<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 June 29, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period ____________ to ___________
Commission File Number 0-21892
PINNACLE MICRO, INC.
(Exact name of the registrant as specified in its charter)
Delaware 33-0238363
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19 Technology Drive, Irvine, California 92618
(Address of principal executive offices)
(714) 789-3000
(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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X .
--- ---
As of July 30, 1996, there were outstanding 7,924,850 shares of the Registrant's
Common Stock.
Page 1 of 13 Pages
Exhibit Index appears on page 12
<PAGE> 2
PINNACLE MICRO, INC.
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements 3
Condensed Balance Sheets at June 29, 1996
and December 30, 1995 3
Condensed Statements of Operations for the thirteen
weeks and twenty-six weeks ended June 29, 1996
and July 1, 1995 4
Condensed Statements of Cash Flows for the
twenty-six weeks ended June 29, 1996 and July 1, 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE MICRO, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 29, December 30,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,720,000 $ 3,606,000
Accounts receivable, net 8,741,000 11,354,000
Income taxes receivable 921,000 999,000
Inventories 14,337,000 11,413,000
Prepaid expenses and other current assets 1,329,000 961,000
Deferred income taxes 1,058,000 1,058,000
----------- -----------
Total current assets 29,106,000 29,391,000
Furniture and equipment, net 2,113,000 2,098,000
Deferred income taxes 213,000 213,000
Other assets 322,000 303,000
----------- -----------
Total assets $31,754,000 $32,005,000
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $13,929,000 $11,644,000
Accrued expenses 1,571,000 1,244,000
Payroll related liabilities 1,106,000 956,000
Note payable to bank and current
portion of long-term debt 5,000,000 6,000
----------- -----------
Total current liabilities 21,606,000 13,850,000
Long-term debt, less current portion -- 14,000
Accrued litigation settlement 980,000 1,400,000
Commitments and contingencies
Stockholders' equity:
Common stock 8,000 8,000
Additional paid-in capital 16,578,000 16,158,000
Retained earnings (7,053,000) 775,000
Foreign currency translation adjustment (365,000) (200,000)
----------- -----------
Total stockholders' equity 9,168,000 16,741,000
----------- -----------
Total liabilities and stockholders' equity $31,754,000 $32,005,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE> 4
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
June 29, 1996 July 1, 1995 June 29, 1996 July 1, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $12,333,000 $20,600,000 $29,767,000 $40,785,000
Cost of sales 10,180,000 15,201,000 24,486,000 29,702,000
----------- ----------- ----------- -----------
Gross profit 2,153,000 5,399,000 5,281,000 11,083,000
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 4,429,000 4,106,000 9,681,000 8,798,000
Research and development 1,436,000 891,000 3,028,000 1,680,000
Nonrecurring charges 87,000 183,000 251,000 408,000
----------- ----------- ----------- -----------
Total operating expenses 5,952,000 5,180,000 12,960,000 10,886,000
----------- ----------- ----------- -----------
Operating income (loss) (3,799,000) 219,000 (7,679,000) 197,000
Interest income (expense) (114,000) 45,000 (146,000) 86,000
----------- ----------- ----------- -----------
Income (loss) before income taxes (3,913,000) 264,000 (7,825,000) 283,000
Income tax expense -- 102,000 3,000 109,000
----------- ----------- ----------- -----------
Net income (loss) $(3,913,000) $ 162,000 $(7,828,000) $ 174,000
=========== =========== =========== ===========
Net income (loss) per share $ (0.49) $ 0.02 $ (0.99) $ 0.02
=========== =========== =========== ===========
Weighted average
common shares outstanding 7,917,000 7,929,000 7,892,000 7,928,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE> 5
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
June 29, 1996 July 1, 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(7,828,000) $ 174,000
----------- -----------
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 674,000 428,000
Provision for doubtful accounts 252,000 98,000
Provision for product returns and price protection 498,000 --
Provision for inventory obsolescence 358,000 (4,000)
Deferred compensation recognized -- 9,000
Changes in operating assets and liabilities:
Accounts receivable 1,863,000 (2,283,000)
Income taxes receivable 78,000 (268,000)
Inventories (3,282,000) (5,265,000)
Prepaid expenses and other current assets (368,000) (858,000)
Other assets (43,000) (271,000)
Accounts payable and accrued expenses 2,497,000 7,545,000
Payroll related liabilities 150,000 112,000
Income taxes payable -- (294,000)
----------- -----------
Net cash used in operating activities (5,151,000) (877,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments -- 1,198,000
Purchase of furniture and equipment (665,000) (611,000)
----------- -----------
Net cash provided by (used in) investing activities (665,000) 587,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable to bank 5,000,000 --
Principal payments on note payable to bank -- (200,000)
Principal payments on long-term debt (20,000) (14,000)
Proceeds from exercise of stock options -- 2,000
Proceeds from issuance of stock through
the employee stock purchase plan -- 68,000
----------- -----------
Net cash provided by (used in) financing activities 4,980,000 (144,000)
----------- -----------
Effect of exchange rate changes on cash (50,000) 257,000
----------- -----------
Decrease in cash and cash equivalents (886,000) (177,000)
Cash and cash equivalents at beginning of period 3,606,000 4,866,000
----------- -----------
Cash and cash equivalents at end of period $ 2,720,000 $ 4,689,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 150,000 $ 19,000
=========== ===========
Income taxes $ -- $ 670,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE> 6
PINNACLE MICRO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 29, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Period Accounting Policies
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles.
Certain information normally included in annual financial statements
prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission, and these financial statements
should be read in conjunction with the Company's Form 10-K for the year
ended December 30, 1995. In the opinion of management, the accompanying
condensed financial statements reflect all material adjustments which
are necessary for a fair presentation of the financial position and
results of operations and cash flows as of and for the twenty-six weeks
ended June 29, 1996 and July 1, 1995.
Revenue Recognition
The Company recognizes product sales revenue at the time of shipment
and records a reserve for estimated sales returns and price
adjustments. The Company has agreements with its resellers which, under
certain circumstances, provide for stock rotation for slow-moving items
and price protection for inventories held by the resellers at the time
of published price reductions.
Foreign Currency Transactions
Gains and losses from foreign currency transactions are included in
operating results, in selling, general and administrative expenses.
Transaction gains increased operating income in the thirteen weeks
ended June 29, 1996 by approximately $130,000 while transaction losses
decreased operating income for the thirteen weeks ended July 1, 1995 by
approximately $204,000. Transaction gains increased operating income in
the twenty-six weeks ended June 29, 1996 by approximately $178,000
while transaction losses decreased operating income for the twenty-six
weeks ended July 1, 1995 by approximately $789,000.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 29, December 30,
1996 1995
---- ----
<S> <C> <C>
Components and work-in-process $13,160,000 $ 9,522,000
Finished goods 1,177,000 1,891,000
----------- -----------
$14,337,000 $11,413,000
----------- -----------
</TABLE>
3. INCOME TAXES
The Company estimated an effective tax rate of 38.5% for the thirteen
weeks and twenty-six weeks ended July 1, 1995. The Company did not
accrue a tax benefit for the operating losses incurred in the thirteen
week and twenty-six week periods ended June 29, 1996.
6
<PAGE> 7
4. CONTINGENCIES
On March 15, 1996, a complaint was filed against the Company and
certain of its officers and directors in a securities class action
lawsuit which alleges that Company management engaged in improper
accounting practices and made certain false and misleading statements.
The complaint was filed in the United States District Court for the
Central District of California under the case name Wills, Cohen, et al.
v. William Blum et al., Case No. SACV96-261GLT. The Company denies all
allegations and intends to vigorously contest the suit. The ultimate
outcome of this matter cannot presently be determined. Accordingly,
no provision for any liability that may result has been made in the
accompanying financial statements. However, any adverse determination
with respect to the pending lawsuit could have a material adverse
effect on the Company's financial statements. The Company expects to
incur significant legal costs relating to this suit in 1996.
5. SUBSEQUENT EVENT
Bank of America, the Company's lender, after defaults on certain
covenants (but not payments), granted extensions or forbearances of the
loan pending repayment.
After discussions with qualified investors in May and June, the
Company completed an offshore placement of $10 million principal amount
of convertible subordinated 8% notes in July, 1996 after the close of
the second quarter. Proceeds from this placement and cash on hand were
used to repay the Bank of America loan on July 17, 1996. The $10
million placement was completed on July 19 yielding aggregate net
proceeds of $9.4 million after commissions (fees) to First Bermuda
Securities Limited. First Bermuda also has the right to receive
compensation in the form of warrants exercisable for five years at a
strike price of 125% of the closing bid/price on the closing date.
First Bermuda received customary piggyback registration rights
beginning 90 days from the Closing Date and demand rights after two
years. The note holders may convert the principal of the 8% notes in
thirds, at discounts from the then market price of 15%, 17.5% and
20%, in intervals 60, 90 and 120 days after the closing.
First Bermuda has issued a term sheet for a second $5 million
placement of 6% debentures plus warrants. The Company has agreed to
give the purchasers of the 8% notes a right of first refusal.
In connection with this offering, the Company notified all
shareholders of the proposed offering and obtained confirmation from
the holders of a majority of the outstanding shares that they would, if
a formal vote had been taken, approve the offering.
7
<PAGE> 8
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED AS A RESULT OF THE RISK FACTORS SET FORTH IN THIS REPORT.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales were $20,600,000 and $12,333,000 for the thirteen weeks ended July 1,
1995 and June 29, 1996, respectively, representing a decrease of approximately
40%. Net sales were $40,785,000 and $29,767,000 for the twenty-six weeks ended
July 1, 1995 and June 29, 1996, respectively, representing a decrease of
approximately 27%. These decreases are primarily attributable to decreased unit
sales and average sales prices of the current recordable CD, Sierra and Tahoe
230 products, and were partially offset by sales of the Vertex product which
began shipping at the end of the second quarter. While the recordable CD product
is facing increased competition, the Sierra and Tahoe 230 products have reached
the end of their product lives.
Gross Profit
Gross profit decreased from $5,399,000 for the thirteen weeks ended July 1,
1995, to $2,153,000 for the thirteen weeks ended June 29, 1996, and decreased as
a percentage of sales from approximately 26.2% as compared to 17.5%. Gross
profit decreased from $11,083,000 for the twenty-six weeks ended July 1, 1995,
to $5,281,000 for the twenty-six weeks ended June 29, 1996, and decreased as a
percentage of sales from approximately 27.2% as compared to 17.7%. The Company
has observed increased competition in the recordable CD market for the current
product. This competition placed additional pressures on selling prices and
gross margins in the current period, and is expected to continue placing
pressure on gross margins in future periods for existing recordable CD products.
The reduction in gross profit is also attributable to the Sierra and Tahoe 230
products reaching the end of their product lives, but was partially offset by
the Company's ability to negotiate cost reductions from its recordable CD
suppliers.
The Company has manufacturing facilities in Colorado Springs, Colorado, devoted
to the production of the Company's Apex and Vertex products. Vertex is in
production in the third quarter and is meeting Company objectives. There were
some scrap and rework costs associated with the former Vertex design. These
costs, along with the overhead associated with this facility, significantly
reduced the Company's gross margins in the reported thirteen week and twenty-six
week periods. This facility and its operations will continue to negatively
impact the Company's gross margins unless and until production volumes increase
significantly for the Apex drives and Apex-based optical libraries or
"jukeboxes."
Selling, General and Administrative
Selling, general and administrative expenses were $4,106,000 and $4,429,000 in
the thirteen weeks ended July 1, 1995 and June 29, 1996, respectively, and
represented approximately 19.9% and 35.9% of net sales. Selling, general and
administrative expenses were $8,798,000 and $9,681,000 in the twenty-six weeks
ended July 1, 1995 and June 29, 1996, respectively, and represented
approximately 21.6% and 32.5% of net sales. The increase in expenditures
resulted primarily from increased advertising and promotional expenditures and
the expansion of the Company's sales and administrative staffs. In the thirteen
weeks ended July 1, 1995 and June 29, 1996, selling, general and administrative
expenses were increased by $204,000 and decreased by $130,000, respectively, as
resulted from Japanese Yen denominated transactions as the U.S. dollar
fluctuated in value in relationship to the Japanese Yen. Selling, general and
administrative expenses were increased by $789,000 and decreased by $178,000 for
the twenty-six weeks ended July 1, 1995 and June 29, 1996, respectively for the
same reason. The Company continues to evaluate a number of cost reduction
alternatives to be implemented in the second half of 1996, with results expected
to be seen in the fourth quarter of 1996 and first quarter of 1997.
