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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-21892
PINNACLE MICRO, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0238563
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19 Technology Drive
Irvine, CA 92618
(Address of principal executive offices) (Zip code)
714-789-3000
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 17, 1997, 10,744,017 shares of the Registrant's Common Stock were
outstanding. As of March 17, 1997, the aggregate market value of the
Registrant's Common Stock, held by non-affiliates of the Registrant was
approximately $20,381,000 based on the closing sales price of $3.19 per share of
the Common Stock as of such date, as reported by The NASDAQ National Market.
Information required by Part III is incorporated by reference to portions of the
Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders which
will be filed with the Securities and Exchange Commission within 120 days after
December 28, 1996.
Page 1 of 101 pages
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PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING 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 1. BUSINESS
Pinnacle Micro, Inc., (the "Company") is a designer, manufacturer,
supplier and reseller of removable optical storage systems. The Company's
products read from and write data to optical media. In 1996, the Company changed
its core business from reselling products manufactured by others to research,
development and manufacturing. The Company's manufactured products range from
the Vertex 2.6 Gigabyte ("GB") drive to its 4.5 terabyte multiple disk optical
library systems ("optical library"). The Company resells under its own brand
name 3.5" magneto optical ("MO") products and compact disc ("CD") recording
systems manufactured by others.
The Company was incorporated in California in May 1987 and
reincorporated in Delaware in May 1993. The Company's headquarters is located at
19 Technology Drive, Irvine, California 92618, and that telephone number is
(714) 789-3000. The Company's operations are located at 4410 ArrowsWest Drive,
Colorado Springs, Colorado 80907, and that telephone number is (719) 264-1000.
PRODUCTS
Magneto Optical Products
The Company's MO drive products combine proprietary firmware,
electronics design, application specific integrated circuits ("ASICs") with
optical mechanical storage subassemblies ("OMAs") manufactured by a third party.
The Company's core technology and lead product is the Apex 4.6 GB 5.25" MO
Drive. The Company primarily directed its 1996 efforts toward the successful
redesign, testing and manufacture of Vertex and Apex MO drives. The Company
believes that its Apex product is the highest capacity 5.25" form factor,
rewritable, random access removable optical drive currently available. The
Vertex 2.6 GB product is based upon the Apex technology. The Company's optical
storage systems are compatible with most personal computer and workstation
operating systems, including Windows NT, Windows 95, Macintosh OS, DOS, Windows
and UNIX. External systems attach to a computer system and include a power
supply, OMA, drive electronics, firmware, software, a SCSI cable and, where
necessary, a SCSI interface card. Internal systems do not include a power
supply. In 1997, PC-compatible Apex and Vertex are shipped with Seagate Backup
Director software (not available for Unix or Mac environments). The Company
provides a one year warranty against defects in material and workmanship for all
of its products. The Company's 3.5" 640 MB Tahoe product will be discontinued in
1997.
The Tahoe and Vertex 5.25" optical storage systems conform to certain
industry standards, which allow for disk interchangeability among systems and
compatibility with future generations of 3.5" and 5.25" systems, respectively.
The Company's Apex 4.6 GB product also reads 2.0 GB media, but not lower
capacity media.
The Company's Sierra 1.3 GB product was phased out in 1996 and replaced
by the Vertex 2.6 GB and Apex 4.6 GB products.
Network Optical Library Systems
The Company also manufactures and sells a line of optical libraries
based on its Apex technology with storage capacities ranging from 75 GB to 4.5
terabytes. Prior products were based upon the Sierra 1.3 GB drive. The library
mechanisms are obtained from third party suppliers and are integrated by the
Company into its library systems. These library systems are most often used in
client/server or other networked environments and are free standing, fully
enclosed units with robotic arms that move 5.25" optical disks to and from one
or more internally mounted drives. A small number of Apex libraries were sold in
1996. The Company believes that library sales are a significant potential market
for the Company and the Apex technology. In 1996, the Company moved away from
use of its proprietary software for optical libraries in favor of using third
party software to reduce software development costs and increase the
marketability of the optical libraries.
In 1996, the Company determined that sales of optical library required
product and software engineering support not previously provided. An
applications engineering team was hired in the first quarter of 1997 for this
purpose.
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CD Recorder Systems
The Company distributes compact disc-recorder ("CD-R") systems under
its own brand name and has done so since 1993. This product line was the
Company's primary source of revenue in the first half of 1996. The Company's
CD-R systems are comprised of a drive assembly manufactured by a third-party
supplier, which the Company differentiates from products of its competitors
through added software, firmware and packaging. The RCD-5040 replaced the
RCD-5020 in 1996. The current product, introduced in the fourth quarter of 1996,
is the RCD-4x4. CD-R products are combined with Adaptec's "EZCD Pro" software
for PC environments, the Company's proprietary CD-R recording software ("CD
Burner") for Mac environments and "Gear" software from Electroson for Unix
environments, to create a complete CD-R system. The Company also bundles its
proprietary backup software, "Disk Archive 95" with Windows compatible products.
For multimedia Macintosh computers applications, the Company bundles "Toast"
software from Astarte. CD-R systems are used to create custom CDs for low volume
data reproduction and distribution. CDs created in a standardized "ISO 9660"
format can be utilized in most CD-ROM drives and players. The CD-R can be used
with Macintosh, IBM, and Unix compatible personal computers.
The Company's Apex and Vertex product lines provided the primary source
of revenue during the second half of 1996. The Company expects the CD-R product
line and business to continue to provide important revenue and product mix
contributions to Pinnacle's business.
"Ready to Store" RTS Program
The Company's independent software vendors ("ISV") program is intended
to assure compatibility between the Company's products and important software
products, in order to increase market acceptance of Apex technology. The Company
identified software compatibility and certification as key areas of improvement
for 1997, as optical library purchases often depend first on software selection.
Participants include Avail Systems, Dantz, FileNet Corporation, Keyfile, Micro
Design International, Inc., Optical Technology Group, Inc., Optika Imaging
Systems, Inc., Optisys, Inc., Pegasus Disk Technologies, Inc., Seagate Software,
Inc., Software Architects, Tracer Technologies, Inc., and Watermark Software,
Inc.
Optical Storage Media
In 1996, the Company distributed and sold rewritable 3.5" and 5.25"
optical storage media with an unformatted capacity of 230, 540 and 640 MB (3.5")
and 1.2, 1.3 GB, 2.3, 2.6 GB 4.2 and 4.6 GB (5.25"), for use with the Company's
and other manufacturers' MO systems. In 1997, the Company intends to discontinue
sales of 230 and 640 MB 3.5" media and sales of 650 MB, 1.3 GB 5.25" media. The
Company sells proprietary media for the Apex product. The Company also markets
and sells recordable CD media for use with its CD-R products.
The Company believes that its 4.6 GB media is the highest density 5.25"
media currently available. Except for the Company's Apex 4.6 GB drive system and
media, all of the Company's 3.5" and 5.25" optical storage systems presently
conform to standards that have been adopted by the International Standards
Organization (ISO), the American National Standards Institute (ANSI) and the
European Computer Manufacturers Association (ECMA). These standards allow for
disk interchangeability among systems and compatibility with future generation
systems based on the same media dimensions. Vertex media is ANSI/ISO compliant,
but it is not ECMA compliant. The Company purchases all media from third party
suppliers and resells the media under Company trademarks.
SALES, MARKETING AND DISTRIBUTION
Market and industry trends are toward ever-increasing memory and
storage capacity. The Apex technology is a leading removable, rewritable and
reliable solution, for near on-line and archival storage. Markets for Apex
technology include archiving, desk top publishing, multi-media, graphic design,
medical imaging, network storage, near on-line storage and other data-intensive
uses.
The Company believes that it retains a large amount of brand "equity"
and recognition from previous investments in advertising. Extended delays of the
Apex introduction, however, adversely affected the Company's and to some extent
the MO industry's credibility within existing vertical markets. The Company is
redirecting its marketing strategy to build on its brand recognition and address
these issues and to expand its presence in the optical library arena. The
Company also
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believes that a business opportunity exists at the high-end of
removable, rewriteable storage market for archiving and backup and is working to
develop that opportunity.
The Company sells its products through distributors, value-added
resellers ("VARs") and systems integrators. The Company no longer sells directly
to dealers. Due to delays in releasing its Apex technology, the Company does not
expect significant OEM sales for several quarters. Smaller OEMs are expected to
place orders in second quarter of 1997 but such purchases are not assured. Major
OEM customers are currently testing and evaluating the Apex product. The Company
also sells to end users directly through its internal sales force. The Company's
distributor channel consists both of national and regional distributors. The
Company's largest distributor, Ingram Micro, Inc., accounted for approximately
18%, 15%, and 15% of net sales in 1996, 1995 and 1994, respectively. No other
customer accounted for more than 10% of the Company's net sales during these
periods.
In conformance with industry practice, the Company generally provides
distributors with stock balancing and price protection rights. This permits
distributors to return slow moving products to the Company for credit and
provides price adjustments for inventories of the Company's products held by
distributors if the Company subsequently lowers the prices of those products. In
1996, steps were taken to reduce these costs and manage the distributor business
more efficiently.
The Company's international sales are currently made through a network
of distributors and resellers, which market and distribute the Company's
products worldwide. International and export sales accounted for approximately
30%, 35% and 29% of net sales in 1996, 1995 and 1994, respectively. (See Note 11
of Notes to Financial Statements). In 1996, the Company had international sales
offices located in Japan and the Netherlands. The Japanese office was closed in
the fourth quarter of 1996 as a cost savings measure. The Company intends to
improve its foreign sales operations and plans to increase foreign sales through
distributors. The risks of international sales include, among other things,
finding and retaining good managers, local or regional competition, currency
fluctuations, export and import controls and government regulation and tariffs.
Customer service and technical support of the Company's products are an
integral part of the Company's business. Customer service and technical support
were an area of customer dissatisfaction in 1996 which management is striving to
address in 1997.
RESEARCH AND DEVELOPMENT
In 1991, the Company established a research and development facility in
Colorado Springs, Colorado to develop proprietary optical technology, including
systems, mechanical, firmware, electronics design and ASICs. During 1995 and
1996, the Company's research and development efforts were principally directed
towards completing the development of the Apex product and then to solving
manufacturing yield issues. Now that Apex is in full production, plans are in
place to develop the successor product. The availability of research and
development funds depends upon the Company's revenues and profitability.
Reductions in such expenditures could impair the Company's ability to innovate
and compete in its targeted markets.
In 1996, 1995 and 1994 the Company's research and development
expenditures were approximately $6,006,000, $4,978,000 and $2,708,000,
respectively. These expenses related primarily to the operations of the
Company's engineering team located in Colorado Springs, Colorado.
MANUFACTURING AND SUPPLIERS
Manufacturing Facilities and Reorganization
Through the third quarter of 1996, the Company had manufacturing
facilities in Irvine, California and Colorado Springs, Colorado. In the fourth
quarter, the Company closed its manufacturing operations in Irvine and
consolidated manufacturing in Colorado Springs, see Item 2, Properties below. A
new facility was identified for all (manufacturing, research and development)
Colorado operations, and the move to the new facility was completed in the first
quarter of 1997. The Company's manufacturing operations consist of final
assembly and testing, quality assurance, packaging and shipping.
Suppliers
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OMAs, Apex media and certain of the ASICs and other components used in
the Company's products are obtained from single sources. These strategic
relationships provide for the sharing of technology and the joint development of
OMA subassemblies, including the development of enhancements to such components.
The Company also purchases from third party suppliers circuit boards, integrated
circuits and other components used in its products. The Company's dependence on
third-party suppliers involves several risks, including limited bargaining power
over pricing, availability, quality and delivery schedules for such components.
There is also the risk that a large supplier may be using the Company to develop
a market for later entry by the supplier. The Company believes that second
sources are available for all components other than OMAs, Apex media and certain
integrated circuits. There can, however, be no assurance that the Company could
obtain all required components from second sources on terms as favorable as
those in place, if at all. If the Company's ability to obtain critical
components from its sole source suppliers for its products were impaired or
interrupted for any reason, the Company would not be able to establish
alternative sources and integrate replacement components into its systems
without substantial disruption to the Company's operations.
Inventory
Delays in manufacturing Apex and Vertex products caused the Company's
inventories to increase during 1996, with adverse effects upon the Company's
liquidity. In its transition in 1996 to an engineering and manufacturing company
from a reseller of goods manufactured by others, the Company experienced
difficulties in manufacturing operations, especially inventory management. These
difficulties were heightened by long lead time components, and the relocation
and consolidation of manufacturing operations in Colorado Springs. The Company
is taking the steps it believes necessary to bring its inventory down to
appropriate levels.
Backlog
Before the production difficulties with the Apex product, the Company
generally shipped its products within a few days of receipt of an order and did
not have a significant backlog. In 1996, the Company carried a significant
backlog of orders for Apex and Apex - related products into the fourth quarter,
such that most Apex shipments in the fourth quarter were against backlog. The
Company completed shipping against the Apex backlog in the first quarter of
1997. There was no significant backlog in prior periods for comparison. The
prior Apex backlog is not believed to be indicative of foreseeable demand in
future quarters.
COMPETITION
The newest optical technology, digital video disc ("DVD"), received
much publicity in 1996. Consumer versions of DVD-ROM players recently began
shipping, while computer data versions have not. The Company currently does not
expect rewriteable DVD-ROM technology to be available until late 1998 at the
earliest. Initial DVD capacity points are expected to be substantially below
those of what MO is expected to reach in that timeframe.
The market for data storage products is competitive and changing,
characterized by price erosion and short product life cycles. The Company's
products compete directly with other optical storage products and removable
storage products. Competition also comes from storage products based on
alternative technologies such as hard disk drives and tape drives. The Company's
optical storage systems compete directly with those manufactured by Sony
Corporation, Hitachi, Ltd., Hewlett-Packard Company, Fujitsu Ltd., Panasonic,
Iomega, Syquest, MOST, Inc., Ricoh, Ltd., Phillips, N.V. and others. Most of
these companies have larger technical staffs, greater brand name recognition and
market presence, larger marketing and sales organizations and greater financial
resources than those of the Company. Certain of the Company's suppliers of
mechanical optical storage subassemblies also develop and market optical storage
systems that compete with those of the Company. Potential direct competitors
include certain computer storage peripheral manufacturers and business storage
systems manufacturers or developers, who may introduce optical storage products
or incorporate a competitive product in their own products. The major
competitive factors in the data storage market include product performance,
capacity, price, size and appearance, reliability, as well as the timing of new
product introductions. There can be no assurance that products based on
competing technologies will not have an adverse effect on the market for optical
data storage products.
While the Company believes that its optical storage products should
compete favorably for applications that require removable, reliable, random
access storage, certain other products such as hard disk drives, tape drives or
other alternative storage technologies, separately or together in various
combinations, may compete more favorably for other applications. Hard disk
drives and tape drives may be less costly alternatives where removable storage
and data security are not required. Iomega Corporation's Jazz drive, a removable
storage product, appears to be selling well at its price and storage capacity.
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The optical storage market is still developing. Hard disk drives are beginning
to compete in cost per megabyte. In the optical media market, the Company
competes as a reseller with a number of other companies, primarily on the basis
of price/performance and purchasing convenience. Optical media manufacturing is
limited to a few companies whose future decisions may affect the Company's media
business. There can be no assurance that the Company will be able to compete
successfully with manufacturers and other resellers of media or that competition
will not have a material adverse effect on the Company's results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company seeks to obtain the appropriate proprietary rights
protection for new technology it develops. The Company attempts to protect its
trade secrets and other proprietary information through agreements with
customers and suppliers, proprietary information agreements with employees and
consultants and other security measures. There can be no assurance that the
Company will be successful in protecting its proprietary technology. Actual
protection and its assumed benefits may differ materially from Company goals as
a result of the intellectual property rights and licensing strategies of the
Company's competitors and of other licensors.
Certain of the Company's products are subject to patents or
intellectual property rights held by third parties. The Company seeks and
obtains license rights, including indemnification against infringement of such
patents or intellectual property rights, as necessary. The high technology
industry, including the data storage industry, has seen a great increase in
patent and related litigation in the past decade. Other entities may hold
patents or have applications on file, which, if valid or enforced, could
adversely affect the Company's use of certain of its technologies and processes.
There can be no assurance that the Company will be successful in obtaining
acceptable license rights and terms if in fact licenses are necessary. The
Company anticipates that it may have continuing obligations and expenses related
to licensing third party technology. There can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that any such assertion may not require the Company to enter into royalty
arrangements or costly litigation.
The Company has patent applications pending in the United States and
intends to file additional patent applications relating to the designs employed
within certain of its products, both hardware and software. There can, however,
be no assurance that any patents applied for will be granted.
EMPLOYEES
As of March 17, 1997, the Company employed 166 full-time employees.
There was a significant turnover in employees in 1996, as a result of the
manufacturing restructuring, the reorganization of the sales force and the
change from a founder-managed business to a company run by professional
managers. The Company laid off 36 employees in 1996. The Company's future
success will depend in large part upon its ability to attract and retain highly
qualified technical, marketing, engineering and management personnel. The
Company's employees are not represented by any collective bargaining agreements,
and the Company has never experienced a work stoppage.
BACKGROUND RISK FACTORS
In addition to the specific risks described elsewhere in this Form
10-K, the Company is subject to certain general risks which include but are not
limited to:
Technological Competition. The Company's future depends materially on
its ability to timely develop and efficiently manufacture new optical storage
products to meet changing customer requirements and evolving industry standards.
Generally speaking, this requires offering higher storage capacities, faster
data transfer rates and lower data access times at the same or reduced costs. In
addition, market acceptance of MO solutions generally, aesthetic appeal and
software compatibility can be important competitive advantages or disadvantages.
The computer industry in general, and the market for the Company's products in
particular, is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and significant price competition,
resulting in short product life cycles and reductions in unit selling prices
over the life of a specific product. Given the Company's limited working capital
resources, new product decisions are of fundamental importance to the Company's
prospects. The announcement, introduction or market expectation of new products
based on new or enhanced technologies, such as the DVD technology announcements
in 1996, the emergence of new industry standards, widely accepted operating
systems or significant price reductions on competitors' products may adversely
affect the sales and prices of the Company's products and the Company's results
of operations.
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There can be no assurance that there will be continued acceptance of
the Company's existing products or that the Company's future products will
achieve market acceptance at acceptable margins. There can be no assurance that
the Company will not experience significant delays in the introduction of new
products in the future, as it has in the past, which could have a material
adverse effect on the Company's results of operations.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results can 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, possible seasonality in the fourth quarter, 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. Any
significant shortfall in forecasted demand could have an immediate adverse
impact on the Company's quarterly results of operations and financial condition.
Past results are not necessarily indicative of future performance for any
particular period, especially given the fundamental changes in the Company's
business in 1996, and there can be no assurance that the Company will experience
revenue growth and profitability in future periods.
International Trade, Foreign Exchange Dependent Purchases; Currency
Fluctuations. The risks of international trade include foreign government
regulation, the difficulties of finding and retaining competent management,
miscommunication, local preferences and changes in taxes and duties. The
Company's OMA suppliers, media suppliers and a number of the Company's other
component suppliers are located in Japan, which subjects the Company to risks of
changes in government policies and regulatory requirements, transportation
delays and the imposition of tariffs and export controls. In the past the
Company experienced losses arising from changes in the Japanese Yen vs. U.S.
dollar exchange rates. In 1996, the Company reduced its currency risk by
converting most of its purchase contracts to be denominated in U.S. dollars.
There can be no assurance that the Company's future results of operations will
not be adversely affected by currency fluctuations.
ITEM 2. PROPERTIES
The Company leases facilities in Irvine, California and Colorado
Springs, Colorado. In the fourth quarter, Irvine manufacturing operations and
two separate Colorado Springs facilities were consolidated into one facility in
Colorado Springs. The combined and reorganized engineering, manufacturing and
shipping operations were relocated, as of the first quarter of 1997, to a new
55,000 square foot facility in Colorado Springs at 4410 ArrowsWest Drive. All
engineering, manufacturing and shipping will be conducted at that facility for
the foreseeable future.
The Irvine facility, following the transfer of manufacturing operations
to Colorado Springs, exceeds the Company's requirements. The Company is pursuing
subtenants for the former Colorado Springs facilities and the Irvine facility.
The Company plans to relocate Irvine-based executive, administrative, sales,
technical support and human resources staff to a smaller, more cost effective
facility.
ITEM 3. LEGAL PROCEEDINGS
In the fourth quarter of 1995, the Company reached a settlement
agreement with the plaintiffs who filed the November 20, 1994, class action
complaint against the Company, certain of its officers and directors and the
Company's then independent auditors, Ernst & Young LLP. The complaint alleged
various violations of federal securities laws and claimed unspecified
compensatory damages and related fees and costs. The complaint was filed in the
United States District Court for the Central District of California under the
case name of Kurtz, et al. v. Blum, et al., Case No. SACV94-1043-GLT. Pursuant
to this settlement, the Company's insurance carrier paid $925,000 in cash in
December 1995, pursuant to a Directors and Officers liability policy purchased
by the Company. In 1996, the Company issued shares of the Company's common stock
valued at $1,400,000 to the plaintiff class and its attorneys.
The Company and certain members 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 for 1993 and 1994. The Company
and its management believe that they fully cooperated with the investigation.
The resignation of the Company's prior independent public accountants on
February 20, 1996, led to additional inquiries by the SEC. These inquiries
relate principally to the accounting matters discussed in Note 12 of Notes to
Financial Statements (1995 adjustments).
