PINNACLE SYSTEMS, INC.
------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held October 28, 1997
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of PINNACLE
SYSTEMS, INC., a California corporation (the "Company"), will be held on
Tuesday, October 28, 1997 at 1:00 p.m. local time, at 280 N. Bernardo Avenue,
Mountain View, California 94043 for the following purposes:
1. To elect six directors to serve until the next Annual Meeting of
Shareholders and until their successors are elected.
2. To approve an amendment to the 1996 Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
365,000 shares.
3. To ratify the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the fiscal year ending June 30, 1998.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only shareholders of record at the close of
business on September 12, 1997 are entitled to notice of and to vote at the
meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed Proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if he or she has returned a Proxy.
Sincerely,
/S/ Authur D. Chadwick
----------------------
Arthur D. Chadwick
Secretary
Mountain View, California
September 26, 1997
YOUR VOTE IS IMPORTANT.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE AND
RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE>
PINNACLE SYSTEMS, INC.
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PROXY STATEMENT FOR 1997
ANNUAL MEETING OF SHAREHOLDERS
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed Proxy is solicited on behalf of the Board of Directors of
PINNACLE SYSTEMS, INC., a California corporation (the "Company"), for use at
the Annual Meeting of Shareholders to be held Tuesday, October 28, 1997 at 1:00
p.m. local time, or at any adjournment thereof, for the purposes set forth
herein and in the accompanying Notice of Annual Meeting of Shareholders. The
Annual Meeting will be held at the Company's principal executive offices
located at 280 North Bernardo Avenue, Mountain View, California 94043, and its
telephone number at that location is (650) 526-1600.
These proxy solicitation materials and the Annual Report to Shareholders
for the year ended June 30, 1997, including financial statements, were first
mailed on or about September 26, 1997 to all shareholders entitled to vote at
the meeting.
Record Date and Principal Share Ownership
Shareholders of record at the close of business on September 12, 1997 are
entitled to notice of and to vote at the meeting. The Company has one series of
Common Shares outstanding, designated Common Stock, no par value. At the record
date, 7,554,886 shares of the Company's Common Stock were issued and
outstanding and held of record by 76 shareholders. No shares of the Company's
Preferred Stock were outstanding.
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of September 12, 1997 as
to (i) each person who is known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each director of the Company,
(iii) each of the executive officers named in the Summary Compensation Table
below and (iv) all directors and executive officers as a group.
Common Stock Approximate
Five Percent Shareholders, Directors Beneficially Percentage
and Certain Executive Officers Owned Owned(1)
- --------------------------------------------- -------------- ------------
The Capital Group Companies, Inc.(2) ...... 565,000 7.5
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, CA 90071
Franklin Resources, Inc.(3) ............... 543,650 7.2
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Blvd.
San Mateo, California 94404
Templeton Global Advisors Limited
Lyford Cay
P.O. Box N-7759
Nassau, Bahamas
J. P. Morgan & Co. Incorporated(4) ......... 440,510 5.8
60 Wall Street
New York, New York 10260
PaineWebber Group Inc.(5) .................. 415,100 5.5
1285 Avenue of the Americas
New York, New York 10019-6028
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Common Stock Approximate
Five Percent Shareholders, Directors Beneficially Percentage
and Certain Executive Officers Owned Owned(1)
- --------------------------------------------- -------------- ------------
Wike/Thompson Capital Management, Inc.(6) ... 393,400 5.2
3800 Norwest Center
90 S. 7th Street
Minneapolis Minnesota 55402
Mark L. Sanders(7) .......................... 251,362 3.2
Ajay Chopra(8) .............................. 145,470 1.9
Charles J. Vaughan(9) ....................... 48,035 *
Glenn E. Penisten(10) ....................... 45,089 *
William Loesch(11) .......................... 42,127 *
Arthur D. Chadwick(12) ...................... 39,854 *
Nyal D. McMullin(13) ........................ 25,266 *
Brian Conner(14) ............................ 17,687 *
John Lewis(15) .............................. 2,500 *
All directors and executive officers as a group
(15 persons)(16) ............................ 655,330 8.3
- ------------
* Less than 1%
(1) Applicable percentage of ownership is based on 7,554,886 shares of Common
Stock outstanding as of September 12, 1997 together with applicable
options for such shareholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to shares. Shares of
Common Stock subject to options currently exercisable or exercisable
within 60 days after September 12, 1997 are deemed outstanding for
computing the percentage ownership of the person holding such options, but
are not deemed outstanding for computing the percentage of any other
person.
(2) Reflects ownership as reported on Schedule 13G dated August 8, 1997 filed
with the Securities and Exchange Commission by The Capital Group Companies,
Inc. ("Capital Group") and Capital Guardian Trust, a wholly-owned
subsidiary of Capital Group. Of the shares reported, Capital Guardian Trust
has sole dispositive power as to 515,000 of the shares and sole voting
power as to 315,000 of such shares. The Company does not have any knowledge
as to where voting and dispositive power with respect to such remaining
shares reside.