8
<PAGE> 9
Research and Development
Research and development expenses were approximately $891,000 and $1,436,000 for
the thirteen weeks ended July 1, 1995 and June 29, 1996, respectively, or 4.3%
and 11.6% of net sales. Research and development expenses were approximately
$1,680,000 and $3,028,000 for the twenty-six weeks ended July 1, 1995 and June
29, 1996, respectively, or 4.1% and 10.2% of net sales. These increases resulted
from increased staffing at the Company's research and development facility,
along with expenses for Apex and Vertex prototypes and for ASIC development fees
paid to third parties. The Company expects to increase its research and
development expense during the next twelve months to complete the development of
the Apex product, and to fund new product development projects.
Nonrecurring charges
Nonrecurring charges were approximately $183,000 and $87,000 in the thirteen
weeks ended July 1, 1995 and June 29, 1996, respectively. Nonrecurring charges
were approximately $408,000 and $251,000 in the twenty-six weeks ended July 1,
1995 and June 29, 1996, respectively. Included in nonrecurring charges are
certain professional fees related to the restatements and related legal matters.
Management expects related legal fees to continue at noticeable levels through
1996. (Please see Note 4 of Notes to Condensed Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 1996, the Company had cash and cash equivalents of $2,720,000 as
compared to $3,606,000 at December 30, 1995. During the twenty-six weeks ended
July 1, 1995, the Company's operations used $877,000 in cash, while they used
$5,151,000 in cash during the twenty-six weeks ended June 29, 1996. Inventories
increased from $11,413,000 at December 30, 1995 to $14,337,000 at June 29, 1996
as the Company's sales levels were lower than had been planned. Accounts payable
increased from $11,644,000 at December 30, 1995 to $13,929,000 at June 29, 1996
as certain of the Company's suppliers provided extended payment terms, and due
to higher inventory levels. Accounts receivable decreased from $11,354,000 at
December 30, 1995 to $8,741,000 at June 29, 1996 as the Company experienced
decreased sales in the current period.
Portions of the Company's accounts payable balance typically include items
denominated in Japanese Yen. As the Japanese Yen generally strengthened during
the twenty-six weeks ended July 1, 1995, the cost to repay these liabilities in
terms of U.S. dollars increased substantially. The Company has renegotiated most
of its principal contracts with Japanese suppliers for payment in U.S. Dollars.
In contrast, as the Japanese Yen generally weakened during the twenty-six weeks
ended June 29, 1996, the cost to repay these liabilities in terms of U.S.
dollars decreased. (See "Selling, General and Administrative" above for details
of these expenses.) These Japanese Yen liabilities were not hedged at June 29,
1996.
The Company's investing activities during this period included capital
expenditures of approximately $700,000 for test and manufacturing equipment
primarily associated with the Company's manufacturing facility in Colorado.
As previously disclosed, the Company was in default of certain covenants (but
not payments) in the loan agreement with its lender. The Company sought
additional capital to repay the loan and for working capital. The Company's
lender, Bank of America, while declining to make additional advances gave
forbearance letters pending repayment of the loan. The Company used funds from a
private placement (Approx. $9.4 million raised) under Regulation S to repay this
loan. (See Note 5 of Notes to Condensed Financial Statements.)
The Company is presently negotiating with a candidate for a successor lender.
The Company is also evaluating its working capital requirements and possible
sources of additional working capital in light of projected capital requirements
for Apex ramp-up and manufacturing.
9
<PAGE> 10
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain present and former members of its senior management have
been the subject of an investigation by the Securities and Exchange Commission
(the "SEC") relating principally to the restatement of the Company's
previously-reported financial results. The Company and its management have been
cooperating fully with the investigation. The resignation of the Company's prior
independent public accountants on February 20, 1996, led to additional inquiries
by the SEC, which additional inquiry is believed to be closed.
The Company reached agreement in principle on terms of settlement with the Staff
of the Enforcement Division of the SEC.
Under the terms of the Company's proposed settlement, which have not been
finally approved by the Commission, the Company would be subject to an
administrative cease and desist proceeding including the following findings,
which the Company would neither admit nor deny: violating Sections 13(a)
(periodic reporting) 13(B)(2)(A) (books and records) and 13(B)(2)(B) (internal
controls) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-13
and 13b2-1 thereunder. The allegations will be based primarily on the
post-period shipping at the fiscal year ended December 31, 1993 and, to a lesser
extent on the inconsistent accounting for certain component sales. One Rule
12b-20 finding would relate to the restatement of the Company's third quarter
1995 financial statements as to certain non-recurring engineering expenditures.
The proposed settlement does not provide for any civil penalties. The Company,
in light of issues raised by the Staff's investigation, has voluntarily
implemented certain measures to enhance its internal controls and improve its
corporate governance.
On March 15, 1996, a complaint was filed against the Company and certain of its
officers and directors in a securities class action lawsuit which alleges that
Company management engaged in improper accounting practices and made certain
false and misleading statements. The Company denies all allegations and intends
to vigorously contest the suit. The ultimate outcome of this matter cannot
presently be determined. The Company expects to incur significant legal costs
relating to this suit in 1996. (See Note 4 of Notes to Condensed Financial
Statements.)
The Company is also subject to other legal proceedings and claims which arise in
the normal course of business. While the outcome of these proceedings cannot be
predicted with certainty, the Company does not believe that the outcome of such
legal matters will have a material adverse effect on the Company's financial
statements.
ITEM 5. OTHER INFORMATION
Vertex and Apex
Vertex 2.6 GB optical drive was relaunched in June 1996. Media from the three
major vendors was tested and qualified. The product was re-engineered for
manufacturing which greatly improved manufacturing yields. The media which ships
with the drive is tested with the drive before shipment to the customer. Current
production is sufficient to satisfy the existing backlog of orders and meet
current demand.
Engineering verification testing on Apex has begun. All mechanical and optical
improvements in components of the drive have been completed and tested. The
Company expects to begin building subassemblies in the third quarter. The
Company plans both pre-production and pilot releases before volume production.
Apex is scheduled for production in the fourth quarter of 1996.
Cooperation From Suppliers
In the second quarter the Company worked out understandings and arrangements
with certain of its vendors pursuant to which the Company obtained temporary
extended terms.
10
<PAGE> 11
Reorganization at the R & D Center and in Manufacturing
During the second quarter the Company formed a business team consisting of
product management, R & D manufacturing and quality assurance. The Company is
now following a product release process that requires disciplined action and
follow up by every department. The launch of a product to the market and the
corresponding sales plan is being prepared in parallel with the development of
products. During the quarter, the Company recruited key manufacturing and
technical people. In addition, the Company reestablished good working
relationships with its key suppliers.
RISK FACTORS
Because of these and other factors affecting the Company's operating results,
including the uncertainties relating to the pending litigation, past financial
performance should not be considered a reliable indicator of future performance,
and investors should not use historical trends to anticipate results or trends
in future periods.
Risks in the Apex program could include the unplanned need for another revision
of the principal printed circuit board and an unexpected problem in media
quality. To date, these risks do not appear to extend or delay the schedule for
commencement of shipping in the fourth quarter.
The Company plans to raise an additional $5 million dollars through a private
placement of a 6% convertible debenture in October 1996. In addition, the
Company continues to evaluate alternative sources of additional working capital,
which the Company in all probability may need to obtain within the next six to
twelve months. If such additional working capital is not or cannot be obtained,
it could limit the Company's growth prospects.
The Company's quarterly operating results fluctuate significantly depending on
factors such as timing of product introductions by the Company and its
competitors, market acceptance of new products and enhanced versions of the
Company's existing products, changes in pricing policies by the Company and its
competitors, currency fluctuations and the timing of expenditures on
advertising, promotion and research and development.
In addition, the Company's component purchases, production and spending levels
are made based upon forecasted demand for the Company's products. Accordingly,
any inaccuracy in forecasting could adversely affect the Company's results of
operations. Demand for the Company's products could be adversely affected by a
slowdown in the overall demand for computer systems or data storage products.
Further, as is common in many high technology companies, the Company's shipments
tend to be disproportionately higher in the latter part of each quarter. The
Company has historically experienced an increase in the number of orders and
shipments in the latter part of each calendar quarter and the Company expects
this pattern to continue in the future. The Company's failure to receive
anticipated orders or to complete shipments in the latter part of a quarter
could have a material adverse effect on the Company's results of operations for
that quarter. Past results are not necessarily indicative of future performance
for any particular period.
The Company continues to face competition from other, much larger, magnetic and
optical storage device developers, including Fujitsu, Sony and Philips. These
competitors have much larger R&D budgets and staffs, much greater engineering
and manufacturing experience, and may be able to bring products to market that
force the Company to reduce prices in order to remain competitive. Such price
competition would reduce the Company's margins, thereby making it more difficult
for the Company to maintain or increase its revenues and consequently to achieve
a profit.
11
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
- -------------- ----------- -----------
<S> <C> <C>
10.32 Form of Offshore Subscription Agreement
10.33 Form of Convertible Note
10.34 Form of Registration Rights Agreement
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K: None
12
<PAGE> 13
SIGNATURES
PINNACLE MICRO, INC.
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.
August 12, 1996 By: /s/ Lawrence Goelman
-----------------------------------------
Lawrence Goelman, President and
Chief Executive Officer
(Duly Authorized Officer)
August 12, 1996
By: /s/ Roger Hay
-----------------------------------------
Roger Hay
Principal Financial Officer and Principal
Accounting Officer
13
<PAGE> 1
EXHIBIT 10.32
THE SECURITIES SUBSCRIBED FOR HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR
SOLD IN THE UNITED STATES (AS DEFINED IN REGULATION S UNDER THE ACT) OR TO OR
FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS (AS DEFINED IN REGULATION S) EXCEPT
PURSUANT TO REGISTRATION UNDER OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT.
OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
This Offshore Securities Subscription Agreement (the "Agreement"), dated July
11, 1996, is entered into by and between Pinnacle Micro, Inc., a company
incorporated in the state of Delaware (the "Company"), and _________________
(the "Buyer").
The Company has offered for sale outside the United States (as that term is
defined in Regulation S ("Regulation S") under the United States Securities Act
of 1933, as amended (the "Act") up to $10,000,000 of 8% Convertible Notes due
July 11, 2001 (the "Securities"), convertible into common stock of the Company.
Buyer has been offered $_______________ in principal amount of the Notes.
Interest on the Securities will be payable as provided in the form of
Convertible Note attached hereto as Annex A. The terms on which the Securities
may be converted into Common Shares (such Common Shares underlying the
Securities being referred to herein as "Shares") and the other terms of the
Securities are set forth in the Form of Convertible Note attached as Annex A.
Capitalized terms used herein and not defined herein shall have the meanings
given to them in Regulation S as the same may be amended from time to time.
The parties hereto agree as follows:
1. Purchase and Sale of Securities. Upon the basis of the representations and
warranties, and subject to the terms and conditions, set forth in this
Agreement, the Company covenants and agrees to sell to the Buyer on the Closing
Date (as hereinafter defined) $__________ of the Securities at a price of 100%
of the original principal amount, and upon the basis of the representations and
warranties, and subject to the terms and conditions, set forth in this
Agreement, the Buyer covenants and agrees to purchase from the Company, on the
Closing Date $________________ of the Securities of the Company at 100% of the
original principal amount.
2. Closing Instructions to Escrow Agent. (a) The closing of the purchase and
sale of the Securities pursuant to Section 1 hereof shall take place on or
before July 15, 1996 (the "Closing Date") after the Company has delivered to the
offices of First Bermuda Securities, Limited (the "Escrow Agent") located at
Jardine House, 3rd Floor, 33/35 Reid Street, Hamilton, HM 12 Bermuda Convertible
Notes (each a "Convertible Note") representing the Securities in denominations
of not less than $50,000 and registered in the names provided by the Buyer
(representing the maximum amount of Securities to be purchased by the Buyer
hereunder).
