<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
or
[ ] 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: 0-19272
MICRONICS COMPUTERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0132288
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
45365 NORTHPORT LOOP WEST
FREMONT, CALIFORNIA 94538-6417
(Address of principal executive offices)
(510) 651-2300
(Registrant's telephone number, including area code)
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
----- -----
At April 30, 1998 there were 12,902,565 shares of the registrant's common stock
outstanding.
The Exhibit Index is on page 13.
<PAGE> 2
MICRONICS COMPUTERS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1998 and September 30, 1997.............................. 3
Condensed Consolidated Statements of Results of
Operations for the three months and six months
ended March 31, 1998
and March 31, 1997................................................. 4
Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 1998
and March 31, 1997................................................. 5
Notes to Condensed Consolidated Financial
Statements......................................................... 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
Item 3: Quantitative and Qualitative Disclosures
About Market Risk.................................................. 10
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders............................. 11
Item 5: Other Information............................................................... 11
Item 6: Exhibits and Reports on Form 8-K................................................ 11
SIGNATURES......................................................................................... 12
EXHIBITS........................................................................................... 13
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MICRONICS COMPUTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 19,945 $ 22,690
Short-term investments .............................. 500 500
Accounts receivable, net ............................ 6,893 10,325
Inventories ......................................... 6,448 9,853
Prepaid expenses and other assets ................... 1,275 1,544
-------- --------
Total current assets ............................ 35,061 44,912
Property and equipment, net .............................. 4,359 4,698
Other assets ............................................. -- 39
-------- --------
$ 39,420 $ 49,649
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 5,141 $ 8,304
Other accrued liabilities ........................... 5,675 6,966
-------- --------
Total current liabilities ....................... 10,816 15,270
Stockholders' equity:
Common stock ........................................ 130 142
Additional paid-in capital .......................... 30,964 33,308
Retained earnings (deficit).......................... (2,490) 929
-------- --------
Total stockholders' equity ...................... 28,604 34,379
-------- --------
$ 39,420 $ 49,649
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE> 4
MICRONICS COMPUTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................. $ 10,873 $ 24,282 $ 30,332 $ 60,470
Cost of sales ......................... 10,392 22,154 27,297 53,657
-------- -------- -------- --------
Gross profit .......................... 481 2,128 3,035 6,813
Operating expenses:
Research and development ......... 1,147 1,409 2,141 2,719
Selling and marketing ............ 1,186 2,613 2,651 4,755
General and administrative ....... 1,233 1,114 2,278 2,337
-------- -------- -------- --------
Total operating expenses ..... 3,566 5,136 7,070 9,811
-------- -------- -------- --------
Loss from operations .................. (3,085) (3,008) (4,035) (2,998)
Interest income ....................... 242 292 494 597
Other income (expense), net ........... 143 52 122 (97)
-------- -------- -------- --------
Total other income ........... 385 344 616 500
-------- -------- -------- --------
Net loss .............................. $ (2,700) $ (2,664) $ (3,419) $ (2,498)
======== ======== ======== ========
Basic and diluted earnings per share .. $ (0.21) $ (0.19) $ (0.26) $ (0.18)
======== ======== ======== ========
Number of shares used in computation of
basic and diluted EPS ............... 12,903 13,979 13,243 13,947
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE> 5
MICRONICS COMPUTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (3,419) $ (2,498)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization .................. 406 566
Loss on disposal of property and equipment ..... 8 75
Gain on exercise of Osborne put option ......... -- (44)
Changes in operating assets and liabilities:
Accounts receivable ....................... 3,432 4,843
Inventories ............................... 3,405 2,001
Prepaid expenses and other assets ......... 269 (111)
Accounts payable .......................... (3,163) (4,142)
Other accrued liabilities ................. (1,291) 1,703
-------- --------
Net cash provided by (used for) operating activities (353) 2,393
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ................ (499) (4,569)
Maturities or sales of short-term investments ...... 499 5,199
Exercise of Osborne put option ..................... -- 794
Purchases of property and equipment, net ........... (75) (501)
Other assets ....................................... 39 34
-------- --------
Net cash provided by (used for) investing activities (36) 957
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock ......................... (2,418) --
Proceeds from issuance of common stock, net ........ 62 174
-------- --------
Net cash provided by (used for) financing activities (2,356) 174
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... (2,745) 3,524
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........ 22,690 19,876
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 19,945 $ 23,400
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE> 6
MICRONICS COMPUTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the financial position,
operating results and cash flows for those periods presented. The results of
operations for the interim periods presented are not necessarily indicative of
the results that may be expected for the full fiscal year. The accompanying
consolidated financial statements should be read together with the audited
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended September 30, 1997.
