UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: May 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-16071
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SUMMAGRAPHICS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0888312
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(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8500 Cameron Road, Austin, Texas 78754
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (512) 835-0900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Common Stock, Par Value $.01 Per Share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such reports), and has been subject to such filing requirements
for the past ninety (90) days.
YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. YES [X] NO [ ]
1
The aggregate market value as of August 18, 1995, of Common Stock held by non-
affiliates of the Registrant: $16,145,003 based on the last reported sale price
on the National Market System as reported by NASDAQ, Inc.
The number of shares of Common Stock outstanding as of August 18, 1995:
4,612,858
2
PART I
ITEM 1 BUSINESS
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Summagraphics Corporation was incorporated in Delaware on June 29, 1972. The
Company's executive offices are located at 8500 Cameron Road, Austin, Texas
78754, telephone number (512) 835-0900. Unless the context otherwise requires,
the "Registrant", the "Company" and "Summagraphics" refer to Summagraphics
Corporation and its consolidated subsidiaries.
GENERAL
Summagraphics is engaged in the manufacture and sale of digitizing tablets,
large format plotters, thermal transfer printers, and graphic cutters.
A digitizer is a computer graphics input device, functionally similar to a
keyboard or mouse, consisting of an electronic stylus or cursor and a tablet
containing a grid of sensors which translate engineering drawings, maps and
other graphic information into digital form for entry into a computer.
A pen plotter is a computer graphics output device, functionally similar to a
printer, but used to automatically draw lines, symbols, diagrams and other
graphics output.
An ink jet plotter is a computer graphics output device, functionally similar
to a printer and pen plotter, but it uses ink jet technology rather than ink pen
technology to automatically draw lines, symbols, diagrams and other graphics
output.
A thermal transfer printer, capable of interfacing with PostScript(R) and
other industry standard software, uses Summagraphics' patented techniques to
produce brilliantly colored, high quality images up to 24" x 40" for sign-making
applications.
A cutter performs a function similar to a plotter, but rather than drawing an
image onto a sheet of paper it accurately cuts on various media (such as vinyl)
along a programmed image employing the same technique as a plotter except using
a knife instead of a pen.
The Company's products are used in applications with high-performance computer
graphics systems, including computer-aided design, manufacturing, engineering,
publishing and graphic arts.
The Company added pen plotters and cutters to its pre-existing digitizer
product lines in May 1990 with the acquisition of Houston Instrument. This
acquisition broadened the Company's presence in the U.S. market, provided the
Company with a manufacturing facility in Belgium and expanded the Company's
U.S., European and Far Eastern distribution networks. Approximately 56% of the
Company's net sales for the fiscal year ended May 31, 1995 was attributable to
overseas markets.
The Company's products are sold by its sales force primarily through
distributors and also to OEMs which incorporate the Company's products into
their own computer products. The Company's products may be integrated with most
personal computers, including IBM-compatible personal computers and Apple
personal computers, workstations from Sun Microsystems and Digital Equipment,
and publishing systems from Scitex, and are compatible with most industry
standard CAD and graphics software applications.
3
The Company's strategy is: to pursue sales and market share growth for its
existing product lines, through product enhancements and new product
introductions; to devote resources to research and development of new products;
and, as and if appropriate opportunities arise, to acquire or develop one or
more complementary product lines or businesses serving the computer graphics
markets.
Summagraphics acquired the Houston Instrument Division ("Houston Instrument")
of Ametek, Inc. ("Ametek") from Ametek in May 1990 in an asset purchase
transaction for a consideration of $23.4 million in cash (after certain post-
closing adjustments) and a $5 million principal amount 8% Convertible
Subordinated Note issued to Ametek by the Company. The Company repurchased the
remaining balance of the Note ($2.5 million) on May 25, 1994 for $1.8 million
and cancelled the 333,333 warrants granted at the time of the acquisition
(exercisable at $15 per share) and issued 300,000 warrants, 150,000 of which
expired on May 1, 1995 and 150,000 of which are exercisable at $9 per share
expiring on May 1, 1997.
In March 1992, the Company restructured its North American operation by
combining the management and administrative processes of its digitizer and
Houston Instrument Divisions into a single operating unit; and established an
administrative headquarters in Europe responsible for cutter manufacturing, and
sales, distribution and service of all Company products for the European market.
Further restructuring was initiated in May 1993, associated with the arrival
of a new President and Chief Executive Officer who joined the Company in April
1993. The restructuring included a reduction in work force, asset write-downs,
consolidation of manufacturing operations in the Company's Austin, Texas
facility, changes in some of the Company's senior executives, and a redeployment
of assets to apply them more effectively. Also, North America and Asia Pacific
sales, manufacturing, and engineering administration is now based in Austin,
Texas.
During fiscal year 1995, the Company changed its corporate headquarters from
Seymour, Connecticut to Austin, Texas, and in late fiscal year 1995 undertook
additional organizational actions which included a reduction in force and
abandonment of the remaining portion of the Company's Connecticut lease.
DIGITIZERS
MARKET AND APPLICATIONS. Digitizers have accounted for approximately forty
percent (40%) of the sales of the Company in fiscal year 1995. Summagraphics'
primary markets for digitizers are in computer-aided design, engineering and
manufacturing (CAD/CAE/CAM). Digitizers typically are used with personal
computers and workstations and support a broad range of software applications
which include high-end computer aided publishing, construction management and
costing, graphics design and animation, mapping and geographic information
systems (GIS) and geological/seismic analysis. They also are used frequently
with software systems such as AutoCAD. Newspaper publishers, for example, use
the Company's digitizers as part of their complete computer-aided publishing
systems for publication layout. Engineers and architects use the Company's
digitizers in estimating construction costs rapidly and accurately from
blueprints and site plans while in the field. Animation and graphics design
uses for the Company's digitizers vary widely and include use in cinema
productions, colorization of black and white movies and television weather and
sport analysis. Digitizers offer significant benefits of speed and efficiency
to the user in CAD design over other input methodologies such as computer mice
and on-screen menus.
4
Uses for digitizers include desktop publishing, image processing and pen-based
computing. See "Business -- Product Development."
TECHNOLOGY. Digitizers are capable of determining the absolute location of a
stylus or cursor to within several thousandths of an inch on a grid of sensors
imbedded in a tablet. Depending upon the technology used, this is accomplished
by pulsing either the grid or the cursor with an electric current causing a
reciprocal electrical flow in the cursor or the grid. This reciprocal flow is
measured, converted into a set of digital X-Y coordinates and transmitted to a
host computer for processing.
Digitizers can offer significant advantages over other entry devices such as
keyboards, mice, trackballs, lightpens, joystick and touchpanels in graphics
intensive applications due to their high level of precision, greater
functionality and increased productivity. Keyboards are primarily used for
inputting text and numerical information and are not well suited for graphics
applications. Mice are low accuracy, relative pointing devices commonly used
with icon-based operating systems and low-resolution graphics applications. By
contrast, digitizers are capable of inputting X-Y coordinate data to communicate
an absolute position. Absolute positioning allows accurate drawing and
selection of discrete points on the surface of the digitizing tablet. The
latter is critical to high accuracy tasks such as digitizing a map or an
existing CAD drawing.
The Company's digitizer products are primarily based on electromagnetic
technology whereby a cursor or a grid generates an electromagnetic field which
is measured by built-in electronic instruments. These methods produce
digitizers capable of higher resolution than other commonly-used technologies
(magnetostrictive and resistive). Electromagnetic tablets offer the additional
advantage of being relatively unaffected by temperature, humidity, electrical
noise and conductive materials on the digitizing surface.
PRODUCTS. The Company offers three (3) series of electromagnetic digitizers:
desktop, industry standard tablets (the SummaSketch Series); low-cost, large-
format tablets (the Summagrid(R) Series); and large-format, high accuracy
tablets (the Microgrid(R) Series). Digitizers are offered in standard
configurations for the distribution market and are customized to meet specific
OEM and foreign market specifications. All are supported by a broad range of
accessory products including styli, cursors, pressure sensitive pens, power
supplies, cabling and software templates. Digitizers may be software or hardware
configured to meet various requirements.
The SummaSketch Series electromagnetic tablets, sold under the trade names
SummaSketch III and SummaSketch III Professional, comprises a majority of the
Company's digitizer sales. MM tablets are constructed using a single printed
circuit board housing the X-Y grid and the control and interface electronics.
Applications include desktop CAD, CAM, CAE, graphic arts design and general
purpose computing.
The Summagrid (SG) Series electromagnetic tablets are constructed of a single
large printed circuit board containing the X-Y grid and control interface
circuitry housed in a separate chassis common to all sizes. The Summagrid
Series offers customers a large format tablet with similar accuracy and
resolution to a desktop unit but at a significantly lower cost than the
Microgrid Series. Applications include cost estimation, facilities management
and low-end CAD or mapping. Both the Summagrid and the Microgrid Series of
digitizers are available in backlit versions for high-end medical and tracing
applications.
5
The Microgrid (MG) Series electromagnetic tablets are constructed of a single
large printed circuit board containing the X-Y grid. Control and interface
electronics are integrated into the tablet in a chassis common to all sizes of
tablets. Applications include high-end CAD, CAE, cartography and civil and
mechanical engineering, which require greater accuracy and line resolution than
desktop models offer. Each Microgrid tablet is tested on the Company's laser
interferometer test bed to guarantee accuracy.
The Company introduced a product enhancement in fiscal year 1993 which enables
the user to utilize at their discretion the cursor or stylus as either a corded
or battery powered cordless (convertible) version. Cordless cursors are an
added convenience to users of large tablets where the large tablet surface
otherwise necessitates a long cord. The cordless technology used on Summagrid
represents core technology for the Company which can be applied to new and
existing digitizer products to offer unique customer benefits. Additionally,
the Company introduced its Microgrid(R) Ultra Series large-format tablet which
is an upgrade of the Company's Microgrid Series high-accuracy tablets for
applications requiring precise formatting devices such as GIS mapping,
electronic design and CAD.
In fiscal year 1995, the Company introduced the Summa Expression, a high
performance desktop tablet designed for graphic arts applications such as
drawing, painting, illustration and animation. This tablet features a small 6"
x 8" active area footprint and allows drawing with high precision and
flexibility using 256 levels of pressure sensitivity and customizable menu
buttons. This tablet is the first of a planned series of high performance
small-format tablets dedicated to address the needs of the professional graphics
user. The SummaPad/TM/ was also introduced in fiscal year 1995. This tablet
features a 4" x 5" active area and also provides pressure sensitivity.
PLOTTERS
MARKET AND APPLICATIONS. The Company began to market plotters in May 1990
with the acquisition of Houston Instrument. In each of the last three (3)
fiscal years, plotters have accounted for approximately thirty percent (30%) of
the Company's sales. The Company's primary markets for plotters are in
computer-aided design and engineering. Its pen plotter products are used
extensively by architects and mechanical, electrical electronic and civil
engineers to create complex drawings and specifications. Pen plotters are also
used with computerized mapping, geographical exploration and geographic
information systems, where precise high quality hard-copy output is required.
The Company's plotters are also used extensively in many other application
areas, including medical, scientific, business and educational presentation
graphics. Pen plotters remain the most cost effective means to create high
quality wide format, permanent line drawings.
The Company introduced in fiscal year 1994 a large-format, color thermal wax
transfer printer-- SummaChrome/TM/ -- for use in in-house design departments of
corporations and retail chains, advertising agencies, graphic design firms, and
sign, copy and photo shops servicing both businesses and consumers.
Applications include the production of colored signs, presentation materials,
photo enlargements, design renderings, maps, and satellite images. In fiscal
year 1995, the Company re-evaluated the resources required to sell this product
and decided to focus its energy on the segment of the graphics market where they
were already positioned for success -- sign-making. Recognizing their unique
opportunity to offer the first large-format digital printing solution that can
print directly on vinyl without any additional process for UV or water
resistance, the Company shifted its marketing focus to take advantage of this
technological advantage. Since
6
the Company already had the sign-making channel in place to support its
SummaSign Series of high performance cutters/plotters, this shift in market
focus is more cost effective to execute.
In fiscal year 1995, the Company introduced its SummaJet/TM / 2 Series of ink
jet plotters for the CAD market. The SummaJet 2 entry took advantage of a void
in the existing ink jet market for low cost color printing.
TECHNOLOGY. All types of plotters function by creating images on hard-copy
media such as paper or polyester film. Pen plotters may be distinguished from
other hard-copy output devices, because pen plotters create hard copy of vector,
or point-to point lines, while other plotters produce raster, which constructs
an image as a series of dots, a print band at a time.
Pen plotters function by receiving plot commands downloaded from a computer
and, by following these instructions, moving one of a selection of pens relative
to paper, film or other media, thereby generating a drawing. The media is
driven bi-directionally on one axis while the pen is driven on the other axis.
Both functions are microprocessor controlled, highly responsive, closed-loop
servo systems that permit accurate and precise graphic creation.
The Company has developed significant expertise in relevant software, servo,
paper handling and mechanical design technologies.
The Company's line of feature-enhanced pen plotters called the HiPlot/(R)/
7000 Series in A-to D-size and A-to E-size plotters, improving speed of
throughput and plot quality.
The Company introduced in fiscal year 1994 its SummaChrome/TM/ Imaging System,
a color thermal transfer printer, which produces large-format color output
images up to 24" x 40" direct on vinyl. The product is intended for sign-makers
who produce large-format vinyl or screen print signs. Since it prints directly
on vinyl, it eliminates the need for weeding, transferring images and enabling
the user to make vivid, fine -lined large-format signs which are durable in
outdoor applications for up to 3-5 years.
The Company introduced in fiscal year 1995 its SummaJet plotter which is the
Company's entry into the color D- and E- size ink jet market. The product is
both raster and vector compatible and intended to address the CAD market with
features like replot, automatic pilot, printing, replot, automatic scaling and
mirror functions.