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<PAGE> 2
(b) The Company and the Buyer agree that they shall instruct the Escrow
Agent as provided in Annex B and as follows:
(i) On the Closing Date, for each Convertible Note subscribed
for and delivered to the Escrow Agent pursuant to paragraph 2(a) above, the
Escrow Agent shall, upon confirmation in the form of a Federal funds wire number
that First Bermuda Securities Limited has wired payment of the Purchase Price
for the Securities (less any fees Company has authorized Escrow Agent to deduct)
in immediately available funds to the Company's account as provided in the
escrow instructions attached as Annex B, release the Securities described in
paragraph 2(a) above. The Escrow Agent shall return to the Company any
Convertible Notes that the Buyer does not purchase on the Closing Date. If the
closing shall not have taken place by July 18, 1996, this Agreement shall
terminate.
(ii) The Escrow Agent will make delivery of the number of
Convertible Notes set forth in clause (2a) above in accordance with the
instructions of the Buyer subject to customary settlement procedures upon
confirmation of the wiring of funds to the Company as described in clause
2(b)(i) above, except that all such Convertible Notes shall be delivered to a
location outside the United States and none of the Convertible Notes shall be
delivered to a U.S. Person (as defined in Regulation S).
3. Representations and Warranties of the Buyer: The Buyer understands and
represents and warrants to, and agrees with the Company that:
(a) The Buyer understands that no federal or state agency has
passed on, or made any recommendation or endorsement of the Securities.
(b) The Buyer acknowledges that, in making the decision to
purchase the Securities, it has relied solely upon independent investigations
made by it and not upon any representations made by the Company with respect to
the Company or the Securities, except for the representations and warranties in
this Agreement, the Convertible Note, the Registration Rights Agreement and the
Officers Certificate, except that the Buyer has received, reviewed and relied
upon the Opinion of Counsel and copies of the report on Form 10-Q for the
quarter ended March 30, 1996, the report Form 10-K for the year ended December
30, 1995, filed by the Company pursuant to the Securities Exchange Act of 1934,
as amended, and all other filings, including filings on Form 8K, under such
Exchange Act since December 30, 1995, which, together with any filings by
Company after the date hereof and prior the Closing, are defined as "Exchange
Act Reports".
(c) The Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from or
non-application of the registration requirements of federal and state securities
laws and that the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the applicability of such
exemptions and the suitability of the Buyer to acquire the Securities.
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<PAGE> 3
(d) The Buyer is not a U.S. Person (as defined in Regulation
S) and is not and will not be an affiliate (as defined in the Exchange Act) of
the Company. To enable the Company to avoid withholding interest paid, the Buyer
certifies under penalty of perjury that it is neither a citizen nor a resident
of the United States and that its address set forth in the Escrow Agreement is
correct.
(e) No offer of the Securities or the common stock issuable on
conversion of the Securities was made to the Buyer while the Buyer was present
in the United States.
(f) At the time the buy order for the Securities was
originated the Buyer was located outside the United States and is outside the
United States on the date of the execution and delivery of this agreement and
will be outside the United States on the Closing Date.
(g) The Buyer is aware that the Securities and the common
stock issuable upon exercise of conversion rights have not been and will not be
registered under the Act (except as may be required under the Registration
Rights Agreement) and may only be offered or sold pursuant to registration under
the Act or an available exemption therefrom.
(h) The Buyer (i) will not, during the period commencing on
the Closing Date and ending 40 days after the Closing Date (the "Restricted
Period"), offer or sell or agree to sell the Securities in the United States, to
a U.S. Person or for the account or benefit of a U.S. Person or other than in
accordance with Rule 903 or 904, as applicable, of Regulation S; and (ii) will,
after the expiration of the Restricted Period, offer, sell, pledge or otherwise
transfer the Securities or the common stock issuable upon the exercise of
conversion rights only pursuant to registration under the Act or an available
exemption therefrom and, in any case, in accordance with applicable federal and
state securities laws.
(i) The Buyer and its affiliates have been advised of and are
familiar with, have complied, and will comply, with the offering restrictions,
and any other requirements, of Regulation S.
(j) The transactions contemplated by this Agreement (i) have
not been pre-arranged by the Buyer with a purchaser located in the United States
which is a U.S. Person, and (ii) are not part of a plan or scheme by the Buyer
to evade the registration provisions of the Act.
(k) The Buyer will be purchasing the Securities for its
account for the purpose of investment and not (i) with a view to, or for sale in
connection with, any distribution thereof; or (ii) for the account or on behalf
of any U.S. Person.
(l) Neither the Buyer nor any of its affiliates has entered,
has the intention of entering, or will during the Restricted Period enter into,
with any U.S. Person, any put option, short position or other similar instrument
or position with respect to the Securities or securities into which the
Securities are convertible.
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<PAGE> 4
4. Registration Rights On or prior to the Closing Date, the Company and Buyer
agree to execute a Registration Rights Agreement in the form substantially set
out in Annex C attached hereto.
5. Conversion of Securities The Securities may be converted into the Shares, as
herein defined, at the option of the holder thereof under the terms set forth in
the Form of Convertible Note, attached hereto as Annex A.
6. Representations and Warranties of the Company. The Company represents and
warrants to, and agrees with, the Buyer that:
(a) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Delaware.
(b) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally and to general principles
of equity; and the Company has full corporate power and authority necessary to
enter into this Agreement and to perform its obligations thereunder.
(c) No consent, approval, authorization or order of any court,
governmental agency or body or arbitrator having jurisdiction over the Company
or any of its affiliates is required for execution of this Agreement, including,
without limitation, the issuance and sale of the Securities, or the performance
of its obligations hereunder.
(d) Except as disclosed to the Buyer or its representatives in
writing, neither the sale of Securities pursuant to, nor the performance of its
obligations under this Agreement by the Company will (i) violate , conflict
with, result in a breach of, or constitute a default (or an event which with the
giving of notice or the lapse of time or both would be reasonably likely to
constitute a default) under (A) the articles of incorporation, charter or
by-laws of the Company or any of its affiliates, (B) any decree, judgment,
order, law, treaty, rule, regulation or determination applicable to the Company
or any of its affiliates of any court, governmental agency or body, or
arbitrator having jurisdiction over the Company or any of its affiliates or over
the properties or assets of the Company or any of its affiliates, (C) the terms
of any bond, debenture, note or any other evidence of indebtedness, or any
material agreement, stock option or other similar plan, indenture, lease,
mortgage, deed of trust or other material instrument to which the Company or any
of its affiliates is a party, by which the Company or any of its affiliates is
bound, or to which any of the properties of the Company or any of its affiliates
is subject, or (D) the terms of any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company or any of its affiliates
is a party to; or (ii) result in the creation or imposition of any lien, charge
or encumbrance upon the Securities or any of the assets of the Company or any of
its affiliates.
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<PAGE> 5
(e) The Company has an authorized capitalization consisting of
30,000,000 shares of Common Stock, par value $.001 per share, and 5,000,000
shares of Preferred Stock, par value $.001 per share ("Preferred Stock"). The
Company has issued and outstanding 7,916,550 shares of Common Stock and nil
shares of Preferred Stock on the date hereof. All of the issued shares of
capital stock of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable; prior to the Closing Date, the authorized
capitalization shall include the Shares to be issued upon conversion of the
Securities. The shares of Common Stock issuable upon conversion of the
Securities, when issued and delivered in accordance with the terms of the
Securities, will be duly and validly issued, fully paid and non-assessable. The
issuance of the Shares will not be in violation of any preemptive or similar
rights of the holders of any securities of the Company. The Securities (i) are
free and clear of any security interests, liens, claims or other encumbrances;
(ii) have been duly and validly authorized and on the Closing Date will be duly
and validly issued, fully paid and non assessable; (iii) will not have been,
individually and collectively, issued or sold in violation of any preemptive or
other similar rights of the holders of any securities of the Company; (iv) will
not subject the holders thereof to personal liability by reason of being such
holders; and (v) the Shares underlying the Securities are quoted on, and will
be, following the completion of the Restricted Period (if sold in accordance
with the provisions of this Agreement and Regulation S as then in effect),
eligible for trading on, the National Association of Securities Dealers Inc.
National Market System ("NASDAQ").
(f) The Company is a Reporting Issuer (as defined in
Regulation S) because it has a class of securities registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") and
has filed all the material required to be filed pursuant to Section 13(a) of the
Exchange Act for a period of at least twelve (12) months preceding the date of
this Agreement, provided that, as disclosed in subparagraph (j) below, certain
of the Company's reports contain 1993 financial statements which are not audited
for the reasons stated in such reports. The Company's stock is listed on Nasdaq
and the Company has received no notice, oral or written, with respect to its
continued eligibility for such listing. The Company hereby agrees, promptly
following the Closing of the transactions contemplated by this Agreement, to
take such action as is necessary to cause the Shares issued upon exercise of
conversion rights under the Convertible Notes to be listed on Nasdaq upon such
conversion following expiration of the Restricted Period (subject, if required,
to notice to Nasdaq of the actual number of shares issued). The Company further
agrees, if the Company applies to have the Common Stock traded on any other
principal stock exchange or market, it will include in such application the
Shares and will take such other action as is necessary or desirable to cause the
Shares to be listed on such other exchange or market upon expiration of the
Restricted Period.
(g) The Exchange Act Reports are the only filings made by the
Company since December 31, 1995 pursuant to Sections 13(a), 13(c), 14 and 15(d)
of the Exchange Act, and the Company will cause its Common Stock to continue to
be registered under Section 12(g) or 12(b) of the Securities Exchange Act of
1934, will comply in all respects with its reporting and filing obligations
under said Act, and will not take any action or file any document (whether or
not
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<PAGE> 6
permitted by said Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Act. The Company will take all action necessary to continue the
listing and trading of its Common Stock on Nasdaq and will comply in all
respects with the Company's reporting, filing and other obligations under the
by-laws or rules of the NASD and Nasdaq.
(h) The Company has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company does
not have any subsidiaries. The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary other than those in which the failure so to qualify
would not have a Material Adverse Effect. "Material Adverse Effect" means any
adverse effect on the business, operations, properties, prospects, or financial
condition of the entity with respect to which such term is used and which is
material to such entity.
(i) The Company has furnished or made available to the Buyer
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof (the "Certificate of Incorporation"), and the
Company's By-Laws, as in effect on the date hereof (the "By-Laws").
(j) The Company has delivered or made available to the Buyer
true and complete copies of the Exchange Act Reports (including, without
limitation, proxy information and solicitation materials excluding any
preliminary proxy not distributed). The Company has not provided to the Buyer
any information which, according to applicable law, rule or regulation, should
have been disclosed publicly by the Company but which has not been so disclosed.
As of their respective dates, the Exchange Act Reports complied in all material
respects with the requirements of the Exchange Act and the rules and regulations
of the SEC promulgated thereunder and other federal, state and local laws, rules
and regulations applicable to such Exchange Act Reports, and none of the
Exchange Act Reports contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; except that the Company's 1993 financial
statements are not audited for the reasons stated in the Exchange Act Reports
and the related disclosures contained in such reports. The financial statements
of the Company included in the Exchange Act Reports comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto; except that the Company's 1993 financial statements are not
audited for the reasons stated in the Exchange Act Reports and the related
disclosures contained in such reports. Such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto; or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
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<PAGE> 7
(k) Except as set forth in the financial statements and other
documents filed by the Company under the Exchange Act, the Company has no
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to December 31, 1995 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
such financial statements, which individually or in the aggregate, are not
material to the financial condition or operating results of the Company. The
Company has not provided to the Buyer any information which, according to
applicable law, rule or regulation, should have been disclosed publicly by the
Company but which has not been so disclosed.
(l) Since December 31, 1995 there has been no material adverse
change and no material adverse development in the business, properties,
operations, financial condition, results of operations or prospects of the
Company, except as disclosed in accordance with the Exchange Act Reports and
except that the Company continues to incur losses.
(m) There is no material action, suit, proceeding, inquiry or
to the knowledge of the Company or any of its subsidiaries, investigation before
or by any court, public board, government agency, self-regulatory organization
or body pending, or to the knowledge of the Company or any of its subsidiaries,
threatened against or affecting the Company or any of its subsidiaries, except
as disclosed in the Exchange Act Reports.
(n) Neither the Company, nor any or its affiliates, nor any
person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of the Securities under the
Act.
(o) The Company has taken no action which would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments by the Buyer relating to this Agreement of the transactions
contemplated hereby, except for dealings with First Bermuda Securities Limited,
whose commissions and fees will be paid for by the Company.