(3) Reflects ownership as reported on Schedule 13G dated February 12, 1997
filed with the Securities and Exchange Commission by Franklin Resources,
Inc. ("FRI"), Charles B. Johnson, Rupert H. Johnson, Jr. and Templeton
Global Advisors Limited. Templeton Global Advisors Limited has sole voting
and dispositive power as to 442,500 of the shares. Templeton Investment
Management Limited, an advisory subsidiary of FRI, has sole voting and
dispositive power as to 81,750 of the shares. Templeton Investment
Management (Australia) Limited, an advisory subsidiary of FRI, has sole
voting and dispositive power as to 19,400 of the shares.
(4) Reflects ownership as reported on Schedule 13G dated January 1, 1997 filed
with the Securities and Exchange Commission by J.P. Morgan & Co.
Incorporated ("J.P. Morgan"). J.P. has sole dispositive power as to all of
these shares and sole voting power as to 234,900 of such shares. The
Company does not have knowledge as to where voting power with respect to
the remaining shares resides.
(5) Reflects ownership as reported on Schedule 13G dated February 14, 1997
filed with the Securities and Exchange Commission by PaineWebber Group Inc.
("PaineWebber"). PaineWebber has sole dispositive power as to all of these
shares and sole voting power as to 396,300 of these shares. The Company
does not have knowledge as to where voting power with respect to the
remaining shares reside or with whom dispositive power is shared.
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(6) Reflects ownership as reported on Schedule 13G dated January 21, 1997
filed with the Securities and Exchange Commission by Wilke/Thomson Capital
Management, Inc. ("Wilke/Thompson"). Wilke/Thompson has sole voting and
dispositive power as to all of such shares.
(7) Includes 234,331 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable with 60 days of September 12, 1997.
(8) Includes 47,832 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
(9) Includes 2,500 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
(10) Includes 2,500 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
(11) Includes 41,999 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
(12) Includes 17,244 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
(13) Includes 10,000 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
(14) Includes 17,687 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
(15) Includes 2,500 shares of Common Stock that may be acquired upon exercise
of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
(16) Includes 346,134 shares of Common Stock which may be acquired upon
exercise of stock options which are presently exercisable or will become
exercisable within 60 days of September 12, 1997.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person.
Voting and Solicitation
Each shareholder is entitled to one vote for each share held. Every
shareholder voting for the election of directors (Proposal One) may cumulate
such shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of shares that such
shareholder is entitled to vote, or distribute such shareholder's votes on the
same principle among as many candidates as the shareholder may select, provided
that votes cannot be cast for more than six candidates. However, no shareholder
shall be entitled to cumulate votes unless the candidate's name has been placed
in nomination prior to the voting and the shareholder, or any other
shareholder, has given notice at the meeting, prior to the voting, of the
intention to cumulate the shareholder's votes. On all other matters, each share
of Common Stock has one vote. A quorum comprising the holders of the majority
of the outstanding shares of Common Stock on the record date must be present or
represented for the transaction of business at the Annual Meeting. Abstentions
and broker non-votes will be counted in establishing the quorum.
This solicitation of proxies is made by the Company, and all related costs
will be borne by the Company. In addition, the Company may reimburse brokerage
firms and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation material to such beneficial owners. Proxies
may also be solicited by certain of the Company's directors, officers and
regular employees, without additional compensation, personally or by telephone
or telegram.
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Deadline for Receipt of Shareholder Proposals
Proposals of shareholders of the Company that are intended to be presented
by such shareholders at the Company's 1998 Annual Meeting of Shareholders must
be received by the Company no later than May 29, 1998 in order that they may be
considered for inclusion in the proxy statement and form of proxy relating to
that meeting.
PROPOSAL ONE
ELECTION OF DIRECTORS
Nominees
A board of six directors is to be elected at the Annual Meeting of
Shareholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's six nominees named below, all of
whom are presently directors of the Company. In the event that any nominee of
the Company is unable or declines to serve as a director at the time of the
Annual Meeting of Shareholders, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. The
Company is not aware of any nominee who will be unable or will decline to serve
as a director. In the event that additional persons are nominated for election
as directors, the proxy holders intend to vote all proxies received by them in
such a manner (in accordance with cumulative voting) as will assure the
election of as many of the nominees listed below as possible, and, in such
event, the specific nominees to be voted for will be determined by the proxy
holders. The term of office for each person elected as a director will continue
until the next Annual Meeting of Shareholders or until a successor has been
elected and qualified.
Vote Required
If a quorum is present and voting, the six nominees receiving the highest
number of votes will be elected to the Board of Directors. Abstentions and
"broker non-votes" are not counted in the election of directors.
<TABLE>
Nominees
The names of the nominees and certain information about them are set forth
below:
<CAPTION>
Director
Name of Nominee Age Position with the Company Since
- ------------------------ ----- ------------------------------------------------- ---------
<S> <C> <C> <C>
Mark L. Sanders. ...... 54 President, Chief Executive Officer and Director 1990
Ajay Chopra. ......... 40 Chairman of the Board of Directors and Vice
President, General Manager, Desktop 1986
John Lewis ............ 61 Director 1995
Nyal D. McMullin ...... 71 Director 1989
Glenn E. Penisten. ... 65 Director 1986
Charles J. Vaughan ... 59 Director 1986
</TABLE>
There is no family relationship between any director or executive officer
of the Company.