PRODUCTS. The Company offers a series of large-format plotters and small-
format plotters. The Company's offering of large-format plotters include high
performance, high speed CAD pen plotters.
The Company introduced the HiPlot 7000 Series of pen plotters in late fiscal
year 1993. The HiPlot Series offers users additional features of faster plot
completion, a primary application requirement and, in addition, improved
plotting quality and a new feature called HIQueue/TM/, a plot management package
for networked multi-user environments. The ability to effectively manage plot
data in a networked multi-user environment is a strong requirement among users.
7
SummaChrome, the Company's color thermal transfer printer for the sign market,
produces color prints up to 24" x 40" of exceptional clarity and brilliance.
Its patented Ribbon Printing/TM/ mechanism permits highly precise registration
and increased resolution to 400 dpi from thermal's traditional desktop 300 dpi
range.
CUTTERS
Cutters are output devices, similar in construction to a pen plotter, but
employ a knife in place of a pen to cut vinyl for signs and banners, artfilm
for screen printing, and various stencil materials for etching text and images
into glass, wood and stone via an abrasive etching process. Cutter performance
is primarily measured by speed, acceleration, and guaranteed accuracy.
Additional features include knife type, tool pressure and software
compatibility. Speed is measured by how many inches the knife moves per second.
Acceleration is how quickly the knife reaches its top speed, this is important
since most signs consist of short lines. Guaranteed accuracy depends on the
drive mechanism, either friction or sprocket, in the cutter. There are
currently two (2) types of knife systems used to cut material; drag and
tangential. Drag knife units typically cost less, have less knife pressure
capability, and are used for general sign applications. Tangential knife units
are typically more expensive, with more knife pressure, greater precision
cutting abilities and the ability to cut a wider variety of material.
The Company markets a line of precision cutters designed to produce low-cost,
computer-generated letter and graphics for sign and display making applications.
During late fiscal year 1993 the Company introduced two (2) new tangential
cutters, the T1000 and the T600. In fiscal year 1994 the Company introduced
three (3) new drag knife cutters, the D610, D750 and the D1300. These cutters
primarily differ in the width of sign media they handle, the type of knife used
and the features they contain. In fiscal year 1995, the Company introduced the
SummaSign cutter (the SummaSign 1010 Plus). This high performance cutter
combines an advanced media handling system, offers both sprocket drive and
friction drive and is therefore capable of handling plain media as well as half-
inch industry-standard punched media. The Company also introduced the low cost,
small-format SummaCut Series of cutters designed for small, independent sign
shops who produce a limited quantity of vinyl signs.
AFTER MARKET SERVICE AND SUPPORT
The Company's customer service group provides customer support for the
Company's products via depot, on-site or on an exchange basis with standard
warranty protection programs which include Limited Lifetime Warranty, 48-Hour
Priority Response/TM/ in the first year after purchase, along with additional
warranty options for 24-Hour Priority Response/TM/ and multiple product leasing
options. This group also sells a wide range of plotting media and a variety of
pens for use with its plotters. The Company also offers a library of CAD
digitizer templates for use with AutoCAD. The Company's templates simplify the
use of CAD programs and increase productivity by permitting the user to bypass
nested menus and access necessary commands quickly.
PRODUCT DEVELOPMENT
During fiscal year 1993, 1994 and 1995 the Company's research and development
expenses were $8,003,000, $5,631,000, and $6,761,000, respectively.
8
During fiscal year 1993, the Company acquired joint ownership of a broad
patent for incorporating a digitizer into a liquid crystal display (LCD) without
the use of a separate digitizer X-Y grid. This allows for a very cost effective
approach to "writing on the screen" pen computer systems. The Company has been
investigating relationships with LCD manufacturers to pursue this technology
further, and recently entered into a license agreement with Sharp Corporation to
enable them to enhance their product line of combined displays and input panels.
The Company's SummaChrome imaging system employs a technology for producing
high quality color thermal transfer images in sizes up to 24" x 40" targeted to
be sold to the sign market.
MARKETING AND CUSTOMERS
The Company seeks to offer a broad line of application-compatible computer
peripheral products for graphics input and output and to develop strong brand
recognition. The Company has developed a world-wide sales network including
OEMs, distributors and manufacturers' representatives and maintains sales
offices in the United States, Belgium, France and Germany.
The Company also maintains a support and technical assistance program for
third-party software developers in emerging markets and has on occasion entered
into several joint marketing support arrangements with developers of selected
applications. No single customer of the Company accounts for ten percent (10%)
or more of the Company's yearly sales.
The Company's network of distributors consists of national, vertical and
regional distributors. National distributors in the United States, such as
Ingram Micro, Inc. and Merisel, and Computer 2000 in Europe, sell to retail
accounts and account for a large percentage of the Company's sales. Vertical
distributors sell to retail accounts. They carry a line of the Company's
products and specialize in integrating the Company's standard products into
specialized systems for vertical markets. Regional distributors focus on an
area typically composed of five (5) to seven (7) states and specialize in
applications and accounts which require a greater amount of service and
technical skill in making the sale. The Company attempts in most instances to
have more than one (1) distributor in foreign countries. The Company believes
that by avoiding reliance upon exclusive distributorship arrangements it
broadens the market for its products and fosters constructive competition among
its distributors.
The Company also sells its products directly to OEMs for incorporation into
systems manufactured by them and indirectly to smaller OEMs through a network of
manufacturer representatives. Many of these sales are customized products which
are incorporated into the OEMs design cycles.
The Company's CAD Warehouse, Inc. subsidiary sells Summagraphics products and
products of other companies, advertises through trade publications and its own
catalog, and sells through orders.
See Note 7 of Notes to Consolidated Financial Statements for information on
the Company's foreign and domestic sales. The Company maintains domestic
sales/service offices in Seymour, Connecticut; Austin, Texas; and Huntington
Beach, California. The Company has foreign sales subsidiaries located in
Brussels, Belgium; London, England; Munich, Germany; and a foreign sales office
located in Paris, France.
9
The Company's marketing and sales organization consists of these groups:
product/management, distribution sales, marketing communications, and customer
service. Product management is responsible for market research, new product
planning and pricing strategies. The North America/Asia Pacific sales group,
headquartered in Austin, Texas, includes regional sales managers covering
domestic and foreign territories who are responsible for both direct and
indirect OEM account relationships, and distribution managers who work with
national, regional and vertical distributors. The European sales group is
headquartered in Brussels, Belgium and operates in a manner similar to its North
America/Asia Pacific counterpart. Each of the North America/Asia Pacific and
European sales and service groups has a marketing communications group
responsible for trade shows, advertising, product sales, literature and customer
relations, and a customer service support capability responsible for customer
service and assisting customers with technical issues.
MANUFACTURING OPERATIONS, QUALITY CONTROL AND WARRANTIES
The Company has certain of its manufacturing performed outside the United
States to take advantage of lower manufacturing costs, while allowing the
Company to maintain high standards of quality.
The Company maintains a manufacturing facility in Gistel, Belgium for the
manufacture of cutters and distribution of all of its products sold in the
European market. In order to reduce manufacturing costs, the Company recently
entered into agreements to outsource manufacturing of its SummaJet ink jet
product line and its large-format digitizer product line and has an ongoing
program of investigating the outsourcing of manufacturing of its remaining
products.
Final assembly of products takes place either at the outsourcing manufacturing
locations or at the Company's facilities in Austin, Texas and Gistel, Belgium
where there is also product warehousing. The Company also does product
warehousing and distribution at its Seymour, Connecticut location.
The Company generally purchases devices, components and sub-assemblies from
more than one source both domestically and internationally where alternative
sources are available and economical; however, the Company uses sole suppliers
for certain components. The Company believes that it maintains adequate
inventories of sole source items and that alternative components or sources for
those items could be readily incorporated into the Company's products.
The Company's present manufacturing capacity is adequate to meet its
anticipated production requirements for the foreseeable future. If required,
the Company has the ability to increase purchases under its existing
manufacturing and second source agreements or to manufacture domestically
products currently manufactured offshore.
The Company maintains quality control procedures for products manufactured
both domestically and offshore. These procedures include quality testing during
design, prototype and pilot stages of production, inspection of incoming raw
materials, inspection of sub-assemblies and testing of finished product using
automatic test equipment. Finished products undergo burn-in testing to provide
for long-term, reliable operation.
10
The Company warrants its products for periods ranging from ninety (90) days to
the life of the product. The Company makes available extended warranties, spare
parts and out-of-warranty repair service in the United States and Europe. To
date, warranty costs have been insignificant.
COMPETITION
The markets in which the Company sells it products are highly competitive.
The Company faces actual and potential competition from a number of established
manufacturers, both domestic and international, including the Company's largest
competitors, CalComp, Inc., a subsidiary of Lockheed Corporation, and Hewlett-
Packard Co., which have or may have significantly greater financial, technical,
manufacturing and marketing resources than the Company; and Mutoh America
Corporation, Wacom Company, Ltd., Encad, Inc., and Oce Vandergrinten. CalComp
competes primarily with the Company's digitizer and plotter products; Mutoh
competes primarily with the Company's cutter products; and Hewlett-Packard
competes primarily with the Company's plotter products. The Company's lower
cost products face competition from manufacturers of mice and tablets, including
Logitech, Inc. The Company recently entered into an OEM agreement with Mutoh
for the production and sale of certain products of each of those companies by
the other, to enhance the Company's product offerings.
The Company believes that its competitive ability also depends on the quality,
pricing, performance and support of its products, manufacturing costs and the
Company's technical capability and successful introduction of new products and
product enhancements. See "Business -- Product Development and Emerging
Markets." The Company believes that it offers a number of important attributes,
including its product price and performance, market presence, technological
expertise, quality of its product line, relationships with certain OEMs and its
well-developed distribution channels. Inability to match product introductions
or enhancements or price/performance of competitors' products could adversely
affect the Company's market share and profitability.
BACKLOG
The Company manufacturers on the basis of its forecast of near-term demand and
maintains inventories of finished products in anticipation of firm orders from
its customers. The Company typically ships within thirty (30) days receipt of
orders. While certain OEMs and distributors place orders for scheduled
deliveries, most of the Company's customers currently order products on an as-
needed basis. For this reason, and because customers may cancel or reschedule
orders with little or no penalty, or may place orders on shipment hold, and
because the Company may decline to ship to customers for credit reasons, the
Company believes that it has no backlog orders that are firm, and, in any event,
that the level of such orders is not indicative of sales.
EMPLOYEES
As of May 31, 1995, the Company employed approximately 311 people, 238
domestically and 73 internationally. None of the employees are covered by a
collective bargaining agreement, although the Company's employees in Belgium are
covered by government mandated benefits. The Company believes that relations
with its employees are good.
11
PATENTS AND PROPRIETARY INFORMATION
The Company attaches importance to its portfolio of patents, trademarks,
copyrights, trade secrets and know-how. In the course of research and
development, Summagraphics engineers at times devise inventions which the
Company may elect to patent if it would provide a clear-cut market advantage,
inhibit competitors, or generate a source of licensing revenues. The Company
has approximately fifty patents and twenty patents pending in the United States
and in a number of foreign countries. The Company also relies on trade secrets,
know-how, contracts, copyrights, trademarks and patents to establish and protect
its proprietary rights and to maintain the confidentiality of trade secrets,
proprietary information and creative developments.
As part of Summagraphics' strategy for protecting its technology and market
position, it will announce certain inventions that it intends to use but does
not intend to patent in order to prevent competitors and others from obtaining
patent protection on such inventions. As a matter of cost control, the Company
may allow certain patents that it judges to be obsolete to lapse.
The Company believes that its proprietary information is protected to the
fullest extent practicable. There can be no assurance that the confidentiality
agreements upon which the Company relies to protect its trade secrets and know-
how would be upheld by the courts. Moreover, patents relating to particular
products do not necessarily preclude competitors from successfully marketing
substitute products to compete with patented products. The Company believes
that the loss of any particular patent, or group of patents, will not have a
material adverse effect on the Company's financial position and results of
operations. Other companies may also obtain patents covering configurations and
processes relating to the Company's products, which would require the Company to
obtain licenses. There can be no assurance that the Company will be able to
acquire such licenses, if required, on commercially reasonable terms.
ITEM 2 PROPERTIES
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The Company's executive offices are located in Austin, Texas in a leased
building having a total of 96,400 square feet of space. The lease will expire
in June 2010. In addition, the Company leases a building in Seymour,
Connecticut (the lease will expire in November 1998), which is being vacated,
and owns a building in Gistel, Belgium, and those buildings have a total of
84,000 and 43,180 square feet of space, respectively. The Company also leases
office space for selling operations in Huntington Beach, California and
Macedonia, Ohio, and in three (3) foreign countries (Germany, France and
Belgium). Except for the Seymour, Austin and Gistel facilities, these locations
function primarily as sales, training and field service centers for their
regions. See Note 9 of Notes to Consolidated Financial Statements for
information regarding the Company's obligations under leases.
ITEM 3 LEGAL PROCEEDINGS
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The Company is a party to several legal actions arising in the normal course
of business. The Company believes that the disposition of these matters will
not have a material adverse affect on its financial position or results of
operations taken as a whole.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
12
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
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STOCKHOLDER MATTERS
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COMMON STOCK MARKET AND DIVIDEND INFORMATION
The Company's common stock is traded in the over-the-counter market and is
quoted on the NASDAQ National Market System (symbol SUGR). The following table
shows the range of high and low sales prices for the Company's common stock.
As of May 31, 1995, the Company had 450 holders of record of its common stock.
This does not include holdings in street or nominee names.
QUARTER ENDED HIGH LOW
- -------------------------------------------------
Aug. 31, 1993 3 7/8 3 5/8
Nov. 30, 1993 4 3/4 4 1/2
Feb. 28, 1994 7 5/8 7 3/8
May 31, 1994 7 3/4 7 1/4
Aug. 31, 1994 7 1/2 6 1/4
Nov. 30, 1994 9 3/8 7 7/8
Feb. 28, 1995 8 6 5/8
May 31, 1995 5 2 5/8
ITEM 6 SELECTED FINANCIAL DATA
- ------ -----------------------
See page 54 hereof.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ----------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------- ----------
See pages 32-37 hereof.