(p) As of the date hereof, the Company has reserved and the
Company shall continue to reserve and keep available at all times, free of
preemptive rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligation to issue shares of its Common Stock upon
conversion of the Securities; provided, however, that the number of shares so
reserved shall at all times be at least 3,000,000. The number of shares so
reserved may be reduced by the number of shares actually delivered pursuant to
the conversion of the Securities (provided that in no event shall the number of
shares so reserved be less than the number required to satisfy the remaining
conversion rights on the unconverted Securities) and the number of shares so
reserved shall be increased to reflect stock splits and stock dividends and
distributions.
(q) No legend has been or shall be placed on the Securities or
share certificates representing the Securities or Shares and no note or stock
transfer instructions have been or shall be given to the Company's transfer
agent with respect thereto other than as set forth in Section 10.
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<PAGE> 8
(r) Based upon the truth and accuracy of the representations
and warranties made by the Buyer, the sale of the Securities pursuant to this
Agreement will be made in accordance with the provisions and requirements of
Regulation S and applicable state law.
(s) No offer to sell the Securities was made by the Company to
any person in the United States.
(t) None of the Company, any affiliate of the Company, or any
person acting on behalf of the Company or any such affiliate has engaged, or
will engage, in any Directed Selling Efforts as that term is defined in
Regulation S with respect to the Securities nor any general solicitation of the
Securities.
(u) The transactions contemplated by this Agreement (i) have
not been pre-arranged with a purchaser who is in the United States or is a U.S.
Person; and (ii) are not part of a plan or scheme to evade the registration
provisions of the Act.
(v) The Company undertakes and agrees to make all necessary
filings in connection with this offering as required by the laws and regulations
of all appropriate jurisdictions and securities exchanges in the United States
of America.
(w) Each party shall indemnify the other against any loss,
cost or damages (including reasonable attorney's fees and expenses) incurred as
a result of such parties' breach of any representation, warranty, covenant or
agreement in this Agreement.
7. Offering Materials. All offering materials and documents used in connection
with offers and sales of the Securities prior to the expiration of the
Restricted Period referred to in Section 3(h) hereof shall include statements to
the effect that the Securities and the shares issuable upon the exercise of
conversion rights have not been registered under the 1933 Act and that the
Buyer, may not directly or indirectly offer or sell the Securities or such
shares in the United States or to a U.S. Persons (other than distributors)
unless the Securities or shares are registered under the 1933 Act, or an
exemption from the registration requirements of the 1933 Act is available. Such
statements shall appear (1) on the cover of any prospectus or offering circular
used in connection with the offer or sale of the Securities; (2) in the
underwriting section of any prospectus or offering circular used in connection
with the offer or sale of the Securities; and (3) in any advertisement made or
issued by Seller, Buyer, any other distributor, any of their respective
affiliates, or any person acting on behalf of any of the foregoing. Seller
represents that all offering materials and documents used in connection with the
offers and sales of the Securities prior to the Closing of the transactions
contemplated herein have complied with the foregoing.
8. Covenants of the Company. (a) The Company agrees that during the period
beginning on the date hereof and ending 90 days following the Closing Date, the
Company will not negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) in any form
(the "Future Offerings"). In addition, the Company will not conduct any Future
Offerings during the period beginning on the 90th day following the date hereof
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<PAGE> 9
and ending 180 days following the Closing Date unless it shall have first
delivered to the Buyer at least ten (10) business days prior to the closing of
such Future Offering, written notice describing the proposed Future Offering,
including the terms and conditions thereof, and providing the Buyer an option
during such ten (10) day period to purchase all or any portion of its "pro-rata"
share of the securities being offered in the Future Offerings on the same terms
as contemplated by such Future Offering (the limitations referred to in this and
the immediately preceding sentence are collectively referred to as the "Capital
Raising Limitation"). The Capital Raising Limitation shall not apply to a
subsequent offering of convertible debt securities not exceeding $5 million
which will close not less than 90 days after this closing and any transaction
involving the Company's commercial banking arrangements or issuances of
securities in connection with a merger, consolidation or sale of assets, or in
connection with any strategic partnership or joint venture (the primary purpose
of which is not to raise equity capital), or in connection with the disposition
or acquisition of a business, product or license by the Company (so long as the
securities so issued are "restricted securities" within the meaning of Rule 144
under the 1933 Act and do not carry registration or piggy back rights for at
least 360 days from the date of this Agreement), the issuance of securities to
settle securities litigation, or exercise of options by or the grant of
performance shares to employees, consultants or directors. The terms (i)
"majority-in-interest" means Holders of 8% Convertible Notes holding more than
50% of the Common Stock underlying the Securities (treating the Securities on an
as converted basis); and (ii) "pro-rata share" means the principal amount of the
Securities initially purchased divided by the aggregate principal amount of all
Securities sold hereunder.
(b) The parties shall use their best efforts timely to satisfy each of
the conditions described in Section 9 of this Agreement.
(c) So long as the Buyers beneficially own any of the Securities, the
Company shall timely file all reports required to be filed with the SEC pursuant
to the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would permit such termination.
(d) The Company agrees to send the following reports to Buyer until
Buyer transfers, assigns, or sells all of the Securities: (i) within ten (10)
days after the filing with the SEC, a copy of its Annual Report on Form 10-K,
its Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K; and (ii)
within two (2) business days after release, copies of all press releases issued
by the Company or any of its subsidiaries.
(e) The Company shall at all times have authorized, and reserved for
the purpose of issuance, a sufficient number of shares of Common Stock to
provide for the full conversion of the outstanding Securities and issuance of
the Conversion Shares in connection therewith (based on the Conversion Price of
the Securities in effect from time to time). In that regard, on the Closing
Date, the Company shall have at least 2,000,000 shares reserved for issuance
upon conversion of the Securities (subject to adjustment in order to comply with
the immediately preceding sentence); provided that the Company shall not reduce
the number of shares of Common Stock reserved for issuance upon conversion of
the Securities without the consent of a majority-in-interest of the Buyers,
which consent will not be unreasonably withheld.
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(f) So long as the Buyer beneficially owns any Securities, the Company
shall maintain its corporate existence, except in the event of a merger,
consolidation or sale of all or substantially all of the Company's assets, as
long as the surviving or successor entity in such transaction (i) assumes the
Company's obligations hereunder and under the agreements and instruments entered
into in connection herewith; and (ii) is a publicly traded corporation whose
Common Stock is listed for trading on the AMEX, the NYSE or the NASDAQ.
(g) The Company and the Buyer agree that the Closing Date, when
certified by Escrow Agent as the Closing shall be deemed to be a conclusion of
the offering of the Securities contemplated hereby. The Company acknowledges and
agrees that, for purposes of clarifying and specifying the applicable Restricted
Period under Regulation S, the Buyer intends to observe as the Restricted Period
(as defined in Regulation S) for the Securities, the period of 40 days
commencing on the Closing Date and ending 40 days thereafter.
(h) The Conversion Shares and the certificates evidencing the same
shall at all times be free of legends (except as provided in Section 10 below),
"stock transfer restrictions," or other restrictions, except for covenants of
the Buyers expressly set forth in this Agreement.
9. Conditions Precedent to the Buyer's Obligation. The obligations of the Buyer
hereunder are subject to the performance by the Company of its obligations
hereunder and to the satisfaction of the following additional conditions
precedent:
(a) The Buyer shall receive, on the Closing Date, an opinion
of independent counsel to the Company, dated the Closing Date, as to the
representations made by the Company in Sections 6(a) through and including 6(c)
hereof, and the opinion of the Company's general counsel as to matters
represented by the Company in Sections 6(d) through 6(f) hereof, and in Sections
6(m) and 6(n) hereof, and such other matters as Buyer reasonably requests.
The form of such opinions shall be as set forth in Exhibits 1 and 2 hereof.
(b) Delivery of the notes representing the Securities with
restrictive legends to the Escrow Agent as set forth herein.
(c) The Company shall have delivered to the Buyer a
certificate in form and substance reasonably satisfactory to the Buyer, executed
by an executive officer of the Company, to the effect that all the conditions to
the Closing shall have been satisfied and the representations and warranties of
the Company herein are true and correct as of the date when made and as of the
Closing Date, and certifying as to the Company's Certificate of Incorporation,
By-Laws, resolutions authorizing transaction, and incumbency of Company
officers.
(d) The Company and the Buyer shall have entered into the
Registration Rights Agreement contemplated by Section 4.
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<PAGE> 11
10. Legends. (a) The certificates representing the Securities and the Shares
issued during the Restricted Period, shall bear the following legend (the
"Legend"):
"The securities represented hereby have been issued pursuant to
Regulation S promulgated under the Securities Act of 1933, as amended
(the "1933 Act"), and have not been registered under the 1933 Act. Such
securities may not be transferred, offered or sold prior to the end of
the forty (40) day period (the "Restricted Period") commencing on July
15, 1996 unless such transfer, offer or sale is made in an "offshore
transaction" and not to or for the account of or benefit of a "U.S.
Person" (as such terms are defined in Regulation S) and is otherwise in
accordance with the requirements of Regulation S. Following expiration
of the Restricted Period, the securities represented hereby may not be
offered, sold or otherwise transferred in the United States or to a
U.S. Person unless the securities are registered under the 1933 Act and
applicable state securities laws, or such offers, sales and transfers
are made pursuant to an available exemption from the registration
requirements of those laws."
(b) Following the expiration of the Restricted Period, and
subject to Section 10(d) below, the Company will remove or will promptly
instruct its transfer agent to remove the Legend from the Securities and, if
applicable, from the Shares issued during the Restricted Period (and will
instruct its transfer agent to issue without the Legend, the Shares issuable
upon any conversion or exercise occurring after the Restricted Period), if the
Buyer holding such Securities or any other person in whose name such
certificates have been or are to be issued shall have delivered a certificate (a
"Removal Certificate") to the Company to the following effect:
"The undersigned acknowledges that the securities to which this
certificate relates have not been registered under Securities Act of
1933, as amended (the "1933 Act") and that offers, sales or other
transfer of such securities must be made in compliance with Regulation
S promulgated under the 1933 Act, pursuant to an effective registration
statement under the 1933 Act or pursuant to an available exemption from
registration, and the undersigned certifies that the undersigned has
not made, nor will the undersigned make or cause to be made, any offer,
sale or other transfer of such securities, in violation of the 1933
Act, other applicable securities laws or the rules and regulations of
the Securities and Exchange Commission."
(c) Upon the submission, at any time after the expiration of
the Restricted Period, by Buyer of a written request for legend removal for the
purpose of a bona fide pledge or deposit of the Securities with a margin
account, together with the certificates for which the legend removal is being
requested, the Company will reissue or will promptly instruct its transfer agent
to reissue the certificates representing the Securities to be so pledged or
deposited without the Legend, and no Removal Certificate shall be required to be
delivered in connection therewith.
(d) Notwithstanding the provisions of this Section 10, if with
respect to the Company's receipt of a Removal Certificate from any person, prior
to any removal of the Legend, there shall have been after the date hereof any
amendment to the 1933 Act or Regulation S or any no action letter,
interpretative release or other advice from the Securities and Exchange
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Commission after the date hereof which disallows the removal of the Legend under
the circumstances in which the request that it be removed is being made, then
the Company shall have no obligation to remove or to instruct its transfer agent
to remove the Legend, unless the Company shall have received from the person
requesting such removal a written letter of counsel to such person reasonably
acceptable to the Company and its counsel confirming that the Legend may be so
removed or share certificates may be so issued without the Legend without
violation of the 1933 Act. If the person requesting a removal of the Legend is
unable to supply the legal opinion referred to above then the Company shall,
upon demand of such person, be obligated to register the Common Stock for resale
pursuant to the terms of the Registration Rights Agreement.
11. Transfer Agent Instructions. The Company's transfer agent (the "Transfer
Agent") will be instructed to reserve for issuance such number of shares of the
Company's Common Stock as would be issuable if the Convertible Notes were
converted on the Closing Date and such additional number of shares as, from time
to time, shall be necessary to provide for the issuance of Shares upon the
conversion of the Convertible Notes. Additionally, the Company shall deliver to
its transfer agent at closing irrevocable instructions substantially in the form
set forth in Annex D attached hereto, pursuant to which the transfer agent shall
be instructed to issue upon conversion the number of shares provided for in the
Convertible Note being converted on the terms provided for therein without
restrictive legend, registered in the names provided by the Holders. The Company
warrants and covenants that no instructions restricting the transferability of
the Securities and the Shares other than the instructions in the immediately
preceding sentence and instructions for a "stop transfer" instruction until the
end of the Restricted Period have been given, or shall be given, to the Transfer
Agent, and that the Securities and the Shares shall otherwise be freely
transferable on the books and records of the Company. Nothing in this section,
however, shall affect in any way the obligations and agreement of the Buyer to
comply with all applicable federal, state and foreign securities laws upon
resale of the Securities.