Mr. Sanders has served as President, Chief Executive Officer and a
director of the Company since January 1990. From 1988 to January 1990, Mr.
Sanders was an independent business consultant. Prior to that time, Mr. Sanders
served in a variety of management positions, most recently as Vice President
and General Manager of the Recording Systems Division, of Ampex, a manufacturer
of video broadcast equipment.
Mr. Chopra, a founder of the Company, has served as Chairman of the Board
of Directors since January 1990, and has served as Vice President, General
Manager, Desktop since April 1997. He previously served as Chief Technology
Officer from June 1996 to April 1997, Vice President of Engineering from
January 1990 to June 1996, and President and Chief Executive Officer of the
Company from its inception to January 1990. From 1983 to 1986, Mr. Chopra
served as Engineering Surpervisor of Mindset Corporation, a computer graphics
manufacturer.
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<PAGE>
Mr. Lewis has served as a director of the Company since December 1995. Mr.
Lewis has been Chairman of the Board of Amdahl Corporation, a developer of high
performance computer systems, since 1987 and was reelected President and Chief
Executive Officer of Amdahl in March 1996. He previously served as President of
Amdahl from 1977 until 1987, and was Amdahl's Chief Executive Officer from 1983
until 1992. He is a director of Cypress Semiconductor Corporation, Vitesse
Semiconductor Corporation and Infinity Financial Technology, Inc.
Mr. McMullin has served as a director of the Company since May 1989. Mr.
McMullin has been a special limited partner of El Dorado Ventures, a venture
capital investment firm, since 1987.
Mr. Penisten has served as a director of the Company since October 1986.
Mr. Penisten has been General Partner of Alpha Venture Partners, a venture
capital investment firm, since 1985, and serves on the Board of Directors of
IKOS, a software and hardware developer to support integrated circuits and
ASIC-based electronic systems, Bell Microproducts, Inc., a distributor of
semiconductor products and a contract manufacturer, and Superconductor
Technologies, Inc., a developer of products utilizing superconductivity
materials, and serves as Chairman of the Board of Network Peripherals, Inc., a
developer of integrated high performance network solutions. Mr. Penisten was
Chairman of the American Electronics Association in 1982.
Mr. Vaughan has served as a director since June 1986. Mr. Vaughan has been
a partner of VLCO Investments, a private investment firm that he founded, since
1985. During the period of May 1989 to January 1992 he served in various
positions at Homestead Financial Corporation and its subsidiaries, including
Executive Vice President and Chief Operating Officer of this diversified
financial services company. Earlier Mr. Vaughan held a number senior management
and financial positions with General Electric Company, including Vice
President--Auditing and Chief Financial Officer of the International and
Consumer Products Sectors.
Board Meetings and Committees
The Board of Directors of the Company held a total of six (6) meetings
during fiscal 1997. No director attended fewer than 75% of the meetings of the
Board of Directors and committees thereof, if any, upon which such director
served. The Board of Directors has an Audit Committee and a Compensation
Committee. The Board of Directors has no nominating committee or any committee
performing such functions.
The Audit Committee, which consisted of Messrs. Penisten and Vaughan until
October 1996 and Messrs. Lewis and Vaughan for the balance of fiscal 1997, is
responsible for overseeing actions taken by the Company's independent auditors
and reviews the Company's internal financial controls. The Audit Committee met
three (3) times during fiscal 1997.
The Compensation Committee, which consisted of Messrs. McMullin and
Penisten during fiscal 1997, met one (1) time during fiscal 1997. The
Compensation Committee is responsible for determining salaries, incentives and
other forms of compensation for executive officers and other employees of the
Company and administers various incentive compensation and benefit plans.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. McMullin and Penisten. See
"Certain Transactions with Management" for a discussion of reportable
transactions with a member of the Compensation Committee.
Certain Transactions with Management
In March 1994, the Company and Bell Microproducts Inc. ("Bell") entered
into a Master Agreement (the "Agreement") under which value-added turnkey
services are to be performed by Bell on behalf of the Company. Glenn Penisten,
a director of the Company, is also a director of Bell. Pursuant to the
Agreement, Bell builds certain products in accordance with the Company's
specifications. In particular, Bell is performing certain services for the
Company with respect to the Alladin product. During the fiscal year ended June
30, 1997, the Company purchased materials totaling $4,431,853 from Bell
pursuant to the Agreement.
5
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The Company believes that the transactions set forth above were made on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties. All future transactions, including loans, between the Company
and its officers, directors, principal shareholders and their affiliates will
be approved by a majority of the Board of Directors, including a majority of
the independent and disinterested outside directors and will continue to be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
PROPOSAL TWO
AMENDMENT TO 1996 STOCK OPTION PLAN
At the Annual Meeting, the shareholders are being asked to approve the
amendment of the Company's 1996 Stock Option Plan (the "Plan") to increase the
number of shares of Common Stock reserved for issuance thereunder by 365,000
shares. The amendment to the Plan was approved by the Board of Directors in
July 1997. As of September 12, 1997, options to purchase an aggregate of
105,600 shares of the Company's Common Stock were outstanding under the Plan
with a weighted average exercise price of $17.91 per share, and 264,400 shares
(excluding the 365,000 shares subject to shareholder approval at this Annual
Meeting) were available for future grant. No shares have been purchased
pursuant to exercise of stock options granted under the plan. The Plan
authorizes the Board of Directors to grant incentive and nonstatutory stock
options to eligible employees, directors and consultants of the Company.
