of Designation of Personal Computer Products,
Inc. with respect to the 5% Convertible Preferred Stock. (Incorporated
by reference to Exhibit 4(d) to 1987 Form 10-K.)
4(b) Amended Certificate of Designation of Personal Computer Products,
Inc. with respect to the 5% Series B Convertible Preferred Stock.
10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by
reference to Form S-8 Filed October 26, 1984, File No. 2-93993.)
10(a.2) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1984 Stock Option Plan. (Incorporated by reference to
Form S-8 filed October 26, 1984, File No. 2-93993.)
10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by
reference to Exhibit 10(g) in 1989 Form 10-K.)
10(b.2) Amendment and Restatement of 1988 Stock Option Plan.
(Incorporated by reference to Exhibit 10(d) to 1991 Form 10-K.)
10(b.3) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1988 Stock Option Plan. (Incorporated by reference to
Exhibit 10(e) to 1991 Form 10-K)
10(c.1) Standard Industrial Lease Multi-Tenant dated February 2, 1990
between the Company and Bernardo Vista Business Park, Ltd.; First
Amendment to Standard Industrial Lease dated February 2, 1990; and
Memorandum of Purchase Option Agreement dated August 29, 1990.
(Incorporated by reference to Form S-4 dated September 24, 1990, File
No. 33-36871.)
10(c.2) Addendum to Lease dated January 12, 1995 for Standard
Industrial Lease Multi-Tenant dated February 2, 1990.
30
10(d) Reference is made to the various stock options and warrants
granted in 1991 to directors and executive officers as described in
Note 8 to the 1995 financial statements. (Incorporated by reference
to Exhibit 10(1) to 1991 Form 10-K.)
10(e.1) Executive Employment Agreement, as amended, between the
Company and Edward W. Savarese, dated July 1, 1990 and amended as of
February 25, 1994. (Incorporated by reference to Exhibit 10(k) to 1994
Form 10-KSB).
10(e.2) Compensation Agreement between the Company and Edward W.
Savarese, dated November 16, 1992. (Incorporated by reference to
Exhibit 10(af) to 1993 Form 10-KSB.)
10(f) Compensation Agreement between the Company and Harry J. Saal,
dated November 16, 1992. (Incorporated by reference to Exhibit 10(ad)
to 1993 Form 10-KSB.)
10(g.1) Compensation Agreement between the Company and Irwin Roth,
dated November 16, 1992. (Incorporated by reference to Exhibit 10(ag)
to 1993 Form 10-KSB.)
10(g.2) Consulting Agreement, dated April 1, 1994, between the Company
and Irwin Roth. (Incorporated by reference to Exhibit 10(az) to 1994
Form 10-KSB.)
10(h) Acquisition Agreement for acquisition of Prima International
subsidiary on October 1, 1993. (Incorporated by reference to Exhibit
2.1 to Amendment No. 1 to Form 8K/A dated October 14, 1993.)
10(i.1) Third Party Development Partner License Agreement, effective
October 22, 1993, between the Company and Adobe Systems Incorporated.
(Incorporated by reference to Exhibit 10(ai) to 1994 Form 10-KSB)
10(i.2) Reference Port Appendix No. 1, dated October 22, 1993, to the
Postscript Support Source and Object Code Distribution License
Agreement between Adobe Systems Incorporated and the Company.
(Incorporated by reference to Exhibit 10(aj) to 1994 Form 10-KSB)
10(j) PCPI/APS License Agreement, dated March 28, 1994, between the
Company and Integrated Device Technology, Inc. (Incorporated by
reference to Exhibit 10(ak) to 1994 Form 10-KSB)
10(k) International Sales Representative Agreement, dated October 15,
1993, between the Company and Nippo Ltd. (Incorporated by reference
to Exhibit 10(ao) to 1994 Form 10-KSB).
10(l) Consulting Agreement dated September 17, 1993 between the
Company and Marius A. Robinson. (Incorporated by reference to Exhibit
10(aq) to 1994 Form 10-KSB)
10(m.1) Warrant Purchase Agreement, dated September 17, 1993, between
the Company and Robinson International, Ltd. (Incorporated by
reference to Exhibit 10(ar) to 1994 Form 10-KSB).
10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares
of Common Stock of the Company at $1.50 per share, dated September 17,
1993, between the Company and Robinson International, Ltd.
(Incorporated by reference to Exhibit 10(as) to 1994 Form 10-KSB)
31
10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares
of Common Stock of the Company at $1.00 per share, dated September 17,
1993, between the Company and Robinson International, Ltd.