12. Miscellaneous. (a) This Agreement may be executed in one or more
counterparts and it is not necessary that signatures of all parties appear on
the same counterpart, but such counterparts together shall constitute but one
and the same agreement.
(b) This Agreement shall be governed by and constructed in
accordance with the laws of the State of California.
(c) This agreement shall inure to the benefit of and be
binding upon the parties hereto, their respective successors, and no other
person shall have any right or obligation hereunder. This Agreement shall not be
assignable by either party without the prior written consent of the other, and
any assignment in violation hereof shall be void. Notwithstanding the foregoing,
the Buyer may assign its rights in this Agreement to, and the provisions of this
Agreement shall inure to the benefit of, and be enforceable by, any transferee
of any of the Securities or Shares.
(d) This Agreement together with the Note and the
Registration Rights Agreement constitutes the entire agreement of the parties
with respect to the subject matter hereof and supersede all prior oral or
written proposals or agreements related thereto. This Agreement may not be
amended or any provision hereof waived, in whole or in part, except by a written
amendment signed by both of the parties hereto.
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IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement, all as of the day and year above written.
BY: PINNACLE MICRO, INC.
_____________________________________________
Name: Lawrence Goelman
Title: President and Chief Executive Officer
or
Name: Roger Hay
Title: Executive Vice President and
Chief Financial Officer
BY:
Name: _______________________________________
Title: ______________________________________
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<PAGE> 1
EXHIBIT 10.33
FORM OF CONVERTIBLE NOTE
THE SECURITIES REPRESENTED HEREBY AND ANY SHARES ISSUED UPON THE EXERCISE OF
CONVERSION RIGHTS HEREUNDER HAVE BEEN AND WILL BE ISSUED PURSUANT TO REGULATION
S PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND
HAVE NOT BEEN REGISTERED UNDER THE 1933 ACT. SUCH SECURITIES MAY NOT BE
TRANSFERRED, OFFERED OR SOLD PRIOR TO THE END OF THE FORTY (40) DAY PERIOD (THE
"RESTRICTED PERIOD") COMMENCING ON JULY 15, 1996 UNLESS SUCH TRANSFER, OFFER OR
SALE IS MADE IN AN "OFFSHORE TRANSACTION" AND NOT TO OR FOR THE ACCOUNT OF OR
BENEFIT OF A "U.S. PERSON" (AS SUCH TERMS ARE DEFINED IN REGULATION S) AND IS
OTHERWISE IN ACCORDANCE WITH THE REQUIREMENTS OF REGULATION S. THIS NOTE MAY NOT
BE CONVERTED INTO SHARES BY OR ON BEHALF OF ANY U.S. PERSON. FOLLOWING THE
EXPIRATION OF THE RESTRICTED PERIOD, THE SECURITIES REPRESENTED HEREBY AND ANY
SHARES ISSUED UPON THE EXERCISE OF CONVERSION RIGHTS MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A U.S. PERSON UNLESS THE
SECURITIES ARE REGISTERED UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES
LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
PINNACLE MICRO, INC.
8% CONVERTIBLE NOTE DUE JULY 11, 2001
THIS NOTE is one of a duly authorized issue of Convertible Notes of PINNACLE
MICRO, INC., a Corporation duly organized and existing under the laws of the
state of Delaware (the "Company") designated as its 8% Convertible Notes Due
July 11, 2001, in an aggregate principal amount of up to $10,000,000.
FOR VALUE RECEIVED, the Company promises to pay to __________ or the registered
holder hereof (the "Holder"), the principal sum of $______________ (United
States Dollars) on July 11, 2001 (the "Maturity Date"), and to pay interest on
the principal sum outstanding from time to time, semi-annually in arrears on the
first day of each December and June (the "Interest Payment Dates"), at the rate
of 8% per annum accruing from the date of issuance. Accrual of interest shall
commence on the first business day to occur after the date hereof until
repayment in full of the principal sum has been made or duly provided for.
Accrued and unpaid interest shall bear interest at the same rate from the due
date of the interest payment, until paid. The interest so payable will be paid
at the option of the Company, either in cash or in shares of common stock at the
then applicable conversion price (computed as described in paragraph 4 below) on
December 11 and June 11 to the person in whose name this Note (or one or more
predecessor Notes) is registered on the records of the Company regarding
registration and transfers of the Notes (the "Note Register") on the tenth day
prior to the Interest Payment Date. The principal of, and interest on, this Note
are payable in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts, at the
address last appearing on the Note Register of the
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<PAGE> 2
Company as designated in writing by the Holder from time to time. The Company
will pay the principal of and interest upon this Note on the due date, free of
any withholding or deduction of any kind, to the registered Holder of this Note
as of the tenth day prior to the due date and addressed to such Holder at the
last address appearing on the Note Register. The forwarding of such check shall
constitute a payment of principal and interest hereunder and shall satisfy and
discharge the liability for principal and interest on this Note to the extent of
the sum represented by such check plus any amounts so deducted.
This Note is subject to the following additional provisions:
1. The Notes are originally issuable in denominations of $50,000 and
integral multiples thereof.
2. All payments on account of the principal of and interest on this Note
and all other amounts payable under this Note (whether made by the Company
or any other person) to or for the account of the Holder hereunder shall be
made free and clear of and without reduction by reason of any present and
future income, stamp, registration and other taxes, levies, duties, costs
and charges whatsoever imposed, assessed, levied or collected by the United
States or any political subdivision or taxing authority thereof or therein,
together with interest thereon and penalties with respect thereto, if any,
on or in respect of this Note (all such taxes, levies, duties, costs and
charges being herein collectively called "United States Taxes"). Should any
such payment be subject to any United States Tax and the provisions of the
preceding sentence of this Paragraph 2 either cannot be effected or do not
result in the Holder actually receiving free and clear of all United States
Taxes an amount equal to the full amount provided under this Note, the
Company shall pay to the Holder such additional amounts as may be necessary
to ensure that the Holder receives a net amount equal to the full amount
which it would have received had such payment not been made subject to
United States Taxes unless withholding arises because holder has failed to
furnish the data described below in this paragraph 2. In addition to the
United States Taxes paid by the Company or additional amounts paid to the
Holder, in each case pursuant to the preceding provisions of this Paragraph
2 ("Additional Payments"), the Company shall also pay to the Holder upon
demand such additional amounts as may be necessary to compensate the
Holder, on an after-tax basis, for any tax or levy imposed or assessed by
any jurisdiction on or with respect to any such Additional Payments
(including any income taxes payable by the Holder with respect to
Additional Payments pursuant to the income tax laws of the jurisdiction of
its principal office or lending office or any political subdivision or
taxing authority thereof). Holder agrees to provide Company a Form W-8, a
certification under penalty of perjury, or a certificate from a financial
institution described in Section 871(h)(4)(B) of the Internal Revenue Code
of 1986 demonstrating that the Holder is not a United States person
3. If at any time there occurs a transaction in which in excess of 50% of
the Company's voting power is transferred (excluding any public or private
offering of Company equity securities), including any consolidation or
merger of the Company with or into any other corporation or other entity or
person (whether or not the Company is the surviving corporation), or any
other corporate reorganization or transaction or series of related
transactions, the Holders of this Note then outstanding may participate in
any such transaction as a class with common stockholders on the same basis
as if this Note had been converted one day prior to the effective date of
such transaction; provided, however, that at the option of the Holder of
this Note if such Holder may treat the effective date of any transaction
that occurs prior to July 11, 2001 as a redemption date and shall be
entitled to have the Company redeem this Note at a price equal to 122.5% of
the outstanding principal amount of this Note, plus accrued but unpaid
interest. Such holder shall be entitled to make such election at any time
up to 10 days prior to the effective date of the transaction. The Company
shall not effect any stock split, subdivision or combination with an
effective date within three (3) trading days preceding the effective date
of a merger or consolidation.
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<PAGE> 3
The Company shall not make, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other
distribution payable in additional shares of common Stock, with an
effective date within three (3) trading days prior to the effective date of
a merger or consolidation.
4. The Holder of this Note is entitled, at its option, at any time
commencing sixty-one (61) days after the Closing Date as defined in the
Offshore Securities Subscription Agreement until maturity hereof to convert
one-third (1/3rd) or any lesser portion of the original principal amount
hereof which is at least $50,000 into shares of common stock of the Company
("Shares") at a conversion price for each share of common stock equal to
eighty-five percent (85%) of the average closing bid price for the five (5)
trading days immediately preceding the conversion date. Beginning
ninety-one (91) days after the Closing Date, an additional 1/3rd of the
original aggregate principal amount may be converted and the conversion
price for each share of common stock equal to eighty-two and one half
percent (82.5%) of the average closing bid price for the five (5) trading
days immediately preceding the conversion date, and beginning one hundred
and twenty-one (121) days after the Closing Date the remaining 1/3rd of the
original aggregate principal amount may be converted and the conversion
price for each share of common stock after such one hundred twenty-first
date shall be equal to eighty percent (80%) of the average closing bid
price for the five (5) trading days immediately preceding the conversion
date, respectively, provided, however, that in no event shall the Holder be
entitled to convert any portion of this Note in excess of that portion of
this Note upon conversion of which the sum of (1) the number of shares of
Common Stock beneficially owned by the Holder and its affiliates (other
than shares of Common Stock which may be deemed beneficially owned through
the ownership of the unconverted portion of this Note and (2) the number of
shares of Common Stock issuable upon the conversion of the portion of this
Note with respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its affiliates of
more than 4.9% of the outstanding shares of Common Stock. For purposes of
the proviso to the immediately preceding sentence, beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulations 13 D-G thereunder, except
as otherwise provided in clause (1) of such proviso). In the event of any
stock split, dividend, combination or similar event occurring after the
Conversion Date and prior to the issuance of the respective stock
certificates, the conversion price will be subject to appropriate
adjustment. For purposes of this section, the closing bid price of the
common stock shall be the closing bid price as reported by the National
Association of Securities Dealers, Inc. National Markets, or the closing
bid price in the over-the-counter market or, in the event the common stock
is listed on a stock exchange, the closing bid price on such exchange as
reported in The Wall Street Journal. Such conversion shall be effectuated
by surrendering the Notes to be converted to the Company, with the form of
conversion notice attached to the Note as Exhibit A, executed by the Holder
of the Note evidencing such Holder's intention to convert this Note, and
accompanied, if required by the Company, by proper assignment hereof in
blank. Interest accrued or accruing from the date of issuance to the date
of conversion on the amount so converted shall be paid in cash or at the
Company's option, in shares of common stock of the Company, calculated at
the same conversion price (as determined above), as would apply on the
conversion date of the principal amount being converted but using the
discount percentage applicable as of such date and shall constitute payment
in full of any such interest on the same terms as would otherwise apply to
the conversion of the principal amount hereof. No fractional Shares or
scrip representing fractions of Shares will be issued on conversion, but
the number of Shares issuable shall be rounded to the nearest whole Share.
The date on which notice of conversion is given ("Conversion Date") shall
be deemed to be the date on which the Holder notifies to the Company of its
intention to convert by delivery, by facsimile transmission or otherwise,
of a copy of the Conversion Notice (as defined below). Notice may be given
by facsimile to the Company at (714) 789-3045. This Note, together with the
original executed copy of the Notice of Conversion, shall be delivered to
the Company as soon as practicable following the date on which notice of
conversion is given as described above. Any unconverted principal amount
and accrued interest thereon shall at the
3
<PAGE> 4
maturity date be paid, at the option of the Holder, in either (a) cash or
(b) shares of common stock valued at a price equal to the average closing
bid price for the five trading days immediately preceding the maturity
date.