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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 claims unspecified
compensatory damages and related fees and costs. 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. However, any
adverse determination with respect to the pending lawsuit could have a material
adverse effect on the financial statements. The Company may incur significant
legal costs relating to this suit in 1997. (See Note 9 of Notes to 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 these other legal matters will have a material adverse effect on the
Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol PNCL. The following table sets
forth, for the periods indicated, the range of high and low bid prices for the
Company's common stock. These prices have been retroactively adjusted to reflect
the 50% stock dividend made effective on December 15, 1995. Such prices do not
include adjustments for retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
1995: 1st Quarter $ 9.583 $ 6.333
2nd Quarter 9.333 5.833
3rd Quarter 15.833 7.833
4th Quarter 19.667 11.333
1996: 1st Quarter 16.500 7.250
2nd Quarter 12.000 6.625
3rd Quarter 9.000 4.875
4th Quarter 8.750 2.000
</TABLE>
There were 1,095 security holders of record as of March 17, 1997. Other
than S Corporation distributions to the Company's existing stockholders in
connection with the termination of the Company's S Corporation status on July 1,
1993, the Company has not paid cash dividends and intends to retain earnings for
use in the business for the foreseeable future. Under the terms of the Company's
revolving line of credit agreement (see Note 4 of the Notes to Financial
Statements), the Company is contractually restricted from paying cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Financial Statements and the accompanying notes and the management's
discussion and analysis of financial condition and results of operations
appearing elsewhere herein. The statement of operations data for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994, and the balance
sheet data at December 28, 1996 and December 30, 1995, is derived from, and
should be read in conjunction with, the audited financial statements included
elsewhere herein. The statement of operations data set forth below with respect
to 1993 and 1992 and the balance sheet data at December 31, 1992, is derived
from unaudited financial statements not included in this Form 10-K. The balance
sheet data at December 31, 1994 and December 31, 1993, is derived from audited
financial statements not included in this Form 10-K.
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED DEC. 28, DEC. 30, DEC. 31, DEC. 31, DEC. 31,
In thousands except per share data 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................................................... $ 59,921 $ 81,844 $ 65,382 $ 38,887 $ 22,920
Gross profit ................................................. 11,829 21,952 19,784 11,990 7,532
Income (loss) from operations ................................ (18,463) (3,274) 4,231 1,267 1,423
Net income (loss) ............................................ (20,833) (2,459) 2,736 1,629 1,331
Net income (loss) per share (1) .............................. (2.52) (0.31) 0.35 -- --
PRO FORMA STATEMENT OF OPERATIONS DATA (2):
Pro forma net income ......................................... $ -- $ -- $ -- $ 858 $ 870
Supplementary pro forma net income per share (1) ............. -- -- -- 0.12 0.15
<CAPTION>
DEC. 28, DEC. 30, DEC. 31, DEC. 31, DEC. 31,
In thousands 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............................................. $ 12,710 $ 15,527 $ 17,105 $ 14,787 $ 2,354
Total assets ................................................. 40,238 32,005 28,855 22,129 7,297
Notes payable and long-term debt ............................. 9,698 -- 1,439 55 240
Stockholders' equity ......................................... 8,503 16,741 18,911 15,814 3,021
</TABLE>
(1) The net income (loss) per share and the supplementary pro forma net
income per share have been retroactively restated to reflect the 1995
stock dividend. (See Note 6 of Notes to Financial Statements).
(2) Effective May 1, 1989, the Company elected to be taxed as an S
Corporation. Accordingly, the provisions for income taxes for the
periods from May 1989 to June 30, 1993 were computed by applying the
California franchise tax rate for S Corporations of 2.5% to pretax
earnings. The pro forma data are unaudited and reflect provisions for
federal and state income taxes (assuming an effective tax rate of 36.3%
and 36.5% for the years ended December 31, 1993 and 1992, respectively)
as if the Company had not elected to be treated as an S Corporation
during these periods. In accordance with a regulation of the SEC, the
pro forma net income per share for the years ended December 31, 1993
and 1992 reflect the effect of an assumed issuance of 301,352 average
shares and 422,565 average shares, respectively, at the initial public
offering price of $7.00 per share, which would have generated
sufficient cash to pay an S Corporation distribution in an amount equal
to retained earnings at June 30, 1993 and December 31, 1992,
respectively.
9
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING 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 STATED HERE AND THROUGHOUT THIS
REPORT.
GENERAL
In 1996, the Company incurred a net loss of $20,833,000 on total sales
of $59,921,000. In its transition in 1996 from a reseller of OEM products to an
engineering and manufacturing company, the Company experienced delays in the
relaunch of its Vertex and Apex products as well as increased competition and
price pressure on its older RCD products. These were major contributing factors
to the net loss for 1996. The Company's future depends upon its ability to
develop markets for Apex technology, timely launch successor products and
continue its transformation to an engineering company. The Company has limited
time and resources to develop markets for the Apex technology. If demand for
Apex cannot be developed to satisfactory levels and sustained, the Company may
have liquidity constraints.
The Vertex 2.6 GB product was announced in March 1996, and relaunched
in June 1996. The Apex 4.6 GB product was redesigned, extensively tested and in
full production by the end of the fourth quarter. The Company's goal to become a
successful research, development and manufacturing company will entail a
comprehensive change in corporate culture, increased working capital
requirements, separate R&D and manufacturing engineering functions, and will
require its operations to manufacture efficiently and manage inventory more
effectively.
Significant events affecting the Company in 1996 included:
In March 1996, a complaint was filed against the Company and certain of
its officers and directors in a securities class action lawsuit alleging that
the Company's former management engaged in improper accounting practices and
made certain false and misleading statements. No provision for any liability
which may result from this matter has been made in the Company's financial
statements. An adverse determination with respect to the pending lawsuit could
have a material adverse effect on the Company. In 1997, the Company may incur
significant legal costs relating to this lawsuit. (See Note 9 of Notes to
Financial Statements).
In July 1996, the Company sold $10,000,000 principal amount of 8%
convertible debentures in an offshore private placement. (See Note 5 of Notes to
Financial Statements). The proceeds of this placement were used to repay the
Company's outstanding loan balance in July 1996 and for working capital
purposes. Substantially all the debentures were converted during the third and
fourth quarters of 1996 and the first quarter of 1997 into nearly 2.5 million
shares of the Company's common stock.
During 1996, the Company recorded restructuring charges of $3,028,000
for costs associated with the Company's planned consolidation and transfer of
manufacturing operations to Colorado Springs, Colorado and the closing of its
branch office in Japan. The Company also recorded $1,200,000 for estimated costs
associated with changes to a major component contract with a key supplier. (See
Note 7 of Notes to Financial Statements).
In December 1996, the Company sold an additional $5,000,000 principal
amount of 6% convertible debentures pursuant to an offshore private placement.
Approximately $1,312,000 of the convertible debentures were converted as of
March 18, 1997, resulting in the issuance of approximately 430,000 shares of the
Company's common stock. The proceeds from this offering were used entirely for
the Company's liquidity needs at the end of the fourth quarter of 1996 and
during the first quarter of 1997. As of March 18, 1997, debentures aggregating
$11,212,000 have been converted into 2,806,943 shares of common stock at
conversion prices ranging from $2.10 to $6.44 per share. In addition, 68,540
shares of common stock were issued for interest payable on converted debentures.
In 1996, the Company significantly changed the composition of its board
of directors and its senior management. At the beginning of the year, the
founders of the Company, William Blum, Scott Blum and James Hanley occupied
senior management positions. The Company hired new managers, including Jonathan
Eddison, Vice President and General Counsel, and Kenneth C. Campbell, then
Executive Vice President Technology, now President. In May, William Blum, a
founder, retired and resigned his positions as President, CEO and director. Mr.
Lawrence Goelman, an outside director,
10
<PAGE> 11
became CEO and President. Roger Hay joined the Company as Executive Vice
President and Chief Financial Officer in June.
While the new management team was able to restructure the Company's
financing agreements (see Notes 4 and 5 of Notes to Financial Statements), and
to relaunch Vertex and Apex, the founders and the new management did not always
agree on their respective roles. Scott Blum resigned as an officer on October 1,
1996 but remained on the board of directors.
John Koehler, Ph.D., and Hans Imhof joined the board of directors in
the fourth quarter. Mr. Goelman resigned on December 6, 1996, and Mr. Charles
Laverty also resigned.
In a related development, Mr. Kenneth Campbell became President on
December 8, 1996 and joined the board of directors. At the same time, Roger Hay
was elected to the board, Scott Blum resigned as a director, and William Blum
rejoined the board. Scott Blum and William Blum entered into a standstill and
voting agreement dated December 8, 1996 pursuant to which they agreed (1) to
vote for the Company's board as constituted on December 8 or its nominees,
provided William Blum or his nominee was on the slate recommended by the board;
(2) to preserve Company confidential information and avoid interference with
management; and (3) to refrain from seeking to form or joining a group for the
purpose of acquiring or selling a controlling interest in the Company. In return
the Company agreed to register certain shares held by the Blums for resale if
requested to do so.
There is no assurance that the standstill agreement will serve to
prevent further disagreements between the founders and the directors, or between
the founders and management, or that such disagreements will not become an issue
after the standstill agreement expires in December 1997.
Delays in the manufacturing of the Apex and Vertex products caused the
Company's inventories to increase significantly in 1996, adversely impacting the
Company's liquidity and capital resources.
During 1996, the Company carried a significant backlog of orders for
Apex and Apex-related products. Most shipments by the Company of Apex and
Apex-related products in the fourth quarter of 1996 were against the backlog.
The Company completed shipping against the backlog for Apex products during the
first quarter of 1997.
See "Liquidity and Capital Resources" below for more information
concerning the Company's capital needs.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as
a percentage of net sales for the fiscal years indicated:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net sales:
Optical storage devices .................. 100.0% 99.3% 92.3%
Components ............................... -- 0.7 7.7
----- ----- -----
Total net sales ...................... 100.0 100.0 100.0
----- ----- -----
Cost of sales:
Optical storage devices .................. 80.3 72.6 62.8
Components ............................... -- 0.6 7.0
----- ----- -----
Total cost of sales .................. 80.3 73.2 69.8
----- ----- -----
Gross profit ............................. 19.7 26.8 30.2
----- ----- -----
Operating expenses:
Selling, general and administrative ...... 32.6 22.1 18.6
Research and development ................. 10.0 6.1 4.1
Nonrecurring charges ..................... 7.9 2.6 1.0
----- ----- -----
Total operating expenses ............. 50.5 30.8 23.7
----- ----- -----
Operating income (loss) ..................... (30.8) (4.0) 6.5
Interest income ............................. 0.1 0.2 0.3
Interest expense ............................ (0.9) -- --
Non-cash interest expense ................... (2.9) -- --
----- ----- -----
Income (loss) before income taxes ........... (34.5) (3.8) 6.8
Income tax expense (benefit) ................ 0.3 (0.8) 2.6
----- ----- -----
Net income (loss) ........................ (34.8)% (3.0)% 4.2%
===== ===== =====
</TABLE>
COMPARISON OF 1996 TO 1995
Net Sales. Net sales of optical storage devices decreased 26% to
$59,921,000 in 1996. The decrease was primarily attributable to the decline in
the average sales price of older RCD products as competition increased as
additional manufacturers entered the market. Additionally, while unit sales of
5.25" optical storage devices in 1996 were greater than in 1995, the average
sales prices of Apex and Vertex in 1996 was less than the average sales price of
its predecessor, Sierra, in 1995. As a result, sales for 5.25" optical storage
devices was approximately unchanged between 1996 and 1995.
Sales of components were $535,000 in 1995; there were no comparable
sales in 1996. The 1995 component sales were to a key supplier of the Company.
Gross Profit. Gross profit from optical storage devices decreased 45.9%
to $11,829,000 in 1996, and decreased as a percentage of optical storage device
revenue to 19.7% in 1996 from 26.9% in 1995. Increased competition in the RCD
market place and the continued delay in production of Apex and Vertex, which
replaced the end of life Sierra, each contributed to the decreased gross profit.
The Company's gross margin as a percent of net sales increased to 24.8% in the
fourth quarter of 1996 as the Company began to ship Apex.
Selling, General and Administrative. Selling, general and
administrative expenses increased 8.0% to $19,565,000 in 1996 and increased as a
percentage of net sales to 32.6% in 1996 from 22.1% in 1995. During 1996,
expenses were reduced by $478,000, or 0.8% of net sales, due to gains in foreign
currency denominated transactions as the U.S. dollar appreciated against the
Japanese Yen. In contrast, expenses were increased by $473,000, or 0.6% of net
sales during 1995 due to losses on such transactions. The 1996 net increase was
primarily the result of the expansion of the sales and administrative staff. The
Company expects that selling, general and administrative expenses will decrease
in 1997 due to the Company's plans to reduce costs in the process of realigning
its operations.
Research and Development. Research and development expenses increased
20.7% to $6,006,000 in 1996, and increased as a percentage of net sales to 10.0%
in 1996 from 6.1% in 1995. The increases in research and development expenses
were primarily due to the expansion of the research and development staff, and
expenses associated with its research and development facility. The majority of
these increased costs related to the support of the Apex product
12
<PAGE> 13
development. The Company expects that research and development expenses in 1997
will focus primarily on development of Apex II.
Nonrecurring charges. Nonrecurring charges were $4,721,000 and
$2,132,000 in 1996 and 1995, respectively. Included in nonrecurring charges are
costs associated with the Company's restructuring, a contract modification in
1996 and litigation settlement charges in 1995 and certain professional fees
related to the restatements and related legal matters. The 1996 restructuring
charge of $3,028,000 was for costs associated with the Company's planned
consolidation and transfer of manufacturing operations to Colorado Springs,
Colorado and the closing of its branch office in Japan. These restructuring
charges principally reflect the costs associated with early termination of
existing leases, losses from the disposal of assets and severance costs
resulting from work force reductions. (See Notes 7 and 9 of Notes to Financial
Statements).
Interest Income and Interest Expense. Interest income was $84,000 and
$187,000 and interest expense was $549,000 and $35,000 in 1996 and 1995,
respectively. While the Company only borrowed on its line of credit sporadically
during 1995, it was frequently in a borrowing position on its line of credit in
1996. Additionally, the Company issued convertible debentures in amounts of
$10,000,000 in July 1996 and $5,000,000 in December 1996 which accrued interest
at 8% and 6%, respectively. (See Notes 4 and 5 of Notes to Financial
Statements).
Non-cash Interest Expense Related to Convertible Debentures. Non-cash
interest expense results from issuing debentures which are convertible at a
discount from market price of the common stock. The non-cash interest recorded
on the convertible debentures is amortized over the periods which the debentures
first become convertible and will have no effect on stockholders' equity and
operating income. The Company expects an additional non-cash interest charge of
$786,000 to record the effect of the deferred interest expense in 1997. (See
Note 5 of Notes to Financial Statements).
Income Taxes. Income tax expense was $184,000 and income tax benefit
was $663,000 for 1996 and 1995, respectively. (See Note 8 of Notes to Financial
Statements).
COMPARISON OF 1995 TO 1994
Net Sales. Net sales of optical storage devices were approximately
$60,345,000 and $81,309,000 in 1994 and 1995, respectively, representing an
increase of approximately 35%. The increase was primarily attributable to
increased unit sales across all product lines, introduction of the RCD-1000 in
the fourth quarter 1994 and increased international sales. Increased units sales
were partially offset by a continuing decline in the average unit sales prices
of the Company's products. International and export sales increased by
approximately 48% from $19,112,000 in 1994 to $28,291,000 in 1995.
Sales of components were $5,037,000 and $535,000 in 1994 and 1995,
respectively. These components, which are electronic chips used in the Company's
optical storage products, were purchased in anticipation of greater demand for
these products than actually materialized. The Company sold these excess
electronic chips throughout 1994. The contract for the purchase of these
electronic chips expired in January 1995, at which time electronic chip sales
decreased substantially. The 1995 component sales were to a key supplier of the
Company.
Gross Profit. Gross profit of optical storage devices increased from
$19,301,000 in 1994 to $21,872,000 in 1995, but decreased as a percentage of
optical storage devices sales from 32.0% to 26.9%. The decreased gross profit
percentage resulted from aggressive product pricing and increased component
costs as a result of the weak U.S. dollar in comparison to the Japanese Yen
during much of 1995. In addition, the Company purchases many of the components
used in its systems from Japanese suppliers. These transactions are largely
denominated in Japanese Yen and the Company's gross profit and gross profit
margin can be significantly impacted by fluctuations in the foreign currency
markets.
Gross profit of components was $483,000 or 9.6% of component sales in
1994, compared to $80,000 or 15.0% in 1995. The Company provides essentially no
value added activities related to these sales.
Selling, General and Administrative. Selling, general and
administrative expenses were $12,149,000 and $18,116,000 in 1994 and 1995,
respectively, and represented approximately 18.6% and 22.1% of net sales. During
1995, $473,000 of the expenses, or 0.6% of net sales, were due to losses in
foreign currency denominated transactions due to the decline of the U.S. dollar
against the Japanese Yen, compared to similar losses of approximately $195,000,
or 0.3% of net sales, in 1994. The increase in expenditures was also the result
of increases in advertising, marketing and trade show expenditures, the
expansion of the sales and administrative staff, and the expenses related to
sales offices in The Netherlands and Japan, which were expanded during 1995.
13
<PAGE> 14
Research and Development. Research and development expenses were
$2,708,000 and $4,978,000 in 1994 and 1995, respectively, and represented
approximately 4.1% and 6.1% of net sales. The increases in research and
development expenses were primarily due to the expansion of the research and
development staff, increased costs associated with third party software and
hardware development contracts and expenses associated with its research and
development facility. The majority of these increased costs related to the
support of the Apex product development.
Nonrecurring charges. Nonrecurring charges were $696,000 and $2,132,000
in 1994 and 1995, respectively. Included in nonrecurring charges are litigation
settlement charges and certain professional fees related to the restatements and
related legal matters. (See Notes 7 and 9 of Notes to Financial Statements).
Provision for Income Taxes. The provision for income taxes was
$1,713,000 for 1994, or an effective income tax rate of approximately 38.5%. The
income tax benefit was $663,000 for 1995. (See Note 8 of Notes to Financial
Statements).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 28, 1996 increased by $1,849,000
from the December 30, 1995 balance. This increase in available cash balances at
December 28, 1996 occurred entirely due to the proceeds from the Company's
second offshore private placement of $5,000,000 which occurred just prior to
year-end. Operating activities used cash and cash equivalents of $14,889,000,
$713,000 and $1,912,000 in 1996, 1995 and 1994, respectively. Inventories
increased by $7,167,000 in 1996. The 1996 increase in inventories was due to the
continuing manufacturing delays in Apex and inventory management problems. The
increase in inventories has been partially offset by an increase in accounts
payable as certain vendors agreed to temporarily extend payment terms.
The Company's announced restructuring in 1996 caused accrued expenses
and other liabilities to increase at year-end 1996 as most restructuring costs
will be paid or incurred throughout 1997 and 1998. The $1,740,000 and $1,361,000
increases in accounts receivable during 1996 and 1995, respectively, were
primarily due to the timing of sales in 1996 and the increase in sales in 1995.
The Company's investing activities during this period included capital
expenditures for computers, furniture and equipment and represented $904,000,
$1,841,000 and $840,000 for 1996, 1995 and 1994, respectively. The increase in
1995 capital expenditures resulted from the Company's development of its
internal manufacturing capabilities and enhancement of its information systems.
As of December 28, 1996, the Company has an income tax receivable of
$1,984,000. This amount should be refunded from the U.S. Government as tax
losses for 1996 and 1995 are carried back to prior years. A valuation allowance
is provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. As a result of the Company's
significant losses in 1996 and uncertainties surrounding the realization of the
net operating loss carryforward which was generated during 1996, management has
determined that the realization of the deferred tax assets is not more likely
than not. Accordingly, a 100% valuation allowance has been recorded. (See Note 8
of Notes to Financial Statements).
The Company currently has a revolving line of credit agreement with a
lender which is collateralized by substantially all assets of the Company and
which expires on September 30, 1998. The Company has a maximum availability of
$10,000,000 under the line of credit based on a percentage of eligible accounts
receivables and inventories. Interest is payable monthly at the lender's
reference rate (8.25% at December 28, 1996) plus 1.75%. As of December 28, 1996
and March 17, 1997, the Company was in compliance with all covenants under the
line of credit. While the Company had no borrowings under its previous line of
credit agreement at December 30, 1995, its borrowings under the current line of
credit totaled $3,276,000 at December 28, 1996 and $6,044,000 at March 17, 1997.
(See Note 4 of Notes to Financial Statements).
The Company's financing activities provided cash and cash equivalents
of $17,548,000 and $1,517,000 in 1996 and 1994, respectively, and used $964,000
in 1995. The significant cash provided in 1996 resulted from the issuance of
$15,000,000 of convertible debentures and net borrowings of $3,276,000 on its
line of credit. These significant borrowings were necessary to fund the
continuing net losses of the Company which were $20,833,000 in 1996 and
$2,459,000 in 1995. (See Notes 4 and 5 of Notes to Financial Statements).
The Company believes that its existing cash balances, anticipated cash
flows from operating activities and borrowings under its line of credit will be
sufficient to support its working capital needs, capital expenditures
requirements,
14
<PAGE> 15
minimum lease payments and restructuring costs for the next twelve months.
However, the Company has recently experienced significant losses from
operations. The Company is taking the steps it believes necessary to bring its
inventory to appropriate levels which will provide cash flows from operating
activities. As part of its relocation to new facilities, the Company will have
capital expenditure requirements of approximately $1,000,000 in the first
quarter of 1997. The Company's ability to meet its future liquidity requirements
is dependent upon its ability to operate profitably or, in the absence thereof,
continued availability under its line of credit and to arrange additional
financing.
The Company's line of credit expires on September 30, 1998 and there
can be no assurances the credit facility will be extended beyond such date. In
an effort to address its working capital needs, the Company has taken or intends
to take a number of actions including (i) a combination and consolidation of its
manufacturing facilities in a single facility located in Colorado Springs,
Colorado; (ii) seeking subtenants for the Company's former Colorado Springs
facility and the Company's Irvine facility; (iii) hiring a new Vice President of
Operations whose responsibilities include inventory management; and (iv)
increased efforts to develop markets for the Company's core Apex technology and
Apex-related products. No assurances can be given that such efforts will
significantly improve the Company's working capital situation.
Because of the Company's present financial condition, normal sources of
external financing may not be available to the Company in the future, including
a replacement line of credit. The Company has not identified as of this filing
any additional financing and is unable to indicate at this time whether any
additional financing will be available to the Company in the future.