------
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The following consolidated financial statements of the Company and the
independent auditors' report are on pages 38-53 hereof.
------
Independent Auditor's Report
Consolidated Balance Sheets -- May 31, 1994 and 1995
Consolidated Statements of Operations -- Years ended May 31, 1993, 1994 and
1995
Consolidated Statements of Stockholders' Equity -- Years ended May 31, 1993,
1994 and 1995
Consolidated Statements of Cash Flows -- Years ended May 31, 1993, 1994 and
1995
Notes to Consolidated Financial Statements
The information captioned "Quarterly Results of Operations" is on page 54 .
-----
13
ITEM 9 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------ -------------------------------------------------------------------
The Company has no disagreement on accounting or financial disclosures matters
with its independent auditors, nor did it change auditors during the fiscal year
ended May 31, 1995.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
DIRECTORS
The following table sets forth the age, the principal occupation during the
past five (5) years and the positions with the Company of each director and any
other directorships held by such person in any company subject to the reporting
requirements of the Securities Exchange Act of 1934 or in any company registered
as an investment company under the Investment Company Act of 1940.
NAME AGE PRINCIPAL OCCUPATION DIRECTORSHIPS
- ---- --- -------------------- -------------
Michael S. Bennett 43 President and Chief Executive Officer
and Director of the Company since April
1993; Senior level positions at Dell
Computer Corp. since 1988; Director of
the Company since 1993.
Ken Draeger 55 President and Chief Executive Officer Galileo Electro-Optics
Decision Data Services, Inc. Since 1992; Corp.
Previously, President of Agfa Compugraphic
since September of 1988; Director of the
Company since June 1994.
Andrew Harris 40 Director of TechDirect International Ltd.
since 1994; President of Dell International
from 1987 to 1994; Director of the Company since
January 1995.
G. Glenn Henry 53 PC Division Director, MIPS Technologies, Inc.
since late 1993; Chief Technical Officer, Dell
Computer Corp. since early 1993; SVP Product
Group, Dell Computer Corp. since before 1989;
Director of the Company since August 1993.
Stephen J. Keane 67 Director of the Company since July, 1985. Storage Technology Corp., Maxserv,
Inc.
Dennis G. Sisco 49 Senior Vice President, Dun & Bradstreet Corp. Gartner Group, Inc.
since July 1993; President, D & B
Enterprises since December 1988, Director of
the company since October 1983.
14
EXECUTIVE OFFICERS
The executive officers of the Company, the age of each, and the period during
which each has served in his present office are as follows:
MICHAEL S. BENNETT (43) joined the Company in April 1993 as President and
Chief Executive Officer and as a Director. Previously he was Vice President, PC
Systems, of Dell Computer Corporation since December 1990, and before that
served as Vice President and General Manager of Dell Marketing Corporation.
Earlier he was President and CEO of Pritronix, Inc., before that served as
President and CEO of Interlan, Inc., and prior to that he was employed for
twelve (12) years by Digital Equipment Corporation in various managerial
positions in manufacturing and sales in the United States and in Europe.
DENNIS JOLLY (45) joined the Company in September, 1995 as a Senior Vice
President of Sales, Marketing, and Service handling the sales, marketing and
support organizations and responsibilities for non-Europe areas. Previously,
Mr. Jolly was with Dell Computer Corporation for seven years in various
capacities, most recently as Group Vice President, Indirect Channel, USA of Dell
Computer Corporation. Prior thereto, he was Director of Marketing for Fourth
Shift Corporation, a manufacturing software company, and before that was
employed by Apple Computer for five years in various capacities, lastly as
Regional Sales Manger.
DAVID G. OSOWSKI (43) joined the Company in September 1986 as Corporate
Controller. In May 1990, he became Corporate Controller and Vice President of
the Company's Digitizer Division and in May 1991, he was promoted to Senior Vice
President, Controller and Treasurer of the Company. Prior to joining the
Company, Mr. Osowski served as Assistant Controller at Boehringer Ingelheim
Pharmaceuticals, Inc. and before that was an audit supervisor at Price
Waterhouse. He holds a BS degree from the University of Bridgeport.
DARIUS C. POWER (49) joined the Company as Senior Vice President of Worldwide
Manufacturing in July, 1995. Prior to joining the Company, Mr. Power was Vice
President of Manufacturing for Leading Edge Products, Inc. and prior thereto, he
was Managing Director of Manufacturing Operations for AST Research, Inc.
ROBERT B. SIMS (53) joined the Company as Vice President, General Counsel and
Secretary in June 1984. In May 1990, he was promoted to Senior Vice President,
General Counsel and Secretary. Mr. Sims has served in corporate counsel
capacities at Mathematical Applications Group, Inc., Lever Brothers Company,
Raymark Corporation and General Signal Corporation and has been associated with
the law firms of Whitham and Ransom and Cahill Gordon & Reindel. Mr. Sims is
director of Raytech Corporation. He holds a BS degree from Franklin and
Marshall College, a Juris Doctor (JD) degree from The George Washington
University Law School (National Law Center) and an MBA from New York University
Graduate School of Business Administration.
JOHN UFFORD (44) joined the Company in October, 1994 as Senior Vice President
of Output Devices and has since assumed management responsibility for Input
Devices as well. Prior to joining Summagraphics , he was with the DuPont
Company for 15 years in a variety of technical and managerial positions. His
most recent assignment was as the Vice President of Engineering for ImagiTex, a
DuPont subsidiary. Prior thereto, he was the Manager, Digital Systems for
Electronic Imaging within DuPont.
15
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
SUMMARY COMPENSATION TABLE (COMPENSATION AND OTHER INFORMATION CONCERNING
EXECUTIVE OFFICERS)
The following table sets forth all cash compensation for services in all
capacities with the Company and its subsidiaries rendered during the fiscal year
ended May 31, 1995, for the Chief Executive Officer at the end of the last
complete fiscal year and for each of the four (4) most highly compensated
executive officers:
LONG TERM
---------
ANNUAL COMPENSATION COMPENSATION AWARDS
NAME OF INDIVIDUAL ------------------- -------------------
OR NUMBER OF ALL OTHER
PERSONS IN GROUP (1) CAPACITIES IN WHICH SERVED YEAR SALARY ($) BONUS ($)(2) STOCK OPTIONS(3) COMPENSATION(4)($)
- -------------------- -------------------------- ---- ---------- ------------ ---------------- ------------------
Michael S. Bennett President and 1995 250,000 ----- 10,000 ----
Chief Executive Officer 1994 250,000 ----- 31.250 ----
1993 32,225 ----- 175,000 ----
David G. Osowski Senior Vice President, 1995 120,000 ----- 10,000 ----
Controller and Treasurer 1994 120,000 6,600 28,500 ----
1993 127,483 22,350 6,000 3,850
William S. Paxton(5) Senior Vice President 1995 125,000 ----- 10,000 ----
Operations 1994 125,000 ----- 12,868 ----
Robert B. Sims Senior Vice President 1995 132,000 ----- 10,000 ----
General Counsel and 1994 132,000 6,600 28,500 ----
Secretary 1993 133,663 14,250 6,000 3,600
John C. Ufford Senior Vice President 1995 72,769 ----- 15,000 ----
Input/Output Devices
(1) The Company presently has six (6) executive officers, including the CEO.
(2) Includes bonus payments accrued and paid during indicated fiscal year and
includes bonus payments which had accrued during prior fiscal year but were paid
in indicated fiscal year, all under the Company's management bonus plan and as
discretionary bonus authorized by the Company's Board of Directors.
(3) See also "Option Grant Table" for option grants.
(4) Includes Company contributions to Cash or Deferral Profit Sharing Plan
(401(k) Plan).
(5) Mr. Paxton left the Company in June 1995.
16
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
% OF TOTAL APPRECIATION FOR OPTION TERM (2)
OPTIONS --------------------------------
GRANTED TO EXERCISE
EMPLOYEES OR BASE EXPIRATION HISTORIC
IN FISCAL PRICE DATE RATE %
NAME OPTIONS YEAR 1995 ($/SHARE) ($/SHARE) (1) 5%($) $10%($)$ (3) APPRECIATION
- ------------------------ ------- --------- ---------- -------- ------- ----- -------- --- ------------
Micheal S. Bennett 10,000 6% 7.00 06/28/04 $44,023 $111,562 n/a (55.36%)
David G. Osowski 10,000 6% 7.00 06/28/04 $44,023 $111,562 n/a (55.36%)
William S. Paxton, Jr. 10,000 6% 7.00 06/28/04 $44,023 $111,562 n/a (55.36%)
Robert B. Sims 10,000 6% 7.00 6/28/04 $44,023 $111,562 n/a (55.36%)
John C. Ufford 15,000 10% 8.00 10/24/04 $75,467 $191,249 n/a (60.94%)
(1) The options granted are non-qualified and are exercisable starting one (1)
year from the grant date but not after ten (10) years from the grant date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED IN-THE-
SHARES UNEXERCISED OPTIONS MONEY
ACQUIRED AT 5/31/95 OPTIONS AT 5/31/95
ON VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/
EXERCISE REALIZED (#) UNEXERCISABLE
NAME (#) ($) EXERCISABLE/UNEXERCISABLE ($)
- ---- --- --- ------------------------- ---
Michael S. Bennett -0- -0- 91,250/125,000 62,300/ -0-
David G. Osowski -0- -0- 42,832/65,500 -0- / -0-
William S. Paxton, Jr. -0- -0- -0-/-0- -0- / -0-
Robert B. Sims -0- -0- 47,332/22,668 -0-/ -0-
John C. Ufford -0- -0- -0-/15,000 -0-/ -0-
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
BENEFICIAL OWNERSHIP OF VOTING SECURITIES
(PRINCIPAL STOCKHOLDERS; DIRECTORS; OFFICER)
The following table sets forth certain information concerning the beneficial
ownership of the Common Stock as of August 18, 1995 by persons known to the
company to own beneficially five percent (5%) or more of the outstanding shares
of Common Stock of the company, by each Director of the Company, by each named
executive officer of the Company set forth in the
17
Summary Compensation Table and by all directors and executive officers of the
Company as a group. Except as otherwise indicated, the persons listed have sole
voting and investment power with respect to shares beneficially owned by them.
Amount and
Nature of Approximate
Name and Affress Beneficial Percentage of
Beneficial Owner Ownership (1) Class
- ---------------- ------------- -----
Bessemer Venture Funds (2)...................... 306,562 6.6%
1025 Old Country Road
Suite 205
Westbury, NY 11590
John G. Panutsos................................ 255,065 5.5%
C.L. King & Associates.......................... 244,500 5.3%
Michael S. Bennett(3)........................... 91,250 2.0%
Ken Draeger(4).................................. 3,000 *
Andrew Harris................................... -0- *
G. Glenn Henry(5)............................... 6,000 *
Stephen J. Keane(6)............................. 7,500 *
Dennis G. Sisco(7).............................. 7,500 *
David G. Osowski(8)............................. 58,833 1.3%
William S. Paxton............................... -0- *
Robert B. Sims(9)............................... 56,332 1.2%
John C. Ufford(10).............................. 5,000 *
All directors and all executive officers as a
group(11)....................................... 235,415 5.1%
* Less than 1%.
- ----------------
(1) Except as otherwise noted, each person or group named in the table has sole
investment and voting power with respect to all shares of Common Stock shown as
beneficially owned by such person or group.
(2) Includes shares held by Bessemer Venture Partners I, L.P., shares held by
Bessemer Venture Partners II, L.P., shares held by G. Felda Hardymon and shares
held by affiliated parties. Mr. Hardymon was a director of the Company who
retired.
(3) Includes 74,583 shares which Mr. Bennett has the right to acquire pursuant
to the exercise of stock options which are exercisable on August 18, 1995 or
within (60) days thereafter.
(4) Includes 3,000 shares which Mr. Draeger has the right to acquire pursuant to
the exercise of stock options which are exercisable on
August 18, 1995, or within sixty (60) days thereafter.
(5) Includes 6,000 shares which Mr. Henry has the right to acquire pursuant to
the exercise of stock options which are exercisable on
August 18, 1995, or within sixty (60) days thereafter.
(6) Includes 7,500 shares which Mr. Keane has the right to acquire pursuant to
the exercise of stock options which are exercisable on
August 18, 1995, or within sixty (60) days thereafter.
(7) Includes 7,500 shares which Mr. Sisco has the right to acquire pursuant to
the exercise of stock options which are exercisable on
August 18, 1995, or within sixty (60) days thereafter.
(8) Includes 51,832 shares which Mr. Osowski has the right to acquire pursuant
to the exercise of stock options which are exercisable on
August 18, 1995, or within sixty (60) days thereafter.
(9) Includes 56,332 shares which Mr. Sims has the right to acquire pursuant to
the exercise of stock options which are exercisable on
August 18, 1995, or within sixty (60) days thereafter.
(10) Includes 5,000 shares which Mr. Ufford has the right to acquire pursuant to
the exercise of stock options which are exercisable on
August 18, 1995, or within sixty (60) days thereafter.
(11) Includes 228,414 shares which all directors and all executive officers as a
group have the right to acquire pursuant to the exercise of stock options which
are exercisable on August 18, 1995, or within sixty (60) days thereafter.
18
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
None
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements.
The following consolidated financial statements of the Company and
the independent auditors' report are on pages 38-53 hereof.
-----
Independent Auditors' Report
Consolidated Balance Sheets -- May 31, 1994 and 1995
Consolidated Statements of Operations -- Years ended May 31, 1993,
1994 and 1995
Consolidated Statements of Stockholders' Equity -- Years ended May
31, 1993, 1994 and 1995
Consolidated Statements of Cash Flows -- Years ended May 31, 1993,
1994 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following consolidated financial statement schedule of the
Company is included herein on page 31.