(Incorporated by reference to Exhibit 10(at) to 1994 Form 10-KSB)
10(m.4) Security Agreement between the Company and Fundamental
Investors, Ltd., dated September 17, 1993. (Incorporated by reference
to Exhibit 10(au) to 1994 Form 10-KSB)
10(m.5) Term Loan Agreement, dated September 17, 1993, between the
Company and Fundamental Investors, Ltd. (Incorporated by reference to
Exhibit 10(av) to 1994 Form 10-KSB)
10(m.6) Letter Agreement ("Amendment No. 1") to Term Loan Agreement
between the Company and Fundamental Investors, Ltd., dated August 18,
1994. (Incorporated by reference to Exhibit 10(aw) to 1994 Form 10-KSB)
10(m.7) Amendment No. 2 to Term Loan Agreement between the Company and
Fundamental Investors, Ltd., dated October 19, 1994. (Incorporated by
reference to Exhibit 10(ax) to 1994 Form 10-KSB)
10(m.8) Amendment No. 3 to Term Loan Agreement between the Company and
Fundamental Investors, Ltd., dated April 7, 1995.
10(m.9) Promissory Note of PCPI for $700,000, dated September 17, 1993
to Fundamental Investors, Ltd.
10(p.7) Amendment No. 2 to Term Loan Agreement between the Company and
Fundamental Investors, Ltd., dated October 19, 1994. (Incorporated by
reference to Exhibit 10(ay) to 1994 Form 10-KSB)
10(n) Promissory Note of the Company for $180,075, dated December 16,
1993, by the Company payable to Xerox Corporation. (Incorporated by
reference to Exhibit 10(aaa) to 1994 Form 10-KSB)
10(o) PCPI/MEI License Agreement, dated September 30, 1994 between the
Company and Matsushita Electric Industrial Co., Ltd. (Incorporated by
reference to Exhibit 10(aac) to 1994 Form 10-KSB)
10(p) Form of standard Warrant Agreement of March 29, 1994 as
described in Note 8 to the 1994 financial statements. (Incorporated by
reference to Exhibit 10(aag) to 1994 Form 10-KSB)
10(q) Form of standard Stock Option Agreement of October 14, 1993 as
described in Note 9 to the 1994 financial statements. (Incorporated by
reference to Exhibit 10(aah) to 1994 Form 10-KSB)
10(r) Compensation Agreement between the Company and Brian Bonar, dated
September 1, 1994.
10(s.1) Term loan agreement with Copolymer, Ltd. dated October 7, 1994.
10(s.2) Conversion agreement with regard to Term loan agreement with
Copolymer, Ltd. dated January 24, 1995.
10(t) Conversion agreement between Nippo, Ltd. and the Company
regarding $400,000 Note dated January 24, 1995.
10(u) Prima International Note and Security Agreement dated April 11,
1995.
16 Price Waterhouse letter to the SEC regarding August 25, 1995
dismissal. (Incorporated by reference to Form 8-K dated August 29,
1995.
32
21 List of Subsidiaries of the Company
23 Consent of Independent Accountants
Exhibits 10(a.1), (a.2), (b.1), (b.2), (b.3), (d), (e.1), (e.2), (f), (g.1),
(g.2), and (r) are management contracts or compensatory plans or arrangements.
The Company will furnish a copy of any exhibit to a requesting stockholder upon
payment of the Company's reasonable expenses in furnishing such exhibit.
(b) No reports on Form 8-K were filed during the last quarter of fiscal 1995.
33
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PERSONAL COMPUTER PRODUCTS, INC.