Upon the surrender of this Note, accompanied by a Notice of Conversion of
Convertible Note in the form attached hereto as Exhibit A, properly
completed and duly executed by the Holder (a "Conversion Notice"), the
Company shall issue and, within three (3) business days (the "Deadline")
after actual delivery of this Note with the Conversion Notice, deliver to
or upon the order of the Holder (1) that number of shares of Common Stock
for the portion of the Note converted as shall be determined in accordance
herewith and (2) a new Note in the form hereof for the balance of the
principal amount hereof, if any. Without in any way limiting the Holder's
right to pursue other remedies, including actual damages and/or equitable
relief, the parties agree that if delivery of the Common Stock issuable
upon conversion of this Note is more than one (1) business day after the
Deadline (other than a failure due to the circumstances described in the
second paragraph of Section 11 below, which failure shall be governed by
such Section ) the Company shall pay to the Holder $150 per day in cash,
for the first day beyond the Deadline and $500 per day for each day
thereafter that the Company fails to deliver such Common Stock. Such cash
amount shall be paid to Holder by the fifth day of the month following the
month in which it has accrued or, at the option of the Holder (by written
notice to the Company by the first day of the month following the month in
which it has accrued), shall be added to the principal amount of this Note,
in which event interest shall accrue thereon in accordance with the terms
of this Note and such additional principal amount shall be convertible into
Common Stock in accordance with the terms of this Note.
The number of shares of Common Stock to be issued upon each conversion
of this Note shall be determined by dividing (i) the sum of (A) that
portion of the principal amount of the Note to be converted plus (B)
the "Conversion Date Interest" (as defined below), by (ii) the
Conversion Price in effect on the date the Conversion Notice is
delivered to the Company by the Holder. Conversion Date Interest means
the product of (i) the principal amount of the Note to be converted,
multiplied by (ii) a fraction (A) the numerator of which is the number
of days elapsed since the date of issuance of this Note and (B) the
denominator of which is 365, multiplied by (iii) .08.
5. At any time commencing one year after the Closing, Company may, by
written notice to Holder at Holder's registered address, prepay this Note
in whole or in part. Such notice shall be given at least ten (10) business
days prior to the payment date and on such date Company shall pay the
outstanding principal and all accrued interest on this Note, unless prior
to such payment date Holder has delivered a Notice of Conversion. Upon
delivery of a Notice of Conversion, the provisions of paragraph 4 shall
apply, except that no further interest shall accrue after the proposed
payment date.
6. No provision of this Note shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Note at the time, place, and rate, and in the coin or
currency, herein prescribed. This Note and all other Notes now or hereafter
issued on similar terms are direct obligations of the Company. This Note
ranks equally with all other Notes now or hereafter issued under the terms
set forth herein. In the event of any liquidation, reorganization, winding
up or dissolution repayment of this Note shall be subordinate in all
respects to any other indebtedness for borrowed money of the Company,
whether outstanding as of the date of this Note or hereafter incurred. Such
subordination shall extend without limiting the generality of the
foregoing, to all indebtedness of the Company to banks, financial
institutions, other secured lenders, equipment lessors and equipment
finance companies, but shall exclude trade debts; and any warrants, options
or other securities convertible into stock of the Company shall rank pari
passu with the Notes in all respects.
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<PAGE> 5
7. The Company hereby expressly waives demand and presentment for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor,
notice of acceleration or intent to accelerate, bringing of suit and
diligence in taking any action to collect amounts called for hereunder and
shall be directly and primarily liable for the payment of all sums owing
and to be owing hereon, regardless of and without any notice, diligence,
act or omission as or with respect to the collection of any amount called
for hereunder.
8. In the event the Company at any time or from time to time after the
Closing Date makes, a dividend or other distribution to Holders of Common
Stock payable in securities of the Company other than shares of Common
Stock, then and in each such event provision shall be made so that the
Holders of Notes shall receive upon conversion thereof pursuant to Section
4 hereof, in addition to the number of shares of common Stock receivable
thereupon, the amount of such other securities of the Company to which a
Holder on the relevant record or payment date, as applicable, of the number
of shares of Common Stock so receivable upon conversion would have been
entitled, plus any dividends or other distributions which would have been
received with respect to such securities had such Holder thereafter, during
the period from the date of such event to and including the holder
conversion date retained such securities, subject to all other adjustments
called for during such period under this Note with respect to the rights of
the Holders of the Notes.
9. In the event that at any time or from time to time after the Closing
Date, the Common Stock issuable upon the conversion of the Note is changed
into the same or different number of shares of any class or classes of
stock, whether by re-capitalization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend or
reorganization provided for elsewhere in this Note or a merger or
consolidation, provided for in Paragraph 3), then and in each such event
each Holder of Notes shall have the right thereafter to convert such Note
into the kind of stock receivable upon such re-capitalization,
reclassification or other change by holders of shares of Common Stock, all
subject to further adjustment as provided herein. In such event, the
formulae set forth herein for conversion and redemption shall be equitably
adjusted to reflect such change in number of shares or, if shares of a new
class of stock are issued, to reflect the market price of the class or
classes of stock issued in connection with the above described transaction.
10. If at any time or from time to time after the Closing Date there is a
capital reorganization of the Common Stock (other than a re-capitalization,
subdivision, combination, reclassification exchange of shares provided for
elsewhere in this Note) then, as a part of such reorganization, provision
shall be made so that the Holders of the Notes shall thereafter be entitled
to receive upon conversion of the Notes the number of shares of stock or
other securities or property to which a holder of the number of shares of
Common Stock deliverable upon conversion would have been entitled on such
capital reorganization. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Note with respect to the
rights of the Holders of the Notes after the reorganization to the end that
the provisions of this Note shall be applicable after that event and be as
nearly equivalent as may be practicable, including, by way of illustration
and not limitation, by equitably adjusting the formulae set forth herein
for conversion and redemption to reflect the market price of the securities
or property issued in connection with the above described transaction.
11. If one or more of the "Events of Default" as described in paragraph 12
shall occur, the Company agrees to pay all costs and expenses, including
reasonable attorneys' fees, which may be incurred by Holder in collecting
any amount due under this Note.
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<PAGE> 6
12. If one or more of the following described "Events of Default" shall
occur:
(a) The Company shall default in the payment of principal or interest on
this Note; or
(b) Any of the representations or warranties made by the Company herein, in
the Offshore Securities Subscription Agreement dated as of July 11,1996
between the Company and the Holder (the "Subscription Agreement"), or
in any certificate or financial or other statements heretofore or
hereafter furnished by or on behalf of the Company in connection with
the execution and delivery of this Note or the Subscription Agreement
shall be false or misleading in any material respect at the time made;
or
(c) The Company shall fail to perform or observe any other covenant, term,
provision, condition, agreement or obligation of the Company under this
Note and such failure shall continue uncured for a period of thirty
(30) days after notice from the Holder of such failure; or
(d) The Company shall (1) become insolvent; (2) admit in writing its
inability to pay its debts as they mature; (3) make an assignment for
the benefit of creditors or commence proceedings for its dissolution;
or (4) apply for or consent to the appointment of a trustee, liquidator
or receiver for it or for a substantial part of its property or
business; or
(e) A trustee, liquidator or receiver shall be appointed for the Company or
for a substantial part of its property or business without its consent
and shall not be discharged within thirty (30) days after such
appointment; or
(f) Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of the
Company and shall not be dismissed within thirty (30) days thereafter;
or
(g) Any money judgment, writ or warrant of attachment, or similar process
except mechanics and materialmen's liens incurred in the ordinary
course of business in excess of Two Hundred Thousand Dollars ($200,000)
in the aggregate shall be entered or filed against the Company or any
of its properties or other assets and shall remain unsatisfied,
unvacated, unbonded or unstayed for a period of thirty (30) days
(unless such order provides for delayed payment) or in any event later
than five (5) days prior to the date of any proposed sale thereunder;
or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against the Company
and, if instituted against the Company, shall not be dismissed, stayed
or bonded within sixty (60) days after such institution or the Company
shall by any action or answer approve of, consent to, or acquiesce in
any such proceedings or admit the material allegations of, or default
in answering a petition filed in any such proceeding; or
(i) The company shall have its common stock delisted from an exchange or
NASDAQ.
Then, or at any time thereafter, and in each and every such case,
unless such Event of Default shall have been waived in writing by the
Holders of a majority of all Notes then outstanding (which waiver shall
not be deemed to be a waiver of any subsequent default) at the option
of the Holders of a majority of all Notes outstanding and in their
discretion, the Holder may consider this Note immediately due and
payable, without presentment, demand, protest or notice of any kind,
all of
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<PAGE> 7
which are hereby expressly waived, anything herein or in any note or
other instruments contained to the contrary notwithstanding, and the
Holder may immediately, and without expiration of any period of grace,
enforce any and all of the Holder's rights and remedies provided herein
or any other rights or remedies afforded by law. In such event, this
Note shall be redeemed by the Company at a redemption price per Note
equal to (i) the lesser of (a) 122.5% of the outstanding principal
amount due hereunder or (b) the maximum redemption premium which may be
permitted under the laws of Delaware (including any provision of law
relating to usury) and (ii) accrued and unpaid interest.
13. In the event that at any time on or after the date hereof and prior to
the anniversary of the Closing Date, trading in the shares on the Company's
Common Stock is suspended on the principal market or exchange for such
shares (including the NASDAQ Stock Market), for a period of five
consecutive trading days, other than as a result of the suspension or
trading in securities in general, or if such Shares are delisted, then, at
a Holder's option, the company shall redeem such Holder's Notes at a
redemption date designated by such Holder, and for the redemption price
provided in Paragraph 12.
14. Notwithstanding anything to the contrary contained herein, each
conversion notice shall contain a representation that, after giving effect
to the shares of the Company's Common Stock to be issued pursuant to such
conversion notice, the total number of shares of the Company's Common Stock
deemed beneficially owned by the Holder, together with all shares of the
Company's Common Stock deemed beneficially owned by the Holder's
"affiliates" as defined in Rule 144 of the Act, will not exceed 4.9% of the
total issued and outstanding shares of the Company's Common Stock. In
addition, notwithstanding anything to the contrary contained herein, the
amount of securities converted by Holder during any three month period
shall not exceed the amount provided in Rule 144(e)(1) of the Act.
15. The Holder may, subject to compliance with the Offshore Securities
Subscription Agreement and the provisions of Regulation S, without notice,
transfer or assign this Note or any interest herein integral multiples of
$50,000 or the entire outstanding balance (other than to a U.S. Person or
on behalf of a U.S. Person) and may mortgage, encumber or transfer any of
its rights or interest in and to this Note or any part hereof and, without
limitation, each assignee, transferee and mortgagee (which may include any
affiliate of the Holder) shall have the right to transfer or assign its
interest. Each such assignee, transferee and mortgagee shall have all of
the rights of the Holder under this note. The Company may condition
registrations of transfers on the receipt of an IRS Form W-8 or an
equivalent certification under penalty of perjury in compliance with
Section 871(h)(4)(B) of the Internal Revenue Code of 1986.
16. For so long as any amount payable under this Note remains unpaid, the
Company shall furnish to the Holder the following information:
(a) No later than one hundred five (105) days following the end of
each fiscal year, beginning with the fiscal year ending
December 31, 1996, consolidated balance sheets, statements of
income and statements of cash flow and shareholders' equity of
the Company and its subsidiaries, if any, prepared in
accordance with generally accepted accounting principles
("GAAP"), and audited by a firm of independent public
accountants. The Company may satisfy this requirement by
delivering its report on Form 10-K for each such year.
(b) Within fifty-one (51) days after the end of each quarter
(except the fourth quarter) of each fiscal year, consolidated
balance sheets, statements of income and statements of cash
flow and shareholders' equity of the Company and its
subsidiaries. The Company may satisfy this requirement by
delivering its report on Form 10-Q for each such quarter.
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<PAGE> 8
17. The Company covenants and agrees that until all amounts due under this
Note have been paid in full, by conversion or otherwise, unless the Holder
waives compliance in writing, the Company shall:
(a) Give prompt written notice to the Holder of any Event of
Default as defined in this Note or of any other matter which
has resulted in, or could reasonably be expected to result in,
a materially adverse change in its financial condition or
operations.
(b) Give prompt notice to the Holder of any claim, action or
proceeding which, in the event of any unfavorable outcome,
would or could reasonably be expected to have a material
adverse effect on the financial condition of the Company.