The Plan is structured to allow the Board of Directors broad discretion in
creating equity incentives in order to assist the Company in attracting,
retaining and motivating the best available personnel for the successful
conduct of the Company's business. Since inception, the Company has provided
stock options as an incentive to its key employees and executives as a means to
promote increased shareholder value. Management believes stock options are one
of the prime methods of attracting and retaining key personnel responsible for
the continued development and growth of the Company's business. In addition,
stock options are considered a competitive necessity in the high technology
industry.
Vote Required
The affirmative vote of a majority of the Votes Cast will be required to
approve the amendment to the Plan. For this purpose, the "Votes Cast" are
defined to be the shares of the Company's Common Stock represented and voting
at the Annual Meeting. In addition, the affirmative votes must constitute at
least a majority of the required quorum, which quorum is a majority of the
shares outstanding at the Record Date. Votes that are cast against the proposal
will be counted for purposes of determining both (i) the presence or absence of
a quorum and (ii) the total number of Votes Cast with respect to the proposal.
Abstentions will be counted for purposes of determining both (i) the presence
or absence of a quorum and (ii) the total number of Votes Cast with respect to
the proposal. Accordingly, abstentions will have the same effect as a vote
against the proposal. Broker non-votes, if any, will be counted for purposes of
determining the presence or absence of a quorum for the transaction of
business, but will not be counted for purposes of determining the number of
Votes Cast with respect to this proposal.
The Board of Directors recommends that shareholders vote "FOR" the
Amendment to the Plan.
The essential terms of the Plan are summarized as follows:
Purpose
The purposes of the Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to employees, directors and consultants of the Company and to promote
the success of the Company's business.
Administration
The Plan provides for administration by the Board of Directors of the
Company or by a Committee of the Board. The Board or the committee appointed to
administer the Plan are referred to in this description as the "Administrator."
The Administrator determines the terms of options granted, including
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<PAGE>
the exercise price, number of shares subject to the option and the
exercisability thereof. All questions of interpretation are determined by the
Administrator and its decisions are final and binding upon all participants.
Members of the Board receive no additional compensation for their services in
connection with the administration of the Plan.
Eligibility
The Plan provides that either incentive or nonstatutory stock options may
be granted to employees (including officers and employee directors) of the
Company or any of its designated subsidiaries. In addition, the Plan provides
that nonstatutory stock options may be granted to directors and consultants of
the Company or any of its designated subsidiaries. The Administrator selects
the optionees and determines the number of shares to be subject to each option.
In making such determination, the Administrator takes into account the duties
and responsibilities of the optionee, the value of the optionee's services, the
optionee's present and potential contribution to the success of the Company and
other relevant factors. The Plan provides a limit of $100,000 on the aggregate
fair market value of shares subject to all incentive options which are
exercisable for the first time in any one calendar year. The Plan provides that
a maximum of 200,000 shares (300,000 shares if in connection with initial
employment) may be granted to any one individual during any fiscal year of the
Company. The Plan does not provide for a minimum number of option shares which
may be granted to any one employee. There is a limit on the aggregate fair
market value of shares subject to all incentive options which are exercisable
for the first time in any one calendar year.
Terms of Options
Each option is evidenced by a stock option agreement between the Company
and the optionee to whom such option is granted and is subject to the following
additional terms and conditions:
(1) Exercise of the Option: The Administrator determines when options
granted under the Plan may be exercised. An option is exercised by giving
written notice of exercise to the Company, specifying the number of shares
of Common Stock to be purchased and tendering payment to the Company of
the purchase price. Payment for shares issued upon exercise of an option
may consist of cash, check, promissory note, delivery of already-owned
shares of the Company's Common Stock subject to certain conditions,
pursuant to a cashless exercise procedure under which the optionee
provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes,
a reduction in the amount of any Company liability to the individual, or
such other consideration as determined by the Administrator and as
permitted by the California Corporations Code.
Options may be exercised at any time on or following the date the
options are first exercisable. An Option may not be exercised for a
fraction of a share.
(2) Option Price: The option price of all incentive stock options and
nonstatutory stock options under the Plan may not be less than the fair
market value of the Common Stock on the date the option is granted. For
purposes of the Plan, fair market value is defined as the closing sale
price per share of the Common Stock on the date of grant as reported on
the Nasdaq National Market. In the case of an option granted to an
optionee who at the time of grant owns stock representing more than 10% of
the voting power of all classes of stock of the Company, the option price
must be not less than 110% of the fair market value on the date of grant.
The closing sale price of the Company's Common Stock on September 12, 1997
was $28 3/8.