--
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
All other Financial Statement Schedules have been omitted because
they are not applicable or because the applicable disclosures have been included
in the Consolidated Financial Statements or in the Notes thereto.
3. Lists of Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1,4.1 Third Restated Certificate of Incorporation of the Registrant (filed
as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended May 31, 1988 (File No. 0-16071) and
incorporated herein by this reference).
19
3.2, 4.2 By-laws of the Registrant, as amended (filed as Exhibit 3.02 to the
Registrant's Registration Statement on Form S-1 (No. 33-15658) and
incorporated herein by this reference).
4.3 Specimen Common Stock certificate (filed as Exhibit 4.02 to the
Registrant's Registration Statement on Form S-1 (No. 33-15658) and
incorporated herein by this reference).
4.4 8% Convertible Subordinated Note due May 1, 1995 of Summagraphics
Corporation (filed as Exhibit 2 to the Registrant's' Current Report
on Form 8-K, dated May 14, 1990, and incorporated herein by this
reference).
10.1 Lease between 330 Realty Associates and the Company dated May 28,
1987 (filed as Exhibit 10.18 to the Registrant's Registration
Statement on Form S-1 (No. 33-15658) and incorporated herein by this
reference).
10.2 1985 Employee Stock Purchase Plan (filed as Exhibit 10.04 to the
Registrant's Registration Statement on Form S-1 (No. 33-15658) and
incorporated herein by this reference).
10.3 1984 Executive Stock Purchase Plan, as amended (filed as Exhibit
10.05 to the Registrant's Registration Statement on Form S-1 (No.
33-15658) and incorporated herein by this reference).
10.4 Form of Stock Purchase Agreement under 1984 Executive Stock Purchase
Plan (filed as Exhibit 10.06 to the Registrant's Registration
Statement on Form S-1 (No. 33-15658) and incorporated herein by this
reference).
10.5 1987 Stock Plan, as amended (filed as Exhibit 10.12 to the
Registrant's Form 10-K for fiscal year 1994 and incorporated herein
by reference).
10.6 1989 Performance Unit Plan (filed as Exhibit 10.11) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
May 31, 1989 (File No. 0-16071) and incorporated herein by this
reference).
10.7 Form of Employment Agreement between Summagraphics Corporation and
senior executive officers (filed as Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
May 31, 1989 (File No. 0-16071) and incorporated herein by this
reference).
10.8 Management Bonus Plan letter (filed as Exhibit 10.09 to the
Registrant's Registration Statement on Form S-1 (No. 33-15658) and
incorporated herein by this reference).
20
10.9 The Cash or Deferral Profit Sharing Plan (filed as Exhibit 10.10 to
the Registrant's Registration Statement on Form S-1 (No. 33-15658)
and incorporated herein by this reference).
10.10 Amended and Restated Shareholders' Agreement, as amended (filed as
Exhibit 10.14 to the Registrant's Registration Statement on Form S-1
(No. 33-15658) and incorporated herein by this reference).
10.11 Second Amendment to Amended and Restated Shareholders' Agreement, as
amended (Exhibit 10.13) (filed as Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended May 31, 1988
(File No. 0-16071) incorporated herein by this reference).
10.12 Agreement of Sale, dated as of March 14, 1990, by and between Ametek
and Summagraphics Corporation (filed as Exhibit 1 to the
Registrant's Current Report on Form 8-K, dated May 14, 1990, and
incorporated herein by reference).
10.13 Registration Rights Agreement, dated as of May 1, 1990, between the
Company and Ametek, Inc. (filed as Exhibit 3 to the Registrant's
Current Report on Form 8-K, dated May 14, 1990, as amended on July
13, 1990 and August 15, 1990 and incorporated here in by this
reference).
10.14 Termination Agreement dated as of May 31, 1994 to terminate the
Registration Rights Agreement dated May 1, 1990, between Ametek,
Inc. and Summagraphics Corporation (filed as Exhibit 10.21 to the
Registrant's Form 10-K for fiscal year 1994 and incorporated herein
by reference).
10.15 Registration Rights Agreement, dated as of May 25, 1994, between
Ametek, Inc. and Summagraphics Corporation (filed as Exhibit 10.22
to the Registrant's Form 10-K for fiscal year 1994 and incorporated
herein by reference).
10.16 Lease Agreement dated as of May 28, 1992 by and between QRS 10-12
(TX), Inc. and QRS 11-5 (TX), Inc., as landlord, and Summagraphics
Corporation, as tenant, on premises located at 8500 Cameron Road,
Austin, Texas in connection with the sale and leaseback of that
property (filed as Exhibit 10.24 to the Registrant's Annual Report
for the fiscal year ended May 31, 1992 (File No. 0-16071) and
incorporated herein by this reference).
10.17 Employment Agreement, dated April 16, 1993, between the Company and
Michael S. Bennett (filed as an Exhibit to the Registrant's Annual
10-K for the fiscal year ended may 31, 1993 (File No. 0-16071) and
incorporated herein by this reference).
10.18 Letter of Credit Agreement dated September 9, 1992, between
Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated
herein by this reference).
21
10.19 Deed of Pledge of Business dated September 9, 1992, between
Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated
herein by this reference).
10.20 Acceptance of Subordination dated October 12, 1992, between
Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1993 (File No. 0-16071) and incorporated
herein by this reference).
10.21 Amendment No. 1 to the Lease Agreement, dated as of August 27, 1993,
between QRS 10-12 (TX), Inc. and QRS (TX), Inc. as landlord and
Summagraphics Corporation, as tenant (filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
May 31, 1993 (File No. 0-16071) and incorporated herein by this
reference).
10.22 Employment Modification Agreement dated as of April 25, 1995, by and
between the Company and Michael S. Bennett.
10.23 Credit Agreement dated as of July 18, 1994 by and between the
Company and Silicon Valley Bank.
10.24 Security Agreement dated as of December 13, 1994 between the Company
and Heller Financial, Inc.
10.25 Amendment dated as of June 1, 1995 of the Security Agreement dated
as of December 13, 1994 between the Company and Heller Financial,
Inc.
10.26 Asset Purchase Agreement dated as of November 10, 1994 among the
Company, CAD Warehouse, Inc. (a Nevada corporation), CAD Warehouse,
Inc. (a Delaware corporation), John G. Panutsos, Rosemary Wollet,
and David C. Hoffer.
10.27 Amendment No. 1 to Form S-3 Registration Statement under the
Securities Act of 1933 dated April 3, 1995 relating to the
registration of 133,323 shares of the Company's Common Stock.
10.28 Form 8 Amendment No.1 to Form 8-K Report of the Company.
10.29 Amendment No. 2 dated as of April 12, 1995 of the Lease Agreement
dated as of May 28, 1992, by and between QRS 10-12 (TX), Inc. and
QRS 11-5 (TX), Inc. and the Company.
10.30 Manufacturing Agreement dated as of September 13, 1995 between the
Company and Harvard Manufacturing Ventures, LLC.
22
10.31 License Agreement dated as of July 31, 1995 between the
Company and Sharp Corporation.
22.1 Subsidiaries
27 Financial Data Schedule
23
REPORTS ON FORM 8-K
Reports on Form 8-K filed by the Company during the fourth quarter of the
Company's fiscal year ended May 31, 1995 were as follows:
None
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Summagraphics Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SUMMAGRAPHICS CORPORATION
AUGUST 29, 1995 BY: /s/ MICHAEL S. BENNETT
------------------
MICHAEL S. BENNETT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of Summagraphics
Corporation and in the capacities and on the date indicated.
/s/ MICHAEL S. BENNETT
- ---------------------------- President, Chief
MICHAEL S. BENNETT Executive Officer August 29, 1995
/s/ DAVID G. OSOWSKI
- ---------------------------- Senior Vice President,
DAVID G. OSOWSKI Controller & Treasurer August 29, 1995
(Principal Financial &
Accounting Officer)
/s/ KEN DRAEGER Director August 29, 1995
- ----------------------------
KEN DRAEGER
/s/ ANDREW HARRIS Director August 29, 1995
- ----------------------------
ANDREW HARRIS
/s/ G. GLENN HENRY Director August 29, 1995
- ----------------------------
G. GLENN HENRY
/s/ STEPHEN J. KEANE Director August 29, 1995
- ----------------------------
STEPHEN J. KEANE
/s/ DENNIS G. SISCO Director August 29, 1995
- ----------------------------
DENNIS G. SISCO
25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ----- ---------------------- ----
3.1,4.1 Third Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Registrant's Annual Report on Form
10-K for the fiscal year ended May 31, 1988 (File No. 0-16071)
and incorporated herein by this reference).
3.2, 4.2 By-laws of the Registrant, as amended (filed as Exhibit 3.02 to
the Registrant's Registration Statement on Form S-1 (No. 33-15658)
and incorporated herein by this reference).
4.3 Specimen Common Stock certificate (filed as Exhibit 4.02 to the
Registrant's Registration Statement on Form S-1 (No. 33-15658)
and incorporated herein by this reference).
4.4 8% Convertible Subordinated Note due May 1, 1995 of Summagraphics
Corporation (filed as Exhibit 2 to the Registrant's' Current
Report on Form 8-K, dated May 14, 1990, and incorporated herein
by this reference).
10.1 Lease between 330 Realty Associates and the Company dated May 28,
1987 (filed as Exhibit 10.18 to the Registrant's Registration
Statement on Form S-1 (No. 33-15658) and incorporated herein by
this reference).
10.2 1985 Employee Stock Purchase Plan (filed as Exhibit 10.04 to the
Registrant's Registration Statement on Form S-1 (No. 33-15658)
and incorporated herein by this reference).
10.3 1984 Executive Stock Purchase Plan, as amended (filed as Exhibit
10.05 to the Registrant's Registration Statement on Form S-1 (No.
33-15658) and incorporated herein by this reference).
10.4 Form of Stock Purchase Agreement under 1984 Executive Stock
Purchase Plan (filed as Exhibit 10.06 to the Registrant's
Registration Statement on Form S-1 (No. 33-15658) and
incorporated herein by this reference).
10.5 1987 Stock Plan, as amended (filed as Exhibit 10.12 to the
Registrant's Form 10-K for the fiscal year 1994 and incorporated
herein by this reference).
26
10.6 1989 Performance Unit Plan (filed as Exhibit 10.11) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
May 31, 1989 (File No. 0-16071) and incorporated herein by this
reference).
10.7 Form of Employment Agreement between Summagraphics Corporation
and senior executive officers (filed as Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
May 31, 1989 (File No. 0-16071) and incorporated herein by this
reference).
10.8 Management Bonus Plan letter (filed as Exhibit 10.09 to the
Registrant's Registration Statement on Form S-1 (No. 33-15658)
and incorporated herein by this reference).
10.9 The Cash or Deferral Profit Sharing Plan (filed as Exhibit 10.10
to the Registrant's Registration Statement on Form S-1 (No. 33-
15658) and incorporated herein by this reference).
10.10 Amended and Restated Shareholders' Agreement, as amended (filed
as Exhibit 10.14 to the Registrant's Registration Statement on
Form S-1 (No. 33-15658) and incorporated herein by this
reference).
10.11 Second Amendment to Amended and Restated Shareholders' Agreement,
as amended (Exhibit 10.13) (filed as Exhibit 10.23 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
May 31, 1988 (File No. 0-16071) incorporated herein by this
reference).
10.12 Agreement of Sale, dated as of March 14, 1990, by and between
Ametek and Summagraphics Corporation (filed as Exhibit 1 to the
Registrant's Current Report on Form 8-K, dated May 14, 1990, and
incorporated herein by reference).
10.13 Registration Rights Agreement, dated as of May 1, 1990, between
the Company and Ametek, Inc. (filed as Exhibit 3 to the
Registrant's Current Report on Form 8-K, dated May 14, 1990, as
amended on July 13, 1990 and August 15, 1990 and incorporated
here in by this reference).
10.14 Termination Agreement dated as of May 31, 1994 to terminate the
Registration Rights Agreement dated May 1, 1990, between Ametek,
Inc. and Summagraphics Corporation (filed as Exhibit 10.21 to the
Registrant's Form 10-K for the fiscal year 1994 and incorporated
herein by this reference).
27
10.15 Registration Rights Agreement, dated as of May 25, 1994, between
Ametek, Inc. and Summagraphics Corporation (filed as Exhibit
10.22 to the Registrant's Form 10-K for the fiscal year 1994 and
incorporated herein by this reference).
10.16 Lease Agreement dated as of May 28, 1992 by and between QRS 10-12
(TX), Inc. and QRS 11-5 (TX), Inc., as landlord, and
Summagraphics Corporation, as tenant, on premises located at 8500
Cameron Road, Austin, Texas in connection with the sale and
leaseback of that property (filed as Exhibit 10.24 to the
Registrant's Annual Report for the fiscal year ended May 31, 1992
(File No. 0-16071) and incorporated herein by this reference).
10.17 Employment Agreement, dated April 16, 1993, between the Company
and Michael S. Bennett (filed as an Exhibit to the Registrant's
Annual 10-K for the fiscal year ended may 31, 1993 (File No. 0-
16071) and incorporated herein by this reference).
10.18 Letter of Credit Agreement dated September 9, 1992, between
Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1993 (File No. 0-16071) and
incorporated herein by this reference).
10.19 Deed of Pledge of Business dated September 9, 1992, between
Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1993 (File No. 0-16071) and
incorporated herein by this reference).
10.20 Acceptance of Subordination dated October 12, 1992, between
Summagraphics N.V. and ABN AMRO Bank (Belgium) N.V. (filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1993 (File No. 0-16071) and
incorporated herein by this reference).