(c) At all times reserve and keep available out of its authorized
but unissued stock, for the purpose of effecting the
conversion of this Note such number of its duly authorized
shares of common stock as shall from time to time be
sufficient to effect the conversion of the outstanding
principal balance of this Note into shares of common stock. If
the Company does not have a sufficient number of shares of
Common Stock available to satisfy the Company's obligations to
a Holder of Notes upon receipt of a conversion notice or is
otherwise unable to issue such shares of Common Stock in
accordance with the terms of this Note (a "Conversion
Default"), from and after the fifth (5th) day following a
Conversion Default (which for all purposes shall be deemed to
have occurred upon the Company's receipt of the applicable
conversion notice), each Holder of the Notes shall have the
right to demand from the Company immediate redemption of the
Notes in cash at a redemption price per Note equal to 122.5%
of the outstanding principal amount of the Note, plus accrued
but unpaid interest on the Note; provided, however, that no
notice of redemption may be delivered by a Holder subsequent
to receipt by such holder of notice from the Company (sent by
overnight or 2-day courier with a copy sent by facsimile) of
availability of sufficient shares of Common Stock to permit
conversion (a "Post-Default Conversion") of all the Notes;
provided further that such right shall be reinstated if the
Company shall thereafter fail to perfect such Post-Default
Conversion by delivery of Common Stock certificates in
accordance with the applicable provision of Paragraph 4 hereof
and payment of all accrued and unpaid interest in cash with
respect thereto within five business days of delivery of the
notice of Post-Default Conversion. In addition to the
foregoing, upon a Conversion Default, the rate of interest on
all of the Notes shall, to the maximum extent of the law, be
increased by two percent (2%) (i.e., from 8% to 10% commencing
on the first day of the thirty (30) day period (or part
thereof) following a Conversion Default; an additional two
percent (2%) commencing on the first day of each of the second
and third such thirty (30) day periods (or part thereof); an
additional one percent (1%) on the first day of each
consecutive thirty (30) day period (or part thereof)
thereafter until such securities have been duly converted or
redeemed as herein provided. Any such interest which is not
paid when due shall, to the maximum extent permitted by law,
accrue interest until paid at the rate from time to time
applicable to interest on the Notes as to which the Conversion
Default has occurred.
(d) Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or
mutilation of this Note and
(i) in the case of loss, theft or destruction, upon provision
of indemnity reasonably satisfactory to it and/or its transfer
agent, or
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(ii) in the case of mutilation, upon surrender and
cancellation of this Note, the Company at its expense will
execute and deliver a new Note, dated the date of the lost,
stolen, destroyed or mutilated Note.
18. The Holder of this Note, by acceptance hereof, agrees that this Note is
being acquired for investment and that such Holder will not offer, sell or
otherwise dispose of this Note or the Shares of common stock issuable upon
exercise thereof except under circumstances which will not result in a
violation of the Act or any applicable state Blue Sky laws or similar laws
relating to the sale of securities.
19. In case any provision of this Note is held by a court of competent
jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if
possible, so that it is enforceable to the maximum extent possible, and the
validity and enforceability of the remaining provisions of this Note will
not in any way be affected or impaired thereby.
20. This Note and the Offshore Securities Subscription Agreement and the
Registration Rights Agreement between the Company and the Holder
constitutes the full and entire understanding and agreement between the
Company and the Holder with respect to the subject hereof. Neither this
Note nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the Company and the Holder.
21. This Note shall be governed by and construed in accordance with the
laws of the state of California.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
PINNACLE MICRO, INC.
DATED: ____________________________ BY: ______________________________
Name:
Title:
BUYER
DATED: ____________________________ BY: ______________________________
Name:
Title:
Buyer certifies under penalty of perjury that Buyer is neither a
citizen nor a resident of the United States and that Buyer's full name
and address are as set out below:
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<PAGE> 10
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
RE: A CONVERTIBLE NOTE OF PINNACLE MICRO, INC.
IN THE PRINCIPAL AMOUNT OUTSTANDING OF $ __________________.
The undersigned hereby irrevocably elects to convert $ __________________ of the
outstanding principal amount of the above referenced Note No._________ into
Shares of common stock of PINNACLE MICRO, INC. (the "Company") according to the
conditions hereof, as of the date written below. The undersigned represents and
warrants that (i) all of the requirements of Regulation S promulgated under the
Securities Act of 1933, as amended (the "Securities Act") applicable to the
undersigned have been complied with by the undersigned; (ii) the undersigned is
not a "U.S. Person" as defined in Regulation S and this note is not being
converted on behalf of any "U.S. Person"; and (iii) the undersigned has not
engaged in any transaction or series of transactions that is a part of or a plan
or scheme to evade the registration requirements of the Securities Act. Further,
the undersigned represents and warrants that after giving effect to the
conversion hereby requested, the undersigned will not beneficially own, together
with its affiliates, more than 4.9% of the Company's issued and outstanding
Common Stock, and that the conversion requested hereby does not, together with
any other conversions in the three months preceding this request, exceed the
amount provided in Rule 144(e)(1) of the Securities Act.
_________________________________________________
Date of Conversion*
_________________________________________________
Applicable Conversion Price [specify discount if
more than one discount percentage is available]
_________________________________________________
Signature
_________________________________________________
Name
_________________________________________________
Address:
_________________________________________________
_________________________________________________
* This original Note and Notice of Conversion must be received by the Company by
the fifth business day following the Date of Conversion.
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<PAGE> 1
EXHIBIT 10.34
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Registration Rights
Agreement"), entered into as of July 11, 1996 by and between _________________,
with offices at _______________ (the "Purchaser"), and Pinnacle Micro, Inc., a
Delaware corporation with offices at 19 Technology Drive, Irvine, California
92618, U.S.A. (the "Company").
W I T N E S S E T H:
WHEREAS, pursuant to a Convertible Securities Subscription
Agreement, dated as of the date hereof (the "Agreement"), by and between the
Company and the Purchaser, the Company has agreed to sell and the Purchaser has
agreed to purchase U.S.$_______________ of the Company's 8% Convertible Notes
due July 11, 2001 (the "Notes") convertible into shares of the Company's Common
Stock, $0.001 par value (the "Shares");
WHEREAS, pursuant to the terms of, and in partial
consideration for, the Purchaser's agreement to enter into the Agreement, the
Company has agreed to provide the Purchaser with certain registration rights
with respect to the Shares as set forth in this Registration Rights Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the Agreement
and this Registration Rights Agreement, the Company and the Purchaser agree as
follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"Registrable Securities" shall mean the Shares issued to
Purchaser or its designee upon conversion of the Notes or upon any stock split,
stock dividend, recapitalization or similar event with respect to such Shares;
provided, however, that Registrable Securities shall cease to be Registrable
Securities when they may be sold pursuant to Rule 144 under the Securities Act.
Registrable Securities shall not include the Notes.
The terms "register", "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness of
such registration statement.
"Registration Expenses" shall mean all expenses to be incurred
by the Company in connection with Purchaser's exercise of its registration
rights under this Agreement, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel for the
Company, blue sky fees and expenses, reasonable fees and disbursements of one
counsel to Holders participating in the registration for a review of the
Registration Statement and related documents, and the expense of any special
audits incident to or required by any such registration (but excluding the
compensation of regular employees of the Company, which shall be paid in any
event by the Company).
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<PAGE> 2
"Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for Holder not included with "Registration
Expenses".
"Holder" shall include the Purchaser and any permitted
transferee of Notes, Shares or Registrable Securities which have not been sold
to the public to whom the registration rights conferred by this Agreement have
been transferred in compliance with Section 11 of this Agreement.
"Registration Statement" shall have the meaning set forth in
Section 3(a) herein.
"Regulation S" shall mean Regulation S as promulgated pursuant
to the Securities Act, and as subsequently amended.
"Rule 144" shall mean Rule 144 under the Securities Act, as
such rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
2. Conditions to Registration Requirement. The Company's
obligation hereunder to register Registrable Securities shall arise in the event
that Company receives a written opinion of counsel for the Holder (which counsel
shall be of a law firm experienced in United States securities matters)
indicating that there has been an amendment or change to the Securities Act or
Regulation S after the date hereof, or the promulgation by the Commission of an
interpretative release or other statement after the date hereof, which prohibits
or restricts Holder from reselling Registrable Securities without registration
under the Securities Act (a "Registration Trigger Event"). Notwithstanding the
foregoing, it will not be deemed a "Registration Trigger Event" to the extent
that Holder desires to engage in a distribution of the Registrable Securities
which otherwise requires registration under the Securities Act or in activity
which otherwise deems Holder to be a statutory underwriter under Section 5 of
the Securities Act. In the event that a Registration Trigger Event has occurred,
then Holder shall be entitled to require the Company to register all of Holder's
Registrable Securities in accordance with this Registration Rights Agreement.
3. Request for Registration.
(a) Upon the occurrence of a Registration Trigger
Event, if the Company shall receive from a Holder (or, in the event there is
more than one Holder as a result of the issuance by the Company of the Notes,
the Company shall receive written notice from such Holders acting with respect
to their rights under this Registration Rights Agreement according to a vote of
a majority-in-interest) a written request that the Company effect any
registration with respect to any Registrable Securities, the Company shall use
its commercially reasonable efforts to effect such registration (including,
without limitation, the execution of an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request in the states specified in such
request. Notwithstanding the foregoing, the Company shall not be obligated
hereunder to effect such registration unless (i) the proposed public
2
<PAGE> 3
offering price of the securities to be included in such registration shall be at
least $500,000 (before deducting underwriting discounts and commissions); and
(ii) such notice requesting that the Company effect a registration pursuant to
this Registration Rights Agreement shall have been received by the Company after
the Company has filed its Annual Report on Form 10-K for the fiscal year ending
December 28, 1996 containing three-year audited financial statements. If the
registration request pertains to any Registrable Securities not yet outstanding
because conversion rights have not been exercised, Company may condition the
registration of such securities on an irrevocable undertaking to pay all
expenses incident to such registration if such conversion rights are not
exercised prior to the effective date of the registration statement.
Subject to the previous paragraph, the Company shall file (i)
a registration statement with the Commission pursuant to Rule 415 under the
Securities Act on Form S-3 under the Securities Act (or in the event that the
Company in ineligible to use such form, such other form as the Company is
eligible to use under the Securities Act) covering the Registrable Securities so
requested to be registered ("Registration Statement"); (ii) such blue sky
filings as shall have been requested by the Holder; and (iii) any required
filings with the National Association of Securities Dealers, Inc. or exchange
where the Shares are traded, as soon as practicable, after receipt of the
request of the Holder. Thereafter the Company shall use its best efforts to have
such Registration Statement and other filings declared effective.
(b) (i) Subject to the conditions contained in
Section 3(a) above, if the Company fails to file a Registration Statement
complying with the requirements of this Registration Rights Agreement within 45
days from the date of receipt by the Company of the Holder's written request
(provided, however, that under the circumstances described in 3(e)(i)(ii) or
(iii) below the Company may have an additional 45 days thereafter to file such
Registration Statement by providing written notice to the Holders requesting
such registration indicating that the Company is diligently pursuing the filing
of such Registration Statement) or if such Registration Statement has not become
effective within 90 days from the date of filing thereof, the Holder shall have,
in addition to and without limiting any other rights it may have at law, in
equity or under the Notes, the Agreement, or this Registration Rights Agreement
(including the right to specific performance), the right to receive, as
liquidated damages, the payments as provided in subparagraph; (ii) of this
section.
(ii) If after ninety (90) days from the date of
filing of the Registration Statement, the Registration Statement has not been
declared effective by the Commission because the Company (A) has been negligent
in timely responding to any comments from the Commission on the Registration
Statement; (B) has failed to use its commercially reasonable efforts to cause
the Registration Statement to be declared effective by the Commission; (C) has
otherwise acted in bad faith in honoring its commitment to cause the
Registration Statement to be declared effective; (D) has been forced to restate
its current or previous financial statements (for years ending after December
31, 1995); (E) has commenced a corporate action such as an acquisition, merger
divestiture, asset sale, reorganization or similar transaction; or (F) has filed
a Registration Statement with the Commission to issue public securities in
accordance with the Securities Act which does not include a registration of the
Registrable Securities, then the Company shall pay to the Purchaser an amount
equal to 3% of the Outstanding Principal Amount (as defined in the Note) of the
Note, in cash, for each 30-day period after such ninety (90) day period that
such Registration Statement is not effective (which payment shall be pro rata
for any period of less than 30 days). In addition to the foregoing, if after 180
days from the date hereof the Registration Statement has not been declared
effective by the Commission due to any
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<PAGE> 4
of the causes described in clauses (A) through (F) of this paragraph 3(b)(ii),
then at the option of such Holder, the Company shall be required to redeem all
the Notes held by such Holder at a redemption price equal to 140% of the
Outstanding Principal Amount of the Note plus accrued interest thereon, together
with all other payments due under this paragraph and under the Note and the
Agreement.