In recent quarters, the Company has experienced declining net sales and
lower gross margins as a result of competitive pressures and the effects of the
loss of and slowing order rates from its major OEM and government customers. The
Company's ability to reverse the trend of declining net sales, which have
yielded net losses, is dependent on several factors including increased order
rates for the Company's products, successful and timely development and market
acceptance of the Company's next generation products, the availability of
qualified sales and engineering personnel and successful competition with the
Company's competitors on a price, service and performance basis. Many of these
factors are not within the Company's control and if order rates for the
Company's products fail to increase, if the Company's next generation products
are not accepted by the Company's customers, or if the Company cannot
successfully compete with its competitors, many of whom have substantially
greater resources than the Company, the Company's net sales will continue to
decline. To the extent that the Company is unable to offset such sales declines
with cost reductions, recurring losses are likely. The Company cannot at this
time foresee when it again will reach profitability, if at all. Management
believes, however, that its available cash reserves are sufficient to meet its
working capital requirements and anticipated level of operations for at least
the next 12 months.
NOTE 2. EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 requires dual presentation of basic earnings per share ("EPS")
and diluted EPS on the face of all statements of earnings for all entities with
complex capital structures. Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation plans including stock options, restricted stock
awards, warrants and other convertible securities using the treasury stock
method. The following summarizes the computation of basic and diluted EPS (in
thousands except for per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net loss used in basic and diluted EPS ...... $ (3,419) $ (2,498)
======== ========
Weighted average number of common shares
used in computing basic EPS ................. 13,243 13,947
Effect of dilutive securities:
Options ................................ -- --
-------- --------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS .. 13,243 13,947
======== ========
</TABLE>
Options to acquire 1,233,465 and 1,258,250 shares of common stock with weighted
average exercise prices of $2.60 and $2.88 for the periods ended March 31, 1998
and March 31, 1997, respectively, were not included in computing diluted EPS
because their effects were antidilutive.
-6-
<PAGE> 7
NOTE 3. SHORT-TERM INVESTMENTS
Short-term investments consist of corporate bonds and U.S. agency
securities with original maturities beyond three months and less than twelve
months.
NOTE 4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
------ ------
(UNAUDITED)
<S> <C> <C>
Raw materials ................ $1,810 $4,085
Work-in-process .............. 713 1,285
Finished goods ............... 3,925 4,483
------ ------
$6,448 $9,853
====== ======
</TABLE>
During the quarter, the Company sold and disposed of obsolete inventory
of approximately $2 million.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Internal Revenue Service examinations of the Company's tax returns
for years 1993 through 1995 have resulted in a preliminary finding that the
Company owes additional taxes and interest amounting to approximately $3.9
million. Although it is reasonably possible the Company may incur a loss upon
conclusion of this claim, the Company believes that adequate tax payments have
been made and accruals recorded for all years and that this matter will, when
resolved, not have a significant material adverse effect on the Company's
financial condition or results of operations.
The Company is a party to various legal actions which arose in the
normal course of business. In the opinion of management and its legal advisors,
the ultimate disposition of these matters will not have a material adverse
effect on the financial condition or results of operations of the Company.
The Company has purchase commitments with at least two of its suppliers
for approximately $17 million in graphics and memory chips. The ultimate value
of these commitments to the Company is dependent on the Company's ability to
sell its graphics add-on card in fiscal 1998. It is reasonably possible that the
Company may not fulfill its sales projections for this product and therefore
these commitments may have a material adverse effect on the Company's results of
operations.
NOTE 6. REPURCHASE OF COMMON STOCK
On November 24, 1997, the Company repurchased from a single shareholder
approximately 1.2 million shares of its outstanding common stock for a cash
price less than the then market price, or approximately $2.4 million. These
shares have been retired.
-7-
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The Company's common stock price may be subject to significant
volatility. For any given quarter, a shortfall in the Company's announced
revenue or earnings from the levels expected by those who trade in the Company's
stock could have an immediate and adverse effect on the trading price of the
Company's common stock. The Company may not learn of, or be able to confirm,
revenue or earnings shortfalls until late in the quarter or following the end of
the quarter. In general, the Company participates in a very dynamic high
technology industry which can result in significant fluctuations in the
Company's common stock price at any time.