15
<PAGE> 16
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the
Company's operations during the eight quarters ended December 28, 1996, and such
data as a percentage of net sales. This quarterly information is unaudited and
has been prepared on the same basis as the annual financial statements and, in
management's opinion, reflects all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the information set forth
therein. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
APRIL 1, JULY 1, SEPT. 30, DEC. 30, MAR. 30, JUN. 29, SEPT. 28, DEC. 28,
1995 1995 1995 1995 1996 1996 1996 1996
------- ------- ------- ------- ------- ------- ------- -------
(1) (2)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Optical storage devices .... $20,185 $20,600 $20,980 $19,544 $17,434 $12,333 $14,259 $15,895
Components ................. -- -- 421 114 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total net sales .......... 20,185 20,600 21,401 19,658 17,434 12,333 14,259 15,895
------- ------- ------- ------- ------- ------- ------- -------
Cost of sales:
Optical storage devices .... 14,501 15,201 15,142 14,593 14,306 10,180 11,646 11,960
Components ................. -- -- 348 107 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total cost of sales ...... 14,501 15,201 15,490 14,700 14,306 10,180 11,646 11,960
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ............... 5,684 5,399 5,911 4,958 3,128 2,153 2,613 3,935
Operating expenses:
Selling, general and
administrative ........... 4,692 4,106 4,325 4,993 5,252 4,429 4,451 5,433
Research and development.... 789 891 1,378 1,920 1,592 1,436 1,494 1,484
Nonrecurring charges ....... 225 183 198 1,526 164 87 4,333 137
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.. 5,706 5,180 5,901 8,439 7,008 5,952 10,278 7,054
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) ....... (22) 219 10 (3,481) (3,880) (3,799) (7,665) (3,119)
Interest income ............... 50 55 41 41 4 -- 59 21
Interest expense .............. (9) (10) (12) (4) (36) (114) (201) (198)
Non-cash interest expense ..... -- -- -- -- -- -- (1,286) (435)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes ....................... 19 264 39 (3,444) (3,912) (3,913) (9,093) (3,731)
Income tax expense (benefit)... 7 102 15 (787) 3 -- -- 181
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ............. $ 12 $ 162 $ 24 $(2,657) $(3,915) $(3,913) $(9,093) $(3,912)
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share.... $ 0.00 $ 0.02 $ 0.00 $ (0.34) $ (0.50) $ (0.49) $ (1.15) $ (0.42)
======= ======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF NET SALES:
Net sales:
Optical storage devices 100.0% 100.0% 98.0% 99.4% 100.0% 100.0% 100.0% 100.0%
Components ............... -- -- 2.0 0.6 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total net sales ........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Cost of sales:
Optical storage devices... 71.8 73.8 70.8 74.2 82.1 82.5 81.7 75.2
Components ............... -- -- 1.6 0.6 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total cost of sales ...... 71.8 73.8 72.4 74.8 82.1 82.5 81.7 75.2
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ............... 28.2 26.2 27.6 25.2 17.9 17.5 18.3 24.8
Operating expenses:
Selling, general and
administrative ........... 23.3 19.9 20.2 25.4 30.2 35.9 31.2 34.2
Research and development.... 3.9 4.3 6.4 9.7 9.1 11.7 10.5 9.3
Nonrecurring charges ....... 1.1 0.9 0.9 7.8 0.9 0.7 30.4 0.9
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.. 28.3 25.1 27.5 42.9 40.2 48.3 72.1 44.4
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) ....... (0.1) 1.1 0.1 (17.7) (22.3) (30.8) (53.8) (19.6)
Interest income ............... 0.2 0.2 0.2 0.2 -- -- 0.4 0.1
Interest expense .............. -- -- (0.1) -- (0.2) (0.9) (1.4) (1.3)
Non-cash interest expense ..... -- -- -- -- -- -- (9.0) (2.7)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes ....................... 0.1 1.3 0.2 (17.5) (22.5) (31.7) (63.8) (23.5)
Income tax expense (benefit) -- 0.5 0.1 (4.0) -- -- -- 1.1
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) .......... 0.1% 0.8% 0.1% (13.5)% (22.5)% (31.7)% (63.8)% (24.6)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Balances are as reflected in Form 10-Q/A filed with the SEC on April 12,
1996.
(2) Balances are as reflected in Form 10-Q/A filed with the SEC on March 25,
1997. (See Note 12 of Notes to Financial Statements).
The Company's quarterly operating results can 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, possible seasonality in the fourth quarter, changes
in pricing policies by the Company and its competitors, currency fluctuations
and the timing of expenditures on advertising, promotion and research and
development.
16
<PAGE> 17
1997 TRENDS
The Company's business changed so much in 1996 that prior periods
provide a limited basis for useful comparison. The Company is in its early
stages as an R&D and manufacturing company based upon the Apex technology. The
OEM reseller business must provide complementary product lines and necessary
revenue diversification. The Company's liquidity has deteriorated due to the
following recent trends:
Apex Bookings. Apex bookings lag significantly below Apex shipments.
The long-standing order backlog for Apex was substantially shipped as of March
17, 1997 leaving minimal backlog. A critical task facing the Company in 1997 is
building demand for the Apex technology (and applications of that technology
such as optical libraries). In the past the Company committed significant
resources to mass market advertising of its products and of optical technology.
The Company is developing a new marketing approach with the aid of its new Vice
President of Marketing, internal and external market research and outside
consultants. The new marketing strategy is being tested and is not yet proven in
the market. The Company has limited time and resources to develop the markets
for its core Apex technology and products. If demand for Apex cannot be
developed to satisfactory levels and sustained the Company may have liquidity
constraints.
Inventory. Inventory balances were higher at March 17, 1997, than at
year-end 1996. The higher inventory results from declining Apex bookings and the
long-lead nature of many Apex components. If Apex demand can not be increased,
the Company's liquidity will further deteriorate as inventory balances remain at
these high levels. Additionally, the Company's exposure to obsolete inventory
increases.
Cash and Liquidity. From year-end 1996 to March 17, 1997, the Company's
cash balance decreased from $5,455,000 to less than $1,000,000 and borrowings on
the Company's line of credit increased from $3,276,000 to $6,044,000. The
build-up of inventory balances, continuing operating losses and costs to
relocate and consolidate operations are largely responsible for the use of cash
and increased borrowings on the line of credit during this period. The Company
is taking the steps it believes necessary to bring its inventory and operating
expense to appropriate levels.
INFLATION AND FOREIGN CURRENCY EXCHANGE
Inflation has not had a significant impact on the Company's operating
results. The Company has from time-to-time attempted to reduce its anticipated
exposure to currency fluctuations by negotiating price and other cost
concessions from its suppliers, and by entering hedging transactions, including
the purchase of forward contracts for foreign currencies. Although the Company
monitors the fluctuations in the value of the Japanese Yen and other relative
currencies and may engage in hedging transactions in the future, the Company
believes that such transactions may be too expensive to adopt as a general
strategy. There can be no assurance that the Company's results of operations
will not be adversely affected by currency fluctuations.
THIS SECTION AND THIS ENTIRE REPORT ON FORM 10-K CONTAIN
FORWARD-LOOKING STATEMENTS AND INCLUDE ASSUMPTIONS CONCERNING THE
COMPANY'S OPERATIONS, FUTURE RESULTS AND PROSPECTS. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ARE
SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES AND OTHER FACTORS. IN
CONNECTION WITH THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
THE COMPANY PROVIDES THE FOLLOWING CAUTIONARY STATEMENTS IDENTIFYING
IMPORTANT FACTORS WHICH, AMONG OTHER THINGS, COULD CAUSE THE ACTUAL
RESULTS AND EVENTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN OR
IMPLIED BY THE FORWARD-LOOKING STATEMENTS AND RELATED ASSUMPTIONS
CONTAINED IN THIS SECTION AND IN THIS ENTIRE REPORT.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required
by this item are set forth at the pages indicated at Item 14(a)(1).
17
<PAGE> 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
COOPERS & LYBRAND L.L.P.
As noted in the Company's Form 8-K dated February 20, 1996, the
engagement of Coopers & Lybrand L.L.P., the former independent accountants of
the Company, was terminated by the resignation of Coopers & Lybrand L.L.P. on
February 20, 1996.
ERNST & YOUNG LLP
As noted in the Company's Form 8-K dated March 30, 1995, the engagement
of Ernst & Young LLP, the former independent accountants of the Company, was
terminated by the resignation of Ernst & Young LLP on March 30, 1995.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ITEM 11. EXECUTIVE
COMPENSATION; ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS are
incorporated herein by reference to the information supplied pursuant to those
Items in the Company's Proxy Statement for the 1997 Annual Meeting of
shareholders which will be filed with the SEC no later than 120 days after the
close of the fiscal year ended December 28, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements.
Indexing to Financial Statements
--------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Certified Public Accountants - 1996 and 1995 Financial Statements 23
Report of Independent Accountants - 1994 Financial Statements 24
Balance Sheets - December 28, 1996 and December 30, 1995 25
Statements of Operations - Years Ended December 28, 1996, December 30, 1995
and December 31, 1994 26
Statements of Stockholders' Equity - Years Ended December 28, 1996,
December 30, 1995 and December 31, 1994 27
Statements of Cash Flows - Years Ended December 28, 1996,
December 30, 1995 and December 31, 1994 28
Notes to Financial Statements 30
</TABLE>
(2) Financial Statement Schedule. The following financial
statement schedule of Pinnacle Micro, Inc., is filed as part
of this Report and should be read in conjunction with the
Financial Statements of Pinnacle Micro, Inc.:
18
<PAGE> 19
Index to Financial Statement Schedule
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Schedule II - Valuation and Qualifying Accounts 42
</TABLE>
All other schedules are omitted because they are not required or the
required information is included in the financial statements or notes thereto.
(3) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description Location
----------- ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company. (1)
3.2 Bylaws of the Company, as currently in effect. (1)
4.1 Specimen Certificate of Common Stock. (1)
10.1* Pinnacle Micro, Inc. Incentive Stock Option, Nonqualified Stock Option
and Restricted Stock Purchase Plan -- 1989 (the "1989 Plan"). (1)
10.2* Form of Incentive Stock Option Agreement pertaining to the 1989 Plan. (1)
10.3* Pinnacle Micro, Inc. Incentive Stock Option, Nonqualified Stock Option
and Restricted Stock Purchase Plan -- 1993 (the "1993 Plan"). (1)
10.4* Form of Incentive Stock Option Agreement pertaining to the 1993 Plan. (1)
10.5* Form of Nonqualified Stock Option Agreement pertaining to the 1993 Plan. (1)
10.6* Form of Restricted Stock Purchase Agreement pertaining to the 1993 Plan. (1)
10.7 Pinnacle Micro, Inc. Employee Stock Purchase Plan. (1)
10.8 Distributor Agreement, dated June 14, 1991, by and between the Company
and Merisel Inc., together with Amendment dated June 14, 1991
and Addendum dated February 11, 1993. (1)
10.9 Distributor Agreement, dated July 30, 1991, by and between the
Company and Tech Data Corporation, together with Addendum No. 1
to Distributor Agreement dated July 30, 1991. (1)
10.10 Distributor Agreement, dated August 18, 1989, by and between the
Company and Ingram Micro D Inc., together with Addenda Nos. 1, 2, 3, 4 and 5. (1)
10.11 Peripherals OEM Purchase Agreement, dated May 1, 1991, by and
between the Company and Hewlett-Packard Company, together with
Amendment to Peripherals OEM Agreement No. A509M, effective May 12, 1992. (1)
10.12 Computer Peripheral Products Company Peripheral Systems Products
Agreement, dated April 1, 1992, by and between the Company and
Computer Peripheral Products Company, Sony Corporation of America. (1)
10.13 Basic Agreement, dated April 1, 1992, by and between the Company
and Sony Corp. in Japan. (1)
10.14 Agreement, effective October 28, 1991, by and between the Company
and Olympus Optical Co., Ltd., together with Memorandum dated
February 19, 1992, Addendum dated August 1, 1992, Memorandum
dated September 9, 1992 and letter dated October 15, 1992. (1)
10.15+ OKI Semiconductor Standard Products Volume Purchase Agreement,
dated August 17, 1992, by and between the Company and OKI Semiconductor. (1)
10.16+ Nippon Pinnacle Micro, Pinnacle Micro and Ricoh Company Ltd.
Purchase Agreement, dated October 1, 1992, by and among the
Company, Nippon Pinnacle Micro and Ricoh Company Ltd. (1)
10.17 Agreement on Sale and Purchase, dated January 1, 1993, by and
between the Company and Victor Company of Japan, Limited, together
with Addenda Nos. I, II and III. (1)
10.19 Lease, dated January 6, 1993, by and between the Company and
Webb/Colorado Ventures, Ltd. (1)
10.20 Lease, dated February 5, 1991, by and between the Company and
The Irvine Company, together with Amendment Nos. 1, 2, 3 and 4. (1)
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Exhibit No. Description Location
----------- ----------- --------
<S> <C> <C>
10.21 Form of Indemnification Agreement for officers and directors of the Company. (1)
10.22* Form of Nonqualified Stock Agreement pertaining to the 1989 Plan. (1)
10.23 Business Loan Agreement, dated August 4, 1994, by and between the
Company and Bank of America, together with Amendment No. One,
dated October 4, 1994 and Amendment No. Two, dated February 2, 1995. (2)
10.24(a) Amendment No. Three, dated August 31, 1995, to Business Loan
Agreement, dated August 4, 1994, by and between the Company
and Bank of America. (3)
10.24(b) Amendment No. Four, dated October 10, 1995, to Business
Loan Agreement, dated August 4, 1994, by and between the
Company and Bank of America. (3)
10.24(c) Amendment No. Five, dated January 24, 1996, to Business Loan
Agreement, dated August 4, 1994, by and between the Company
and Bank of America. (3)
10.24(d) Amendment No. Six, dated March 28, 1996, to Business Loan
Agreement, dated August 4, 1994, by and between the Company
and Bank of America. (3)
10.25++ Development, Manufacturing and Purchasing Agreement dated
June 30, 1995, by and between the Company and Asahi Optical Co., LTD. (3)
10.26* Employment Agreement dated December 15, 1995, by and
between the Company and James G. Hanley. (3)
10.27* First Amendment to the 1993 Equity Incentive Plan of Pinnacle
Micro, Inc. (the "1993 Plan"). (3)
10.28* First Amendment to the 1989 Equity Incentive Plan of Pinnacle
Micro, Inc. (the "1989 Plan"). (3)
10.29++ Development and Manufacturing Agreement dated October 6,
1994, by and between the Company and Advanced Hardware
Architectures, Inc. (3)
10.30++ Computer 2000 Purchase Agreement dated September 13, 1995,
by and between the Company and Computer 2000. (3)
10.31 Stipulation of settlement - Class action - Kurtz, et al. vs. Blum, et al.;
Case No. SAC-94-1043-GLT(EEx). (3)
10.32 Form of Offshore Subscription Agreement. (4)
10.33 Form of Convertible Debentures. (4)
10.34 Form of Registration Rights Agreement. (4)
10.35 Loan and Security Agreement with Coast Business Credit dated
September 18, 1996. (5)
10.36* 1996 Long-Term Incentive Plan. 46
10.37* 1996 Non-Employee Directors Stock Option Plan. 59
10.38* Employment Agreement for Kenneth Campbell as of December 1, 1996. 63
10.39* Employment Agreement for Roger Hay as of December 1, 1996. 69
10.40* Employment Agreement for Jonathan B. Eddison as of December 1, 1996. 75
10.41* Employment Agreement for Kevin Lehnert as of December 1, 1996. 81
10.42* Employment Agreement for David Ooley as of December 1, 1996. 87
10.43* Stand-still and Voting Rights Agreement dated December 8, 1996. 93
10.44* Scott Blum - Severance Agreement and Release of February 13, 1997. 96
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ----------
(1) Incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form S-1, Reg. No. 33-62614.
(2) Incorporated by reference to exhibit filed with the Company's Report on
Form 10-K for the fiscal year ended December 31, 1994.
20
<PAGE> 21
(3) Incorporated by reference to exhibit filed with the Company's Report on
Form 10-K for the fiscal year ended December 30, 1995.
(4) Incorporated by reference to the exhibit filed with the Company's
Report on Form 10-Q for the period ended June 29, 1996.
(5) Incorporated by reference to the exhibit filed with the Company's
Report on Form 10-Q for the period ended September 28, 1996.
- ----------
* Denotes applicable executive compensation plans and arrangements of the
Company.
+ Confidential treatment has been granted by the Commission. The copy
filed as an exhibit omits the information subject to the
confidentiality grant.
++ Confidentiality treatment has been requested. The copy filed as an
exhibit omits the information subject to the confidentiality request.
(b) Reports on Form 8-K
October 1, 1996 Scott Blum resignation
December 6, 1996 Lawrence Goelman and Charles Laverty resignations;
Standstill and Voting Agreement
December 20, 1996 Closing of Offshore Private Placement of
Convertible Debentures for $5 million
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PINNACLE MICRO, INC.
March 31, 1997 By: /s/ Kenneth C. Campbell
-------------------------------------
Date Kenneth C. Campbell, President
March 31, 1997 By: /s/ Roger Hay
-------------------------------------
Date Roger Hay, Executive Vice President,
Chief Financial Officer and Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 31, 1997 By: /s/ Kenneth C. Campbell
-------------------------------------
Date Kenneth C. Campbell, President and
Director
March 31, 1997 By: /s/ Roger Hay
-------------------------------------
Date Roger Hay, Executive Vice President,
Chief Financial Officer, Chief
Accounting Officer and Director
March 31, 1997 By: /s/ Roger Hay
-------------------------------------
Date Daryl White, Chairman of the Board of
Directors
March 31, 1997 By: /s/ Roger Hay
-------------------------------------
Date John E. Koehler, Director
March 31, 1997 By: /s/ Roger Hay
-------------------------------------
Date Hans Imhof, Director
March 31, 1997 By: /s/ Roger Hay
-------------------------------------
Date William F. Blum, Director
22
<PAGE> 23
Report of Independent Certified Public Accountants
The Board of Directors
Pinnacle Micro, Inc.
We have audited the accompanying balance sheets of Pinnacle Micro, Inc. as of
December 28, 1996 and December 30, 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 28, 1996. We have also audited the information for the
years ended December 28, 1996 and December 30, 1995 in the financial statement
schedule listed in the Index at Item 14(a)2. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
statement schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and the financial statement schedule. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial
statements and the financial statement schedule. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pinnacle Micro, Inc. as of
December 28, 1996 and December 30, 1995, and the results of its operations and
its cash flows for each of the two years in the period ended December 28, 1996
in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule referred to above
presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Costa Mesa, California
February 14, 1997
23
<PAGE> 24
Report of Independent Accountants
The Board of Directors
Pinnacle Micro, Inc.