(iii) The Company acknowledges that its failure
to register the Registrable Securities in accordance with this Registration
Rights Agreement will cause the Holder to suffer damages in an amount that will
be difficult to ascertain. Accordingly, the parties agree that it is appropriate
to include in this Registration Rights Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages
provisions set forth above represent the parties' good faith effort to quantify
such damages and, as such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty.
(iv) In computing the time periods provided in
this paragraph 3(b), any delays arising from the failure or refusal of any
Holder to provide information which the Company's counsel or the Commission
states in writing is required for inclusion on the Registration Statement within
ten (10) days of a written request by the Company to provide such information,
shall increase the number of days for the Company to act by a corresponding
number.
(c) If there is more than one Holder, such Holders
shall act with respect to their rights under this Registration Rights Agreement
according to the vote of a majority-in-interest.
(d) The Company shall make available for inspection
by a representative or representatives of the Holder, and any attorney or
accountant retained by such Holder, all financial and other records customary
for such purposes, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such representative, attorney or
accountant in connection with such Registration Statement. The Holder will agree
to keep all non-public information supplied to it confidential until such
information is included in a Registration Statement which has been made publicly
available.
(e) The Company shall not be obligated to keep such
Registration Statement continuously effective for a period of more than two
years from the date it is declared effective by the Commission; provided,
however, that if so requested by the holders of a majority-in-interest of the
Registrable Securities the Company shall agree to extend the period for which
the Registration Statement remains effective to the same extent that "suspension
periods" are imposed pursuant to the next paragraph, but only so long as the
then unsold Registrable Securities covered by such Registration are too numerous
to be sold under the volume limitations of Rule 144 in any applicable three
month period by any Holder.
Following the effectiveness of the Registration
Statement pursuant to this Registration Rights Agreement, the Company may, at
any time, suspend the effectiveness of such Registration Statement and sales
thereunder for up to forty-five (45) days, as appropriate (a "Suspension
Period"), by giving notice to each Holder (or underwriter, if any) selling
thereunder, if the Company shall have determined that the Company may be
required to disclose any material corporate development which disclosure (i) may
have a material adverse effect on the Company; (ii) may have a material adverse
affect on the transaction or matter to be disclosed; or (iii) would be
detrimental to the Company
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<PAGE> 5
or its stockholders. Notwithstanding the foregoing, no more than two Suspension
Periods (i.e., ninety (90) days) may occur in immediate succession, and the
Company shall use its best efforts to limit the duration and number of any
suspension periods. Holder agrees (and shall require that any underwriter agree)
that, upon receipt of any notice from the Company of any Suspension Period,
Holder shall forthwith discontinue disposition of shares covered by the
Registration Statement or Prospectus until such Holder (i) is advised in writing
by the Company that the use of the applicable Prospectus may be resumed; (ii)
has received copies of a supplemental or omitted Prospectus, if applicable; and
(iii) has received copies of any additional or supplemental filings which are
incorporated or deemed to be incorporated by reference in such Prospectus.
4. Expenses of Registration. All Registration Expenses
incurred in connection with any registration, qualification or compliance with
registration pursuant to this Agreement shall be borne by the Company, and all
Selling Expenses shall be borne by the Holder.
5. Registration on Form S-3. Although the Company shall use
its commercially reasonable efforts to qualify for registration on Form S-3 or
any comparable or successor form or forms, or in the event that the Company is
ineligible to use such form, such form as the Company is eligible to use under
the Securities Act, nothing in the Agreement or this Registration Rights
Agreement is intended to require the Company to pay dividends in order to use
Form S-3.
6. Registration Procedures. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep the
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense, the Company will use its best efforts
to:
(a) Keep such Registration Statement effective for
the period ending twenty-four (24) months after the registration has been
declared effective by the Commission or until the Holder has completed the
distribution described in the Registration Statement relating thereto, whichever
first occurs.
(b) Furnish such number of prospectuses and other
documents incident thereto as the Holder from time to time may reasonably
request.
7. Indemnification.
(a) Company Indemnity. The Company will indemnify the
Holder, each of its officers, directors and partners, and each person
controlling Holder, within the meaning of Section 15 of the Securities Act and
the rules and regulations thereunder with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, (including any
related registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any state securities law or in either case, any
rule or regulation thereunder applicable to the Company and relating to action
or inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse the Holder, each
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<PAGE> 6
of its officers, directors and partners, and each person controlling such
Holder, for any legal and any other expenses reasonably incurred in connection
with investigating and defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission based upon written information
furnished to the Company by Holder and stated to be specifically for use
therein. The indemnity agreement contained in this Section 7(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent will not be unreasonably withheld).
(b) Holder Indemnity. The Holder will, if Registrable
Securities held by it are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors, officers, partners, and each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act and the rules and regulations thereunder, each
other Holder (if any), and each of their officers, directors and partners, and
each person controlling such other Holder against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, and will reimburse the Company and such other Holders and their
directors, officers and partners, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by Holder and
stated to be specifically for use therein, and provided that the maximum amount
for which the Holder shall be liable under this indemnity shall not exceed the
net proceeds received by the Holder from the sale of the Registrable Securities.
The indemnity agreement contained in this Section 7(b) shall not apply to
amounts paid in settlement of any such claims, losses, damages or liabilities if
such settlement is effected without the consent of Holder (which consent shall
not be unreasonably withheld).
(c) Procedure. Each party entitled to indemnification
under this Article (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the defense of
any such claim in any litigation resulting therefrom, provided that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Article
except to the extent that the Indemnifying Party is materially and adversely
affected by such failure to provide notice. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
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<PAGE> 7
8. Contribution. If the indemnification provided for in
Section 7 herein is unavailable to the Indemnified Parties in respect of any
losses, claims, damages or liabilities referred to herein (other than by reason
of the exceptions provided therein), then each such Indemnifying Party, in lieu
of indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) as between the Company and the Holder on the one hand and the
underwriters on the other, in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Holder on the one hand or
underwriters, as the case may be, on the other from the offering of the
Registrable Securities, or if such allocation is not permitted by applicable
law, in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and of the
Holder or underwriters, as the case may be, on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations; and (ii) as
between the Company on the one hand and the Holder on the other, in such
proportion as is appropriate to reflect the relative fault of the Company and of
the Holder in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations.
The relative benefits received by the Company on the one hand
and the Holder or the underwriters, as the case may be, on the other shall be
deemed to be in the same proportion as the proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company from the initial sale of the Notes which can be converted into
Registrable Securities by the Company to the Holder pursuant to the Subscription
Agreement which corresponds to this Registration Rights Agreement bear to the
gain realized by such Holder or the total underwriting discounts and commissions
received by the underwriters as set forth in the table on the cover page of the
prospectus, as the case may be. The relative fault of the Company on the one
hand and of the Holder or underwriters, as the case may be, on the other shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, by the Holder or
by the underwriters.
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 8 exceed the amount that such Indemnifying Party
would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 7(a) or 7(b) hereof had been
available under the circumstances.
The Company and the Holder agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Holder or the underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraphs. The amount paid or payable by an Indemnified Party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraphs shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this section, no Holder or underwriter shall
be required to contribute any amount in excess of the amount by which (i) in the
case of the Holder, the net proceeds received by the Holder from the sale of
Registrable Securities; or (ii) in the case of an underwriter, the total price
at which the Registrable Securities purchased by it and distributed to the
public were offered to the public exceeds, in any such case, the amount of any
damages
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<PAGE> 8
that the Holder or underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
9. Survival. The indemnity and contribution agreements
contained in Sections 7 and 8 shall remain operative and in full force and
effect regardless of (i) any termination of the Agreement or any underwriting
agreement; (ii) any investigation made by or on behalf of any Indemnified Party
or by or on behalf of the Company; and (iii) the consummation of the sale or
successive resales of the Registrable Securities.
10. Information by Holder. The Holder shall furnish to the
Company such information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Agreement.
11. Transfer or Assignment of Registration Rights. The rights,
granted to Purchaser by the Company under this Registration Rights Agreement, to
cause the Company to register Registrable Securities, may be transferred or
assigned to a transferee or assignee of not less than $50,000 in principal
amount of Notes, provided that the Company is given written notice by Holder at
the time of or within a reasonable time after said transfer or assignment,
stating the name and address of said transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned, and provided further that the transferee or assignee of such rights
is not deemed by the board of directors of the Company, in its reasonable
judgment, to be a competitor of the Company; and provided further that the
transferee or assignee of such rights agrees to be bound by this Registration
Rights Agreement.
Purchaser is one of a group of holders of Registrable
Securities issued or issuable pursuant to a total aggregate amount of up to $10
million of notes purchased by Purchaser and others in a transaction designed to
qualify as an offering pursuant to Regulation S. Any action to be taken under
this Registration Rights Agreement or any term of this Registration Rights
Agreement may be amended or waived only with written action by the Company and
the holders of at least a majority-in-interest of the total of the Registrable
Securities. Any action, amendment or waiver effected in accordance with this
paragraph shall be binding upon each of the other holders of Registrable
Securities at the time then outstanding.
12. Miscellaneous.
(a) Entire Agreement. This Registration Rights
Agreement contains the entire understanding and agreement of the parties, and
may not be modified or terminated except by a written agreement signed by both
parties.
(b) Notices. Any notice or other communication given
or permitted under this Agreement shall be in writing and shall be deemed to
have been duly given if personally delivered or sent by registered or certified
mail, return receipt requested, postage prepaid or by air courier, (a) if to
Purchaser, at its address hereinabove set forth; (b) if to the Company, at its
address hereinabove set forth; and (c) if to a holder other than Purchaser, at
the address thereof furnished by like notice to the Company; or (d) to any such
addresses at such other address or addresses as shall be so furnished to the
other parties by like notice.
8
<PAGE> 9
(c) Gender of Terms. All terms used herein shall be
deemed to include the feminine and the neuter, and the singular and the plural,
as the context requires.
(d) Governing Law; Consent of Jurisdiction. This
Registration Rights Agreement and the validity and performance of the terms
hereof shall be governed by and construed in accordance with the laws of the
State of California, except to the extent that the law of Delaware regulates the
Company's issuance of securities. The parties hereto hereby consent to, and
waive any objection to the exercise of, personal jurisdiction in the State of
New York with respect to any action or proceeding arising out of this
Registration Rights Agreement.
(e) Titles. The titles used in this Registration
Rights Agreement are used for convenience only and are not to be considered in
construing or interpreting this Registration Rights Agreement.
(f) Prospectus Delivery Requirements. Holder agrees,
on Holder's behalf, and shall require any transferee or assignee pursuant to
Section 11 above to agree, to comply with all prospectus delivery requirements
applicable to resales of the securities pursuant to the Registration Statement.
(g) Termination. The rights of Holder to require the
Company to request a Registration pursuant to this Registration Rights Agreement
shall terminate on the date which is five (5) years from the date of this
Registration Rights Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed as of the date first above
written.
PURCHASER PINNACLE MICRO, INC.
a Delaware Corporation
By: _______________________ By: _________________________________________
Name: _____________________ Name: Lawrence Goelman
Title: ____________________ Title: President and Chief Executive Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AS OF JUNE 29, 1996 AND THE UNAUDITED
CONDENSED STATEMENT OF OPERATIONS FOR THE TWENTY-SIX WEEKS ENDED JUNE 29, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> JUN-29-1996
<CASH> 2,720
<SECURITIES> 0
<RECEIVABLES> 9,664
<ALLOWANCES> 923
<INVENTORY> 14,337
<CURRENT-ASSETS> 29,106
<PP&E> 5,024
<DEPRECIATION> 2,911
<TOTAL-ASSETS> 31,754
<CURRENT-LIABILITIES> 21,606
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 9,160
<TOTAL-LIABILITY-AND-EQUITY> 31,754
<SALES> 29,767
<TOTAL-REVENUES> 29,767
<CGS> 24,486
<TOTAL-COSTS> 24,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> (7,825)
<INCOME-TAX> 3
<INCOME-CONTINUING> (7,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,828)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