10.21 Amendment No. 1 to the Lease Agreement, dated as of August 27,
1993, between QRS 10-12 (TX), Inc. and QRS (TX), Inc. as landlord
and Summagraphics Corporation, as tenant (filed as an Exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended May 31, 1993 (File No. 0-16071) and incorporated herein by
this reference).
10.22 Employment Modification Agreement dated as of April 25, 1995, by
and between the Company and Michael S. Bennett.
28
10.23 Credit Agreement dated as of July 18, 1994 by and between the
Company and Silicon Valley Bank.
10.24 Security Agreement dated as of December 13, 1994 between the
Company and Heller Financial, Inc.
10.25 Amendment dated as of June 1, 1995 of the Security Agreement
dated as of December 13, 1994 between the Company and Heller
Financial, Inc.
10.26 Asset Purchase Agreement dated as of November 10, 1994 among the
Company, CAD Warehouse, Inc. (a Nevada corporation), CAD
Warehouse, Inc. (a Delaware corporation), John G. Panutsos,
Rosemary Wollet, and David C. Hoffer.
10.27 Amendment No. 1 to Form S-3 Registration Statement under the
Securities Act of 1933 dated April 3, 1995 relating to the
registration of 133,323 shares of the Company's Common Stock.
10.28 Form 8 Amendment No.1 to Form 8-K Report of the Company.
10.29 Amendment No. 2 dated as of April 12, 1995 of the Lease Agreement
dated as of May 28, 1992, by and between QRS 10-12 (TX), Inc. and
QRS 11-5 (TX), Inc. and the Company.
10.30 Manufacturing Agreement dated as of September 13, 1995 between
the Company and Harvard Manufacturing Ventures, LLC.
10.31 License Agreement dated as of July 31, 1995 between the Company
and Sharp Corporation.
22.1 Subsidiaries
27 Financial Data Schedule
29
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
------------------------------------------------------------
The Board of Directors and Shareholders
Summagraphics Corporation:
The audits referred to in our report dated June 27, 1995, except as to Notes 5
and 9 which are as of September 20, 1995, included the related financial
statement schedule as of May 31, 1995, and for each of the years in the three-
year period ended May 31, 1995, included in the annual report of Form 10-K.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Our report refers to a change in the method of accounting for income taxes in
1993.
/s/ KPMG Peat Marwick LLP
Austin, Texas
June 27, 1995
30
SUMMAGRAPHICS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
Balance at
Beginning Charged to Balance at
Description of Period Cost and Expenses Charge Off's End of Period
----------- ---------- ----------------- ------------ -------------
Allowance for
doubtful
receivables:
1993 $ 547,000 $ 818,000 $ (246,000) $1,119,000
1994 $1,119,000 $ 124,000 $ (130,000) $1,113,000
1995 $1,113,000 $ 229,000 $ (388,000) $ 954,000
Balance at
Beginning Charged to Balance at
Description of Period Cost and Expenses Charge Off's End of Period
----------- ---------- ----------------- ------------ -------------
Reserves for
excess & obsolete
inventory:
1993 $4,126,000 $ 716,000 $ (647,000) $4,195,000
1994 $4,195,000 $ 637,000 $ (606,000) $4,226,000
1995 $4,226,000 $1,497,000 $(1,009,000) $4,714,000
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items in the
Consolidated Statements of Operations as percentages of net sales. The table
and the subsequent discussion should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained elsewhere herein.
Percentage of Net Sales
-----------------------
Years Ended May 31, 1993 1994 1995
---- ---- ----
Net Sales 100% 100% 100%
Cost of Sales 64 65 74
--- --- ---
Gross Profit 36 35 26
Selling, general and administrative 37 24 28
Research and development 10 7 9
Restructuring and other charges 10 - 3
--- --- ---
Operating income (loss) (21) 3 (14)
Interest income (expense), net * * (1)
Miscellaneous, net * * *
--- --- ---
Income (loss) before income taxes,
extraordinary gain and cumulative
effect of change in accounting method (21) 3 (15)
Provision for income taxes - - *
--- --- ---
Income (loss) before extraordinary
gain and cumulative effect of
change in accounting method (21) 3 (15)
Extraordinary gain - 1 -
Cumulative effect of change in accounting for
income taxes 1 - -
--- --- ---
Net income (loss) (20) 4 (15)
--- --- ---
* Not meaningful or less than 1%
1995 Compared to 1994
Net sales increased 1% from 1994 to 1995. The net sales increase reflects
record European net sales, positive results of new distribution alliances in
Asia, and an increase in sales by CAD Warehouse. These increases were offset by
a decline in the Company's North American region, due to the accelerating
erosion of the large format pen plotter market, a later-than-planned
introduction of the Company's ink jet plotter (SummaJet), the loss of certain
digitizer OEM business and the final sell out of large format scanners, which
were discontinued in 1994.
The Company's gross profit margin declined to 26% in 1995 from 35% in 1994, due
to high startup and manufacturing costs related to the new large format ink jet
plotter, as well as lower selling prices for the Company's older line of pen
plotters. The reduction in gross margin also reflects the costs, including
severance, of outsourcing the manufacturing of its ink jet product, which is
expected to be completed during the first quarter of fiscal 1996 as well as
significant charges for reserves for obsolete and excess inventories. The
Company signed a manufacturing outsourcing contract in September 1995 for its
ink jet product which it expects will result in improved gross profit margins
for this product in 1996.
32
Selling, general and administrative expenses as a percentage of net sales
increased from 24% or $18,934,000 in 1994 to 28% or $21,940,000 in 1995. This
increase reflects increased promotional costs related to the delayed
introduction of the Company's ink jet plotter and the lower than expected sales
volume generated by the product. Additional selling costs were also incurred on
other products in order to offset the lower revenues of the ink jet product.
The Company expects sales and promotional costs to decline in 1996, but still be
negatively impacted by continued efforts to increase demand for its ink jet
product.
The Company's research and development expenses, as a percentage of net sales,
increased from 7% in 1994 to 9% in 1995 principally due to the increased
spending associated with the development of the new large format ink jet
plotters introduced in 1995, new digitizer products and the conversion of its
SummaChrome product from primarily a paper printer to a vinyl media printer
targeted at the sign making market where the Company's cutter products are sold.
The Company anticipates that its research and development costs, as a percentage
of net sales, will decline in fiscal 1996 due to a reduction in major product
introductions planned for the Company's printer/plotter product lines.
Fourth Quarter 1995 Charges
- ---------------------------
In the fourth quarter of fiscal 1995, the Company incurred various non-
recurring/unusual charges, including charges related to lease abandonment,
manufacturing outsourcing, unusual new product introduction costs and excess
inventory allowances.
A lease abandonment charge of approximately $2.2 million was incurred related to
the Company's decision to move substantially all remaining activities at its
Connecticut facility to Austin, Texas. This charge reflects the remaining lease
obligations, leasehold improvement and operating costs associated with the lease
which expires in November 1998.
The Company incurred approximately $1.4 million in charges, primarily for
severance, related to the outsourcing of its ink jet and large format digitizer
manufacturing and general downsizing of its North American operations.
Delays in the initial introduction and subsequent manufacturing of the SummaJet
product resulted in approximately $2.2 million in charges in the fourth quarter
for air freighting of materials required for production and for delivery to
customers where orders were fulfilled later than requested, price credits to
distributors for in-stock inventories related to competitive price reductions to
which the company responded in the fourth quarter, rework related to adding a
product feature to aid in the marketing of the product, additional promotional
expenses to relaunch the product after the delayed introduction and write downs
of superseded parts inventories.
The Company recorded write-downs for unused fixed assets and for excess and
obsolete parts and products inventories of approximately $3.2 million primarily
related to discontinued and or excess plotter product lines and for parts and
supplies for its large format thermal wax printer that are not required for the
vinyl sign making application to which the product is now targeted.
33
As a result of the factors described above, the Company had an operating loss of
$10,623,000 in 1995 compared to operating income of $2,664,000 in 1994.
Interest expense increased from $421,000 in 1994 to $609,000 in 1995. This
increase reflects an increase in average outstanding debt in 1995 as compared to
1994. The increased debt is related primarily to the increased inventory levels
maintained by the Company in 1995.
The Company had pre-tax loss of $11,412,000 in 1995 versus income of $2,142,000
in 1994.
The Company recorded a deferred tax provision of $187,000 related to one of the
Company's Belgian subsidiaries which was profitable in 1995.
1994 Compared to 1993
Net sales declined 4% from 1993 to 1994. The decline in sales resulted
primarily from a change in channel inventory management practices in North
America, continuing erosion of the large format pen plotter market, primarily as
a result of competition from ink-jet plotters, and the discontinuance of sales
of large format scanners.
The Company's gross profit margin declined from 36% in 1993 to 35% in 1994 due
to lower sales volume, reduced selling prices and increased freight charges
caused by lower inventory levels, offset by cost reductions implemented as part
of the consolidation of the Company's North American manufacturing operations
and generally tighter spending controls.
Selling, general and administrative expenses as a percentage of net sales
decreased from 37% in 1993 to 24% in 1994 despite the decline in net sales. Two
percent of the decline was due to the elimination of approximately $1,950,000 of
litigation expenses incurred in 1993 as a result of the favorable settlement of
a patent litigation suit against the Company in early 1994. The favorable
settlement, net of related expenses resulted in a gain of approximately
$120,000. The absence of large bad debt and intangible asset write-offs were
achieved through a combination of general personnel reductions, elimination of
personnel and expense redundancies as a result of the consolidation of certain
functions at the Company's Texas facility and tighter expense controls in all
areas.
The Company's research and development expenses, as a percentage of net sales,
decreased from 10% in 1993 to 7% in 1994 principally due to general personnel
reductions, tighter spending controls and the absence of major product
development expenditures as incurred in 1993 for products that were introduced
late in 1993 and early 1994.
In 1993, the Company incurred a restructuring charge of $8,487,000. No like
charges were incurred in 1994.
As a result of the factors described above, the Company had operating income for
$2,664,000 in 1994 compared to an operating loss of $16,750,000 in 1993.
Miscellaneous, net, decreased from income of $220,000 in 1993 to an expense of
$206,000 in 1994. This decrease is primarily due to the absence of favorable
foreign currency transaction gains realized in 1993.
34
The Company had pre-tax income of $2,142,000 in 1994 versus a loss of
$16,835,000 in 1993.
In the fourth quarter of 1994 the Company realized a $645,000 extraordinary gain
on the early retirement of its remaining $2,500,000 of 8% convertible
subordinated debt.
Liquidity and Capital Resources
In May 1994, the Company amended its U.S. banking agreement, extending the
expiry date from May 22, 1994 to November 30, 1994.
In July 1994, the Company entered into an eighteen month $8,000,000 revolving
credit agreement (U.S. Credit Agreement) for its U.S. operations with a new
bank, replacing its previous credit agreement.
In November 1994, the Company completed a merger, accounted for as a pooling of
interests, with CAD Warehouse, Inc. a leading mail order marketer of computer
peripherals primarily to the computer aided design market. The consolidated
financial statements, as presented, have been prepared to provide for
retroactive effect of the merger.
In December 1994, the Company entered into a credit agreement to provide capital
expenditure financing in the aggregate amount of $2,500,000. The Company
received funding under this line in the amount of $1,153,000 which is repayable
over a period of three (3) years. In May 1995, the agreement was extended to
August 31, 1995.
During 1995, the Company borrowed approximately $9.3 million under its bank
credit facilities, primarily to fund increases in inventories. The inventory
increase was due primarily to the impact of the delayed sales introduction of
the Company's line of large format ink-jet plotters, a slow-down in demand for
the Company's line of pen plotters caused by several new competing ink jet
products introduced in the latter half of fiscal 1995 and increased cutter
inventories to satisfy a large increase in cutter demand.
In 1995, as a result of its U.S. operating losses and the various charges
described above, the Company violated certain financial covenants with its U.S.
bank, the landlord of its Texas facility and the loan agreement for the
Company's capital expenditures. In September 1995, all parties agreed to waive
all events of default and to revise the respective agreements.
In conjunction with the agreement with the U.S. bank, the credit facility will
be reduced to $7,000,000 and the term of the facility will be extended to
September 30, 1996. The Company cannot receive additional advances under this
facility. In return for the commitment, the Company has agreed to issue, at
current market values, warrants to acquire shares of the Company's common stock
and to provide accelerated repayment of the debt if additional cash proceeds are
generated from certain asset dispositions or issuances of any new subordinated
debt.
The Company's sources of liquidity consist of on-hand cash balances, a
$4,000,000 revolving credit facility in Belgium, the loan agreement for capital
expenditures, vendor credit and cash generated from operations. The Company's
availability under its Belgian bank credit line is calculated based upon
percentages, as determined by the banks, of certain eligible receivables and to
a lesser extent inventories. The Company has $1,347,000 available under its
loan agreement for capital expenditures, but only anticipates utilizing
$200,000 before the expiration date of August 31, 1995. The
35
Company will not have any availability under its current domestic credit
facility. The Company has a substantial investment in inventories for its ink
jet plotter, thermal wax printer and pen plotters. Because of this investment,
the Company will not be required to purchase a substantial portion of the
materials required to build these output devices during the first two quarters
of fiscal 1996.
During the year the Company utilized its cash balances and credit facilities to
fund operations, working capital, capital expenditures and other costs. Charges
against the restructuring reserve established in 1993 totaled $2,081,000 during
1995. The remaining reserves of $1,804,000 relate to leased space at the
Company's former corporate headquarters in Connecticut. The Company expects the
restructuring and lease abandonment reserves to be utilized ratably over the
next four years. The Company estimates substantial savings in 1995 as a result
of the restructuring in 1993.