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Pinnacle Micro, Inc. for the year ended December 31, 1994. Our
audit also included the information for the year ended December 31, 1994 in the
financial statement schedule listed in the Index at Item 14(a)2. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Pinnacle
Micro, Inc. for the year ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
As a result of the accounting irregularities described in Note 9, the Company is
the subject of an investigation by the Securities and Exchange Commission and is
a defendant in a class action lawsuit alleging various violations of federal
securities laws. The ultimate outcome of these matters cannot presently be
determined and, accordingly, no provision for any liability that may result has
been made in the statement of operations for the year ended December 31, 1994.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
May 15, 1995
24
<PAGE> 25
PINNACLE MICRO, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $ 5,455,000 $ 3,606,000
Accounts receivable, net of allowance
of $748,000 at December 28, 1996
and $1,178,000 at December 30, 1995 ............... 11,726,000 11,354,000
Income taxes receivable ............................. 1,984,000 999,000
Inventories ......................................... 17,714,000 11,413,000
Prepaid expenses and other current assets ........... 215,000 961,000
Deferred income taxes ............................... -- 1,058,000
------------ ------------
Total current assets ................................... 37,094,000 29,391,000
Furniture and equipment, net ........................... 1,739,000 2,098,000
Deferred interest related to convertible debentures .... 786,000 --
Deferred income taxes .................................. -- 213,000
Other assets ........................................... 619,000 303,000
------------ ------------
Total assets ........................................... $ 40,238,000 $ 32,005,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable ........................................ $ 3,276,000 $ --
Accounts payable .................................... 15,540,000 11,644,000
Accrued expenses .................................... 2,922,000 1,264,000
Accrued restructuring ............................... 1,421,000 --
Payroll related liabilities ......................... 1,225,000 956,000
------------ ------------
Total current liabilities .............................. 24,384,000 13,864,000
Convertible debentures ................................. 6,422,000 --
Other liabilities ...................................... 929,000 1,400,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
Issued and outstanding - none ..................... -- --
Common stock, $.001 par value:
Authorized shares - 30,000,000
Issued and outstanding shares -
9,935,594 at December 28, 1996
and 7,867,599 at December 30, 1995 .............. 10,000 8,000
Additional paid-in capital .......................... 28,551,000 16,158,000
Retained earnings (accumulated deficit) ............. (20,058,000) 775,000
Foreign currency translation adjustment ............. -- (200,000)
------------ ------------
Total stockholders' equity ............................. 8,503,000 16,741,000
------------ ------------
Total liabilities and stockholders' equity ............. $ 40,238,000 $ 32,005,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
PINNACLE MICRO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
Optical storage devices ............... $ 59,921,000 $ 81,309,000 $ 60,345,000
Components ............................ -- 535,000 5,037,000
------------ ------------ ------------
Total net sales ..................... 59,921,000 81,844,000 65,382,000
------------ ------------ ------------
Cost of sales:
Optical storage devices ............... 48,092,000 59,437,000 41,044,000
Components ............................ -- 455,000 4,554,000
------------ ------------ ------------
Total cost of sales ................. 48,092,000 59,892,000 45,598,000
------------ ------------ ------------
Gross profit ............................. 11,829,000 21,952,000 19,784,000
------------ ------------ ------------
Operating expenses:
Selling, general and administrative ... 19,565,000 18,116,000 12,149,000
Research and development .............. 6,006,000 4,978,000 2,708,000
Nonrecurring charges .................. 4,721,000 2,132,000 696,000
------------ ------------ ------------
Total operating expenses ............ 30,292,000 25,226,000 15,553,000
------------ ------------ ------------
Operating income (loss) .................. (18,463,000) (3,274,000) 4,231,000
Interest income .......................... 84,000 187,000 237,000
Interest expense ......................... (549,000) (35,000) (19,000)
Non-cash interest expense related
to convertible debentures ............. (1,721,000) -- --
------------ ------------ ------------
Income (loss) before income taxes ........ (20,649,000) (3,122,000) 4,449,000
Income tax expense (benefit) ............. 184,000 (663,000) 1,713,000
------------ ------------ ------------
Net income (loss) ........................ $(20,833,000) $ (2,459,000) $ 2,736,000
============ ============ ============
Net income (loss) per share ........... $ (2.52) $ (0.31) $ 0.35
============ ============ ============
Weighted average common shares outstanding 8,272,000 7,842,000 7,849,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
PINNACLE MICRO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS FOREIGN
-------------------- PAID-IN (ACCUMULATED CURRENCY
THREE YEARS ENDED DEC. 28, 1996 SHARES AMOUNT CAPITAL DEFICIT) TRANSLATION TOTAL
--------- ------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 .......... 5,183,639 $ 5,000 $15,418,000 $ 391,000 $ -- $ 15,814,000
Exercise of stock options ........... 27,062 -- 157,000 -- -- 157,000
Tax benefit of employee stock options -- -- 157,000 -- -- 157,000
Purchases through the employee
stock purchase plan ............... 3,405 -- 31,000 -- -- 31,000
Deferred compensation ............... -- -- -- 16,000 -- 16,000
Net income for the year ended
December 31, 1994 ................. -- -- -- 2,736,000 -- 2,736,000
--------- ------- ----------- ------------ --------- ------------
Balances at December 31, 1994 .......... 5,214,106 5,000 15,763,000 3,143,000 -- 18,911,000
Exercise of stock options ........... 16,037 -- 191,000 -- -- 191,000
Tax benefit of employee stock options -- -- 70,000 -- -- 70,000
Purchases through the employee
stock purchase plan ............... 14,938 -- 134,000 -- -- 134,000
Shares issued in connection with
50% stock dividend ................ 2,622,518 3,000 -- (3,000) -- --
Repayment of dividends by
S Corporation stockholders ........ -- -- -- 80,000 -- 80,000
Deferred compensation ............... -- -- -- 14,000 -- 14,000
Foreign currency translation ........ -- -- -- -- (200,000) (200,000)
Net loss for the year ended
December 30, 1995 ................. -- -- -- (2,459,000) -- (2,459,000)
--------- ------- ----------- ------------ --------- ------------
Balances at December 30, 1995 .......... 7,867,599 8,000 16,158,000 775,000 (200,000) 16,741,000
Exercise of stock options ........... 15,010 -- 63,000 -- -- 63,000
Tax benefit of employee stock options -- -- 11,000 -- -- 11,000
Purchases through the employee
stock purchase plan ............... 19,737 -- 98,000 -- -- 98,000
Shares issued for settlement of
stockholder lawsuit ............... 190,084 -- 1,400,000 -- -- 1,400,000
Shares issued upon conversion of
convertible debentures ............ 1,801,381 2,000 8,083,000 -- -- 8,085,000
Shares issued for interest on
convertible debentures ............ 41,783 -- 191,000 -- -- 191,000
Additional paid-in capital related to
debenture embedded interest ....... -- -- 2,507,000 -- -- 2,507,000
Foreign currency translation ........ -- -- -- -- 200,000 200,000
Warrants issued in connection with
convertible debentures ............ -- -- 31,000 -- -- 31,000
Non-employee stock option
compensation ...................... -- -- 9,000 -- -- 9,000
Net loss for the year ended
December 28, 1996 ................. -- -- -- (20,833,000) -- (20,833,000)
--------- ------- ----------- ------------ --------- ------------
Balances at December 28, 1996 .......... 9,935,594 $10,000 $28,551,000 $(20,058,000) $ -- $ 8,503,000
========= ======= =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
PINNACLE MICRO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss) ..................................... $(20,833,000) $(2,459,000) $ 2,736,000
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization .................... 1,323,000 896,000 658,000
Provision for doubtful accounts .................. 369,000 230,000 78,000
Provision for product returns and price protection 999,000 128,000 240,000
Provision for inventory obsolescence ............. 866,000 871,000 476,000
Provision for litigation settlement .............. -- 1,400,000 --
Non-cash interest expense ........................ 1,721,000 -- --
Interest on debentures paid in common stock ...... 191,000 -- --
Compensation related to stock options and warrants 40,000 -- --
Deferred compensation recognized ................. -- 14,000 16,000
Deferred income taxes ............................ 1,271,000 (128,000) (300,000)
Loss on disposal of assets ....................... -- 16,000 --
Changes in operating assets and liabilities:
Accounts receivable ............................ (1,740,000) (1,361,000) (5,879,000)
Income taxes receivable ........................ (985,000) (999,000) 202,000
Inventories .................................... (7,167,000) (4,260,000) (2,149,000)
Prepaid expenses and other current assets ...... 746,000 (423,000) (66,000)
Other assets ................................... 31,000 25,000 (250,000)
Accounts payable and accrued expenses .......... 7,081,000 4,994,000 2,043,000
Payroll related liabilities .................... 269,000 343,000 283,000
Other liabilities .............................. 929,000 -- --
------------ ----------- -----------
Net cash used in operating activities ................. (14,889,000) (713,000) (1,912,000)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments ........................ -- 2,436,000 2,485,000
Purchase of furniture and equipment ................... (904,000) (1,841,000) (840,000)
------------ ----------- -----------
Net cash provided by (used in) investing activities ... (904,000) 595,000 1,645,000
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable ............................ 8,276,000 -- 1,400,000
Principal payments on note payable to bank ............ (5,000,000) (1,400,000) --
Proceeds from issuance of debentures .................. 15,000,000 -- --
Payment of debt issuance costs ........................ (900,000) -- --
Principal payments on long-term debt and
capital lease obligations .......................... -- (39,000) (16,000)
Dividends (paid to stockholders) repaid to Company .... -- 80,000 (212,000)
Proceeds from exercise of stock options ............... 63,000 191,000 157,000
Tax benefit from exercise of stock options ............ 11,000 70,000 157,000
Proceeds from issuance of stock through the
employee stock purchase plan ....................... 98,000 134,000 31,000
------------ ----------- -----------
Net cash provided by (used in) financing activities ... 17,548,000 (964,000) 1,517,000
------------ ----------- -----------
Effect of exchange rate changes on cash ............... 94,000 (178,000) --
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents ...... 1,849,000 (1,260,000) 1,250,000
Cash and cash equivalents at beginning of year ........ 3,606,000 4,866,000 3,616,000
------------ ----------- -----------
Cash and cash equivalents at end of year .............. $ 5,455,000 $ 3,606,000 $ 4,866,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 29
PINNACLE MICRO, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ............................. $ 306,000 $ 45,000 $ 19,000
========== ========= ==========
Income taxes ......................... $ 15,000 $ 670,000 $1,381,000
========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued upon conversion of
debentures, net .................... $8,085,000 $ -- $ --
========== ========= ==========
Common stock issued for settlement
of stockholder lawsuit ............. $1,400,000 $ -- $ --
========== ========= ==========
Additional paid-in capital related to
debenture embedded interest ........ $2,507,000 $ -- $ --
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 30
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 28, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pinnacle Micro, Inc., (the "Company") develops, manufactures and markets optical
storage systems for data intensive applications for use both with stand-alone
and networked personal computers and workstations. The financial statements
include the accounts of Pinnacle Micro, Inc., and its foreign branches, Nippon
Pinnacle Micro and Euro Pinnacle Micro.
Nippon Pinnacle Micro was closed during 1996 (see Note 7).
FISCAL YEARS
Beginning with fiscal year 1995, the Company operates and reports financial
results on a fiscal year of 52 or 53 weeks ending on the Saturday closest to
December 31. Accordingly, fiscal 1996 ended on December 28, 1996 and fiscal 1995
ended on December 30, 1995. Prior to 1995 all fiscal years ended on December 31.
All references to years in these notes to financial statements represent fiscal
years unless otherwise noted.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less when purchased.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is determined using the straight-line method for all
assets based on the estimated useful lives of the assets, which range from one
to five years. Leasehold improvements are amortized using the straight-line
method over the shorter of their estimated useful lives or the term of the
related leases.
DEBT ISSUANCE COSTS
The costs related to the issuance of the convertible debentures are capitalized
and amortized over the terms of the related debt.
30
<PAGE> 31
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation cost is recognized for its employee stock
option plans, unless the exercise price of options granted is less than fair
market value on the date of grant. The Company has adopted the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (see Note 6).
FOREIGN CURRENCY TRANSACTIONS
On January 1, 1995, the Company changed the functional currency of its branch
located in Japan (Nippon Pinnacle Micro) to the local functional currency and,
accordingly, the foreign currency denominated assets and liabilities were
translated to U.S. dollars at the year-end exchange rate. The effects of
translation are recorded as a separate component of stockholders' equity through
the date that Nippon Pinnacle Micro was closed during 1996 (see Note 7).
Exchange gains and losses arising from transactions denominated in foreign
currencies are translated at average exchange rates. Net foreign currency
transaction gains of $478,000 and losses of $473,000 and $195,000 were realized
in 1996, 1995 and 1994, respectively, and are included in selling, general and
administrative expenses in the accompanying statements of operations.
Substantially all of the transactions of the Company's branch in the Netherlands
(Euro Pinnacle Micro) are denominated in U.S. dollars and accordingly no
remeasurement of foreign currency is necessary as the accounts are maintained in
U.S. dollars.
Foreign currency forward contracts are entered into from time to time to offset
the effects of exchange rate changes on transactions denominated in foreign
currencies. These contracts generally have maturity dates that do not exceed
three months. Gains and losses on contracts which effectively hedge foreign
currency transactions are deferred and included in income as part of those
transactions. The aggregate contract value of instruments used to buy U. S.
dollars in exchange for Japanese Yen was approximately $3,204,000 at December
30, 1995. There were no such contracts entered into at December 28, 1996. The
carrying value of the foreign currency contracts approximated their fair market
value. The counter parties to these transactions are major international
financial institutions; the Company does not anticipate nonperformance by the
counter parties.
SOFTWARE DEVELOPMENT COSTS
Research and development costs resulting from the design, development and
testing of new software for use in products are expensed as incurred until
technological feasibility has been established. Certain costs incurred
thereafter, such as coding and testing, are capitalized until the product is
available for general release to customers. Such amounts were not material for
the years presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair value
because of the short maturity of those items. The Company believes the carrying
amounts of the Company's notes payable and convertible debentures approximate
fair value because the interest rates on these instruments are subject to change
with, or approximate, market interest rates.
31
<PAGE> 32
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Credit is extended for all customers based on financial condition and,
generally, collateral is not required. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents. The Company places its cash
and temporary cash investments with high credit quality institutions. At times
such investments may be in excess of the FDIC insurance limit.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
For Income Taxes." Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NET INCOME (LOSS) PER SHARE
Net income per share is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the period. Fully
diluted earnings per share approximates primary earnings per share.
Net loss per share is based on the weighted average number of common shares
outstanding during the period. Common equivalent shares are not included in the
computation because their effect would be antidilutive.
The weighted average common shares outstanding used in the computation of income
(loss) per share have been retroactively restated to reflect the 1995 stock
dividend (see Note 6).
RECLASSIFICATIONS
Certain reclassifications have been made to 1994 and 1995 financial statements
to be consistent with the 1996 presentation.
32
<PAGE> 33
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Components and work-in-process ........... $13,991,000 $ 9,522,000
Finished goods ........................... 3,723,000 1,891,000
----------- -----------
$17,714,000 $11,413,000
=========== ===========
</TABLE>
From time-to-time certain vendors have established liens against inventory sold
to the Company. At December 30, 1995, inventory subject to vendor liens totaled
$634,000. There was no inventory subject to vendor liens at December 28, 1996.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Furniture and equipment ...................... $ 2,587,000 $ 2,014,000
Computers .................................... 1,601,000 1,425,000
Tooling ...................................... 757,000 757,000
Leasehold improvements ....................... 270,000 202,000
----------- -----------
5,215,000 4,398,000
Accumulated depreciation and amortization .... (3,476,000) (2,300,000)
----------- -----------
$ 1,739,000 $ 2,098,000
=========== ===========
</TABLE>
4. NOTE PAYABLE
The Company has a $10,000,000 revolving line of credit agreement with a lending
institution which is collateralized by substantially all assets of the Company
and which expires on September 30, 1998. Outstanding borrowings on this line of
credit at December 28, 1996 aggregated $3,276,000. The total unused amount
available at December 28, 1996 was $6,030,000. Borrowings on this line credit
are based on a percentage of eligible accounts receivable and inventories. The
Company can obtain up to $3,500,000 in letters of credit pursuant to this
agreement; there were no such obligations under standby letters of credit at
December 28, 1996. Interest is payable monthly at the institution's reference
rate (8.25% at December 28, 1996) plus 1.75%. At December 28, 1996, the Company
was in compliance with all convenants of the line of credit. The current line of
credit replaces a prior $5,000,000 line of credit with a different lending
institution which had no amounts outstanding at December 30, 1995.
The maximum amount outstanding under the Company's lines of credit at the end of
any month was $5,000,000 in 1996 and $1,200,000 in 1995. Average monthly
borrowings were $2,239,000 at a weighted average interest rate of 9.57% for 1996
and $261,000 at a weighted average interest rate of 8.81% for 1995.
5. CONVERTIBLE DEBENTURES
In July 1996, the Company completed its first offshore placement of $10,000,000
principal amount of convertible subordinated 8% debentures due July 2001. The
$10,000,000 placement yielded aggregate net proceeds of $9,400,000 after
commissions and fees to First Bermuda Securities Limited ("First Bermuda").
First Bermuda also received additional compensation in the form of 73,846
warrants exercisable for five years at a price of $8.125 which was 125% of the
closing
33
<PAGE> 34
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONVERTIBLE DEBENTURES (CONTINUED)
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 debenture holders may convert the principal of the 8%
debentures in thirds, at discounts from the then market price of 15%, 17.5% and
20%, in intervals commencing 60, 90 and 120 days after the closing,
respectively.
In December 1996, the Company completed a second offshore placement of
$5,000,000 principal amount of convertible subordinated 6% debentures due
December 2001. The $5,000,000 placement yielded aggregate net proceeds of
$4,700,000 after commission and fees to First Bermuda. First Bermuda also
received additional compensation in the form of 65,076 warrants exercisable for
five years at a price of $4.61 which was 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
debenture holders received an aggregate of 32,538 of warrants with terms similar
to those of First Bermuda, except that such warrants are exercisable for one
year. The debenture holders may convert the principal of the 6% debentures as
follows: 30%, 40% and 30%, at discounts from the then market price of 15%, 17.5%
and 20%, in intervals commencing 50, 80 and 110 days after closing,
respectively.
According to the views of certain members of the Staff of the SEC, convertible
debt instruments which are convertible at a discount to market should be
accounted for by treating such discount as additional interest expense. The
Company has computed the amount of the discount based on the difference between
the conversion price and fair value of the underlying common stock on the date
the debentures were issued. The Company conformed to those views and recorded
$2,507,000 as additional paid-in capital for the discount related to the
embedded interest in the convertible debentures. Of this amount, $1,721,000 has
been amortized and is included in the caption "Non-cash interest expense related
to convertible debentures" in the accompanying 1996 statement of operations (see
Note 12). The unamortized balance of deferred interest related to convertible
debentures is $786,000 at December 28, 1996 and is being amortized to interest
expense over the period that the debentures are first convertible using the
effective interest rate method.
As of December 28, 1996, debentures aggregating $8,578,000 have been converted
into 1,801,381 shares of common stock at conversion prices ranging from $3.15 to
$6.44 per share. Stockholders' equity was increased by the full amount of the
debentures converted less the unamortized debt issuance costs. In addition,
41,783 shares of common stock were issued for $191,000 of interest payable on
the converted debentures.
6. STOCKHOLDERS' EQUITY
DIVIDENDS TO STOCKHOLDERS
Subsequent to the conversion from an S Corporation to a C Corporation, the
Company paid dividends for the previously taxed undistributed S Corporation
earnings as of June 30, 1993. As of December 31, 1994, these stockholders were
estimated to have been overpaid by $130,000, which was included as a receivable
in the 1994 balance sheet. This $130,000 overpayment plus an additional $80,000,
which was also determined to be an overpayment, were repaid to the Company
during 1995.
34
<PAGE> 35
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
DIVIDENDS TO STOCKHOLDERS (CONTINUED)
The Company anticipates future earnings will be retained for use in the
business. The Company paid a 50% stock dividend on December 15, 1995, to
stockholders of record as of December 1, 1995. A total of 2,622,518 shares and
less than $1,000 of cash for fractional shares were distributed as part of this
stock dividend. All references in the financial statements to share amounts, per
share amounts and stock plan data have been restated to reflect this stock
dividend. The Company does not anticipate paying cash dividends on the common
stock in the foreseeable future. In addition, the Company's line of credit
agreement restricts the Company's ability to pay cash dividends on its capital
stock.
STOCK OPTIONS AND STOCK PURCHASE PLANS
Under terms of the Company's stock option plans (the "Plans"), 3,605,000 shares
of the Company's common stock are reserved for the granting of incentive stock
options and nonqualified stock options, and the sale of restricted common stock
to the Company's key employees and non-employee directors. Options may not be
granted at a price that is less than fair market value on the date of grant, as
determined by the Company's Board of Directors, while restricted common stock
may be sold at any price. Options generally vest over 36 months and must be
exercised within 10 years from the date of grant. During 1996, the Company
adopted the 1996 Non-Employee Directors Stock Option Plan under which eligible
directors will automatically receive initial option grants to purchase 25,000
shares upon joining the Company's board of directors and additional option
grants to purchase 10,000 shares after each subsequent annual meeting of the
Company's stockholders.
For financial reporting purposes, compensation expense, representing the excess
of the deemed value for accounting purposes of the stock issuable upon exercise
of the options over the aggregate exercise price of such options, amounting to
$50,000, was deferred in 1992 and was amortized over the vesting periods of the
respective option grants. This compensation expense was fully amortized at
December 30, 1995. During 1996, the Company recognized $9,000 of compensation
expense related to the issuance of stock options to non-employees.
The following is a summary of the activity under the Company's stock option
plans:
<TABLE>
<CAPTION>
Number of Shares Option Price
Under Option per Share
----------- --------------
<S> <C> <C>
Options outstanding at December 31, 1993 204,579 $ .19 - 12.67
Granted 192,750 7.17 - 12.33
Exercised (40,593) .19 - 7.00
Canceled (67,920) 4.51 - 12.67
----------- --------------
Options outstanding at December 31, 1994 288,816 .33 - 12.00
Granted 737,700 6.41 - 15.17
Exercised (24,055) .87 - 8.83
Canceled (95,007) 6.41 - 11.17
----------- --------------
Options outstanding at December 30, 1995 907,454 .33 - 15.17
Granted 1,841,175 3.69 - 15.00
Exercised (15,010) .33 - 6.59
Canceled (1,080,886) .33 - 15.17
----------- --------------
Options outstanding at December 28, 1996 1,652,733 $ .33 - 15.17
=========== ==============
</TABLE>
The weighted average option price per share was $6.40, $7.15 and $8.43 for
options outstanding at December 28, 1996, December 30, 1995 and December 31,
1994, respectively.
35
<PAGE> 36
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND STOCK PURCHASE PLANS (CONTINUED)
Information relating to stock options at December 28, 1996 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
Range of Options Outstanding Options Exercisable
-------- ---------------------------- ----------------------------
Exercise Prices Weighted Average Weighted Average
--------------- ---------------- ----------------
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
--------- ------ ----------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 0.33 to $ 5.50 125,140 8.73 $ 3.67 35,140 $ 2.34
$ 6.00 to $ 6.00 1,024,375 9.12 6.00 80,000 6.00
$ 6.25 to $ 6.25 25,000 9.76 6.25 -- --
$ 6.41 to $ 6.41 203,150 8.02 6.41 169,650 6.41
$ 6.59 to $ 8.33 174,226 8.29 7.57 73,951 7.66
$ 9.83 to $11.00 21,542 8.48 10.88 8,942 10.78
$11.17 to $11.17 52,500 6.95 11.17 52,500 11.17
$13.83 to $13.83 7,500 8.72 13.83 2,500 13.83
$14.25 to $14.25 11,800 9.10 14.25 -- --
$15.17 to $15.17 7,500 8.83 15.17 2,500 15.17
--------- --------- ---------
$ 0.33 to $15.17 1,652,733 8.80 $ 6.40 425,183 $ 6.98
========= =========
</TABLE>
In addition, the Company has an employee stock purchase plan which allows
employees to purchase directly from the Company shares of the Company's common
stock at a 15% discount from the market price, and to pay the purchase price in
installments by payroll deductions. The Company has reserved 150,000 shares for
granting under the employee stock purchase plan. During 1996, 19,737 shares of
common stock were purchased under this plan at an average price of $4.95. During
1995 and 1994, 14,938 and 3,405 shares were purchased at an average price of
$9.04 and $9.10, respectively, prior to considering the impact of the stock
dividend. As of December 28, 1996 and December 30, 1995, the Company's employee
stock purchase plan liability (included under the caption "Payroll Related
Liabilities" in the accompanying balance sheets) totaled $230,000 and $214,000,
respectively.
Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation," requires the Company to provide pro forma information
regarding net income and earnings per share as if such compensation cost for the
Company's stock option and purchase plans had been determined in accordance with
the fair value based method prescribed in FAS 123. The Company estimates the
fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995, respectively: 0% dividend yield; expected volatility of
19%; risk free interest rates of 6.37% and 6.92%; and expected lives of 3 years.