By: EDWARD W. SAVARESE
------------------
Edward W. Savarese
Chairman, President, and
Chief Executive Officer
September 29, 1995
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
EDWARD W. SAVARESE Chairman of the Board of Directors,
- ------------------ President, and Chief Executive Officer September 29, 1955
Edward W. Savarese
RALPH R. BARRY Secretary and Chief Financial Officer
- -------------- (Principal Financial Officer and
Ralph R. Barry Principal Accounting Officer) September 29, 1995
BRIAN BONAR Executive Vice President and Director
- -----------
Brian Bonar September 29, 1995
HARRY J. SAAL Director
- -------------
Harry J. Saal September 29, 1995
IRWIN ROTH Director
- ----------
Irwin Roth September 29, 1995
34
Index to Exhibits
- -------------------------------------------------------------------------------
Number Description of Exhibit Page
3(a) Certificate of Incorporation of the Company, as amended, and
currently in effect. See also Item 4(a). (Incorporated by
reference to Exhibit 3(a) to 1988 Form 10- K.)................... *
3(b) Certificate of Amendment of Certificate of Incorporation of
the Company, filed February 8, 199............................... 39
3(c) By-Laws of the Company, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K).... *
4(a) Amended Certificate of Designation of Personal Computer
Products, Inc. with respect to the 5% Convertible Preferred
Stock. (Incorporated by reference to Exhibit 4(d) to 1987
Form 10-K.)...................................................... *
4(b) Amended Certificate of Designation of Personal Computer Products,
Inc. with respect to the 5% Series B Convertible Preferred
Stock ........................................................... 40
10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by
reference to Form S-8 Filed October 26, 1984, File No.
2-93993.) ....................................................... *
10(a.2) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1984 Stock Option Plan. (Incorporated by reference
to Form S-8 filed October 26, 1984, File No. 2-93993.) ......... *
10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by
reference to Exhibit 10(g) in 1989 Form 10-K.) .................. *
10(b.2) Amendment and Restatement of 1988 Stock Option Plan.
(Incorporated by reference to Exhibit 10(d) to 1991 Form 10-K ... *
10(b.3) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1988 Stock Option Plan. (Incorporated by
reference to Exhibit 10(e) to 1991 Form 10-K) ................... *
10(c.1) Standard Industrial Lease Multi-Tenant dated February 2, 1990
between the Company and Bernardo Vista Business Park, Ltd.;
First Amendment to Standard Industrial Lease dated February 2,
1990; and Memorandum of Purchase Option Agreement dated August
29, 1990. (Incorporated by reference to Form S-4 dated
September 24, 1990, File No. 33-36871.) ......................... *
10(c.2) Addendum to Lease dated January 12, 1995 for Standard
Industrial Lease Multi-Tenant dated February 2, 1990............. 45
10(d) Reference is made to the various stock options and warrants
granted in 1991 to directors and executive officers as described
in Note 8 to the 1994 financial statements. (Incorporated by
reference to Exhibit 10(1) to 1991 Form 10-K.) .................. *
* Exhibit is incorporated by reference only and a copy is not included in this
filing.
35
Number Description of Exhibit Page
10(e.1) Executive Employment Agreement, as amended, between the
Company and Edward W. Savarese, dated July 1, 1990 and amended
as of February 25, 1994. (Incorporated by reference to
Exhibit 10(k) to 1994 Form 10-KSB.) ............................. *
10(e.2) Compensation Agreement between the Company and Edward W.
Savarese, dated November 16, 1992. (Incorporated by reference
to Exhibit 10(af) to 1993 Form 10-KSB.) ......................... *
10(f) Compensation Agreement between the Company and Harry J. Saal,
dated November 16, 1992. (Incorporated by reference to Exhibit
10(ad) to 1993 Form 10-KSB.) .................................... *
10(g.1) Compensation Agreement between the Company and Irwin Roth,
dated November 16, 1992. (Incorporated by reference to
Exhibit 10(ag) to 1993 Form 10-KSB) ............................. *
10(g.2) Consulting Agreement, dated April 1, 1994, between the Company
and Irwin Roth. (Incorporated by reference to Exhibit 10(az)
to 1994 Form 10-KSB.)............................................ *
10(h) Acquisition Agreement for acquisition of Prima International
subsidiary on October 1, 1993. (Incorporated by reference to
Exhibit 2.1 to Amendment No. 1 to Form 8K/A dated October 14,
1993.) .......................................................... *
10(i.1) Third Party Development Partner License Agreement, effective
October 22, 1993, between the Company and Adobe Systems
Incorporated. (Incorporated by reference to Exhibit 10(ai) to
1994 Form 10-KSB.) .............................................. *
10(i.2) Reference Port Appendix No. 1, dated October 22, 1993, to the
Postscript Support Source and Object Code Distribution License
Agreement between Adobe Systems Incorporated and the Company.