The Company experienced a significant loss in 1995 as a result of its decision
to abandon its lease in Connecticut, the delayed introduction of a significant
new product, charges related to downsizing operations in North America, write-
offs of idle fixed assets and excess or obsolete inventories and significant
competitive pressures primarily related to its plotter product lines. The
Company has developed a plan to return to profitable levels during fiscal 1996
which include outsourcing certain of its manufacturing and distribution
requirements as well as reducing expenditures in all areas. The waiver received
on the U.S. Credit Agreement was based in part, on management's projections of
future operations and cash flows. The ability of the Company to achieve its
projections is dependent upon various factors, some of which may be outside the
control of the Company. In addition management is considering various
alternatives to raise additional funds including additional debt or equity
financing and/or sales of certain operating assets. However, there can be no
assurance that any such alternatives can be successfully consummated.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on the results
of operations to date. However, since the Company sources a substantial portion
of its production from Far East manufacturers, the cost of imported product is
dependent on the inflation rate in those countries, fluctuations in the value of
the U.S. dollar and import duties or restrictions.
The Company does a substantial portion of its business internationally. The
Company's products are priced in dollars in all North American, Latin American,
Asian and Pacific Rim countries. In Europe, the Company prices its products in
local currencies in Germany, England, France, Belgium and in dollars in other
European and Middle Eastern countries. Approximately 50% of sales are
denominated in local currencies and 50% in dollars. The European operations
incur approximately the same percentages of their expenses in either local
currencies or dollars. Accordingly, the Company believes that it effectively
matches cash inflows and outflows and is not subject to material cash flow
impacts due to currency fluctuations. During the year the devaluation in Mexican
peso has slowed sales to Mexico and caused a slowdown in collection from
customers in Mexico. However, the Company has not experienced nor does it expect
any material write-offs of receivables from this event.
ACCOUNTING FOR ASSET IMPAIRMENT
During March, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived
36
Assets and for Long-Lived Assets To Be Disposed Of." The Company is required to
adopt Statement 121 in the fiscal year beginning June 1, 1996. Statement 121
requires that long-lived assets and certain indentifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has not completed all of the analyses required to
estimate the impact of the new statement, however, the adoption of Statement 121
is not expected to have a material adverse impact on the Company's financial
position or the results of its operations at the time of adoption.
37
SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31, 1993 1994 1995
- ----------------------------------------------------------------------------------------
Net sales $ 81,404,000 $ 77,755,000 $ 78,494,000
Cost of sales 51,772,000 50,526,000 58,188,000
- ----------------------------------------------------------------------------------------
Gross profit 29,632,000 27,229,000 20,306,000
Selling, general and administrative 29,892,000 18,934,000 21,940,000
Research and development 8,003,000 5,631,000 6,761,000
Restructuring, lease abandonment and
other charges (note 2) 8,487,000 - 2,228,000
- ----------------------------------------------------------------------------------------
Operating income (loss) (16,750,000) 2,664,000 (10,623,000)
- ----------------------------------------------------------------------------------------
Other income (expense):
Interest income 124,000 105,000 21,000
Interest expense (429,000) (421,000) (609,000)
Miscellaneous, net 220,000 (206,000) (201,000)
- ----------------------------------------------------------------------------------------
(85,000) (522,000) (789,000)
- ----------------------------------------------------------------------------------------
Income (loss) before income
taxes, extraordinary gain and
cumulative effect of change
in accounting method (16,835,000) 2,142,000 (11,412,000)
Provision for income taxes (note 8) - - 187,000
- ----------------------------------------------------------------------------------------
Income (loss) before extraordinary
gain and cumulative effect of
change in accounting method (16,835,000) 2,142,000 (11,599,000)
Extraordinary gain (note 5) - 645,000 -
Cumulative effect of change in
method of accounting for income taxes 411,000 - -
- ----------------------------------------------------------------------------------------
Net income (loss) $(16,424,000) $ 2,787,000 $(11,599,000)
- ----------------------------------------------------------------------------------------
Net income (loss) per common share:
Income (loss) before extraordinary
gain and cumulative effect of change
in accounting method $ (3.89) $ 0.47 $ (2.56)
Extraordinary gain - 0.14 -
Cumulative effect of change in
method of accounting for income
taxes 0.09 - -
- ----------------------------------------------------------------------------------------
Net income (loss) per common share $ (3.80) $ 0.61 $ (2.56)
- ----------------------------------------------------------------------------------------
Weighted average shares used in computing
net income (loss) per common share 4,323,000 4,519,000 4,537,000
- ----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1994 1995
- --------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 819,000 $ 560,000
Accounts receivable (less allowance for doubtful
accounts of $1,113,000 in 1994 and $954,000 in 1995) 17,914,000 18,039,000
Inventories:
Materials 5,269,000 9,881,000
Work-in process 1,043,000 2,504,000
Finished goods 5,224,000 6,998,000
- --------------------------------------------------------------------------------------------
11,536,000 19,383,000
Prepaid expenses and other current assets 1,117,000 1,136,000
- --------------------------------------------------------------------------------------------
Total current assets 31,386,000 39,118,000
- --------------------------------------------------------------------------------------------
Fixed assets:
Land 290,000 344,000
Building 1,319,000 1,616,000
Machinery and equipment 12,133,000 13,861,000
Furniture and fixtures 1,228,000 1,241,000
Leasehold improvements 1,009,000 1,044,000
Construction-in-progress 187,000 389,000
- --------------------------------------------------------------------------------------------
16,166,000 18,495,000
Less: accumulated depreciation and amortization (9,725,000) (13,188,000)
- --------------------------------------------------------------------------------------------
Net fixed assets 6,411,000 5,307,000
- --------------------------------------------------------------------------------------------
Intangible and other assets, net of accumulated
amortization (note 3) 9,509,000 9,176,000
- --------------------------------------------------------------------------------------------
$ 47,336,000 $ 53,601,000
- --------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 9,583,000 $ 12,500,000
Accrued liabilities (notes 2 and 4) 9,274,000 10,619,000
Notes payable (note 5) - 9,548,000
Current portion of long-term debt (note 5) 148,000 561,000
Current obligations under capital leases 458,000 277,000
- --------------------------------------------------------------------------------------------
Total current liabilities 19,463,000 33,505,000
- --------------------------------------------------------------------------------------------
Long-term liabilities, less current portion:
Long-term debt (note 5) 947,000 1,579,000
Capital lease obligations 535,000 282,000
Deferred gain on sale of building 510,000 476,000
Deferred tax liability (note 8) - 498,000
Restructuring, lease abandonment and other charges
(note 2) 1,804,000 2,857,000
- --------------------------------------------------------------------------------------------
Total long-term liabilities 3,796,000 5,692,000
- --------------------------------------------------------------------------------------------
Commitments and contingencies (note 9)
Stockholders' equity (note 6):
Preferred stock, $.01 par value, authorized
5,000,000 shares - -
Common stock, $.01 par value, authorized 20,000,000
shares, issued 4,546,000 shares in 1994 and
4,645,000 shares in 1995 45,000 46,000
Additional paid-in capital 38,639,000 39,111,000
Retained earnings (accumulated deficit) (13,830,000) (25,879,000)
Cumulative translation adjustment (302,000) 1,601,000
- --------------------------------------------------------------------------------------------
24,552,000 14,879,000
- --------------------------------------------------------------------------------------------
Less: Treasury stock, at cost - 49,000 shares in
1994 and 1995 (465,000) (465,000)
Stockholder note receivable (10,000) (10,000)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 24,077,000 14,404,000
- --------------------------------------------------------------------------------------------
$ 47,336,000 $ 53,601,000
See accompanying notes to financial statements.
39
SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
---------------------
Number of Additional Paid-in Retained Earnings
Years ended May 31, 1993, 1994 and 1995 Shares Amount Capital (Accumulated Deficit)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1992 4,268,000 $43,000 37,921,000 1,213,000
Sale of common stock 146,000 1,000 58,000 -
Sale of common stock pursuant to the 1987
Employee Stock Plan 3,000 - 18,000 -
Imputed benefit from the granting of options
below fair market value - - 75,000 -
Sale of common stock pursuant to the 1988
Employee Stock Purchase Plan 59,000 1,000 276,000 -
Awards granted pursuant to the 1987 stock
plan 5,000 - 35,000 -
Net loss - - - (16,424,000)
Sale of treasury stock at $8.00 per share - - 14,000 -
Purchase of treasury stock at $7.69 per share - - - -
Unrealized translation loss - - - -
Dividends paid to stockholders of CAD
Warehouse, Inc., an S-corporation - - - (450,000)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1993 4,481,000 45,000 38,397,000 (15,661,000)
- -----------------------------------------------------------------------------------------------------------------------
Sale of common stock pursuant to the 1987
Employee Stock Plan 11,000 - 42,000 -
Sale of common stock pursuant to the 1988
Employee Stock Purchase Plan 47,000 - 165,000 -
Awards granted pursuant to the 1987 stock
plan 7,000 - 35,000 -
Net income - - - 2,787,000
Unrealized translation loss - - - -
Dividends paid to stockholders of CAD
Warehouse, Inc., an S-corporation - - - (956,000)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1994 4,546,000 45,000 38,639,000 (13,830,000)
- -----------------------------------------------------------------------------------------------------------------------
Sale of common stock pursuant to the 1987
Employee Stock Plan 59,000 1,000 304,000 -
Sale of common stock pursuant to the 1988
Employee Stock Purchase Plan 37,000 - 150,000 -
Awards granted pursuant to the 1987 stock
plan 3,000 - 18,000 -
Net loss - - - (11,599,000)
Unrealized translation gain - - - -
Dividends paid to stockholders of CAD
Warehouse, Inc., an S-corporation - - - (450,000)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1995 4,645,000 $46,000 39,111,000 (25,879,000)
- -----------------------------------------------------------------------------------------------------------------------
Cumulative Translation Treasury Stock and Stockholders'
Years ended May 31, 1993, 1994 and 1995 Adjustment Stockholder Note Equity
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1992 154,000 (292,000) 39,039,000
Sale of common stock - - 59,000
Sale of common stock pursuant to the 1987
Employee Stock Plan - - 18,000
Imputed benefit from the granting of options
below fair market value - - 75,000
Sale of common stock pursuant to the 1988
Employee Stock Purchase Plan - - 277,000
Awards granted pursuant to the 1987 stock
plan - - 35,000
Net loss - - (16,424,000)
Sale of treasury stock at $8.00 per share - 186,000 200,000
Purchase of treasury stock at $7.69 per share - (369,000) (369,000)
Unrealized translation loss (147,000) - (147,000)
Dividends paid to stockholders of CAD
Warehouse, Inc., an S-corporation - - (450,000)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1993 7,000 (475,000) 22,313,000
- -----------------------------------------------------------------------------------------------------------------------
Sale of common stock pursuant to the 1987
Employee Stock Plan - - 42,000
Sale of common stock pursuant to the 1988
Employee Stock Purchase Plan - - 165,000
Awards granted pursuant to the 1987 stock
plan - - 35,000
Net income - - 2,787,000
Unrealized translation loss (309,000) - (309,000)
Dividends paid to stockholders of CAD
Warehouse, Inc., an S-corporation - - (956,000)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1994 (302,000) (475,000) 24,077,000
- -----------------------------------------------------------------------------------------------------------------------
Sale of common stock pursuant to the 1987
Employee Stock Plan - - 305,000
Sale of common stock pursuant to the 1988
Employee Stock Purchase Plan - - 150,000
Awards granted pursuant to the 1987 stock
plan - - 18,000
Net loss - - (11,599,000)
Unrealized translation gain 1,903,000 - 1,903,000
Dividends paid to stockholders of CAD
Warehouse, Inc., an S-corporation - - (450,000)
- -----------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1995 1,601,000 (475,000) 14,404,000
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
SUMMAGRAPHICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31, 1993 1994 1995
- --------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (16,424,000) $ 2,787,000 $(11,599,000)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Gain on retirement of debt - (645,000) -
Cumulative effect of change in
accounting method (411,000) - -
Depreciation and amortization 5,536,000 3,580,000 3,629,000
Restructuring, lease abandonment and
other charges 8,487,000 - 2,228,000
(Gain) loss on sale of fixed assets 253,000 (4,000) 14,000
Compensation in form of stock 110,000 35,000 18,000
Changes in assets and liabilities:
Accounts receivable 2,360,000 34,000 864,000
Inventories (1,111,000) 644,000 (6,985,000)
Prepaid and other current assets 126,000 (8,000) 56,000
Accounts payable (1,424,000) 4,465,000 2,670,000
Accrued liabilities (198,000) (4,828,000) 883,000
Other liabilities - (321,000) 18,000
- --------------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (2,696,000) 5,739,000 (8,204,000)
- --------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (2,782,000) (1,528,000) (1,927,000)
Proceeds from sale of fixed assets 29,000 55,000 10,000
Intangible assets (516,000) 38,000 644,000
- --------------------------------------------------------------------------------------
Net cash used in investment
activities (3,269,000) (1,435,000) (1,273,000)
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (450,000) (956,000) (450,000)
Proceeds from long-term borrowings 983,000 - 855,000
Proceeds from short-term borrowings 2,805,500 - 9,323,000
Proceeds from sales of common stock 354,000 208,000 455,000
Purchases of treasury stock (369,000) - -
Repayment of short-term debt - (2,805,000) -
Repayment of long-term debt and capital - - -
lease obligations (2,864,000) (2,623,000) (466,000)
- --------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities 458,000 (6,176,000) 9,717,000
- --------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (322,000) 42,000 (499,000)
- --------------------------------------------------------------------------------------
Net change in cash (5,828,000) (1,830,000) (259,000)
Cash at beginning of year 8,477,000 2,649,000 819,000
- --------------------------------------------------------------------------------------
Cash at end of year $ 2,649,000 $ 819,000 $ 560,000
- --------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31,1993, 1994, and 1995 Summagraphics Corporation and Subsidiaries
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Company is primarily engaged in the manufacture and sale of digitizing
tablets (computer input devices), and plotters (computer output devices). These
products are used in applications with high performance computer graphics
systems such as computer-aided design (CAD). The Company engages in the
manufacture and sale of cutters. The Company also owns a mail-order distributor
of CAD related equipment and software. The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly owned. All significant intercompany balances and transactions have been
eliminated.