Under the accounting provisions of FAS 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Net loss: 1996 1995
-------------- --------------
<S> <C> <C>
As reported ................ $ (20,833,000) $ (2,459,000)
Pro forma .................. $ (21,187,000) $ (2,788,000)
Net loss per share:
As reported ................ $ (2.52) $ (0.31)
Pro forma .................. $ (2.56) $ (0.36)
</TABLE>
36
<PAGE> 37
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. NONRECURRING CHARGES
Restructuring
During 1996, the Company recorded restructuring charges of $3,028,000 for costs
associated with the Company's planned consolidation and transfer of
manufacturing operations to Colorado Springs, Colorado and the closing of its
branch office in Japan. These restructuring charges principally reflect the
costs associated with early termination of existing leases, losses from the
disposal of assets and severance costs resulting from work force reductions.
During the fourth quarter, the Japanese branch office was closed and the Irvine,
California manufacturing facility was relocated to Colorado Springs, Colorado.
During 1996, charges totaling $678,000 were incurred in connection with this
restructuring, including: $421,000 for the write-off of the foreign currency
translation upon closing of the Japanese branch office; $107,000 for severance
related to the termination of 17 employees who worked in manufacturing and
marketing functions; $150,000 for facility and lease terminations. The remaining
balance of the restructuring liability as of December 28, 1996 was $2,350,000.
The majority of these liabilities should be paid or settled by the end of 1997,
except for amounts related to longer term lease and severance agreements, which
are included in other liabilities in the accompanying 1996 balance sheet.
Contract Termination
In 1996, the Company recorded $1,200,000 for estimated costs associated with
changes to a major component contract with a key supplier.
Litigation Settlement and Professional Fees
During 1996, 1995 and 1994 the Company incurred $493,000, $732,000 and $696,000,
respectively, for certain professional fees related to litigation and SEC
related matters. In addition, the Company incurred $1,400,000 for litigation
settlement expenses in 1995 (see Note 9).
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal .......... $(1,103,000) $ (536,000) $ 1,528,000
State ............ 1,000 1,000 482,000
Foreign .......... 15,000 -- 3,000
----------- ----------- -----------
(1,087,000) (535,000) 2,013,000
----------- ----------- -----------
Deferred:
Federal .......... 971,000 (60,000) (226,000)
State ............ 300,000 (68,000) (74,000)
----------- ----------- -----------
1,271,000 (128,000) (300,000)
----------- ----------- -----------
$ 184,000 $ (663,000) $ 1,713,000
=========== =========== ===========
</TABLE>
37
<PAGE> 38
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Income tax expense (benefit) differs from the amount that would result from
applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate ...... $(7,021,000) $(1,061,000) $ 1,513,000
State income taxes ...................... 1,000 1,000 269,000
Nondeductible expenses .................. 595,000 495,000 13,000
Tax exempt income ....................... (1,000) (45,000) (71,000)
Adjustment to deferred tax asset
valuation allowance ................ 1,271,000 -- --
Net operating loss carryforward for which
no tax benefit has been recognized . 5,396,000 -- --
Other ................................... (57,000) (53,000) (11,000)
----------- ----------- -----------
$ 184,000 $ (663,000) $ 1,713,000
=========== =========== ===========
</TABLE>
The components of the deferred income tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward .................. $ 4,591,000 $ 54,000
Accrued restructuring costs and
other accruals not currently deductible ........ 995,000 100,000
Inventory obsolescence reserve ................... 430,000 327,000
Furniture and equipment .......................... 353,000 274,000
Sales returns and allowances for doubtful accounts 294,000 492,000
Research and development credit carryforward ..... 190,000 --
Other ............................................ 127,000 24,000
----------- ----------
Total deferred tax assets ............................ 6,980,000 1,271,000
Valuation allowance .................................. (6,980,000) --
----------- ----------
Net deferred tax asset ............................... $ -- $1,271,000
=========== ==========
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. As a result of
the Company's significant losses in 1996 and uncertainties surrounding the
realization of the net operating loss carryforward which was generated during
1996, management has determined that the realization of the deferred tax assets
is not more likely than not. Accordingly, a 100% valuation allowance has been
recorded. The net change in the total valuation allowance for the year ended
December 28, 1996 was an increase of $6,980,000. There was no change in the
valuation allowance during 1995.
At December 28, 1996, the Company has a federal tax net operating loss
carryforward of approximately $12,400,000, which expires in 2011 and a state net
operating loss carryforward of approximately $6,900,000 which expires through
2001.
38
<PAGE> 39
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In the fourth quarter of 1995, the Company reached a settlement agreement with
the plaintiffs who filed the November 20, 1994, class action complaint against
the Company, certain of its officers and directors and the Company's then
independent auditors, Ernst & Young LLP. This complaint resulted from the
Company's restatement of prior financial statements which, most significantly,
required approximately $2,400,000 of revenue, $1,400,000 of cost of good sold
and $70,000 of selling, general and administrative expenses previously reported
as earned or incurred in the quarter ended December 31, 1993 to be reported
instead as being earned or incurred in the quarter ended March 31, 1994. The
complaint alleged various violations of Federal Securities Laws and claimed
unspecified compensatory damages and related fees and costs. The complaint was
filed in the United States District Court for the Central District of California
under the case name of Kurtz, et al. v. Blum, et al., Case No. SACV94-1043-GLT.
The settlement agreement with the plaintiffs concerning this litigation required
a cash payment of $925,000 and the issuance of shares of the Company's common
stock with a value of $1,400,000. Pursuant to this settlement, the Company's
insurance carrier paid $925,000 in cash in December 1995, in connection with a
Directors and Officers liability policy purchased by the Company. The Company
issued 190,084 shares of common stock valued at $1,400,000 to the plaintiff
class and its attorneys during 1996. A provision for this $1,400,000 litigation
settlement was included as part of nonrecurring charges in the accompanying 1995
statement of operations (see Note 7).
The Company and certain members or 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. These inquiries
relate principally to the 1995 accounting adjustment matters discussed in Note
12. The Company and its management continue to cooperate fully with the SEC.
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 may incur significant legal costs relating to this suit
in 1997.
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 these
other legal matters will have a material adverse effect on the Company's
financial statements.
39
<PAGE> 40
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Operating Leases
The Company leases its facilities and equipment under various noncancellable
operating leases for terms of up to five years. Future minimum lease payments
under these leases as of December 28, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 1,629,000
1998 954,000
1999 392,000
2000 133,000
-----------
$ 3,108,000
===========
</TABLE>
Rent expense was approximately $1,650,000, $1,531,000 and $801,000 for 1996,
1995 and 1994, respectively.
10. EMPLOYEE BENEFITS
The Company maintains an elective retirement savings plan which is intended to
qualify under Section 401(k) of the Internal Revenue Code. Participating
employees are allowed to contribute up to 15% of their cash compensation. The
Company can make contributions to the plan at the discretion of management.
There were no contributions to the plan in 1996, which was the first year of the
plan.
11. MAJOR CUSTOMERS, EXPORT SALES AND GEOGRAPHIC SEGMENT INFORMATION
For 1996, 1995 and 1994, the Company had product sales to one distributor of
approximately $10,847,000, $11,965,000 and $9,900,000 or 18%, 15% and 15%,
respectively, of the Company's net sales. The accounts receivable balance from
this distributor was $2,820,000 and $2,645,000 or 24% and 23% of total accounts
receivable at December 28, 1996 and December 30, 1995, respectively.
The Company's United States operations include export sales of $6,568,000,
$10,589,000 and $6,857,000 for 1996, 1995 and 1994, respectively. Foreign
operations are comprised of sales offices in the Netherlands and Japan which are
branches of the Company. Inventory is transferred to each of these sales offices
at the Company's manufacturing cost. A summary of the Company's operations by
geographic region is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
United States ............... $ 48,489,000 $ 64,142,000 $ 53,127,000
Europe ...................... 9,838,000 15,543,000 8,488,000
Japan ....................... 1,594,000 2,159,000 3,767,000
------------ ------------ ------------
$ 59,921,000 $ 81,844,000 $ 65,382,000
------------ ------------ ------------
Operating income (loss):
United States ............... $(17,571,000) $ (3,761,000) $ 2,751,000
Europe ...................... (221,000) 1,096,000 1,537,000
Japan ....................... (671,000) (609,000) (57,000)
------------ ------------ ------------
$(18,463,000) $ (3,274,000) $ 4,231,000
------------ ------------ ------------
Identifiable assets:
United States ............... $ 37,990,000 $ 26,912,000 $ 25,429,000
Europe ...................... 1,955,000 3,062,000 1,631,000
Japan ....................... 293,000 2,031,000 1,795,000
------------ ------------ ------------
Total assets ................ $ 40,238,000 $ 32,005,000 $ 28,855,000
------------ ------------ ------------
</TABLE>
40
<PAGE> 41
PINNACLE MICRO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FOURTH QUARTER ADJUSTMENTS
1996 Adjustments
The Company originally accounted for its convertible debentures (see Note 5) in
accordance with APB 14, "Accounting for Convertible Debentures and Debt Issued
with Stock Purchase Warrants." According to the views of certain members of the
Staff of the SEC, which the Company learned in December 1996, convertible debt
instruments which are convertible at a discount to market should be accounted
for by treating such discount as additional interest expense. The Company
conformed to those views and computed the amount of the discount based on the
difference between the conversion price and fair value of the underlying common
stock on the date the debentures were issued. In the fourth quarter of 1996, the
Company recorded $1,721,000 of non-cash interest expense related to the embedded
interest in the convertible debentures. Of this amount, $1,286,000 should have
been recorded as interest expense in the third quarter. If this amount had been
properly recorded, net loss would have increased by $1,286,000 ($0.16 per share)
in the third quarter and decreased by $1,286,000 ($0.14 per share) in the fourth
quarter. The Company considers these amounts to be material and therefore has
restated its financial statements for the quarterly period ended September 28,
1996 on Form 10-Q/A for that period.
1995 Adjustments
The Company previously capitalized certain non-recurring engineering
expenditures for 1994 and the quarters ended April 1, July 1 and September 30,
1995, which expenditures primarily related to design and development of
components incorporated into certain of the Company's products. The Company
since determined the capitalization of these amounts was not appropriate. The
amounts should have been accounted for as research and development and expensed
as incurred. The aggregate amount of capitalized expenditures for 1994 and 1995
were $138,000 and $429,000, respectively.
The amounts capitalized in 1995 and the aggregate effect of such amounts if they
had been properly expensed are as follows:
<TABLE>
<CAPTION>
Quarter Amount Aggregate Effect on
Ended Capitalized Net Income Net Income Per Share
----- ----------- ---------- --------------------
<S> <C> <C> <C>
April 1 $ 38,000 $ (23,000) $ -
July 1 69,000 (42,000) -
September 30 322,000 (198,000) (.03)
----------
Total $ 429,000
==========
</TABLE>
The Company considers the $322,000 for the quarter ended September 30, 1995 to
be material and restated the financial statements in the Form 10-Q/A for that
period. The Company considers the $38,000 for the quarter ended April 1, 1995,
the $69,000 for the quarter ended July 1, 1995 and the $138,000 for 1994 to be
immaterial and therefore has not restated the financial statements for those
periods. For the aforementioned periods which have not been restated, the total
amount of $245,000 was charged to research and development expense for the
quarter ended December 30, 1995. The aggregate effect of such adjustments in the
quarter ended December 30, 1995 was to increase the net loss by $151,000 or $.02
per share.
41
<PAGE> 42
SCHEDULE II
PINNACLE MICRO, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 28, 1996
<TABLE>
<CAPTION>
Balance at Charged to Balance at
DESCRIPTION Beginning Costs and End of
----------- of Period Expenses Deductions Period
--------- -------- -------------- ----------
<S> <C> <C> <C> <C>
Year ended December 28, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts .................... $350,000 $369,000 $ (383,000)* $ 336,000
Allowance for product returns and price protection.. 828,000 999,000 (1,415,000) 412,000
Inventory obsolescence reserve ..................... 783,000 866,000 (554,000)** 1,095,000
Year ended December 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts .................... $287,000 $230,000 $ (167,000)* $ 350,000
Allowance for product returns and price protection.. 700,000 128,000 -- 828,000
Inventory obsolescence reserve ..................... 683,000 871,000 (771,000)** 783,000
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts .................... $250,000 $ 78,000 $ (41,000)* $ 287,000
Allowance for product returns and price protection.. 460,000 240,000 -- 700,000
Inventory obsolescence reserve ..................... 207,000 476,000 -- 683,000
</TABLE>
- ----------
* Doubtful accounts written off.
** Disposal of obsolete inventory.
42
<PAGE> 1
EXHIBIT 10.36
1996 LONG-TERM INCENTIVE PLAN
1. Purpose. The Pinnacle Micro, Inc. 1996 Long-Term Incentive Plan seeks to
promote the interest of the Company and its shareholders by assisting the
Company to attract, retain and reward executive, managerial and other key
employees and consultants and to promote a mutuality of interest between such
persons and the Company's shareholders. The Plan allows performance-based stock
and cash incentives and other equity-based incentive awards, thereby giving Plan
participants a proprietary interest in pursuing the long-term growth,
profitability and financial success of the Company.
2. Definitions. For purposes of the Plan, the following terms shall have the
meanings set forth below:
(a) "Award" or "Awards" means an award or grant made to a
Participant under Sections 6 through 9, inclusive, of the Plan.
(b) "Award Agreement" means a written agreement in such form as
may from time to time be approved by the Committee, setting forth
the terms and conditions of an Award and executed by the Company
and the Participant.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" for an Employee's termination shall be determined by
the Board of Directors of the Company; provided, however, that any
Employee's written employment agreement which includes a different
definition of cause or an analogous provision, shall govern with
respect to that Employee.
(e) "Change in Control" means the occurrence of any of the
following events:
1) The acquisition after the date hereof in one or more
transactions by any "Person" (as the term person is used for
purposes of Section 13(d) or 14(d) of the Exchange Act) of
"Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of forty percent (40%) or more of the
combined voting power of the Company's then outstanding voting
securities (the "Voting Securities"), provided, however, that for
purposes of this paragraph (a), the Voting Securities acquired
directly from the Company by any Person shall be excluded from the
determination of such Person's Beneficial Ownership of Voting
Securities (but such Voting Securities shall be included in the
calculation of the total number of Voting Securities then
outstanding); or
2) During any period of two consecutive years during the term
of this Plan, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a
majority thereof, unless the election of each director who was not a
director at the beginning of such period has been approved in
advance by directors representing at least two-thirds of the
directors then in office who were directors at the beginning of the
period; or
3) Approval by shareholders of the Company of (i) a merger or
consolidation involving the Company if the stockholders of the
Company immediately before such merger or consolidation do not own,
directly or indirectly, immediately following such merger or
consolidation, more than fifty percent (50%) of the combined voting
power of the outstanding voting securities of the corporation
resulting from such merger or consolidation in substantially the
same proportion as their ownership of the Voting Securities
immediately before such merger or consolidation, or (ii) a complete
liquidation or dissolution of the Company or an agreement for the
sale or other disposition of all or substantially all of the assets
of the Company.
46
<PAGE> 2
10.36
Notwithstanding anything in this paragraph to the contrary, a Change
in Control shall not be deemed to occur solely because forty (40%)
or more of the then outstanding Voting Securities is acquired by (i)
a trustee or other fiduciary holding securities under one or more
employee benefit plans maintained by the Company or any of its
subsidiaries, or (ii) any corporation which, immediately prior to
such acquisition, is owned directly or indirectly by the
stockholders of the Company in the same proportion as their
ownership of stock in the Company immediately prior to such
acquisition.
Moreover, notwithstanding anything in this paragraph to the
contrary, a Change in Control shall not be deemed to occur solely
because any Person (the "Subject Person") acquires Beneficial
Ownership of more than the permitted percentage of the outstanding
Voting Securities as a result of an acquisition of Voting Securities
by the Company which, by reducing the number of Voting Securities
outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Person, provided, that if, after
such share acquisition by the Company, the Subject Person becomes
the Beneficial Owner of any additional Voting Securities, then a
Change in Control shall occur.
(f) "Code" means the Internal Revenue Code of 1986, as in effect
from time to time, or any successor thereto, together with rules,
regulations and interpretations promulgated thereunder.
(g) "Committee" means the Compensation Committee of the Board,
constituted as provided in Section 3 of the Plan, or any other
committee appointed by the Board with responsibility for the
administration of the Plan whose members meet the requirements for
eligibility to serve set forth in Section 3 of the Plan.
(h) "Common Stock" means the Common Stock par value $0.001 per
share of the Company or any security of the Company issued in
substitution, exchange or lieu thereof.
(i) "Company" means Pinnacle Micro, Inc., a Delaware corporation
or any successor corporation.
(j) "Consultant" means an individual that provides bona fide
services to the Company and who is not an employee of the Company.
(k) "Director" means a member of the Board.
(l) "Disability" means disability as determined by the Committee in
accordance with standards and procedures similar to those under the
Company's long-term disability plan.
(m) "Employee" means key employees (including officers who are
members of the Board) of the Company or any Subsidiary; as
identified by the Committee.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended and in effect from time to time, or any successor statute.
(o) "Fair Market Value" of Common Stock on any date means (i) if
the Common Stock is listed on an established stock exchange or any
automated quotation system that provides sale quotations, the
closing sale price for a share of the Common Stock on such exchange
or quotation system on the applicable date, or if no sale of the
Common Stock shall have been made on that day, on the next preceding
day on which there was a sale of the Common Stock; (ii) if the
Common Stock is not listed on any exchange or quotation system, but
bid and asked prices are
47
<PAGE> 3
10.36
quoted and published, the mean between the quoted bid and asked
prices on the applicable date, and if such prices are not available
on such day, on the next preceding day on which such prices were
available; and (iii) if the Common Stock is not regularly quoted,
the fair market value of a share of Common Stock on the applicable
date established by the Committee in good faith by any fair and
reasonable means. Fair Market Value determined by the Committee in
good faith shall be final, binding and conclusive on all parties.
(p) "Incentive Stock Option" means any Stock Option that is
specifically designated by the Committee as an "incentive stock
option" within the meaning of section 422 of the Code.
(q) "Non-Employee Director" except for purposes of Section 3(a),
means any Director who is not an Employee of the Company or any
Subsidiary.
(r) "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
(s) "Participant" means an Employee or Non-Employee Director to
whom an Award has been made and is outstanding under the Plan.
(t) "Performance Award" means an Award granted pursuant to the
provisions of Section 9 of the Plan, the vesting of which is
contingent upon the attainment of specific Performance Objectives
during specific Performance Periods.
(u) "Performance Equity Grant" means an Award of units representing
shares of Common Stock granted pursuant to the provisions of Section
9 of the Plan.
(v) "Performance Objectives" means specific targets and objectives
established by the Committee using one or more of the following
criteria: earnings per share of the Common Stock, return on average
stockholders' equity, return on capital, total stockholder returns
of the Company, operating cash flow, net income, sales growth,
return on sales and return on net assets. Performance Objectives may
be absolute or may be based on the results of a peer group of
comparable companies established by the Committee. Satisfaction of
Performance Objectives shall be determined in accordance with
generally accepted accounting principles, as utilized by the Company
in its reports filed under the Exchange Act.
(w) "Performance Period" means a period of not less than one fiscal
quarter nor more than three consecutive Company fiscal years for
which Performance Objectives have been established.
(x) "Performance Unit Grant" means an Award of monetary units
granted pursuant to the provisions of Section 9 of the Plan.
(y) "Plan" means this Pinnacle Micro Inc. 1996 Long-Term Incentive
Plan, as set forth herein and as it may be amended from time to
time.
(z) "Restriction Period" means the period of time (i) a non-
Consultant Participant must remain employed by the Company or any
of its Subsidiaries or in such circumstances where an Employee
becomes a Non-Employee Director and (ii) a Consultant provides
bona fide services to the Company or a Subsidiary, in order for a
Restricted Stock Award to vest.
(aa) "Restricted Stock Award" means an Award of shares of Common
Stock granted pursuant to the provisions of Section 8 of the Plan
which may be subject to restrictions which lapse over
48
<PAGE> 4
10.36
time with or without regard to Performance Objectives, as the
Committee in its sole discretion shall determine.
(bb) "Retirement" means retirement from active employment with the
Company and its Subsidiaries at any age at which the Participant is
entitled to an immediately commencing pension under any retirement
plan of the Company or as otherwise determined by the Board of
Directors.
(cc) "Rule 16b-3" means Rule 16b-3 of the General Rules and
Regulations under the Exchange Act (or any successor rule or
regulation).
(dd) "Spread" means the amount (not less than zero) by which the
Fair Market Value of a share of Common Stock subject to the Stock
Option exceeds the exercise price of a Stock Option.
(ee) "Stock Appreciation Right" means an Award granted pursuant to
the provisions of Section 7 of the Plan, entitling a Participant to
receive an amount equal to (or if the Committee shall determine at
the time of grant, less than) the excess of the Fair Market Value of
a share of Common Stock on the date of exercise over the Fair Market
Value of a share of Common Stock on the date of grant of the Stock
Appreciation Right, multiplied by the number of shares of Common
Stock with respect to which the Stock Appreciation Right shall have
been exercised.
(ff) "Stock Option" means an Award to purchase shares of Common
Stock granted pursuant to the provisions of Section 6 of the Plan.
(gg) "Subsidiary" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if
each of the corporations other than the last corporation in the
unbroken chain owns stock possessing fifty percent or more of the
total combined voting power of all classes of stock in one of the
other corporations in such chain.
(hh) "Ten-Percent Stockholder" means an individual who "owns," as
defined in section 424 of the Code, stock possessing more than ten
percent of the total combined voting power of all classes of stock
of: (i) the Company, (ii) a Subsidiary, or (iii) a parent
corporation of the Company.
(ii) Window Period" means the period beginning on the third
business day following the date of release of the financial data
specified in paragraph (e)(l)(ii) of Rule 16b-3 and ending on the
twelfth business day following such date.
3. Administration.
(a) The Committee. The Plan shall be administered by a Committee
appointed from time to time by the Board and comprised of not less
than two of the then members of the Board. To the extent required by
Rule 16b-3, each Committee member must be a "non-employee director"
as defined, for purposes of this Section 3(a), in Rule 16b-3. Unless
the Board determines otherwise, the Committee shall be comprised
solely of persons who qualify as "outside" directors for purposes of
section 162(m)(4)(C)(i) of the Code. Members of the Committee shall
serve at the pleasure of the Board and the Board may from time to
time remove members from, or add members to, the Committee. A
majority of the members of the Committee shall have the power to act
for the Committee. Action approved in writing by a majority of the
members of the Committee then serving shall be fully as effective as
if the action had been taken by majority vote at a duly called
meeting of the Committee, but only if each member of the Committee
was given notice of such proposed action one day prior to such
written approval.