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, that involve risks and uncertainties,
including the rate of orders for the Company's products, the timely availability
and acceptance of new products, changes in management of the Company,
difficulties experienced by the Company with respect to hiring and retaining
qualified personnel, the impact of competitive products and pricing, the impact
of the Company's efforts to implement its evolving long-term strategy and the
other risks detailed below including, without limitation, the risks described in
the section labeled "Factors That May Affect Future Results," and the risks
described from time to time in the Company's other reports filed with the
Securities and Exchange Commission. The actual results that the Company achieves
may differ materially from any forward-looking projections due to such risks and
uncertainties. Words such as "believes," "anticipates," "expects," "future,"
"intends," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Micronics Computers, Inc. operates in a rapidly changing environment
that involves a number of risks, some of which are beyond the Company's control.
The following discussion highlights some of those risks.
The Company's operating results are subject to quarterly and other
fluctuations due to a variety of factors, including the volume and timing of
orders received, potential cancellation or rescheduling of orders, competitive
pressures, availability and cost of component parts and materials from the
Company's suppliers, adequate forecasting of the mixed product demand due to
production lead times, the timing of new product announcements and introductions
by the Company or its competitors, changes in the mix of products sold, research
and development expenses associated with new product introductions, the timing
and level of development costs, market cyclical nature of the semiconductor
industry and economic conditions generally or in various geographic areas and
the Company's ability to develop new product features.
In recent quarters, the Company has experienced declining net sales and
has incurred lower gross margins as a result of competitive pressures and the
effects of the loss of and slowing order rate from its major OEM and government
customers. The Company's ability to reduce the trend of declining net sales,
which have yielded net losses, is dependent on several factors including
increased order rates for the Company's products, successful and timely
development and market acceptance of the Company's next generation products, the
availability of qualified sales and engineering personnel and successful
competition with the Company's competitors on a price, service and performance
basis. Many of these factors are not within the Company's control, and if order
rates for the Company's products fail to increase, if the Company's next
generation products are not successfully and timely developed and accepted by
the Company's customers, or if the Company cannot successfully compete with its
competitors, many of whom have substantially greater resources than the Company,
the Company's net sales will continue to decline. To the extent that the Company
is unable to offset such sales declines with cost reductions, recurring losses
are likely. The Company cannot at this time foresee when it will again reach
profitability, if at all.
-8-
<PAGE> 9
Many of the Company's technical employees are critical to its success.
The loss of one or more of these employees could have a materially adverse
effect on the Company's operations. The demand for key technical employees in
the industry, and especially in the Silicon Valley, has become very intense.
Companies have been luring away key employees with very attractive offers. The
Company has lost, from time to time, some of its talent to this intense
competition, and there can be no assurance that the Company will be able to hire
and retain its key talent due to this intense competition.
The Company has had several personnel changes in other areas of the
organization. The Company tries to find the best talent available; however, new
employees have a ramp-up time to understand and learn the Company's products,
build customer relationships, and manage administrative activities. These
changes could have a negative impact on the Company's future sales and
profitability.
COMPARISON OF RESULTS
NET SALES Net sales were $10.9 million for the three months ended March
31, 1998, a decrease of 55% from $24.3 million for the similar period ended
March 31, 1997. Net sales for the six months ended March 31, 1998 were $30.3
million, down 50% from $60.5 million through last year's second quarter. The
reduction in revenue from the prior year's three-month and six-month periods is
primarily the result of a decline in unit sales of motherboards in the OEM
channel to Micron Electronics, Inc., maturation of the Company's products in the
motherboard business and declining average selling price (ASP). The Company does
not presently expect sales to Micron to return to historical levels. The revenue
decline is partially offset by an increase in unit sales for the Righteous 3D(R)
add-in card marketed by the Company through its wholly-owned subsidiary, Orchid
Technology and by sales of motherboards to a new OEM customer.
The Company anticipates that the aggregate dollar value of motherboard
sales may further decline during the quarter ending June 30, 1998 (the third
quarter of fiscal 1998) over sales reported for the second quarter and that
sales of the Company's multimedia graphics accelerator add-in cards may increase
during the same period.