Cash Equivalents
For the purpose of cash flows, the Company considers all highly liquid
investments with maturities of three (3) months or less to be cash equivalents.
The Company had no cash equivalents at May 31, 1994 and 1995.
Inventories
Inventories are stated at the lower of cost or market. Cost is applied on a
first-in, first-out (FIFO) basis; market is determined on the basis of estimated
net realizable value. The Company reserves for inventory that is determined to
be obsolete or substantially in excess of forecasted demand.
Fixed Assets
Fixed assets acquired are stated at cost. Equipment and furniture under capital
leases are stated at the lower of the present value of future minimum lease
payments or fair value at the inception of the lease.
Building depreciation is provided on the straight-line method over a period of
fifteen (15) years, depreciation of furniture and fixtures and machinery and
equipment (including amortization of assets covered by capital leases) is
provided on the straight-line method, based on estimated useful lives ranging
from three (3) to ten (10) years. Amortization of leasehold improvements is
provided over the lesser of estimated useful life of the improvement or the life
of the lease. Maintenance and repairs are charged to operations as incurred;
significant betterments are capitalized.
Intangible Assets
Goodwill represents the amount by which the cost to purchase Houston Instrument
exceeded the fair market value of the related net assets. The Company assesses
the recoverability of its intangible assets by determining whether the
amortization of the intangible asset balance over its remaining life can be
recovered through projected future operating cash flows before interest over the
remaining amortization period. As a result of this ongoing review, the Company
reduced the original life of the goodwill from forty (40) to twenty-five (25)
years. The effect of the change in fiscal 1995, which was recorded
prospectively, is $53,000.
Other acquired identifiable intangible assets are amortized using the straight-
line method over lives not exceeding seven and one-half (7.5) years.
42
WARRANTY RESERVE
The Company provides warranties on its products for various periods. The
Company reserves for future warranty costs based on historical failure rates and
repair costs.
REVENUE RECOGNITION
The Company recognizes revenue when product is shipped to customers. Under
contract, certain customers may return a small percentage of the prior quarter's
net purchases provided the product is in resale condition and a new order of
equal value is placed for delivery within thirty (30) days. The Company carries
reserves for these and other returns based on historical trends.
INCOME TAXES
Effective June 1, 1992, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Prior to June 1, 1992, the Company recorded taxes under the provisions set forth
in Statement of Financial Accounting Standards No. 96.
PER SHARE DATA
Net income (loss) per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
stock options and warrants, calculated by using the Treasury Stock method.
FOREIGN EXCHANGE
Assets and liabilities of foreign subsidiaries generally are translated into
U.S. Dollars at exchange rates in effect at the end of the year whereas revenues
and expenses are translated using average exchange rates that prevailed during
the year. Gains and losses that result from this process are shown as an
adjustment in stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to conform to prior years' data to the
current presentation.
BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared to give
retroactive effect to the merger with CAD Warehouse, Inc., an S - Corporation,
on November 10, 1994 in exchange for 510,000 shares of the Company's common
stock. The merger was accounted for using the pooling of interest method.
NOTE 2: RESTRUCTURING, LEASE ABANDONMENT AND OTHER CHARGES
In the fourth quarter of 1993, the Company incurred an $8,487,000 restructuring
charge in response to the difficult worldwide economic conditions as well as to
maximize cost efficiencies. The restructuring charge was provided to cover
costs of reductions in workforce, and the relocation of the Company's
Connecticut manufacturing operations to its Texas facility. The charge included
a provision of $248,000 for fixed assets write-downs due to the consolidation,
$2,606,000 of lease and leasehold improvement costs for the unused portion of
its Connecticut facility, $2,629,000 for severance and related charges due to a
43
fifteen percent (15%) reduction of workforce in June, 1993, and $1,636,000 for
manufacturing consolidation costs consisting of moving, relocation, and
severance. At May 31, 1995, $1,804,000 of this liability, related to the
Connecticut lease, remained. This remaining amount will be utilized over the
approximately four (4) years remaining on the lease.
In the fourth quarter of 1995, the Company decided to abandon its leased
facility in Connecticut, and accordingly recorded a liability of $2,228,000
related to the furtherance of the Company's consolidation of operations to
Austin, Texas. This abandoned lease liability relates to the remaining lease
and leasehold improvement costs associated with the Company's Connecticut
facility. This liability will be funded over the approximately four (4) years
remaining on the lease.
NOTE 3: INTANGIBLE AND OTHER ASSETS
Significant components of intangible and other assets at May 31, 1994 and 1995
are as follows:
1994 1995
==== ====
Goodwill $9,570,000 $9,912,000
Other acquired intangibles 2,789,000 2,941,000
========== ==========
12,359,000 12,853,000
Less accumulated amortization 3,232,000 3,903,000
========== ==========
9,127,000 8,950,000
Other assets 382,000 226,000
========== ==========
$9,509,000 $9,176,000
========== ==========
NOTE 4: ACCRUED LIABILITIES
Significant components of accrued liabilities at May 31, 1994 and 1995 are as
follows:
1994 1995
==== ====
Payroll and other compensation $1,461,000 $1,223,000
Federal, state, foreign, and payroll
withholding taxes 774,000 444,000
Sales returns and allowances 1,040,000 3,026,000
Restructuring and lease abandonment costs 2,081,000 1,039,000
Other 3,918,000 4,887,000
========== ==========
$9,274,000 $10,619,000
========== ==========
44
NOTES 5: INDEBTEDNESS AND LIQUIDITY
A. Long-Term Debt
Long-term debt at May 31, 1994 and 1995 consists of the following:
1994 1995
==== ====
Convertible subordinated note (i) $ - $ -
Other (ii) 1,095,000 2,140,000
========== ==========
1,095,000 2,140,000
Less current portion 148,000 561,000
========== ==========
$ 947,000 $1,579,000
The aggregate maturities of long-term debt are as follows:
1996 $ 561,000
1997 490,000
1998 352,000
1999 105,000
2000 and thereafter 632,000
==========
$2,140,000
==========
(i) Convertible Subordinated Note
In connection with the acquisition of Houston Instrument, the Company issued to
the seller an 8%, five-year, interest only, $5,000,000 convertible subordinated
note due on May 1, 1995. The note was convertible at anytime after May 1, 1991
into 333,333 shares of common stock of the Company at $15.00 per share, subject
to adjustment, through the exercise of attached warrants. In July, 1992, the
Company exercised its option to prepay $2,500,000, thereby reducing the
remaining note balance to $2,500,000. In May, 1994, the Company repurchased the
note (with a remaining balance of $2,500,000) for $1,800,000, resulting in an
extraordinary gain of $645,000. In connection with the note repayment, the
Company canceled the existing 333,000 warrants and issued 300,000 new warrants
to purchase shares of the Company's common stock (150,000 of which expired on
May 1, 1995 and 150,000 of which are exercisable at $9.00 a share, subject to
adjustment, and expire on May 1, 1997).
(ii) Other
Consists of local borrowings of a Belgian subsidiary, including a $1,054,000
mortgage due in the year 2005, on the subsidiary's facility in Gistel, Belgium.
Interest rates on this debt range from 7.55% to 10% per annum.
Also, in December 1994, the Company entered into a loan agreement (Loan
Agreement) that provides financing for capital expenditures through May 31,
1995, to a maximum amount of $2,500,000. The Company received funding under
this agreement in the amount of $1,153,000, through May 31, 1995, which is
payable over a period of three (3) years at a rate based on London InterBank
Offered Rate (LIBOR). In May 1995, the agreement was extended to August 31,
1995. Under the terms of the agreement, the Company is subject to certain
covenants and restrictions. At May 31, 1995, the Company was in default with
respect to certain of the covenants. On September 18, 1995, the Company
executed an agreement which waives the existing
45
events of default and provides for amendments to the financial covenants
acceptable to both the lender and the Company.
B. REVOLVING CREDIT AGREEMENTS
On October 12, 1992, one of the Company's Belgian subsidiaries entered into a
$4,000,000 Credit Agreement. This agreement has no defined expiry date and
requires the bank to give six (6) months notice of termination, if no defaults
exist. Borrowings under this agreement may be in the form of various bank
instruments, in various currencies and at various rates, at the Company's
option, and are secured by essentially all of the subsidiary's assets except
real property. Under the terms of the agreement, the subsidiary is subject to
certain covenants and restrictions. As of May 31, 1995, the subsidiary was in
compliance with all covenants and restrictions. At May 31, 1995, $1,452,000 was
available under this agreement.
In July, 1994, the Company entered into an $8,000,000 Credit Agreement (U.S.
Credit Agreement) with a new bank replacing the $6,000,000 facility in place at
May 31, 1994. Under the terms of the agreement, the Company is subject to
certain covenants and restrictions. Borrowings under this agreement may be in
the form of various bank instruments at rates based on the bank's base rate and
are secured by substantially all of the Company's North American assets. At May
31, 1995, the Company was in default under the terms of the Credit Agreement.
On September 18, 1995 the Company received a commitment to amend the existing
Credit Agreement to extend the maturity date to September 30, 1996, waive the
existing events of default, reduce the facility to $7,000,000, and to adjust the
facility pricing and covenants and restrictions. At May 31, 1995, there was no
incremental availability under this agreement. In return for the commitment, the
Company has agreed to issue, at market value, warrants to acquire shares of the
Company's common stock and to apply a portion of proceeds from certain cash
inflows outside the ordinary course of business, if any, to outstanding
principal.
C. LIQUIDITY
The Company experienced a significant loss in 1995 as a result of its decision
to abandon its lease in Connecticut, the delayed introduction of a significant
new product, charges related to downsizing operations in North America, write-
offs of idle fixed assets and excess or obsolete inventories and significant
competitive pressures primarily related to its plotter product lines. The
Company has developed a plan to return to profitable levels during fiscal 1996
which include outsourcing certain of its manufacturing and distribution
requirements as well as reducing expenditures in all areas. The waiver received
on the U.S. Credit Agreement was based in part, on management's projections of
future operations and cash flows. The ability of the Company to achieve its
projections is dependent upon various factors, some of which may be outside the
control of the Company. In addition, management is considering various
alternatives to raise additional funds including additional debt or equity
financing and/or sales of certain operating assets. However, there can be no
assurance that any such alternatives can be successfully consummated.
NOTE 6: STOCKHOLDERS' EQUITY
A. COMMON STOCK RESERVED
The following shares of common stock are reserved for issuance at May 31,
1995:
Stock option plans:
Employee stock plan 1,213,000
46
Non-employee director stock option plan 75,000
Performance unit plan 50,000
=========
1,338,000
Warrants 150,000
Employee stock purchase plan 35,000
=========
1,523,000
=========
B. Stock Option Plans
The Company's 1987 Stock Option Plan provides for the granting to directors,
consultants, officers, and other employees of options to purchase a total of
1,350,000 shares of common stock.
The Company's 1988 Non-Employee Director Stock Option Plan ("Directors' Plan")
for outside directors provides for the issuance of options for 75,000 shares of
common stock exercisable for a period of ten (10) years from date of the option
grant. Under the Directors' Plan, each member of the Board of Directors
("Board") who is neither an employee nor an officer of the Company will be
automatically granted on October 31 of each year an option to purchase 3,000
shares of the Company's common stock.
In addition to these two plans, the Board may also grant qualified and non-
qualified options, stock purchase rights, and stock awards.
Any options, awards, etc., granted under these plans are required to be at
prices which are not less than the fair market value per share of common stock
on the date of grant. The options, awards, etc., shall either be fully
exercisable on the date of grant or shall become exercisable thereafter in such
installments as the Board may specify. Each option shall expire on the date
specified by the Board, subject to earlier termination provisions, but not more
than, under 1987 Stock Plan, ten (10) years and one day and, under the
Directors' Plan, ten (10) years, from the date of grant.
A summary of changes in stock issuable under employee and non-employee option
plans follows:
Range of
Shares Exercise Prices
====== ================
Outstanding at May 31, 1992 501,000 $6.00 - $13.25
Granted 285,000 3.75 - 9.00
Exercised (8,000) 4.00 - 9.00
Canceled (152,000) 7.00 - 12.00
========= ==================
Outstanding at May 31, 1993 626,000 3.75 - 13.25
Granted 543,000 .01 - 7.13
Exercised (18,000) 3.50 - 7.13
Canceled (202,000) 3.13 - 11.50
========= ==================
Outstanding at May 31, 1994 949,000 .01 - 13.25
Granted 182,000 3.13 - 8.63
Exercised (62,000) 3.13 - 8.00
Canceled (225,000) 3.13 - 13.25
========= ==================
Outstanding at May 31, 1995 844,000 $.01 - $9.00
========= ==================
At May 31, 1995, 424,000 options were exercisable at prices ranging from $.01 to
$9.00 a share.
47
C. Employee Stock Purchase Plan
The 1988 Employee Stock Purchase Plan which was approved by stockholders in
1989, provides that eligible employees may authorize payroll deductions between
2% and 10% of their regular pay to purchase up to a maximum of 2,000 shares of
the Company's common stock in a fiscal year. The purchase price of the stock is
the lesser of 85% of the average market price of the Company's common stock on
either the first or last business day of the Payment Period. Payment Periods
begin on June 1 and December 1 each year. The aggregate number for shares which
may be purchased under this plan is 250,000, of which 215,000 have been
purchased to date.
D. Performance Unit Plan
The 1989 Performance Unit Plan which was approved by stockholders in fiscal
1990, provides that officers and key employees of the Company may be granted
performance units by the Board or a committee comprised of at least three (3)
Board members (no such committee has been appointed). Performance units, which
are the equivalent of $100 each, may be granted either in cash or shares of
common stock or any combination thereof, to participants upon the attainment of
certain achievement objectives as established by the Board. No performance
units have been granted to date.