49
<PAGE> 5
10.36
(b) Powers of the Committee. The Committee is authorized to
construe and interpret the Plan, to promulgate, amend and rescind
rules and regulations relating to the implementation of the Plan and
to make all other determinations necessary or advisable for the
administration of the Plan. Subject to the provisions of the Plan,
the Committee shall have full authority, in its discretion, to
determine the Employees and Non-Employee Directors to whom Awards
shall be granted, the number of shares of Common Stock or units to
be covered by each of the Awards, and the terms of any such Award.
Any good faith determination, decision or action of the Committee in
connection with the construction, interpretation, administration, or
application of the Plan shall be final, conclusive and binding upon
all persons participating in the Plan and any person claiming under
or through them. The Company shall effect the granting of Awards by
execution of appropriate Award Agreements. No member of the
Committee shall be liable for any good faith act or omission with
respect to his or her service on the Committee.
4. Shares of Common Stock Subject to the Plan.
(a) Maximum Number of Shares of Common Stock. The maximum number of
shares of Common Stock as to which Awards may be granted under the
Plan shall be one million five hundred thousand (1,500,000), subject
to adjustment, as provided in Section 14 of the Plan. For the
purpose of computing the total number of shares of Common Stock
available for Awards under the Plan, counted against this limit
shall be the number of shares of Common Stock subject to issuance
upon exercise or settlement of Awards, in each case determined as at
the dates as of which such Awards are granted. If any Awards are
forfeited, terminated or expire unexercised, the shares of Common
Stock which had been subject to such Awards shall again be available
for Awards under the Plan to the extent of such forfeiture or
expiration of such Awards. Common Stock which may be issued under
the Plan may be either authorized and unissued shares or issued
shares which have been reacquired by the Company. Fractional shares
of Common Stock shall not be issued under the Plan.
(b) Certain Limitations. The maximum number of shares of Common
Stock with respect to which Stock Options and Stock Appreciation
Rights may be granted during any fiscal year to any Employee shall
not exceed 100,000 and the maximum number of shares of Common Stock
with respect to which Restricted Stock Awards may be granted during
any fiscal year to any Participant should not exceed 100,000;
however, the maximum number of shares of Common Stock with respect
to which Awards may be granted during any fiscal year to any
Employee shall not exceed 100,000. The maximum dollar value with
respect to Awards (other than Stock Options and Stock Appreciation
Rights payable in shares of Common Stock) that are intended to
qualify as performance-based compensation under section 162(m)(4)(C)
of the Code which may be paid in any fiscal year during any
particular Performance Period to any Employee shall be One Million
dollars ($1,000,000).
5. Eligibility. Awards may be granted from time to time to Employees and
Consultants as the Committee, in its discretion, shall determine. In making
Awards, the Committee shall take into account the duties of prospective
Awardees, their present and potential contributions to the success of the
Company and any of its Subsidiaries, and such other factors as the Committee
shall deem relevant in connection with accomplishing the purposes of the Plan.
6. Stock Options. Stock Options granted under the Plan may be (i) Incentive
Stock Options, (ii) Non-Qualified Stock Options or (iii) a combination of the
foregoing. The Award Agreement shall designate the extent to which a Stock
Option is an Incentive Stock Option or a Non-Qualified Stock Option. Stock
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the express provisions of the Plan, as the Committee shall
deem desirable:
50
<PAGE> 6
10.36
(a) Grant. Stock Options may be granted alone, in addition to or in
tandem with other Awards under the Plan.
(b) Stock Option Price. The exercise price per share of Common
Stock purchasable under a Stock Option shall be determined by the
Committee at the time of grant, but in no event shall the exercise
price of a Stock Option be less than One Hundred Percent of the Fair
Market Value of a share of the Common Stock on the date of the grant
of such Stock Option. In addition, in the case of an Employee who is
a Ten-Percent Shareholder at the time an Incentive Stock Option is
granted, the exercise price of an Incentive Stock Option shall not
be less than One Hundred Ten Percent of the Fair Market Value of the
Common Stock on the date of the grant of such Incentive Stock
Option.
(c) Option Term. The term of each Stock Option shall be fixed by
the Committee, except that such term shall not exceed ten years. In
the case of a grant of an Incentive Stock Option to an Employee who
is a Ten-Percent Shareholder at the time of grant, the term of an
Incentive Stock Option shall not exceed five years.
(d) Exercisability. A Stock Option shall be exercisable at such
times and subject to such terms and conditions as shall be
determined by the Committee at the date of grant. Except as provided
in Section 12 of the Plan or in the relevant Award Agreement, no
Stock Option may be exercised unless the holder thereof is at the
time of such exercise in the employ or service (including service as
a director) of the Company or a Subsidiary and has been continuously
serving or so employed since the date the Stock Option was granted.
(e) Method of Exercise. A Stock Option may be exercised, in whole
or in part, by giving written notice of exercise to the Company
specifying the number of shares of Common Stock to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price in cash, in shares of Common Stock already owned by the
Participant (subject to the requirements of Rule 16b-3) or any
combination of cash and such shares. No shares of Common Stock shall
be issued until full payment has been made therefor. The Committee
will establish procedures whereby a Participant (subject to
requirements of Rule 16b-3, Regulation T, federal income tax laws,
and other federal, state and local tax and securities laws) can
exercise a Stock Option or a portion thereof without making a direct
payment of the option price to the Company. The Committee shall
establish the administrative procedures and policies its deems
appropriate and such procedures and policies shall be binding on any
Participant wishing to utilize the cashless exercise program.
(f) Special Rules for Incentive Stock Options. To the extent that
the aggregate Fair Market Value (determined as of the options'
grant) of the Common Stock with respect to which Incentive Stock
Options first become exercisable by the Participant during any
calendar year (under all such plans of the Participant's employer
corporation and its parent, and Subsidiaries, if any), exceeds
$100,000, the options shall not be an Incentive Stock Option. For
purposes of the preceding sentence, Stock Options shall be taken
into account in the order in which they were granted. Any Stock
Option granted under the Plan which is intended to be an Incentive
Stock Option, but which is in excess of the limitation set forth in
this Section shall to that extent be a Non-Qualified Stock Option.
Incentive Stock Options shall not be granted after the 10th
anniversary of the Plan's adoption by the Board.
7. Stock Appreciation Rights. The grant of Stock Appreciation Rights under the
Plan shall be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent with the express terms of
the Plan, as the Committee shall deem desirable:
51
<PAGE> 7
10.36
(a) Grant. A Stock Appreciation Right may be granted in tandem
with, in addition to or independent of a Stock Option or any other
Award under the Plan.
(b) Exercise. A Stock Appreciation Right may be exercised by a
Participant in accordance with procedures established by the
Committee. The Committee may also provide that a Stock Appreciation
Right shall be automatically exercised on one or more specified
dates. A Stock Appreciation Right granted in tandem with a Stock
Option will entitle the Participant, upon exercise of the Stock
Appreciation Right to surrender all or part of the unexercised
portion of that tandem Stock Option and to receive the Spread for
the number of shares of Common Stock which could have been acquired
under the surrendered Stock Option. Each Stock Appreciation Right
granted in tandem with a Stock Option shall be exercisable to the
extent, and only to the extent, the related Stock Option is
exercisable. Each Stock Appreciation Right shall be for such term as
the Committee may determine, not to exceed 10 years and may expire
prior to the term of a tandem Stock Option. Each Stock Appreciation
Right granted on a stand alone basis shall be exercisable to the
extent, and for such term, as the Committee may determine. Except as
provided in Section 12 of the Plan or in the relevant Award
Agreement, no Stock Appreciation Right may be exercised unless the
holder thereof is at the time of such exercise in the employ or
service (including service as a director) of the Company or a
Subsidiary and has been continuously so employed since the date the
Stock Appreciation Right was granted.
(c) Form of Payment. Payment upon exercise of a Stock Appreciation
Right may be made in cash, in shares of Common Stock or any
combination thereof, as the Committee shall determine except that
for any Stock Appreciation Right exercised on or subsequent to a
Change in Control payment shall be in cash.
(d) Special Rules for Stock Appreciation Rights Granted in Tandem
with Incentive Stock Options. With respect to Stock Appreciation
Rights granted in tandem with Incentive Stock Options, the following
rules shall apply:
(i) The Stock Appreciation Right shall not be exercisable unless the
Spread on the related Incentive Stock Option is positive.
(ii) In no event shall any amounts paid per share pursuant to the
Stock Appreciation Right exceed the Spread on the date of exercise
of the related Incentive Stock Option.
(iii) The Stock Appreciation Right must expire no later than the
last date on which the related Incentive Stock Option can be
exercised.
8. Restricted Stock Awards. Restricted Stock Awards may be subject to
restrictions which lapse over time. They may be granted with or without regard
to Performance Objectives for a specific Performance Period. Restricted Stock
Awards shall be subject to the following terms and conditions and may contain
such additional terms and conditions, not inconsistent with the express
provisions of the Plan, as the Committee shall deem desirable:
(a) Restricted Stock Awards. A Restricted Stock Award is an Award
of shares of Common Stock transferred to a Participant subject to
such terms and conditions as the Committee deems appropriate,
including, without limitation, restrictions on the sale, assignment,
transfer or other disposition of such shares and the requirement
that the Participant forfeit such shares on termination of
employment for specified reasons within a specified period of time.
(b) Grants of Awards. Restricted Stock Awards may be granted under
the Plan in such form and on such terms and conditions as the
Committee may from time to time approve. Restricted
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10.36
Stock Awards may be granted alone, in addition to or in tandem
with other Awards under the Plan. Subject to the terms of the
Plan, the Committee shall determine the number of Restricted
Stock Awards to be granted to a Participant and the Committee
may impose different terms and conditions on any particular
Restricted Stock Award made to any Participant. Each Participant
receiving a Restricted Stock Award shall be issued a stock
certificate for those shares of Common Stock. This certificate
shall be registered in the name of such Participant, shall be
accompanied by a stock power duly executed by such Participant,
and shall bear an appropriate legend referring to the terms,
conditions and restrictions applicable to the Award. This
certificate shall be held in custody by the Company until the
restrictions on it have lapsed or been removed.
(c) Performance Objectives. If the Committee determines that
a Restricted Stock Award is intended to qualify as
performance-based compensation under section 162(m)(4)(C) of the
Code, the Restricted Stock Award shall be subject to the
attainment of Performance Objectives for a Performance Period.
Specific Performance Objectives shall be established in writing
no later than the number of days equal to 25% of the applicable
Performance Period after the commencement of the Performance
Period to which the Performance Objectives relate. In
establishing the Performance Objectives, the Committee shall
also establish a schedule setting forth the portion of the
Restricted Stock Award which will be earned based on the degree
of achievement of the Performance Objectives, as determined by
the Committee. Except to the extent it would cause a Restricted
Stock Award intended to qualify as performance-based
compensation to fail so to qualify, the Committee may at any
time adjust the Performance Objectives, change any schedule of
vesting, change the way Performance Objectives are measured or
shorten any Performance Period if it determines that conditions
or the occurrence of events warrant such action. The Committee
shall not have the discretion to increase a Restricted Stock
Award which is intended to constitute performance-based
compensation under the Code.
(d) Restriction Period. In order for a Participant to vest
in a Restricted Stock Award, the Participant must remain in the
employment or service (including service as a director) of the
Company or its Subsidiaries, subject to relief for specified
reasons, for the Restriction Period set forth in the Award
Agreement. The Committee, in its sole discretion, may provide
for the lapse of restrictions in installments during the
Restriction Period. Unless otherwise restricted by the
provisions of Section 8(c), upon expiration of the applicable
Restriction Period (or lapse of restrictions during the
Restriction Period if the restrictions lapse in installments)
the Participant shall be entitled to receive his or her
Restricted Stock Award or portion thereof, as the case may be.
If the Restricted Stock Award is intended to constitute
performance-based compensation under the Code, as soon as
practicable after the end of the applicable measurement period
as determined by the Committee, the Committee shall determine
the extent to which the Performance Objectives, if any, have
been met and the extent to which Restricted Stock Awards are
payable.
(e) Performance Periods. The Committee may establish
Performance Periods applicable to Restricted Stock Awards. There
shall be no limitation on the number of Performance Periods
established by the Committee and more than one Performance
Period may encompass the same fiscal year.
(f) Rights as a Shareholder. Subject to any restrictions set
forth in the applicable Award Agreement, with respect to the
shares of Common Stock received under a Restricted Stock Award,
a Participant shall have all of the rights of a shareholder of
the Company, including the right to vote the shares and the
right to receive any cash dividends. Subject to any restrictions
set forth in the applicable Award Agreement, stock dividends
issued with respect to the shares covered by a Restricted Stock
Award shall be treated as additional shares under the Restricted
Stock Award and shall be subject to the same restrictions and
other terms and conditions that apply to shares under the
Restricted Stock Award with respect to which such dividends are
issued.
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<PAGE> 9
10.36
9. Performance Awards. Performance Awards granted under the Plan may be in
the form of either Performance Equity Grants or Performance Unit Grants, or a
combination of both as determined by the Committee at the time of grant.
Performance Awards shall be subject to the following terms and conditions and
shall contain such additional terms and conditions, not inconsistent with the
express provisions of the Plan, as the Committee shall deem desirable:
(a) Performance Equity Grants. A Performance Equity Grant is
an Award of units (with each unit equivalent in value to one
share of Common Stock) granted to a Participant subject to such
terms and conditions as the Committee deems appropriate,
including, without limitation, the requirement that the
Participant forfeit units in the event certain Performance
Objectives are not met within a designated Performance Period.
(b) Performance Unit Grants. A Performance Unit Grant is an
Award of units (with each unit representing such monetary amount
as designated by the Committee) granted to a Participant subject
to such terms and conditions as the Committee deems appropriate,
including, without limitation, the requirement that the
Participant forfeit units in the event certain Performance
Objectives are not met within a designated Performance Period.
(c) Grants of Awards. Performance Awards may be granted
under the Plan in such form and to such Participants as the
Committee may from time to time approve. Performance Awards may
be granted alone, in addition to or in tandem with other Awards
under the Plan. Subject to the terms of the Plan, the Committee
shall determine the number of Performance Awards to be granted
to a Participant. The Committee may impose different terms and
conditions on any particular Performance Award made to any
Participant. Each grant of a Performance Award shall be
evidenced by a written instrument granting a specified number of
Performance Equity Grants or Performance Unit Grants and
designating the Performance Period, the Performance Objectives,
the proportion of payments for performance between the minimum
and full performance levels, if any, restrictions applicable to
shares of Common Stock receivable in settlement, if any, and any
other terms, conditions, restrictions and rights with respect to
such grant as determined by the Committee.
(d) Performance Periods. The Committee shall establish
Performance Periods applicable to Performance Awards. There
shall be no limitation on the number of Performance Periods
established by the Committee and more than one Performance
Period may encompass the same fiscal year.
(e) Performance Objectives. If the Committee determines that
a Performance Award is intended to qualify as performance-based
compensation under section 162(m)(4)(C) of the Code, the special
provisions of Section 8(c) shall apply.
(f) Payment of Awards. In the case of a Performance Equity
Grant, the Participant shall be entitled to receive payment for
each unit earned in an amount equal to the aggregate Fair Market
Value of the shares of Common Stock covered by such Award. In
the case of a Performance Unit Grant, the Participant shall be
entitled to receive payment for each unit earned in an amount
equal to the dollar value of each unit times the number of units
earned. Settlement of a Performance Award shall be made as soon
as practicable following the conclusion of the respective
Performance Period. Payment shall be made in cash, in shares of
Common Stock (the number to be determined based on Fair Market
Value at the conclusion of such Performance Period) or in any
combination thereof, as the Committee in its sole discretion
shall determine.
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<PAGE> 10
10.36
10. Deferral Elections. The Committee in its sole discretion may permit a
Participant to elect to defer his or her receipt of the payment of cash or the
delivery of shares of Common Stock that would otherwise be due to such
Participant by virtue of the earn out or exercise of an Award made under the
Plan. If any such election is permitted, the Committee shall establish rules and
procedures for such payment deferrals, including the possible (a) payment or
crediting of reasonable interest or earnings on the deferred amounts, (b) the
payment or crediting of dividend equivalents on deferrals of Common Stock and
(c) the election procedures a Participant must use.
11. Deferral Elections. The Committee may permit any Participant receiving
an Award to elect to defer his or her receipt of a payment of cash or shares
that would be otherwise due such individual by virtue of the exercise,
settlement, vesting or lapse of restrictions regarding any Award made under the
Plan. If any such election is permitted, the Committee shall establish rules and
procedures for such payment deferrals, including the possible payment or
crediting or reasonable interest on such deferred amounts credited in cash and
the payment or crediting of dividend equivalents in respect to deferrals
credited in shares of Common Stock.
12. Termination of Employment or Service. Except as otherwise provided in
Section 15(a) or an Award Agreement, upon termination of a Participant's
employment with the Company or any of its Subsidiaries or a Non-Employee
Director's service with the Company or a Consultant's service to the Company, as
the case may be, the Participant (or in the case of death, the persons to whom
the Award is transferred by will or the laws of descent and distribution) may
exercise the Award during the following periods of time (but in no event after
the normal expiration date of such Award) to the extent the Participant was
entitled to exercise the Award at the date of termination:
(i) in the case of death, Disability or Retirement, the Award shall
remain exercisable for one year after the date of termination;
(ii) in the case of termination for Cause, the Award shall remain
exercisable for 5 Company working days following such
termination and shall thereafter be no longer exercisable; and
(iii) in the case of termination for any other reason, the Award shall
remain exercisable for 90 days after the date of termination.
To the extent the Award is not exercised within the foregoing periods of time,
the Award shall automatically terminate at the end of the applicable period of
time.
13. Non-transferability of Awards. Except as permitted by the Committee, no
Award under the Plan, and no rights or interest therein, shall be assignable or
transferable by a Participant except by will, the laws of descent and
distribution or pursuant to a qualified domestic relations order, as defined by
the Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
14. Changes in Capitalization.
(a) No Effect on Power to Make Changes in Capitalization.
The existence of the Plan and the Awards granted hereunder shall
not affect or restrict the right of the Board or the
shareholders of the Company to make any adjustment,
recapitalization, reorganization or other change in the
Company's capital structure or its business, to merge or
consolidate the Company with another entity, issue bonds,
debentures or preferred or prior preference stocks ahead of or
affecting the Company's capital stock, to dissolve or liquidate
the Company or to sell or transfer any part of its assets or
business, or to engage in any other corporate act or proceeding.
(b) Adjustments. In the event of changes in all of the
outstanding shares of Common Stock by reason of stock dividends,
stock splits, recapitalization, mergers, consolidations,
combinations, or exchanges of shares, separations,
reorganizations, liquidations or similar events, or in the event
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<PAGE> 11
10.36
extraordinary cash or non-cash dividends are declared with
respect to outstanding shares of Common Stock or other similar
transactions, the number and class of shares of Common Stock
available under the Plan in the aggregate, the number and class
of shares of Common Stock subject to Awards theretofore granted,
the number of Stock Appreciation Rights theretofore granted,
applicable purchase prices, applicable Performance Objectives
for the Performance Periods not yet completed and performance
levels related thereto, and all other applicable provisions,
shall be equitably adjusted by the Committee, as determined by
the Committee in its sole discretion.
Any adjustments made pursuant to this Section may provide for
the elimination of any fractional share of Common Stock which
might otherwise become subject to an Award.
15. Change in Control.
(a) Special Treatment. In the event of a Change in Control
(i) all Stock Options or Stock Appreciation Rights then
outstanding shall become fully exercisable as of the date of the
Change in Control, whether or not then exercisable, (ii) all
restrictions and conditions of all Restricted Stock Awards then
outstanding shall be deemed satisfied as of the date of the
Change in Control and (iii) all Performance Awards shall be
deemed to have been fully earned as of the date of the Change of
Control. Moreover, the Committee, in its sole discretion, may at
any time, and subject to the terms and conditions as it may
impose: (a) grant Awards that become exercisable only in the
event of a Change in Control, (b) provide for Awards to be
exercised automatically and only for cash in the event of a
Change in Control, and (c) provide in advance or at the time of
a Change in Control for cash to be paid in settlement of any
Award in the event of a Change in Control.
(b) Restrictions on Benefits. Notwithstanding the provisions
of Section 15(a), the aggregate present value of all parachute
payments payable to or for the benefit of a Participant, whether
payable pursuant to the Plan (or otherwise) (excluding those
payments made pursuant to an agreement with the Company that
specifically provides otherwise), shall be limited to three
times the Participant's base amount less one dollar and, to the
extent necessary, the special treatment described in clauses (i)
and (ii) of Section 15(a) shall be reduced or eliminated by the
Committee in order that this limitation not be exceeded;
provided, however, that this provision shall not apply if the
Employee's written employment agreement contains a comprehensive
parachute provision with conflicting terms. For purposes of this
Section, the terms "parachute payment," "base amount" and
"present value" shall have the meanings assigned thereto under
Code section 280G. It is the intention of this Section to avoid
excise taxes on the Participant under Code section 4999 or the
disallowance of a deduction to the Company pursuant to Code
section 280G. Acceptance of an Award constitutes the
Participant's agreement to this Section of the Plan.
16. Amendment and Termination. The Board may amend or terminate the Plan at
any time, but no amendment shall be made without the approval of the
stockholders of the Company if stockholder approval under section 422 of the
Code or Rule 16b-3 would be required or if it would change the material terms of
performance goals that were previously approved by the Company's stockholders,
within the meaning of Treasury Regulation Section 1.162-27(e)(4)(vi) or a
successor provision (unless the Board determines that such approval is not
necessary to avoid loss of a deduction under section 162(m) of the Code, such
approval will not avoid such a loss of deduction or such approval is not
advisable). No amendment of the Plan or any Award granted under the Plan shall
impair any Participant's rights, without his or her consent, under any Award
theretofore granted under the Plan.