(3) Termination of Employment or Consulting Relationship: The Plan
provides that if the optionee's employment or consulting relationship with
the Company is terminated for any reason, other than death, or disability,
the period of time during which an option may be exercised following such
termination is such period as is determined by the Administrator may be
exercised only to the extent the options were exercisable on the date of
termination and in no event later than the expiration of the term of the
option.
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<PAGE>
(4) Death: If an optionee should die while an employee or a consultant
of the Company (or during such period of time not exceeding three months,
as determined by the Administrator) following termination of the
optionee's employment or consultancy, options may be exercised at any time
prior to the expiration of the term of such option as set forth in the
Notice of Grant but only to the extent that the options were exercisable
on the date of death or termination of employment.
(5) Disability: If an optionee's employment is terminated due to a
disability, options may be exercised at any time within twelve months from
the date of such termination, but only to the extent that the options were
exercisable on the date of termination of employment and in no event later
than the expiration of the term of such option as set forth in the Notice
of Grant.
(6) Termination of Options: The term of each option is fixed by the
Administrator and may not exceed ten years from the date of grant in the
case of incentive stock options. However, incentive stock options granted
to an optionee who, immediately before the grant of such option, owned
more than 10% of the total combined voting power of all classes of stock
of the Company or a parent or subsidiary corporation, may not have a term
of more than five years. No option may be exercised by any person after
such expiration.
(7) Nontransferability of Options: Unless determined otherwise by the
Administrator, an option is nontransferable by the optionee, other than by
will or the laws of descent and distribution, and is exercisable only by
the optionee during his or her lifetime or, in the event of death, by a
person who acquires the right to exercise the option by bequest or
inheritance or by reason of the death of the optionee.
(8) Buyout Provision: The Administrator may at any time offer to buy
out, for a payment in cash or shares of Common Stock of the Company, any
option previously granted, based on such terms and conditions as the
Administrator shall establish and communicate to the optionee at the time
that such offer is made.
Adjustment Upon Changes in Capitalization
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization which results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, an appropriate adjustment shall be made in the option price and in the
number of shares subject to each option. In the event of a merger of the
Company with or into another corporation, all outstanding options may either be
assumed or an equivalent option may be substituted by the surviving entity or,
if such options are not assumed or substituted, such options shall become
exercisable as to all of the shares subject to the options, including shares as
to which would not otherwise be exercisable. In the event that options become
exercisable in lieu of assumption or substitution, the Administrator shall
notify optionees that all options shall be fully exercisable for a period of 15
days, after which such options shall terminate.
Amendment and Termination
The Board of Directors may amend the Plan at any time or from time to time
or may terminate it without approval of the shareholders. However, no action by
the Board of Directors or shareholders may alter or impair any option
previously granted under the Plan without the consent of the optionee. In any
event, the Plan will terminate in October 2006.
Tax Information
Options granted under the Plan may be either "incentive stock options," as
defined in Section 422 of the Code, or nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time
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<PAGE>
of sale or exchange equal to the difference between the exercise price and the
lower of (i) the fair market value of the shares at the date of the option
exercise or (ii) the sale price of the shares. A different rule for measuring
ordinary income upon such a premature disposition may apply if the optionee is
also an officer, director, or 10% shareholder of the Company. Generally, the
Company will be entitled to a deduction in the same amount as the ordinary
income recognized by the optionee. Any gain or loss recognized on such a
premature disposition of the shares in excess of the amount treated as ordinary
income will be characterized as long-term or short-term capital gain or loss,
depending on the holding period.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time he is granted a nonstatutory option. However, upon its
exercise, the optionee will recognize ordinary income generally measured as the
excess of the then fair market value of the shares purchased over the purchase
price. Any taxable income recognized in connection with an option exercise by
an optionee who is also an employee of the Company will be subject to tax
withholding by the Company. Upon resale of such shares by the optionee, any
difference between the sales price and the optionee's purchase price, to the
extent not recognized as taxable income as described above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.
Generally, the Company will be entitled to a tax deduction in the same amount
as the ordinary income recognized by the optionee with respect to shares
acquired upon exercise of a nonstatutory option.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Plan, does not purport to be complete, and does not discuss
the tax consequences of the optionee's death or the income tax laws of any
municipality, state or foreign country in which an optionee may reside.
Participation in the Plan
The grant of options under the Plan to executive officers, including the
officers named in the Summary Compensation Table below, is subject to the
discretion of the Administrator. As of the date of this proxy statement, there
has been no determination by the Administrator with respect to future awards
under the Plan. Accordingly, future awards are not determinable. The table of
option grants under "Executive Compensation and Other Matters--Option Grants in
Last Fiscal Year" provides information with respect to the grant of options to
the Named Executive Officers during fiscal 1997. Information regarding options
granted to non-employee Directors during fiscal 1997 is set forth under the
heading "Executive Compensation and Other Matters--Compensation of Directors."
During fiscal 1997, all current executive officers as a group and all other
employees as a group were granted options to purchase 339,000 shares and
368,500 shares, respectively, pursuant to all stock option plans.