NOTE 7: FOREIGN AND DOMESTIC OPERATIONS, EXPORT SALES, AND MAJOR CUSTOMERS
Sales, operating income (loss), and identifiable assets of the Company by
geographical area are as follows:
Years Ended May 31, 1993 1994 1995
---- ---- ----
Sales to unaffiliated customers:
United States $ 45,147,000 $ 42,175,000 $ 34,228,000
Europe 21,881,000 21,435,000 27,381,000
Other 14,376,000 14,145,000 16,885,000
============ ============ ============
$ 81,404,000 $ 77,755,000 $ 78,494,000
============ ============ ============
Operating Income (Loss):
United States $(11,367,000) $ 1,426,000 $ (9,647,000)
Europe (4,255,000) 954,000 2,208,000
Other (1,128,000) 284,000 (3,184,000)
============ ============ ============
$(16,750,000) $ 2,664,000 $(10,623,000)
============ ============ ============
Balance at May 31, 1993 1994 1995
---- ---- ----
Identifiable Assets:
United States $ 38,237,000 $ 35,082,000 $ 34,898,000
Europe 20,066,000 18,751,000 21,987,000
Eliminations (6,028,000) (6,497,000) (3,284,000)
============ ============ ============
$ 52,275,000 $ 47,336,000 $ 53,601,000
============ ============ ============
During 1993, 1994, and 1995, export sales were $14,376,000, $14,145,000, and
$16,885,000, respectively. No one customer accounted for greater than ten
percent (10%) of net sales in any of these years.
48
NOTE 8: INCOME TAXES
A $187,000 provision for income taxes was recorded in 1995 (none was recorded in
1994 or 1993). The provision (benefit) for income taxes consists of the
following for 1993, 1994, and 1995:
Year ended May 31, 1993 Current Deferred Total
------- -------- -----
Federal $(411,000) $ 789,000 $ 378,000
State - (88,000) (88,000)
Foreign - (290,000) (290,000)
========= ========= =========
Total $(411,000) $ 411,000 $ -
========= ========= =========
Year ended May 31, 1994 Current Deferred Total
------- -------- -----
Federal $ - $ - $ -
State - - -
Foreign - - -
========= ========= =========
Total $ - $ - $ -
========= ========= =========
Year ended May 31, 1995 Current Deferred Total
------- -------- -----
Federal $(400,000) $ - $(400,000)
State - - -
Foreign 21,000 566,000 587,000
========== ========== =========
Total $(379,000) $ 566,000 $ 187,000
========== ========== ==========
Effective June 1, 1992, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
The components of the net deferred tax asset (liability) as of May 31, 1994 and
1995 were as follows:
U.S. Federal
As of May 31, 1994 & State Foreign
------------ -------
Deferred tax assets:
Other assets $ 328,000 $ -
Inventory reserves 1,495,000 -
Restructuring accruals 1,261,000 354,000
Other miscellaneous items 1,180,000 197,000
Tax credit carryforwards 1,986,000 -
Net operating loss carryforwards 1,708,000 2,085,000
Valuation allowance (7,440,000) (901,000)
=========== ===========
Total deferred tax asset 518,000 1,735,000
Deferred tax liabilities:
Property, Plant, and Equipment 518,000 -
Tax deductible goodwill - 1,735,000
=========== ===========
Total deferred tax liability 518,000 1,735,000
=========== ===========
Net deferred tax asset (liability) $ - $ -
=========== ===========
49
U.S. Federal
As of May 31, 1995 & State Foreign
Deferred tax assets:
Other assets $ 944,000 $ 153,000
Inventory and warranty reserves 1,792,000 -
Restructuring accruals 2,283,000 51,000
Accounts receivable and return reserves 1,201,000 -
Tax credit carryforwards 1,689,000 -
Net operating loss carryforwards 3,598,000 2,361,000
Valuation allowance (10,518,000) (79,000)
============ ===========
Total deferred tax asset 989,000 2,486,000
============ ===========
Deferred tax liabilities:
Property, plant, and equipment 989,000 -
Tax deductible goodwill - 2,984,000
Total deferred tax liability 989,000 2,984,000
============ ===========
Net deferred tax asset (liability) $ - $ (498,000)
============ ===========
The valuation allowance for deferred tax assets as of June 1, 1994 was
$8,341,000. The net change in the valuation allowance for the year ended May
31, 1995 was an increase of $2,256,000. Subsequently recognized tax benefits
relating to the valuation allowance for deferred tax assets as of May 31, 1995
will be allocated as follows:
Income tax benefit that would be reported in the
consolidated statement of operations $ 10,343,000
Goodwill 254,000
===============
$ 10,597,000
===============
The provision for income taxes varies from the amounts computed by applying the
U.S. Federal Income Tax rate of thirty-four percent (34%) as follows:
1993 1994 1995
Amount % Amount % Amount %
------ - ------ - ------ -
Computed "expected" tax
expense (benefit) $(5,724,000) (34.0) $ 947,000 34.0 $(3,880,000) (34.0)
Increase (reduction)
resulting from:
Benefit of Subchapter S
Corporation status (169,000) (1.0) (333,000) (11.9) (156,000) (1.4)
Change in the beginning of
the year balance of the
valuation allowance for
deferred tax assets
allocated to income tax
expense 6,298,000 37.4 (690,000) (24.8) 2,256,000 19.8
Differing foreign tax rates (166,000) (1.0) 57,000 2.0 104,000 0.9
State taxes-net of federal
benefit (223,000) (1.3) - - - -
Amortization of goodwill 28,000 .2 26,000 .9 2,099,000 18.4
Other differences (44,000) (.3) (7,000) (.2) (236,000) (2.1)
============= ====== ========= ===== =========== =====
$ - - $ - - $ 187,000 1.6
============= ====== ========= ===== =========== =====
50
At May 31, 1995, the Company had available NOL carryforwards of approximately
$10,584,000 and $5,874,000 for U.S. and foreign tax reporting purposes,
respectively. The NOL carryforwards for tax reporting purposes expire in
varying amounts in the U.S. through the year 2009. The NOL's in foreign
jurisdictions carryforward indefinitely. Further, the Company has general
business credit carryforwards of approximately $669,000 which expire through the
year 2007, foreign tax credits of $514,000 which expire through the year 2000,
and alternative minimum tax carryforwards of $322,000 which have no expiration
dates.
U.S. and foreign income (loss) from operations before federal, state, and
foreign income taxes are as follows:
1993 1994 1995
U.S. $(13,759,000) $ 2,326,000 $(13,034,000)
Foreign (3,076,000) 461,000 1,622,000
============ =========== ============
$(16,835,000) $ 2,787,000 $(11,412,000)
============ =========== ============
The Company is currently undergoing an audit of its 1991 through 1993 U.S.
Federal income tax returns. There have been no material deficiencies asserted
by the IRS for the audit to date.
NOTE 9: COMMITMENTS AND CONTINGENCIES
A. Leases
In May, 1992, the Company concluded a sale and leaseback of its Austin, Texas
facility. The Company recorded a $612,000 gain on the sale which was deferred
and is being amortized over the lease term. The lease is an eighteen (18) year
operating lease expiring in the year 2010. The lease provides for a fixed
rental charge, plus additional rent based on increases in the Consumer Price
Index. Under the terms of the agreement, the Company is subject to certain
covenants and restrictions. At May 31, 1995, the Company was in default with
certain of the covenants. On September 20, 1995, the lessor committed to waive
defaults at May 31, 1995 and to forbear against exercising remedies to financial
covenant violations in exchange for commitments to specific performance by the
Company through August 31, 1996.
The Company leases various assets used in its operations, primarily buildings
and equipment. Substantially all of the leases provide that the Company pay for
maintenance and insurance.
Future minimum lease payments for leased capital assets total $607,000 of which
$48,000 represents interest. Capital leases and non-cancelable operating
leases, exclusive of the Connecticut facility, at May 31, 1995 require the
following annual minimum lease payments:
51
Capital Operating
Leases Leases
------- ---------
1996 $312,000 $ 1,049,000
1997 270,000 1,009,000
1998 25,000 946,000
1999 - 899,000
2000 - 865,000
Later years - 8,626,000
======== ===========
$607,000 $13,394,000
======== ===========
Rental expense on operating leases for 1993, 1994, and 1995 was $1,803,000,
$1,530,000 and $1,686,000, respectively. The original cost and net book value
of furniture and equipment under capital lease at May 31, 1995 was $1,776,000
and $164,000, respectively.
B. Employee 401 (k) Plan
The Company's 401(k) Plan covers all full-time employees who have completed six
(6) months of continuous employment and are eighteen (18) years of age or older.
Under the terms of the plan an employee may contribute up to twenty percent
(20%) of annual compensation, up to five percent (5%) of which will be matched
by the Company at 25%, 50%, 75% or 100% of the employee contribution depending
on years of service. Employee contributions vest fully upon contribution while
employer contributions vest twenty percent (20%) per year. Employer
contributions for 1993, 1994, and 1995 were $268,000, $0 and $0, respectively.
Additional contributions may be authorized by the Board of Directors predicated
on Company performance.
C. Litigation
The Company is party to various legal actions and administrative proceedings and
subject to various claims arising in the normal course of business. The Company
believes that the disposition of these matters will not have a material adverse
effect on its financial position or results of operations taken as a whole.
NOTE 10: SUPPLEMENTARY CASH FLOW INFORMATION AND OTHER
For the years ended May 31, 1993, 1994, and 1995 certain supplementary cash flow
information follows:
1993 1994 1995
-------- -------- --------
Cash paid during the year for:
Interest $450,000 $421,000 $609,000
Income taxes $499,000 $ - $ -
Non-cash financing activities,
capital leases $693,000 $175,000 $ 15,000
In the fourth quarter of fiscal 1995, the Company incurred various non-
recurring/unusual charges, including charges related to lease abandonment,
manufacturing outsourcing, unusual new product introduction costs and excess
inventory allowances which aggregated approximately $9 million.
52
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Summagraphics Corporation:
We have audited the accompanying consolidated balance sheets of Summagraphics
Corporation and subsidiaries as of May 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended May 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Summagraphics
Corporation and subsidiaries as of May 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in note 8 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1993.
/s/ KPMG Peat Marwick LLP
Austin, Texas
June 27, 1995, except as to notes 5 and 9
which are as of September 20, 1995.
53
Summagraphics Corporation and Subsidiaries
Selected Financial Information
(000s omitted, except per share data) 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------
Statement of Operations Data:
Net sales $ 80,794 $ 77,295 $ 81,404 $ 77,755 $ 78,494
Operating income (loss) 7,644 810 (16,750) 2,664 (10,623)
Income (loss) before extraordinary
gain and cumulative effect of change
in accounting method 4,673 (1,231) (16,835) 2,142 (11,599)
Extraordinary gain - - - 645 -
Cumulative effect of change in
accounting for income taxes - - 411 - -
Net income (loss) 4,673 (1,231) (16,424) 2,787 (11,599)
Net income (loss) per common share:
Income (loss) before extraordinary
gain and cumulative effect of change
in accounting method 1.14 (0.30) (3.89) 0.47 (2.56)
Extraordinary gain - - - 0.14 -
Cumulative effect of change in
accounting for income taxes - - 0.09 - -
Net income (loss) per common share $ 1.14 $ (0.30) $ (3.80) $ 0.61 $ (2.56)
Weighted average shares used in
computing net income (loss) per
common share 4,116 4,113 4,323 4,519 4,537
Balance Sheet Data:
Working capital $ 16,421 $ 23,982 $ 11,329 $ 11,923 $ 5,613
Total assets 59,594 61,086 52,276 47,336 53,601
Long-term debt 5,370 5,261 3,627 947 1,579
Retained earnings (accumulated deficit) 2,443 1,213 (15,661) (13,830) (25,879)
Stockholders' equity $ 39,519 $ 39,039 $ 22,314 $ 24,077 $ 14,404
- --------------------------------------------------------------------------------------------------
Quarterly Results of Operations
(000s omitted, except per share data)
1994 Aug. 31 Nov. 30 Feb. 28 May 31
- --------------------------------------------------------------------------------------------------
Net sales $ 17,130 $ 19,479 $ 19,460 $ 21,686
Operating income (loss) (566) 1,038 852 1,330
Income (loss) before income taxes and
extraordinary gain (708) 910 679 1,261
Extraordinary gain - - - 645
Net income (loss) (725) 927 679 1,906
Net income (loss) per common share:
Income (loss) before extraordinary
gain (0.16) 0.21 0.15 0.27
Extraordinary gain - - - 0.14
Net income (loss) per common share $ (0.16) $ 0.21 $ 0.15 $ 0.41
- --------------------------------------------------------------------------------------------------
1995 Aug. 31 Nov. 30 Feb. 28 May 31
- --------------------------------------------------------------------------------------------------
Net sales $ 18,651 $ 20,419 $ 22,273 $ 17,151
Operating income (loss) 294 487 516 (11,920)
Income (loss) before income taxes 303 384 180 (12,279)
Net income (loss) 303 384 180 (12,466)
Net income (loss) per common share $ 0.06 $ 0.08 $ 0.04 $ (2.74)
- --------------------------------------------------------------------------------------------------
Note - The Consolidated Financial Statements of the Company have been restated
- ----
to give retroactive effect to the merger with CAD Warehouse, Inc. (See note 1 of
Notes to the Consolidated Financial Statements).
54
COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG SUMMAGRAPHICS CORPORATION,
NASDAQ US INDEX AND NASDAQ COMPUTER MANUFACTURERS
Indexed to 5/31/90
NASDAQ US Index NASDAQ Computer Manufacturers Summagraphics
$ 100 $ 100 $ 100
$ 114 $ 115 $ 110
$ 133 $ 126 $ 59
$ 160 $ 153 $ 31
$ 169 $ 125 $ 56
$ 201 $ 185 $ 23
[GRAPH APPEARS HERE]
55