The Company attempts to minimize sales price erosion by continually
shifting its product mix to newer products based upon more powerful
microprocessors, higher clock speeds, faster bus architectures and other
advanced features for which the Company can often realize higher prices.
However, several of the Company's current products are end-of-life products.
Future revenue will depend on the level of sales to existing major customers,
the ability to sign on new customers, the mix of products developed and sold by
the Company, the ability of the Company to obtain key components on a timely
basis and the Company's ability to maintain unit prices despite competitive
pressures.
The Company's customers are in the computer industry, which is subject
to rapid technological change, product obsolescence and intense price
competition. The factors affecting the computer industry in general, and the
Company's major customers in particular, could have a material adverse effect on
the Company's results of operations.
COST OF SALES/GROSS PROFIT The Company's gross profit as a percentage
of net sales was 4.4% and 8.8% for the three months ended March 31, 1998 and
March 31, 1997,respectively. The gross profit margin percentage for the six
months ended March 31, 1998 was 10.0% compared to 11.3% for the same period in
the prior year. The lower margin in the second quarter of fiscal 1998 is
primarily related to the writedown of inventory to the lower of cost or market
and reserves for end-of-life products.
OPERATING EXPENSES Operating expenses for the second quarter ended
March 31, 1998 decreased 30% or $1.5 million to $3.6 million from $5.1 million
for the comparable quarter in the prior fiscal year. For the first six months of
fiscal 1998, operating expenses of $7.1 million were $2.7 million lower than
$9.8 million for the same period of the prior year. Research and development
expenses decreased $.2 million, selling and marketing expenses decreased $1.4
million while general and administrative expenses increased $.1 million for the
three months ended March 31, 1998 compared to the second quarter of the prior
year. For the six-month period, research and development expenses decreased $.6
million, selling and marketing expenses decreased $2.1 million and general and
administrative expenses remained unchanged. The reduction in operating expenses
for the three- and six-month periods is due primarily to lower salary and
benefit expenses associated with the reduction in employee headcount and lower
overhead costs due to the continued consolidation of functional groups within
the Company and its subsidiaries. The significant decrease in selling and
marketing expenses in the second quarter of the current fiscal year compared to
the same period of the prior year is due primarily to expenses incurred in the
prior year related to expanding sales and marketing efforts in the distribution
and international sales channels.
-9-
<PAGE> 10
INTEREST AND OTHER INCOME AND EXPENSE Interest income of $242,000
for the second quarter ended March 31, 1998 declined 17% compared to $292,000
for the comparable prior year period and decreased 17% to $494,000 for the six
months ended March 31, 1998 compared to $597,000 for the same period in the
prior year. Last year's invested balances were slightly higher for both the
three-month and six-month periods and included income of $44,000 from the
exercise of the Osborne put option.
PROVISION FOR INCOME TAXES The Company recorded no income tax expense
in the second quarters and six-month periods ended March 31, 1998 and March 31,
1997. The Internal Revenue Service examinations of the Company's tax returns for
years 1993 through 1995 have resulted in a preliminary finding that the Company
owes additional taxes and interest amounting to approximately $3.9 million.
Although it is reasonably possible the Company may incur a loss upon conclusion
of this claim, the Company believes that adequate tax payments have been made
and accruals recorded for all years and that this matter will when resolved not
have a significant material adverse effect on the Company's financial condition
or results of operations.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at March 31, 1998 was $24.2 million, down $5.4 million
from $29.6 million at September 30, 1997. The decrease in working capital was
primarily due to losses in the first two quarters of the fiscal year and the use
of approximately $2.4 million to repurchase Micronics common stock from a single
shareholder.
At March 31, 1998, the Company's principal sources of liquidity
included $20.4 million of cash and cash equivalents and short-term
interest-bearing financial instruments.