PROPOSAL THREE
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected KPMG Peat Marwick LLP, independent
auditors, to audit the consolidated financial statements of the Company for the
fiscal period ending June 30, 1998, and recommends that shareholders vote for
ratification of such appointment. In the event of a negative vote on
ratification, the Board of Directors will reconsider its selection.
KPMG Peat Marwick LLP has audited the Company's financial statements
annually since 1987. Representatives of KPMG Peat Marwick LLP are expected to
be present at the meeting with the opportunity to make a statement if they
desire to do so and are expected to be available to respond to appropriate
questions.
The Board unanimously recommends a vote "FOR" the ratification of the
appointment of KPMG Peat Marwick LLP as independent auditors.
9
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
<TABLE>
Executive Compensation
The following table sets forth total compensation for the fiscal years
ended June 30, 1997, 1996 and 1995 for the Chief Executive Officer and each of
the next four most highly compensated executive officers during the fiscal year
ended June 30, 1997 (the "Named Executive Officers"):
Summary Compensation Table
<CAPTION>
Long-Term
Compensation
Awards
Annual -------------
Compensation Number of
------------------------------------- Securities
Name and Principal Fiscal Other Annual Underlying All Other
Position Year Salary Bonus Compensation Options Compensation
- ---------------------------- ---------- ---------- ------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Sanders ......... 1997 $188,000 -- -- 45,000 --
President, Chief Executive 1996 176,500 6,000 -- 9,000 --
Officer and Director 1995 150,604 7,672 -- 40,000 --
Brian Conner ............ 1997 156,929 -- -- 15,000
Vice President, Europe, 1996 146,553 6,000 -- 9,000 --
African and Middle East 1995(1) 58,815 2,940 -- 20,000 --
Ajay Chopra ............... 1997 152,504 -- 20,000
Chairman of the Board 1996 133,500 6,000 -- 9,000 --
of Directors and Vice 1995 122,365 5,460 -- 47,000 --
President, General
Manager, Desktop(2)
William Loesch(3) ......... 1997 132,507 -- -- 40,000 --
Vice President, Consumer 1996 121,500 7,905 -- 9,000 --
1995 113,000 5,487 -- 27,000 --
Arthur D. Chadwick ...... 1997 130,000 -- -- 30,000
Vice President, Finance and 1996 118,500 8,982 -- 9,000 --
Administration, Chief 1995 106,004 5,432 -- 32,000 --
Financial Officer and
Secretary
<FN>
- ------------
(1) Mr. Conner joined the Company in February 1995.
(2) Mr. Chopra became Vice President, General Manager, Desktop in April 1997.
Prior to then, in 1996 and 1995 he was Chief Technical Officer.
(3) Mr. Loesch became Vice President, Consumer in April 1997. Prior to then in
1996 and 1995 he was Vice President, New Business Development.
</FN>
</TABLE>
10
<PAGE>
Option Grants In Last Fiscal Year
<TABLE>
The following table provides information concerning each grant of options
to purchase the Company's Common Stock made during the fiscal year ended June
30, 1997 to the Named Executive Officers:
<CAPTION>
Potential Realizable
Individual Grants Value
---------------------------------------------------------- Minus Exercise Price at
Number of % of Total Exercise Assumed Annual Rates of
Securities Options Price Stock Price Appreciation
Underlying Granted to Per Share for Option Term(1)
Options Employees in ($/sh) Expiration ------------------------
Name Granted(#) Fiscal Year (2)(3) Date 5% 10%
- ------------------------------ ------------ -------------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Sanders(4) ......... 25,000 3.53% $ 10.00 11/21/06 $ 157,224 $ 398,436
Mark L. Sanders(5) ......... 20,000 2.83% 10.00 11/21/06 125,779 318,748
Brian Conner(4) ............ 15,000 2.12% 10.00 11/21/06 94,334 239,061
Ajay Chopra(4) ............ 20,000 2.83% 10.00 11/21/06 125,779 318,748
William Loesch(4) ......... 20,000 2.83% 10.00 11/21/06 125,779 318,748
William Loesch(5) ......... 20,000 2.83% 10.00 11/21/06 125,779 318,748
Arthur D. Chadwick(4) ...... 15,000 2.12% 12.62 07/22/06 119,050 301,695
Arthur D. Chadwick(4) ...... 15,000 2.12% 10.00 11/21/06 94,334 239,061
<FN>
- ------------
(1) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the 10 year option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by reference to the closing sale
price of the Common Stock on the Nasdaq National Market on the date of
grant.
(3) Exercise price may be paid in cash, promissory note, by delivery of
already-owned shares subject to certain conditions, or pursuant to a
cashless exercise procedure under which the optionee provides irrevocable
instructions to a brokerage firm to sell the purchased shares and to remit
to the Company, out of the sale proceeds, an amount equal to the exercise
price plus all applicable withholding taxes. (4) The options shown granted
in fiscal 1997 become exercisable as to 25% of the option shares on the
first anniversary of the date of grant and as to 1|M/48 of the option
shares each month thereafter, with full vesting occurring on the fourth
anniversary of the date of grant. Under the 1987 Stock Option Plan, the
Board of Directors retains the discretion to modify the terms, including
the price, of outstanding options.