17. Miscellaneous.
(a) Tax Withholding. The Company shall have the right to
deduct or withhold any taxes, including transfer taxes, of any
kind required by law to be withheld with respect to such
payments
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10.36
under the Plan or to take such other action as may be necessary
in the opinion of the Company to satisfy all obligations for the
payment of such taxes, including requiring the Participant or
his beneficiary or estate to pay any amount required to be
withheld. If Common Stock is used to satisfy tax withholding,
such Stock shall be valued based on the Fair Market Value when
the tax withholding is required to be made. If the Employee
disposes of shares of Common Stock acquired pursuant to an
Incentive Stock Option in any transaction considered to be a
disqualifying transaction under sections 421 and 422 of the
Code, the Employee must give the Company written notice of such
transfer and the Company shall have the right to deduct any
taxes required by law to be withheld from any amounts otherwise
payable to the Employee.
(b) No Right to Employment. Neither the adoption of
the Plan nor the granting of any Award shall confer upon any
employee of the Company or any Subsidiary any right to continued
employment with the Company or any Subsidiary nor shall it
interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees
at any time, with or without Cause even if Awards will be
forfeited as a result of employment termination. The grant of an
Award to a Consultant or to a Non-Employment Director shall
neither confer employment status towards such individual nor
prevent the Company from terminating such individual's services.
(c) Unfunded Plan. Except as provided in Section 17(d), the
Plan shall be unfunded and the Company shall not be required to
segregate any assets that may at any time be represented by
Awards under the Plan. No obligation of the Company under the
Plan or any Award shall be deemed to be secured by any pledge
of, or other encumbrance on, any property of the Company.
(d) Payments to Trust. The Committee is authorized to cause
to be established a trust agreement or several trust agreements
or other funding vehicles whereunder the Company may make
payments of amounts due or to become due to Participants in the
Plan.
(e) Other Company Benefit and Compensation Programs.
Payments and other benefits received by a Participant under an
Award made pursuant to the Plan shall not be deemed a part of a
Participant's regular, recurring compensation for purposes of
the termination, indemnity or severance pay law of any country
and shall not be included in, nor have any effect on, the
determination of benefits under any other employee benefit plan
or similar arrangement provided by the Company or a Subsidiary
unless expressly so provided by such other plan or arrangements,
or except where the Committee expressly determines that
inclusion of an Award or portion of an Award should be included
to accurately reflect competitive compensation practices or to
recognize that an award has been made in lieu of a portion of
competitive annual cash compensation. Awards under the Plan may
be made in combination with or in tandem with, or as
alternatives to, grants, awards or payments under any other
Company or Subsidiary plans. The Company or any Subsidiary may
adopt such other compensation programs and additional
compensation arrangements as it deems necessary to attract,
retain and reward employees for their service.
(f) Securities Law Restrictions. No shares of Common Stock
shall be issued under the Plan unless counsel for the Company
shall be satisfied that such issuance will be in compliance with
applicable Federal and state securities laws. Certificates for
shares of Common Stock delivered under the Plan may be subject
to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and
other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Common Stock is then listed,
and any applicable Federal or state securities law. The
Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
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10.36
(g) Award Agreement. Each Participant receiving an Award
under the Plan shall enter into an Award Agreement with the
Company in a form specified by the Committee agreeing to the
terms and conditions of the Award and such related matters as
the Committee shall, in its sole discretion, determine.
(h) Costs of Plan. The costs and expenses of administering
the Plan shall be borne by the Company.
(i) Section 16. With respect to persons subject to Section
16 of the Exchange Act, transactions under this Plan are
intended to comply with all applicable conditions of Rule 16b-3
or its successors under the Exchange Act. To the extent any
provision under the Plan or action by the Committee fails to so
comply, it shall be deemed null and void to the extent permitted
by law and deemed advisable by the Committee.
(j) Governing Law. The Plan and all actions taken thereunder
shall be governed by and construed in accordance with the laws
of the State of California without regard to the principles of
the conflict of laws thereof.
(k) Effective Date And Termination Date. The Plan shall be
effective upon Board approval and adoption, subject to approval
by the Company's shareholders at the 1996 annual meeting of
shareholders. The Plan shall terminate ten years after the date
of Board approval.
(l) Severability. In the event any provision or provisions
of the Plan are held to be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining
provisions shall not in any way be effected or impaired.
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<PAGE> 1
EXHIBIT 10.37
PINNACLE MICRO, INC.
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
1. PURPOSE. This Plan seeks to advance the interests of
Pinnacle Micro, Inc., a California corporation (the "Company"), and its
stockholders ("Stockholders") by (a) encouraging increased share ownership by
the Company's directors who are not employees of the Company or any of its
subsidiaries, (b) enhancing the Company's ability to attract and retain the
services of experienced, able and knowledgeable persons to serve as directors
and (c) providing additional incentive for directors to contribute their best
efforts to the Company's success.
2. NON-QUALIFIED STOCK OPTIONS. The stock options to be
granted pursuant to this Plan ("Options" or, individually, an "Option") are
nonstatutory options and are not intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended.
3. ADMINISTRATION. This Plan shall be administered by the
Company's board of directors (the "Board"). The Board shall have full authority,
consistent with this Plan, to interpret this Plan, to promulgate such rules and
regulations with respect to this Plan as it deems desirable and to make all
other determinations necessary or desirable for the administration of this Plan.
All decisions, determinations and interpretations of the Board shall be binding
upon all Eligible Directors (as defined in Section 5(a) hereof), the Company and
all other interested persons.
4. SHARES SUBJECT TO THE PLAN. The shares of stock to be
issued upon the exercise of Options shall be authorized shares of the Company's
common stock ("Shares" or, individually, "Share"), either previously unissued or
previously issued but reacquired by the Company. The aggregate number of Shares
to be issued upon the exercise of Options shall be 350,000, subject to
adjustment as provided in Section 8 below. Any Share subject to an Option which
is cancelled or terminated without having been exercised shall again be
available to be awarded under this Plan.
5. GRANTING OF OPTIONS.
(a) Eligible Director. As used herein, "Eligible Director"
means any of the Company's directors who are not officers or other employees of
the Company or any subsidiary of the Company (collectively, "Eligible Directors"
and, individually, an "Eligible Director").
(b) Initial Grants. The Company shall grant an initial Option
to purchase 25,000 Shares to each person who is an Eligible Director immediately
following the first annual meeting of Stockholders held on or after the
effective date of this Plan at which the Plan is approved by the Stockholders;
provided however, that if the Company has granted an Eligible Director, in the
person's role as a non-employee director, options to purchase Shares prior to
the effective date of and not pursuant to this Plan, then the Company shall
grant such Eligible Director an Option to purchase the number of Shares by which
25,000 Shares exceeds the number of Shares represented by the prior grant or
grants.
Thereafter, the Company shall grant an initial Option to
purchase 25,000 Shares to each person who becomes an Eligible Director (but who
previously was not an Eligible Director as of the first annual meeting of
Stockholders following the effective date of this Plan), which Option shall be
granted on the earlier of the date such person is first elected and/or appointed
as a Company director
(c) Automatic Grants. On the date of each annual meeting of
Stockholders, beginning in 1997, the Company shall grant an Option to purchase
10,000 Shares to each Eligible Director as of the date of such meeting (other
than to Eligible Directors who received an initial grant under Section 5(b)
hereof during the calendar
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10.37
year in which such annual meeting is held), provided that each such Eligible
Director continues in office after such annual meeting.
(d) No Option Grant Where Prohibited. No person shall be
granted an Option under this Plan if at the time of such grant, the grant is
prohibited by applicable law or by the policies of the employer of such person
or the policies of any other company of which such person is a member of the
board of directors or a general partner.
(e) Option Agreement. Each Option shall be evidenced by an
option agreement executed by the Company and the Eligible Director receiving
such Option. Each such agreement shall state the terms and conditions of the
grant, not inconsistent with this Plan, as the Board in its sole discretion
shall determine and approve.
(f) Option Price. The purchase price for each Share subject to
an Option shall be its Fair Market Value (as defined in paragraph 5(g) below)
determined as of the date such Option is granted (the "Grant Date").
(g) Definition of Fair Market Value. For the purposes of this
Plan, "Fair Market Value" of the Common Stock as of a certain date (the
"Determination Date") means: (i) if the Common Stock is listed on an established
stock exchange or any automated quotation system that provides sale quotations,
the closing sale price for a share of the Common Stock on such exchange or
quotation system on the applicable date, or if no sale of the Common Stock shall
have been made on that day, on the next preceding day on which there was a sale
of the Common Stock; (ii) if the Common Stock is not listed on any exchange or
quotation system, but bid and asked prices are quoted and published, the mean
between the quoted bid and asked prices on the applicable date, and if such
prices are not available on such day, on the next preceding day on which such
prices were available; and (iii) if the Common Stock is not regularly quoted,
the fair market value of a share of Common Stock on the applicable date
established by the Board in good faith by any fair and reasonable means. Fair
Market Value determined by the Board in good faith shall be final, binding and
conclusive on all parties.
(h) Nontransferability. Other than as permitted by the Board,
an Option shall be nonassignable and nontransferable other than by will or the
laws of descent and distribution.
6. EXERCISE OF OPTIONS.
(a) Vesting Schedule. Except as provided in Section 6(c)
hereof, each Option shall become exercisable on the following schedule: (i)
beginning on the first anniversary of the Grant Date, as to 33% of the Shares
covered by such Option (the "Covered Shares"), (ii) beginning on the second
anniversary of the Grant Date, as to 66% of the Covered Shares, and (iii)
beginning on the third anniversary of the Grant Date, and thereafter until the
expiration of such Option pursuant to Section 7 of this Plan, as to 100% of the
Covered Shares. Any other provision of this Plan notwithstanding, no Option
shall be exercisable as to any Shares with respect to which such Option
previously has been exercised.
(b) Method of Exercise. Prior to its expiration pursuant to
Section 7 hereof and in accordance with the vesting schedule outlined in Section
6(a) hereof, each Option may be exercised, in whole or in part (provided,
however, that the Company shall not be required to issue fractional shares) by
delivery of written notice of exercise to the secretary of the Company
accompanied by the full purchase price of the Shares being purchased. The
purchase price shall be paid at the time of exercise (i) in cash, (ii) in
previously held shares of the Company's common stock (subject to the
requirements of Rule 16b-3), the Fair Market Value of which, as of the date of
exercise, is equal to the Purchase Price, or (iii) by any combination of cash or
Payment Shares. The Board of Directors will establish procedures whereby an
Eligible Director may (subject to the requirements of Rule 16b-3, Regulation T,
federal income tax laws, and other federal, state and local tax and securities
laws) exercise an Option or a portion thereof without making a direct payment of
the option price to the Company. The Board shall establish
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10.37
such administrative procedures and policies as it deems appropriate and such
procedures and policies shall be binding on any Eligible Director wishing to
utilize the cashless exercise program.
(c) Effect of Change in Control. In the event of a Change in
Control of the Company, all unexpired Options held by each Eligible Director on
the date of such Change in Control shall be immediately exercisable in full,
notwithstanding the vesting schedule of Section 6(a) hereof.
For purposes of this Plan, a "Change in Control" of the
Company shall mean the occurrence of any of the following events:
(i) The acquisition after the date hereof in one or more
transactions by any "Person" (as the term person is used for purposes
of Section 13(d) or 14(d) of the Exchange Act) of "Beneficial
Ownership" (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of forty percent (40%) or more of the combined voting
power of the Company's then outstanding voting securities (the "Voting
Securities"), provided, however, that for purposes of this paragraph
(a), the Voting Securities acquired directly from the Company by any
Person shall be excluded from the determination of such Person's
Beneficial Ownership of Voting Securities (but such Voting Securities
shall be included in the calculation of the total number of Voting
Securities then outstanding); or
(ii) During any period of two consecutive years during the
term of this Plan, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a
majority thereof, unless the election of each director who was not a
director at the beginning of such period has been approved in advance
by directors representing at least two-thirds of the directors then in
office who were directors at the beginning of the period; or
(iii) Approval by shareholders of the Company of (i) a merger
or consolidation involving the Company if the stockholders of the
Company immediately before such merger or consolidation do not own,
directly or indirectly, immediately following such merger or
consolidation, more than fifty percent (50%) of the combined voting
power of the outstanding voting securities of the corporation resulting
from such merger or consolidation in substantially the same proportion
as their ownership of the Voting Securities immediately before such
merger or consolidation, or (ii) a complete liquidation or dissolution
of the Company or an agreement for the sale or other disposition of all
or substantially all of the assets of the Company.
Notwithstanding anything in this paragraph to the contrary, a
Change in Control shall not be deemed to occur solely because forty
percent (40%) or more of the then outstanding Voting Securities is
acquired by (i) a trustee or other fiduciary holding securities under
one or more employee benefit plans maintained by the Company or any of
its subsidiaries, or (ii) any corporation which, immediately prior to
such acquisition, is owned directly or indirectly by the stockholders
of the Company in the same proportion as their ownership of stock in
the Company immediately prior to such acquisition.
Moreover, notwithstanding anything in this paragraph to the
contrary, a Change in Control shall not be deemed to occur solely
because any Person (the "Subject Person") acquires Beneficial Ownership
of more than the permitted percentage of the outstanding Voting
Securities as a result of an acquisition of Voting Securities by the
Company which, by reducing the number of Voting Securities outstanding,
increases the proportional number of shares Beneficially Owned by the
Subject Person, provided, that if after such share acquisition by the
Company, the Subject Person becomes the Beneficial Owner of any
additional Voting Securities, then a Change in Control shall occur.
7. EXPIRATION OF OPTIONS. Except as hereinafter provided, each
Option shall expire on the earlier of (a) ten years after the Grant Date of such
Option or (b) the date that the Eligible Director holding such Option ceases to
be a member of the Board; provided, however, that to the extent any unexpired
Options are
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10.37
otherwise exercisable on the date that an Eligible Director ceases to be a
member of the Board for any reason other than "cause", death or retirement under
a retirement plan of the Company, such Options shall remain exercisable for
twelve months following the last day of the Eligible Director's Board membership
and shall expire if not exercised within said twelve-month period. If Board
membership ceases on account of death or retirement under a retirement plan of
the Company, all unexpired Options held by the Eligible Director on the last day
of Board membership, which are then exercisable or would have become exercisable
had the Director continued as a member of the Board for one additional year,
shall be immediately exercisable and remain exercisable for 365 days following
the last day of the Eligible Director's Board membership and shall expire if not
exercised within said 365-day period. To the extent any otherwise unexpired
Options are not exercisable in accordance with the immediately preceding
sentence, they shall expire as of the date of death or the effective date of
retirement, as the case may be. All Options held by an Eligible Director whose
membership on the Board ends after the occurrence of "cause" shall expire
immediately on the last date of membership. "Cause", for the purposes of this
paragraph 7, means any (i) act or omission for which indemnification of the
Eligible Director is prohibited by the Delaware General Corporation Law, (ii)
conviction of a felony which adversely affects the Company, or (iii) misconduct
involving personal profit to the Eligible Director.
8. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. In the event of
changes in the outstanding shares of Common Stock by reason of stock dividends,
stock splits, recapitalization, merger, consolidation, combination, or exchanges
of shares, separations, reorganizations, liquidations or similar events, the
number and class of shares of Common Stock available under the Plan in the
aggregate, the number and class of shares of Common Stock subject to Options
theretofore granted and the Option price, shall be equitably adjusted by the
Board, as determined by the Board in its sole discretion.
Any adjustments made pursuant to this Section may provide for the
elimination of any fractional share of Common Stock which might otherwise become
subject to an Option.
9. TAX WITHHOLDING. Any exercise of an Option pursuant to this
Plan shall be subject to withholding of state and federal income taxes, FICA tax
or other taxes to the extent required by applicable law.
10. LAWS AND REGULATIONS. This Plan, the grant and exercise of
Options under this Plan, and the obligation of the Company to sell or deliver
any of its securities (including, without limitation, Options and Shares) under
this Plan shall be subject to all applicable laws, regulations and rules. In the
event that the Shares are not registered under the Securities Act of 1933 (the
"Act") or any applicable state securities laws prior to the delivery of such
Shares, the Company may require, as a condition to the issuance thereof, that
the persons to whom Shares are to be issued represent and warrant in writing to
the Company that such Shares are being acquired by him or her for investment for
his or her own account and not with a view to, for resale in connection with, or
with an intent of participating directly or indirectly in, any distribution of
such Shares within the meaning of the Act, and a legend to that effect may be
placed on the certificates representing the Shares.
11. TERMINATION AND AMENDMENT OF THIS PLAN. The Board may at
any time terminate this Plan or may at any time or times amend this Plan or
amend any outstanding Options for the purpose of satisfying the requirements of
any changes in applicable laws or regulations or for any other purpose which at
the time may be permitted by law.
12. EFFECTIVE DATE. This Plan shall become effective on the
date of approval by the Board; provided, however, that this Plan shall be
submitted to the Stockholders for approval, and if not approved by the
Stockholders within one year from the date of approval by the Board, this Plan
shall be of no force and effect. Options granted under this Plan before approval
of this Plan by the Stockholders shall be granted subject to such approval and
shall not be exercisable before such approval.
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EXHIBIT 10.38
PINNACLE MICRO, INC.
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is made and entered into by
and between Kenneth C. Campbell ("Executive") and Pinnacle Micro, Inc., (the
"Company"), effective as of December 1, 1996 (the "Effective Date") with
reference to the following facts:
Executive has been recruited by Company to fill a critical executive
position. The Company is going through a management transition and financial
turnaround. Company and Executive desire to agree upon the services to be
rendered for such period of time upon the terms and conditions set forth herein.
The Company's Board further believes that it must provide the Executive with
certain enhanced severance benefits upon Executive's termination of employment
following a change of control (as defined below) to provide the Executive,
through enhanced financial security, incentive to continue providing services to
the Company notwithstanding the possibility of a change of control.
NOW, THEREFORE, in consideration of the premises and of the mutual
convenants and conditions set forth herein, the parties hereto agree as follows:
1. Employment; Duties: (a) Employment Period: During the period
commencing with the Effective Date and terminating 2 years for (the "Contract
Employment Period") or on the date (the "Termination Date") that Executive is
terminated in accordance with Sections 5, 6 or 7 of this Agreement or resigns
for whatever reason, (the "Employment Period"), Executive shall serve as
Executive Vice President, Technology and General Manager of the Company or in
such other position as he accepts prior to a Change of Control. During such
employment period, Executive shall discharge the duties of his office as shall
reasonably be assigned to him by the President and Chief Executive Officer. The
Contract Employment period shall be automatically annually extended for 12 month
periods after the expiration of the initial term unless otherwise terminated in
accordance with this Agreement.
(b) No Conflict of Interest: During the Employment Period,
Executive shall not serve as a director, employee, consultant or advisor to any
other corporation or other business enterprise without the prior written consent
of the Board; which consent shall not be unreasonably withheld. Executive may,
however, serve in any capacity with any civic, educational or charitable
organization or any trade association without the approval of the Board, so long
as such activities do not interfere with his duties and obligations under this
Agreement. If the Board views any such activities as interfering it shall notify
Executive and provide a reasonable opportunity to cure the interference.
2. Compensation:
(a) Base Salary: During the Employment Period, the Company shall
pay Executive a base salary (the "Employment Base Salary") at a rate of not less
than $285,000.00 per year, payable in equal installments no less frequently than
twice monthly.
(b) Bonuses: During the Employment Period, Executive shall
receive bonuses (I) as determined by the Compensation Committee of the Board of
Directors in consultation with the President and Chief Executive Officer; and
(ii) according to the terms of any Company executive bonus plans.
(c) Stock Options: During the Employment Period Executive will
receive such stock options or similar performance incentives as determined
separately in writing by the Compensation Committee of the Board of Directors in
its sole discretion after consultation with the President and Chief Executive
Officer. A summary of Executive's initial grant is attached hereto as Exhibit A.
3. Employee Benefits: During the Employment Period, Executive shall be
included in all employee benefit plans, programs or arrangements, including,
without limitation, any plans, programs or arrangements providing for retirement
benefits, incentive compensation, profit bonuses, disability benefits, health
and life
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10.38
insurance, vacation and paid holidays, which shall be established by the Company
for, or made available to, its senior executives and to such other benefits and
perquisites as are specifically set forth herein. The Company will obtain at
Company expense, life insurance and reasonable disability policies for
Executives and Key Employees and Executive shall participate therein on a basis
comparable to other executives.
(a) Reimbursement of Expenses: The Company shall reimburse
Executive for all out-of-pocket expenses reasonably incurred and paid by him in
the performance of his duties pursuant to this Agreement, in accordance with
written Company policies.
4. Definition of Terms: The following terms referred to in this Agreement
shall have the following meanings:
(a) Cause: "Cause" shall mean (i) any act of personal dishonesty
committed by the Executive in connection with his responsibilities as an
employee; (ii) any act which violates state or federal law, concerning or
involving dishonesty or moral tempted any settlement, order or judgment against
Executive under the federal or state securities laws and regulations; (iii) a
willful act by the Executive which is materially injurious to the Company; and
(iv) continued nonperformance (two weeks or more) by the Executive following
delivery to the Executive of a written demand for performance from the Company
which describes the basis for the Company's belief that the Executive has not
substantially performed his duties.
(b) Change of Control: "Change of Control" means the occurrence
of any of the following events:
(i) Any "person" or group (as such terms and used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board occurring within
a two-year period, as a result of which fewer than a majority of the directors
are Incumbent Directors. "Incumbent Directors" shall mean directors who either
(A) are directors of the Company as of the date hereof; or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors for the Company); or
(iii) The stockholders of the Company approve any transaction
which would be a reorganization under Delaware or California law and result in
the voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) less than fifty percent (50%) of
the total voting power represented by the voting securities of the surviving
entity outstanding immediately after such merger or consolidation; or
(iv) The stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
(c) Disability: "Disability" shall mean that the Executive has
been unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, a determined by the Company (or by a physician agreed upon by the
parties or selected by the Arbitrator if the parties cannot agree) to be total
and permanent. If a court shall determine Executive is not competent to select
an Arbitration an Disability shall be deemed to exist. Termination resulting
from Disability may only be effected after at least 30 days' written notice by
the Company of its intention to terminate the Executive's employment. In the
event that the Executive resumes the performance of substantially all of his
duties hereunder before the termination of his employment becomes effective, the
notice of intent to terminate shall automatically be deemed to have been
revoked.