Management believes existing cash and cash equivalents and short-term
investments will provide sufficient funds to meet the Company's operating and
capital requirements over the next twelve months.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
-10-
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April 20, 1998
at the Company's headquarters in Fremont, California. Of the 12,902,565 shares
outstanding as of the record date, 11,266,673 shares were present or represented
by proxy at the meeting. The following matters were submitted to a vote of
security holders:
(1) To elect the following to serve as a Director of the Company:
<TABLE>
<CAPTION>
Votes in Favor Votes Withheld
-------------- --------------
<S> <C> <C>
William E. Shelander 8,516,793 2,749,880
Charles J. Hart 8,517,343 2,749,330
Diane Simon 8,513,443 2,753,230
Jim Timmins 8,510,343 2,718,330
</TABLE>
(2) To approve the adoption of the 1998 Equity Incentive Plan:
<TABLE>
<CAPTION>
Votes
---------
<S> <C>
Votes for: 1,845,332
Votes against: 3,687,241
Votes abstaining 76,127
Broker non-votes 5,657,973
</TABLE>
(3) To ratify the selection of KPMG Peat Marwick LLP as the Company's principal
independent auditors:
<TABLE>
<CAPTION>
Votes
---------
<S> <C>
Votes for: 9,925,447
Votes against: 890,526
Votes abstaining: 450,700
Broker non-votes 0
</TABLE>
ITEM 5: OTHER INFORMATION
Effective February 6, 1998, the Company changed its principal officers.
Charles J. Hart was appointed Chief Executive Officer, President and a director
of the Company. Mr. Hart replaces interim President Fred Dietrich and interim
Chief Executive Officer Bill Shelander. Mr. Shelander continues as Chairman of
the Board of the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.01 Employment Agreement with Charles J. Hart
27.01 Financial Data Schedule
-11-
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Micronics Computers, Inc.
-----------------------------------
Registrant
Date: May 8, 1998 /s/Bill R. Finley
----------------------- -----------------------------------
Bill R. Finley
Duly Authorized Officer,
Vice President, Finance and
Chief Financial Officer
-12-
<PAGE> 13
Exhibit Index
Exhibit
Number Description
- ------ -----------
10.01 Employment Agreement with Charles J. Hart
27.01 Financial Data Schedule
-13-
<PAGE> 1
EXHIBIT 10.01
MICRONICS COMPUTERS, INC.
EMPLOYMENT AGREEMENT
This Agreement is entered into as of February 6, 1998 (the "Effective
Date") by and between Micronics Computers, Inc., a Delaware corporation (the
"Company"), having its principal place of business at 45365 Northport Loop West,
Fremont, California 94538, and Charles J. Hart ("Mr. Hart"), residing at
_____________________________________________. In consideration of the terms and
conditions set forth in this Agreement, the parties agree as follows:
1. EMPLOYMENT AND DUTIES.
1.1 APPOINTMENT. On the Effective Date, the Company hereby
employs Mr. Hart and Mr. Hart hereby accepts employment with the Company upon
the terms and conditions set forth in this Agreement. During the term of this
Agreement, Mr. Hart will be Chief Executive Officer of the Company and his
duties will be executive in nature, consistent with his title. Initially, he
will report to Wm. E. Shelander, Chairman of the Board of Directors of the
Company (the "Board"). Mr. Hart has been elected to the Board and will be
renominated at the April 1997 annual meeting of the Company's stockholders. Mr.
Hart hereby represents and warrants to the Company that he is free to enter into
and fully perform this Agreement and the documents referred to herein.
1.2 NATURE OF EMPLOYMENT. During the term of his employment with
the Company, Mr. Hart will devote his full skill, efforts, business time and
attention to his employment with the Company. Mr. Hart will not perform services
for compensation for any entity or person other than the Company without the
prior express written consent of the Company after approval by resolution of the
Board. However, Mr. Hart may participate in investment or other activities
unrelated to employment for another for compensation to the extent that such
activities do not preclude or conflict with his employment under this Agreement.
2. TERM. The term of this Agreement will commence as of the Effective
Date and will terminate on the earlier of the death of the Mr. Hart or on the
second anniversary of the date of this Agreement (the "Expiration Date").
3. COMPENSATION AND EXPENSES. In consideration for the services to be
rendered to the Company under this Agreement in all capacities, including,
without limitation, services as an officer, employee, director or member of any
committee of the Board of the Company or any subsidiary thereof, during the term
of this Agreement, Mr. Hart will be paid as follows:
3.1 SALARY. During the period from the Effective Date to August
3, 1998 ("Period One"), Mr. Hart will be paid $20,000 per month. From August 3,
1998 to February 2, 1999 ("Period Two"), Mr. Hart will be paid $22,000 per
month, and on and after February 2, 1999 ("Period Three"), subject to the
discretion of the Board, Mr. Hart will be paid a salary of
<PAGE> 2
Micronics/Hart
Employment Agreement
$25,000 per month. Changes during Period Three, either up or down, will be
determined by the Board, in its sole discretion, at any time or from time to
time. Any such salary will be payable in installments, as earned, less any
normal payroll deductions, in accordance with prevailing payroll practices of
the Company from time to time and will be proportionately reduced to the extent
that Mr. Hart is not working full time for the Company. For purposes of this
Section 3.l, "full time" will be defined by the Company's policy, as amended
from time to time, concerning the number of hours that must be worked by an
individual to be considered a full-time employee and, if no policy is set, "full
time" shall mean at least 40 hours per week.