(5) The option becomes exercisable on the fifth year anniversary date of the
grant of the option, with an acceleration clause which vests them earlier
upon the achievement by the Company's Consumer Business Group of revenue
and profitability objectives during calendar 1997.
</FN>
</TABLE>
11
<PAGE>
Aggregated Option Exercises In Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
The following table sets forth certain information regarding the exercise
of stock options by the Named Executive Officers in the fiscal year ended June
30, 1997 and the value of stock options held as of June 30, 1997 by such
individuals.
<CAPTION>
Number of Securities Value of Unexercised
Shared Underlying Unexercised In-the-Money Options
Acquired on Value Options at June 30, 1997 (#) at June 30 1997 ($)(1)
Exercise Realized ------------------------------- ------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Sanders. ......... -- -- 229,415 63,313 $3,396,548 $459,145
Brian Conner ............ -- -- 14,853 29,147 79,944 166,806
Ajay Chopra ............... -- -- 42,187 41,813 430,430 282,583
William Loesch ......... -- -- 38,437 55,563 418,683 356,254
Arthur D. Chadwick ...... -- -- 16,474 47,126 125,408 263,154
<FN>
- ------------
(1) Fair market value of the Common Stock as of June 30, 1997 determined by
reference to the closing sale price of the Common Stock on the Nasdaq
National Market minus the exercise price.
</FN>
</TABLE>
Employment Contracts and Change-In-Control Arrangements
In September 1994, the Company and Mark L. Sanders, President, Chief
Executive Officer and a director, entered into an agreement (the "Agreement")
providing that in the event of Mr. Sanders' resignation or termination of
employment, the Company will retain him as a part-time employee to render
services to the Company on an as-needed basis for up to one full day per month.
As compensation for his services, the Company will pay Mr. Sanders a fee of
$1,000 per month. The Agreement becomes effective upon Mr. Sanders' resignation
or termination of employment with the Company and terminates in September 1999.
The Agreement may not be terminated by the Company.
The Company currently has no other employment contracts with any of the
Named Executive Officers, and the Company has no other compensatory plan or
arrangement with such Named Executive Officers where the amounts to be paid
exceed $100,000 and which are activated upon resignation, termination or
retirement of any such Named Executive Officer upon a change in control of the
Company.
Compensation of Directors
Non-employee members of the Company's Board of Directors receive an annual
retainer of $8,000 and an additional $500 for each committee meeting attended.
The Company's 1994 Director Option Plan provides that options may be granted to
non-employee directors of the Company who do not represent shareholders holding
more than 1% of the Company's outstanding Common Stock pursuant to an automatic
nondiscretionary grant mechanism. Pursuant to the 1994 Director Option Plan, in
October 1997, an option to purchase 5,000 shares of the Company's Common Stock
at an exercise price of $11.50 per share was granted to each of Nyal D.
McMullin, Glenn E. Penisten and Charles J. Vaughan.
Report of the Compensation Committee of the Board of Directors
The Compensation Committee (the "Committee") of the Board of Directors
reviews and approves the Company's executive compensation policies. The
following is the report of the Committee describing the compensation policies
and rationales applicable to the Company's executive officers with respect to
the compensation paid to such executive officers for the fiscal year ended June
30, 1997.
Compensation Philosophy
The Company's philosophy in setting its compensation policies for
executive officers is to maximize shareholder value over time. The primary goal
of the Company's executive compensation program is therefore to closely align
the interests of the executive officers with those of the Company's
shareholders. To achieve this goal, the Company attempts to (i) offer
compensation opportunities that attract and retain executives whose abilities
are critical to the long-term success of the Company, motivate such individuals
to perform at their highest level and reward outstanding achievement, (ii)
maintain a portion of the
12
<PAGE>
executive's total compensation at risk, tied to achievement of financial,
organizational and management performance goals, and (iii) encourage executives
to manage from the perspective of owners with an equity stake in the Company.
The Company currently uses two integrated components--Base Salary, and Stock
Options Incentives--to meet these goals.
Base Salary
The base salary component of the total compensation is designed to
compensate executives competitively within the industry and the marketplace.
The Committee reviewed and approved fiscal 1997 base salaries for the Chief
Executive Officer and other executive officers at the beginning of the fiscal
year. Base salaries were established by the Committee based upon competitive
compensation data, an executive's job responsibilities, level of experience,
individual performance and contribution to the business. Executive officer
salaries have been targeted at or above the average rates paid by competitors
to enable the Company to attract, motivate, reward and retain highly skilled
executives. In order to evaluate the Company's competitive posture in the
industry, the Committee reviewed and analyzed the compensation packages,
including base salary levels, offered by other high technology companies. No
specific formula was applied to determine the weight of each factor.
During fiscal 1997, the compensation of Mark L. Sanders, the Company's
President and Chief Executive Officer, consisted of base salary, and stock
options. Mr. Sanders base salary for fiscal 1997 was approximately $188,000. In
addition, Mr. Sanders was granted an option to purchase 45,000 shares of Common
Stock at an exercise price of $10.00, which was the fair market value of the
Company's Common Stock at the date of grant. The Committee reviews the Chief
Executive Officer's salary at the beginning of the calendar year using the same
criteria and policies as are employed for the other executive officers.