(Incorporated by reference to Exhibit 10(aj) to 1994 Form
10-KSB.) ........................................................ *
10(j) PCPI/APS License Agreement, dated March 28, 1994, between the
Company and Integrated Device Technology, Inc. (Incorporated by
reference to Exhibit 10(ak) to 1994 Form 10-KSB.)................ *
10(k) International Sales Representative Agreement, dated October 15,
1993, between the Company and Nippo Ltd. (Incorporated by
reference to Exhibit 10(ao) to 1994 Form 10-KSB.) ............... *
10(l) Consulting Agreement dated September 17, 1993 between the Company
and Marius A. Robinson. (Incorporated by reference to Exhibit
10(aq) to 1994 Form 10-KSB.) .................................... *
10(m.1) Warrant Purchase Agreement, dated September 17, 1993, between the
Company and Robinson International, Ltd. (Incorporated by
reference to Exhibit 10(ar) to 1994 Form 10-KSB.) ............... *
10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares of
Common Stock of the Company at $1.50 per share, dated September
17, 1993, between the Company and Robinson International, Ltd.
(Incorporated by reference to Exhibit 10(as) to 1994 Form
10-KSB.)......................................................... *
* Exhibit is incorporated by reference only and a copy is not included in this
filing.
36
Number Description of Exhibit Page
10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares of
Common Stock of the Company at $1.00 per share, dated September
17, 1993, between the Company and Robinson International, Ltd.
(Incorporated by reference to Exhibit 10(at) to 1994 Form
10-KSB.)......................................................... *
10(m.4) Security Agreement between the Company and Fundamental Investors,
Ltd., dated September 17, 1993. (Incorporated by reference to
Exhibit 10(au) to 1994 Form 10-KSB.)............................. *
10(m.5) Term Loan Agreement, dated September 17, 1993, between the
Company and Fundamental Investors, Ltd. (Incorporated by
reference to Exhibit 10(av) to 1994 Form 10-KSB.)................ *
10(m.6) Letter Agreement ("Amendment No. 1") to Term Loan Agreement
between the Company and Fundamental Investors, Ltd., dated
August 18, 1994. (Incorporated by reference to Exhibit 10(aw)
to 1994 Form 10-KSB.)............................................ *
10(m.7) Amendment No. 2 to Term Loan Agreement between the Company
and Fundamental Investors, Ltd., dated October 19, 1994.
(Incorporated by reference to Exhibit 10(ax) to 1994 Form
10-KSB.) ........................................................ *
10(m.8) Amendment No. 3 to Term Loan Agreement between the Company
and Fundamental Investors, Ltd., dated April 7, 1995. ........... 46
10(m.9) Promissory Note of PCPI for $700,000, dated September 17, 1993
to Fundamental Investors, Ltd. (Incorporated by reference to
Exhibit 10(ay) to 1994 Form 10-KSB.)............................. *
10(n) Promissory Note of the Company for $180,075, dated December 16,
1993, by the Company payable to Xerox Corporation. (Incorporated
by reference to Exhibit 10(aaa) to 1994 Form 10-KSB.) ........... *
10(o) PCPI/MEI License Agreement, dated September 30, 1994 between the
Company and Matsushita Electric Industrial Co., Ltd.
(Incorporated by reference to Exhibit 10(aac) to 1994 Form
10-KSB.) ........................................................ *
10(p) Form of standard Warrant Agreement of March 29, 1994 as
described in Note 8 to the 1994 financial statements.
(Incorporated by reference to Exhibit 10(aag) to 1994 Form
10-KSB.) ........................................................ *
10(q) Form of standard Stock Option Agreement of October 14, 1993 as
described in Note 9 to the 1994 financial statements.
(Incorporated by reference to Exhibit 10(aah) to 1994 Form
10-KSB.) ........................................................ *
10(r) Compensation Agreement between the Company and Brian Bonar dated
September 1 , 1994............................................... 48
10(s.1) Term loan agreement with Copolymer, Ltd. dated October 7, 1994... 55
10(s.2) Conversion agreement with regard to Term loan agreement with
Copolymer, Ltd. dated January 24, 1995 .......................... 56
10(t) Conversion agreement between Nippo, Ltd. and the Company
regarding $400,000 Note dated January 24, 1995 .................. 57
* Exhibit is incorporated by reference only and a copy is not included in this
filing.
37
Number Description of Exhibit Page
10(u) Prima International Note and Security Agreement dated April 11,
1995............................................................. 58
16 Price Waterhouse letter to SEC regarding August 25, 1995
dismissal (Incorporated by reference to Form 8-K dated August
29, 1995 ........................................................ *
21 List of Subsidiaries of the Company ............................. 71
23 Consent of Independent Accountants .............................. 72
* Exhibit is incorporated by reference only and a copy is not included in this
filing.
38