3.2 QUARTERLY BONUSES. The Board, in its sole discretion, may
determine by resolution to pay Mr. Hart all or any portion of the following
quarterly bonuses upon the achievement of the following milestones in any
Quarter (defined below):
3.2.1 Definitions.
(a) "Quarter" shall mean a three-month period
commencing on the first day of January, April, July or October in any calendar
year during the term of this Agreement and until April 1, 2000 so long as Mr.
Hart is employed full-time by the Company for the entire three-month period,
with the first such Quarter to commence on January 1, 1998 and the last such
Quarter to commence January 1, 2000.
(b) "Operating Income" shall mean the Company's actual
income from operations, determined in accordance with generally accepted
accounting principles for financial reporting purposes, consistently applied,
after review or audit of the Company's independent auditors in each case.
3.2.2 Operating Income Bonus. If Operating Income for any
Quarter (the "First Quarter") is $500,000 or more and Operating Income for the
following Quarter (the "Second Quarter") exceeds Operating Income for the First
Quarter, then Mr. Hart will be eligible to receive a $50,000 bonus for the First
Quarter. For example, (a) if Operating Income earned for the Quarter that
commenced on January 1, 1998 is $500,000 and Operating Income is $500,000.01 for
the Quarter commencing on April 1, 1998, then Mr. Hart will be eligible to
receive a $50,000 bonus for the Quarter that commenced on January 1, 1998, and
(b) if Operating Income is $499,999.01 for the Quarter commencing on October 1,
1999 and is $500,000.01 for the Quarter commencing on January 1, 2000, then Mr.
Hart will not be eligible for a bonus for the Quarter commencing on October 1,
1999.
3.4 WHEN BONUS EARNED AND PAID. Each bonus provided for under
this Section 3 will be paid to Mr. Hart within 20 days after the Board has
approved the same, in its discretion, by resolution duly adopted at a meeting or
by written consent and Operating Income has been determined for the Quarters in
question. For purposes of such meeting or written consent, Mr. Hart may be
counted to establish a quorum, Mr. Hart's vote will not be counted in connection
with such approval and such approval may occur subsequent to the termination of
this Agreement. Accordingly, computation of any amount available for
distribution will not be construed to create Mr. Hart's rights to receive
"wages" until Board approval has been obtained and such 20 day period has run.
2
<PAGE> 3
Micronics/Hart
Employment Agreement
3.5 BENEFITS. During the term of this Agreement, Mr. Hart will
not be entitled to any payments under the Company's Cash Bonus Plan or its
Profit Sharing Plan. Except as to participation in such Plans, Mr. Hart will be
provided with such vacation, disability, insurance and other benefits as are
provided to the Company's employees generally.
3.6 EXPENSES. The Company will reimburse Mr. Hart for all
reasonable and necessary expenses incurred by Mr. Hart in connection with the
Company's business, provided that such expenses are deductible to the Company,
are in accordance with applicable policy set by the Board or Company management
from time to time and are properly documented and accounted for in accordance
with the policy of the Company and with the requirements of the Internal Revenue
Service.
4. COMPANY STOCK.
4.1 OPTION GRANT. As of the Effective Date, Mr. Hart has been
granted an option pursuant to the Company's 1989 Stock Option Plan (the "Plan")
for the purchase in the aggregate of 350,000 shares of the Company's Common
Stock, exercisable at an exercise price per share equal to the per share closing
price of the Company's Common Stock on February 5, 1998. The option vests as to
87,500 shares on February 6, 1999 and the remaining 262,500 shares vest as to an
equal number of shares each month over the following three-year period, for a
total vesting period of four years. This option is an Incentive Stock Option
with respect to the first $100,000 worth of stock that vests in each year. In
accordance with the Plan, all options accelerate vesting upon certain
acquisitions of the Company. However, the Company and Mr. Hart agree that such
accelerated vesting will not apply to two-thirds of the shares of Common Stock
subject to the option described in this Section 4.1 if the acquisition
transaction is closed by the Company within six months after the Effective Date.