Stock Options
The Committee provides the Company's executive officers with long-term
incentive compensation through grants of stock options under the Company's 1987
Stock Option Plan until April 1997, and the Company's 1996 Stock Option Plan.
The Board believes that stock options provide the Company's executive officers
with the opportunity to purchase and maintain an equity interest in the Company
and to share in the appreciation of the value of the Company's Common Stock.
The Board believes that stock options directly motivate an executive to
maximize long-term shareholder value. The options also utilize vesting periods
that encourage key executives to continue in the employ of the Company. All
options granted to executive officers to date have been granted at the fair
market value of the Company's Common Stock on the date of grant. The Board
considers the grant of each option subjectively, considering factors such as
the individual performance of the executive officer and the anticipated
contribution of the executive officer to the attainment of the Company's
long-term strategic performance goals. Long-term incentives granted in prior
years are also taken into consideration. During fiscal 1997, Mr. Sanders
received an option to purchase 45,000 shares of Common Stock and the executive
officers as a group received options to purchase 339,000 shares of Common
Stock.
Incentives for executive officers reflect the Committee's belief that a
portion of the compensation of each executive officer should be contingent upon
the performance of the Company, as well as the individual contribution of each
executive officer. To carry out this philosophy, stock options have been
granted to certain officers which have accelerated vesting provisions if
certain quarterly and annual sales and profitability objectives are met. The
executive officers, including Mr. Sanders, must successfully achieve these
performance targets which were submitted by management to the Committee for its
evaluation and approval at in conjunction with the stock option grant. The
Committee evaluates the completion of the goals and acceleration of the stock
option vesting if the goals have been met. The Committee believes that the
stock option acceleration provision provides an excellent link between the
Company's earnings performance and the incentives paid to executives.
Section 162(m)
The Board has considered the potential future effects of Section 162(m) of
the Internal Revenue Code on the compensation paid to the Company's executive
officers. Section 162(m) disallows a tax deduction for any publicly-held
corporation for individual compensation exceeding $1.0 million in any
13
<PAGE>
taxable year for any of the executive officers named in the proxy statement,
unless compensation is performance-based. The Company has adopted a policy
that, where reasonably practicable, the Company will seek to qualify the
variable compensation paid to its executive officers for an exemption from the
deductibility limitations of Section 162(m). The 1996 Stock Option Plan,
includes a limit on the number of shares which may be granted to any one
employer during the fiscal year. Such limit is intended to preserve the
company's ability to deduct the compensation expense relating to stock options
granted under such plan.
In approving the amount and form of compensation for the Company's
executive officers, the Committee will continue to consider all elements of the
cost to the Company of providing such compensation, including the potential
impact of Section 162(m).
Respectfully submitted by:
COMPENSATION COMMITTEE
Nyal D. McMullin
Glenn E. Penisten
14
<PAGE>
Performance Graph
Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the shareholders of the Company's Common Stock with
the cumulative return of the Nasdaq Stock Market-US Index and of the Hambrecht
& Quist Technology Index for the period commencing November 8, 1994 (the date
the Company became subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended) and ending on June 30, 1997. Returns for the
indices are weighted based on market capitalization at the beginning of each
fiscal year.
[The following description data is supplied in accordance with Rule 304(d) of
Regulation S-T]
COMPARISON OF 32 MONTH CUMULATIVE TOTAL RETURN*
AMONG PINNACLE SYSTEMS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
11/08/94 6/95 6/96 6/97
--------------------------------------------------
Pinnacle Systems, Inc. 100 225 208 171
Hambrecht & Quist Technology 100 143 167 218
NASDAQ Stock Market (U.S.) 100 122 157 191
- ------------
(*) The graph assumes that $100 was invested on November 8, 1994 in the
Company's Common Stock and in the Nasdaq Stock Market-US Index and in the
Hambrecht & Quist Technology Index and that all dividends were reinvested.
No dividends have been declared or paid on the Company's Common Stock.
Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns.
The information contained above under the captions "Report of the
Compensation Committee of the Board of Directors" and "Performance Graph" shall
not be deemed to be "soliciting material" or to be "filed" with the Securities
and Exchange Commission, nor shall such information be incorporated by
reference into any future filing under the Securities Act or Exchange Act,
except to the extent that the Company specifically incorporates it by reference
into such filing.
15
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers,
Inc. Executive officers, directors and greater than ten percent stockholders
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. Based solely in its review of the copies of such
forms received by it, or written representations from certain reporting
persons, the Company believes that, during the fiscal year ended June 30, 1997
all executive officers and directors of the Company complied with all
applicable filing requirements, except that Ajay Chopra, Vice President,
Desktop Products, and Nyal McMullin, Director, each filed one Form 4 reporting
the sale of shares of the Company's Common Stock, one week after the required
deadline.
OTHER MATTERS
The Company knows of no other matters to be submitted at the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of Proxy to vote the shares they represent
as the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Dated: September 26, 1997
16