4.2 ADDITIONAL OPTIONS. Additional options will be granted to Mr.
Hart under the Plan (or any successor plan) subsequent to the execution of this
Agreement at an exercise price equal to the closing price of the Company's
Common Stock on the Nasdaq National Market on the day preceding the date of
Board approval of such grant (a) for an additional 100,000 shares approximately
six months after the Effective Date and (b) for an additional 100,000 shares
upon completion of two consecutive Quarters in which Operating Income exceeds
$500,000 in each such Quarter, assuming in each case that Mr. Hart remains
continuously employed by the Company through the date of grant. Each option
described in this Section 4.2 will vest in arrears as to an equal number of
shares each month over a four-year period commencing on the date of grant and
will qualify as an Incentive Stock Option to the extent possible given the
$100,000 per annum vesting restriction imposed by applicable tax laws relating
to Incentive Stock Options. Any further options granted to Mr. Hart will be at
the sole discretion of the Board.
5. COLLATERAL AGREEMENTS. Mr. Hart and the Company acknowledge that
they have entered into, or will enter into prior to February 6, 1998, an
Indemnification Agreement and a Confidentiality and Proprietary Rights Agreement
(the "Proprietary Rights Agreement") in standard form used by the Company with
its employees generally. Such Agreements will not terminate as a result of
expiration or termination of this Agreement and thereafter will continue in full
force and effect in accordance with their terms.
3
<PAGE> 4
Micronics/Hart
Employment Agreement
6. TERMINATION OF EMPLOYMENT DURING TERM.
6.1 DEFINITIONS.
6.1.1 "Good Cause" shall mean (a) habitual neglect or
malfeasance of duty that continues uncured after 30 days notice by the Company
to Mr. Hart, (b) a material act of dishonesty, (c) conviction of a felony, (d)
inability to render services under this Agreement for any period in excess of 90
days out of any twelve-month period (whether due to ill health or otherwise),
(e) failure to cure or cease repeated or a serious violation or violations of
the Company's published and written rules, or of the directions of the Board,
that remain or remains uncured 30 days after receipt of written notice thereof
or (f) material or repeated breach of this Agreement or of the Proprietary
Rights and Confidentiality Agreement to be entered into by the Company and Mr.
Hart as provided in Section 5 above that remains uncured 30 days after receipt
of written notice thereof.
6.1.2 "Severance." If Mr. Hart's employment with the Company
is terminated by the Company without Good Cause during Period One, then
"Severance" will mean $120,000. If such termination occurs during Period Two,
"Severance" will mean $22,000 times the number of full months that Mr. Hart has
served as an employee under the terms of this Agreement (the "Service Period"),
and if such termination occurs during Period Three, "Severance" will mean an
amount equal to twelve months' of Mr. Hart's monthly salary then-current at the
time of such termination.
6.2 TERMINATION BY MR. HART. Mr. Hart, in his sole discretion,
may terminate his employment with the Company at any time prior to the
Expiration Date upon giving the Company at least 45 days prior written notice
delivered to any other member of the Board at such Board member's last known
address. Such termination will also terminate this Agreement.
6.3 TERMINATION BY THE COMPANY. The Company, in the sole
discretion of the Board, may terminate Mr. Hart's employment prior to the
Expiration Date, with or without Good Cause. Termination by the Company for Good
Cause will terminate this Agreement. However, if termination is without Good
Cause (a) the Company must give Mr. Hart at least seven days' prior written
notice, (b) Severance will be paid to Mr. Hart, payable over six months if such
termination occurs during Period One, over the number of full months that is
equal to the Service Period if such termination occurs during Period Two and
over a twelve month period if such termination occurs during Period Three and
(c) during any time that Severence is paid to Mr. Hart, the Company will provide
COBRA benefits to Mr. Hart and his immediate family at the Company's expense.
Payments of Severance will be made in equal amounts at such times as Mr. Hart
would have been paid had he remained employed by the Company to the date of each
payment so long as Mr. Hart does not materially breach the terms of the
Proprietary Rights Agreement. This Agreement will be terminated in every other
respect as of the date Mr. Hart ceases to be an employee of the Company
subsequent to a termination by the Company without Good Cause.
6.4 TERMINATION AS A DIRECTOR. Any termination of Mr. Hart's
status as an employee of the Company will also automatically terminate Mr.
Hart's status as an officer and
4
<PAGE> 5
Micronics/Hart
Employment Agreement
as a director serving on the Board, without any further action having to be
taken by any person or entity. However, Mr. Hart agrees to provide such written
resignations therefrom as the Company may reasonably request.
7 GENERAL PROVISIONS.
7.1 ARBITRATION. Mr. Hart and the Company will submit to binding
arbitration in any controversy or claim arising out of, or relating to, this
Agreement or any breach hereof, provided, however, that the Company retains its
right to, and shall not be prohibited, limited or in any other way restricted
from, seeking or obtaining equitable relief from a court having jurisdiction
over the parties. Such arbitration shall be conducted in accordance with the
Rules of the American Arbitration Association in effect at that time, and
judgment upon the determination or award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. Cost of the arbitration
(including, without limitation, reasonable attorney's fees and disbursements)
will be borne by the losing party in such arbitration as determined the
arbitrator(s) thereof. Notwithstanding the foregoing, any controversy or claim
arising out of, or relating both to this Agreement or any breach hereof and to a
breach of one or more of the Agreements described in Section 5 above will not be
subject to arbitration pursuant to this Section 7.1 but may be litigated in any
court having jurisdiction thereof.
7.2 ENFORCEABILITY. If any provision of this Agreement shall be
found by any arbitrator(s) or court of competent jurisdiction to be invalid or
unenforceable, the parties hereby waive such provision to the extent that it is
found to be invalid or unenforceable and to the extent that to do so would not
deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator(s) or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect. Remedies provided for in this
Agreement are cumulative and are in addition to any other right or remedy
granted to any party by contract, at law, in equity or otherwise.
7.3 NO WAIVER. The failure by either party at any time to require
performance or compliance by the other of any of its obligations or agreements
shall in no way affect the right to require such performance or compliance at
any time thereafter. The waiver by either party of a breach of any provision
hereof shall not be taken or held to be a waiver of any preceding or succeeding
breach of such provision or as a waiver of the provision itself. No waiver of
any kind shall be effective or binding, unless it is in writing and is signed by
the party against whom such waiver is sought to be enforced.
7.4 ASSIGNMENT. This Agreement and all rights hereunder are
personal to Mr. Hart and may not be transferred or assigned by Mr. Hart at any
time. The Company may assign its rights, together with its obligations
hereunder, to any parent, subsidiary, affiliate or successor, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets, provided, however, that any such assignee assumes the
Company's obligations hereunder. This Agreement shall be binding upon, and inure
to the benefit of, the permitted successors and personal representatives of the
respective parties hereto.
5
<PAGE> 6
Micronics/Hart
Employment Agreement
7.5 WITHHOLDING. All sums payable to Mr. Hart hereunder shall be
reduced by federal, state, local and other withholding and similar taxes or
payments required by applicable law.
7.6 ENTIRE AGREEMENT; AMENDMENT. Except as specifically provided
herein, this Agreement constitutes the entire and only agreement between the
parties relating to employment of Mr. Hart by the Company and his status as an
officer and director of the Company. This Agreement supersedes and cancels any
and all previous contracts, arrangements or understandings with respect thereto.
This Agreement may be amended, modified, superseded, canceled, renewed or
extended only by an agreement in writing executed by both parties hereto.
7.7 NOTICES. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given when delivered personally or mailed by certified mail,
return receipt requested, postage prepaid to the address of the relevant party
as set forth above or as may be changed by notice given hereafter in accordance
with the provisions of this Section 7.7.
7.8 GENERAL INTERPRETATION. The headings contained in this
Agreement are for reference purposes only and shall in no way affect the meaning
or interpretation of this Agreement. In this Agreement, the singular includes
the plural, the plural includes the singular, and the masculine gender includes
both male and female referents. This Agreement maybe executed in two or more
counterparts, each of which shall be deemed to be an original but all of which,
taken together, constitute one and the same agreement. This Agreement and the
rights and obligations of the parties hereto shall be construed in accordance
with the laws of the State of California, without giving effect to the
principles of conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first written above.
MR. HART: MICRONICS COMPUTERS, INC.
/s/ CHARLES J. HART By: /s/ WM. E. SHELANDER
- -------------------------- ---------------------------------------
Charles J. Hart Wm. E. Shelander, Authorized Signatory
6
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