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10.38
(d) Good Reason: "Good Reason" shall mean, following a change of
control (i) without the Executive's express written consent, the significant
reduction of the Executive's duties, authority or responsibilities, relative to
the Executive's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Executive of such reduced duties,
authority or responsibilities; (ii) without the Executive's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Executive immediately prior to the Change of Control; (iii) a reduction by
the Company in the Employment Base Salary of the Executive; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Executive was entitled immediately prior to the Change of Control with the
result that the Executive's overall benefits package under Section 3 hereof is
significantly reduced (other than as contemplated by this Agreement); (v) the
relocation of the Executive to a facility or a location more than thirty (30)
miles from the Executive's then present location, without the Executive's
express written consent; (vi) any purported termination of the Executive by the
Company which is not effected for Disability or for Cause; or (vii) the failure
of the Company to obtain the assumption of this agreement by any successors
contemplated in Section 18 below;
5. Termination of Employment Prior to a Change of Control: The following
provisions shall apply with respect to termination of Executive's employment
prior to a Change of Control:
(a) Termination without Cause:
(i) General: If, prior to the end of the Employment Period
and prior to a Change of Control (A) Executive's employment is terminated by the
Company without Cause, then the Company shall:
(A) Cash Severance Payments: Pay to Executive severance
payments of one month's Employment Base Salary for a period equal to Executive
Vice President - 24 months following the date of termination; (the "Severance
Period"). Such severance payments shall be paid at regular payroll intervals or
in one lump sum within 30 days of the Termination Date as determined by Company.
(B) Accelerated Vesting Option: Give Executive (or his
legal representative if he is Disabled) 30 days to elect to accelerate the
vesting of 80% all unvested equity compensation (forfeiting the 20% balance of
unvested equity compensation) to the same extent as if it would have vested if
Executive remained employed through the required vesting period.
(C) Continued Group Health and Insurance Benefits:
Continue to make available to the Executive and the covered dependents, and to
pay directly or indirectly for, to the same extent as paid prior to the
Termination Date, all group health plan, life and other similar insurance plans
or Company-sponsored arrangements providing comparable benefits in which
Executive or such covered dependents participate on the Termination Date through
the Severance Period.
(ii) Death: In the event of Executive's death while he is
receiving benefits pursuant to Section 6(a)(i)(C) hereof, the Company shall
continue providing and paying severance and for group health plan, life and
similar insurance coverage or Company-sponsored arrangements providing
comparable benefits for the covered dependents through the Severance Period.
(iii) All vested options or other equity compensation must
be exercised within 12 months of the Termination Date.
(b) Termination for Cause; Resignation: If, during the
Employment Period and prior to a Change of Control, Executive's employment is
terminated by the Company for Cause, or if Executive resigns from his
employment, then Executive shall be entitled only to payment of all amounts
including benefits earned or owed to Executive and only to such equity
compensation as is fully vested as of the Termination Date.
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10.38
6. Termination of Employment Following a Change of Control: The following
provisions shall apply to termination of Executive's employment on or following
a Change of Control:
(a) Termination without Cause; Resignation for Good Reason:
(i) General: If, following a Change of Control (A)
Executive's employment is terminated by the Company without Cause, or (B)
Executive resigns from his employment hereunder for Good Reason, then the
Company shall:
(A) Cash Severance Payments: Pay to Executive severance
payments of one month's Employment Base Salary for a period equal to Executive
Vice President - 24 months following the date of termination; (the "Severance
Period"). Such severance payments shall be paid at regular payroll intervals or
in a lump sum within 30 days of the Termination Date as determined by the
Company.
(B) Accelerated Vesting: Cause the vesting of all
restricted stock, stock options and other equity-based compensation held on the
date of termination by Executive, to fully accelerate, as of the date of
termination, so that they become 100% vested in the stock of the Controlling
entity.
(C) Continued Group Health and Insurance Benefits:
Continue to make available to the Executive and the Covered Dependents, and pay
for, to the same extent as paid prior to the Change of Control and termination
of the employment or consulting relationship, all group health plan, life and
other similar insurance plans or Company-sponsored arrangements providing
comparable benefits in which Executive or such Covered Dependents participate on
the date of the Executive's termination, through the Change of Control Severance
Period.
(ii) Death During Severance Period: In the event of
Executive's death while he is receiving benefits pursuant to Section 6(a)(i)(C)
hereof, the Company shall continue providing and paying for group health plan,
life and similar insurance plan coverage or Company-sponsored arrangements
providing comparable benefits to the covered dependents through the Change of
Control Severance Period.
(b) Termination for Cause; Resignation Without Good Reason: If,
following a Change of Control, Executive's employment is terminated by the
Company for Cause, or if Executive resigns from his employment hereunder other
than for Good Reason, then Executive shall be entitled only to payment of all
amounts (including benefits) earned or owed to Executive, and only to such
equity compensation as is fully vested as of the Termination Date.
(iii) All stock options or warrants so vested must be
exercised within 12 months of the Termination Date.
7. Death or Permanent Disability: In the event Executive's employment
terminates due to Executive's death or Disability, whether or not there has been
a Change of Control, the Company shall:
(a) Cash Lump-Sum Payment: Pay to Executive, his estate, or his
personal representative (as appropriate) a lump-sum cash payment equal to 12
months' Employment Base Salary to be paid within 30 days after the date the
Company receives notice of Executive's death, or within 30 days after the date
it has been determined that Executive has incurred a Disability.
(b) Equity Compensation: Allow the estate or representative of
the Executive 12 months from the Termination Date to exercise equity
compensation vested as of the Termination Date.
(c) Continued Group Health and Insurance Benefits: Continued to
make available to the Executive (if alive) and the Covered Dependents (whether
or not Executive is alive) and pay for, to the same extent as paid prior to
termination of employment, all group health plan, life and other similar
insurance plans or Company-sponsored arrangements providing comparable benefits
in which Executive or such Covered Dependents participate on the date of the
Executive's termination, for a period of 12 months following the Termination
Date.
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10.38
(d) Other Benefits: Pay to Executive, his estate, or his
personal representative (as appropriate) all other benefits normally paid to
employees who have died or incurred a disability.
8. Golden Parachute Limitation: The payments and benefits payable to
Executive under this Agreement and all other contracts, arrangements, or
programs with the Company shall not, in the aggregate exceed the maximum amount
that may be paid to Executive without triggering golden parachute penalties
under Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), as determined in good faith by the Company's independent auditors.
Executive agrees that, to the extent payments or benefits under this Agreement
would not be deductible under Code Section 162(m) if made or provided when
otherwise due under this Agreement, such payments and benefits shall be made or
provided later, immediately after Section 162(m) ceases to preclude their
deduction, with interest thereon at the rate provided in Code Section
1274(b)(2)(B). If even after such deferral the payments and benefits otherwise
payable to Executive must be reduced to avoid triggering such penalties, the
payments and benefits will be reduced in the priority order designated by the
Executive, or, if the Executive fails promptly to designate an order, in the
priority order designated by the Company. If an amount in excess of the limit
set forth in this Section 8 is paid to Executive, Executive shall repay the
excess amount to the Company upon demand. Executive and the Company agree to
cooperate with each other in connection with any administrative or judicial
proceedings concerning the existence or amount of golden parachute penalties on
payments or benefits received by Executive.
9. Termination Date: The date of termination of employment by the Company
shall be the date specified in a written notice of termination to Executive. The
date of resignation shall be the date specified in the written notice of
resignation from Executive to the Company. For purposes of this Agreement, no
purported termination of Executive's employment for Cause shall be effective
without delivery of such Notice of Termination.
10. Assignment: Executive's rights and obligations under this Agreement
are not assignable by Executive, but shall pass to his estate or personal
representative upon death or disability (as determined pursuant to this
Agreement).
11. Notices: Any notice required or permitted under this Agreement shall
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if sent by facsimile, or mailed to the other party
at its address set forth below in this Section 10, or at such other address as
such party may designate by written notice to the other party hereto. Any
effective notice hereunder shall be deemed given on the date personally
delivered or on the date sent by facsimile or deposited in the United States
mail (sent by certified mail, return receipt requested), as the case may be, at
the following address:
(i) If to the Company: (ii) If to Executive:
Pinnacle Micro, Inc.
19 Technology Drive
Irvine, California 92618
Attn: General Counsel
Fax: 714/789-3045
12. Disputes: Any disputes between the parties hereto shall be settled by
arbitration in Irvine, California under the auspices of, and in accordance with
the rules of, the Judicial Arbitration and Mediation Service/Endispute, by an
arbitrator who is mutually agreeable to the parties hereto, (such arbitrator or
hereinafter referred to as the "Arbitrator"). The decision in such arbitration
shall be final and conclusive on the parties, in lieu of any court action, which
is expressly waived, with the sole exception of a Company initiated injunctive
proceeding to protect its confidential information or trade secrets, judgment
upon such decision may be entered in any court having jurisdiction thereof. The
parties hereby agree that the Arbitrator shall be empowered to enter an
equitable decree mandating specific enforcement of the terms of this Agreement.
The Company and Executive shall share equally all expenses of the Arbitrator
incurred in any arbitration hereunder; provided, however, that the Company or
Executive, as the case may be, shall bear all expenses of the Arbitrator and all
of the legal fees and out-
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10.38
of-pocket expenses of the other party to the extent if the Arbitrator determines
that the claim or position of such party was without reasonable foundation.
13. Severability: If an arbitrator determines that any term or provision
hereof is invalid or unenforceable, (a) the remaining terms and provisions
hereof shall be unimpaired and (b) such arbitrator shall have the authority to
replace such invalid or unenforceable term or provision with a term or provision
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision.
14. Entire Agreement: This Agreement by and between the Company and
Executive represents the entire agreement of the parities with respect to the
matters set forth herein, and to the extent inconsistent with other prior
contracts, arrangements or understandings between the parties, supersedes all
such previous contracts, arrangements or understandings between the Company and
Executive. The Agreement may be amended only by mutual written agreement of the
parties hereto.
15. Withholding: Company shall be entitled to withhold, or cause to be
withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
16. Governing Law: This Agreement shall be construed, interpreted, and
governed in accordance with the laws of California without reference to rules
relating to conflict of law.
17. Successors: This Agreement shall be binding upon and inure to the
benefit of, and shall be enforceable by Executive and the Company, their
respective heirs, executors, administrators and assigns. In the event the
Company is merged, consolidated, liquidated by a parent corporation, or
otherwise combined into one or more corporations, the provisions of this
Agreement shall be binding upon and inure to the benefit of the parent
corporation or the corporation resulting from such merger or to which the asset
shall be sold or transferred, which corporation from and after the date of such
merger, consolidation, sale or transfer shall be deemed to be the Company for
purposes of this Agreement. In the event of any other assignment of this
Agreement by the Company, by operation of law or otherwise, the Company shall
remain primarily liable for its obligations hereunder. This Agreement shall not
be assignable by Executive.
18. Headings: The headings of sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. Counterparts: This Agreement may be executed by either of the parties
hereto in counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this in counterparts
Agreement as of the Effective Date.
COMPANY: EXECUTIVE:
PINNACLE MICRO, INC. KENNETH C. CAMPBELL
/s/Lawrence Goelman /s/Kenneth C. Campbell
------------------- ----------------------
Lawrence Goelman
President, Chief Executive Officer
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EXHIBIT 10.39
PINNACLE MICRO, INC.
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is made and entered into by
and between Roger Hay ("Executive") and Pinnacle Micro, Inc., (the "Company"),
effective as of December 1, 1996 (the "Effective Date") with reference to the
following facts:
Executive has been recruited by Company to fill a critical executive
position. The Company is going through a management transition and financial
turnaround. Company and Executive desire to agree upon the services to be
rendered for such period of time upon the terms and conditions set forth herein.
The Company's Board further believes that it must provide the Executive with
certain enhanced severance benefits upon Executive's termination of employment
following a change of control (as defined below) to provide the Executive,
through enhanced financial security, incentive to continue providing services to
the Company notwithstanding the possibility of a change of control.
NOW, THEREFORE, in consideration of the premises and of the mutual
convenants and conditions set forth herein, the parties hereto agree as follows:
1. Employment; Duties: (a) Employment Period: During the period
commencing with the Effective Date and terminating 2 years for (the "Contract
Employment Period") or on the date (the "Termination Date") that Executive is
terminated in accordance with Sections 5, 6 or 7 of this Agreement or resigns
for whatever reason, (the "Employment Period"), Executive shall serve as
Executive Vice President, Chief Financial Officer of the Company or in such
other position as he accepts prior to a Change of Control. During such
employment period, Executive shall discharge the duties of his office as shall
reasonably be assigned to him by the President and Chief Executive Officer. The
Contract Employment period shall be automatically annually extended for 12 month
periods after the expiration of the initial term unless otherwise terminated in
accordance with this Agreement.
(b) No Conflict of Interest: During the Employment Period,
Executive shall not serve as a director, employee, consultant or advisor to any
other corporation or other business enterprise without the prior written consent
of the Board; which consent shall not be unreasonably withheld. Executive may,
however, serve in any capacity with any civic, educational or charitable
organization or any trade association without the approval of the Board, so long
as such activities do not interfere with his duties and obligations under this
Agreement. If the Board views any such activities as interfering it shall notify
Executive and provide a reasonable opportunity to cure the interference.
2. Compensation:
(a) Base Salary: During the Employment Period, the Company shall
pay Executive a base salary (the "Employment Base Salary") at a rate of not less
than $225,000.00 per year, payable in equal installments no less frequently than
twice monthly.
(b) Bonuses: During the Employment Period, Executive shall
receive bonuses (i) as determined by the Compensation Committee of the Board of
Directors in consultation with the President and Chief Executive Officer; and
(ii) according to the terms of any Company executive bonus plans.
(c) Stock Options: During the Employment Period Executive will
receive such stock options or similar performance incentives as determined
separately in writing by the Compensation Committee of the Board of Directors in
its sole discretion after consultation with the President and Chief Executive
Officer. A summary of Executive's initial grant is attached hereto as Exhibit A.
3. Employee Benefits: During the Employment Period, Executive
shall be included in all employee benefit plans, programs or arrangements,
including, without limitation, any plans, programs or arrangements providing
for retirement benefits, incentive compensation, profit bonuses, disability
benefits, health and life
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10.39
insurance, vacation and paid holidays, which shall be established by the Company
for, or made available to, its senior executives and to such other benefits and
perquisites as are specifically set forth herein. The Company will obtain at
Company expense, life insurance and reasonable disability policies for
Executives and Key Employees and Executive shall participate therein on a basis
comparable to other executives.
(a) Reimbursement of Expenses: The Company shall reimburse
Executive for all out-of-pocket expenses reasonably incurred and paid by him in
the performance of his duties pursuant to this Agreement, in accordance with
written Company policies.
4. Definition of Terms: The following terms referred to in this Agreement
shall have the following meanings:
(a) Cause: "Cause" shall mean (i) any act of personal dishonesty
committed by the Executive in connection with his responsibilities as an
employee; (ii) any act which violates state or federal law, concerning or
involving dishonesty or moral tempted any settlement, order or judgment against
Executive under the federal or state securities laws and regulations; (iii) a
willful act by the Executive which is materially injurious to the Company; and
(iv) continued nonperformance (two weeks or more) by the Executive following
delivery to the Executive of a written demand for performance from the Company
which describes the basis for the Company's belief that the Executive has not
substantially performed his duties.
(b) Change of Control: "Change of Control" means the occurrence
of any of the following events:
(i) Any "person" or group (as such terms and used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board occurring
within a two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date hereof; or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors for the Company); or
(iii) The stockholders of the Company approve any
transaction which would be a reorganization under Delaware or California law and
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) less than fifty
percent (50%) of the total voting power represented by the voting securities of
the surviving entity outstanding immediately after such merger or consolidation;
or
(iv) The stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
(c) Disability: "Disability" shall mean that the Executive has
been unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, a determined by the Company (or by a physician agreed upon by the
parties or selected by the Arbitrator if the parties cannot agree) to be total
and permanent. If a court shall determine Executive is not competent to select
an Arbitration an Disability shall be deemed to exist. Termination resulting
from Disability may only be effected after at least 30 days' written notice by
the Company of its intention to terminate the Executive's employment. In the
event that the Executive resumes the performance of substantially all of his
duties hereunder before the termination of his employment becomes effective, the
notice of intent to terminate shall automatically be deemed to have been
revoked.
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(d) Good Reason: "Good Reason" shall mean, following a change of
control (i) without the Executive's express written consent, the significant
reduction of the Executive's duties, authority or responsibilities, relative to
the Executive's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Executive of such reduced duties,
authority or responsibilities; (ii) without the Executive's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Executive immediately prior to the Change of Control; (iii) a reduction by
the Company in the Employment Base Salary of the Executive; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Executive was entitled immediately prior to the Change of Control with the
result that the Executive's overall benefits package under Section 3 hereof is
significantly reduced (other than as contemplated by this Agreement); (v) the
relocation of the Executive to a facility or a location more than thirty (30)
miles from the Executive's then present location, without the Executive's
express written consent; (vi) any purported termination of the Executive by the
Company which is not effected for Disability or for Cause; or (vii) the failure
of the Company to obtain the assumption of this agreement by any successors
contemplated in Section 18 below;
5. Termination of Employment Prior to a Change of Control: The following
provisions shall apply with respect to termination of Executive's employment
prior to a Change of Control:
(a) Termination without Cause :
(i) General: If, prior to the end of the Employment
Period and prior to a Change of Control (A) Executive's employment is terminated
by the Company without Cause, then the Company shall:
(A) Cash Severance Payments: Pay to Executive
severance payments of one month's Employment Base Salary for a period equal to
Executive Vice President - 24 months following the date of termination; (the
"Severance Period"). Such severance payments shall be paid at regular payroll
intervals or in one lump sum within 30 days of the Termination Date as
determined by Company.
(B) Accelerated Vesting Option: Give Executive
(or his legal representative if he is Disabled) 30 days to elect to accelerate
the vesting of 80% all unvested equity compensation (forfeiting the 20% balance
of unvested equity compensation) to the same extent as if it would have vested
if Executive remained employed through the required vesting period.
(C) Continued Group Health and Insurance
Benefits: Continue to make available to the Executive and the covered
dependents, and to pay directly or indirectly for, to the same extent as paid
prior to the Termination Date, all group health plan, life and other similar
insurance plans or Company-sponsored arrangements providing comparable benefits
in which Executive or such covered dependents participate on the Termination
Date through the Severance Period.
(ii) Death: In the event of Executive's death while he
is receiving benefits pursuant to Section 6(a)(i)(C) hereof, the Company shall
continue providing and paying severance and for group health plan, life and
similar insurance coverage or Company-sponsored arrangements providing
comparable benefits for the covered dependents through the Severance Period.
(iii) All vested options or other equity compensation
must be exercised within 12 months of the Termination Date.
(b) Termination for Cause; Resignation: If, during the
Employment Period and prior to a Change of Control, Executive's employment is
terminated by the Company for Cause, or if Executive resigns from his
employment, then Executive shall be entitled only to payment of all amounts
including benefits earned or owed to Executive and only to such equity
compensation as is fully vested as of the Termination Date.
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6. Termination of Employment Following a Change of Control: The following
provisions shall apply to termination of Executive's employment on or following
a Change of Control:
(a) Termination without Cause; Resignation for Good Reason:
(i) General: If, following a Change of Control (A)
Executive's employment is terminated by the Company without Cause, or (B)
Executive resigns from his employment hereunder for Good Reason, then the
Company shall:
(A) Cash Severance Payments: Pay to Executive
severance payments of one month's Employment Base Salary for a period equal to
Executive Vice President - 24 months following the date of termination; (the
"Severance Period"). Such severance payments shall be paid at regular payroll
intervals or in a lump sum within 30 days of the Termination Date as determined
by the Company.
(B) Accelerated Vesting: Cause the vesting of
all restricted stock, stock options and other equity-based compensation held on
the date of termination by Executive, to fully accelerate, as of the date of
termination, so that they become 100% vested in the stock of the Controlling
entity.
(C) Continued Group Health and Insurance
Benefits: Continue to make available to the Executive and the Covered
Dependents, and pay for, to the same extent as paid prior to the Change of
Control and termination of the employment or consulting relationship, all group
health plan, life and other similar insurance plans or Company-sponsored
arrangements providing comparable benefits in which Executive or such Covered
Dependents participate on the date of the Executive's termination, through the
Change of Control Severance Period.
(ii) Death During Severance Period: In the event of
Executive's death while he is receiving benefits pursuant to Section 6(a)(i)(C)
hereof, the Company shall continue providing and paying for group health plan,
life and similar insurance plan coverage or Company-sponsored arrangements
providing comparable benefits to the covered dependents through the Change of
Control Severance Period.
(b) Termination for Cause; Resignation Without Good Reason: If,
following a Change of Control, Executive's employment is terminated by the
Company for Cause, or if Executive resigns from his employment hereunder other
than for Good Reason, then Executive shall be entitled only to payment of all
amounts (including benefits) earned or owed to Executive, and only to such
equity compensation as is fully vested as of the Termination Date.
(iii) All stock options or warrants so vested must be
exercised within 12 months of the Termination Date.
7. Death or Permanent Disability: In the event Executive's employment
terminates due to Executive's death or Disability, whether or not there has been
a Change of Control, the Company shall:
(a) Cash Lump-Sum Payment: Pay to Executive, his estate, or his
personal representative (as appropriate) a lump-sum cash payment equal to 12
months' Employment Base Salary to be paid within 30 days after the date the
Company receives notice of Executive's death, or within 30 days after the date
it has been determined that Executive has incurred a Disability.
(b) Equity Compensation: Allow the estate or representative of
the Executive 12 months from the Termination Date to exercise equity
compensation vested as of the Termination Date.
(c) Continued Group Health and Insurance Benefits: Continued to
make available to the Executive (if alive) and the Covered Dependents (whether
or not Executive is alive) and pay for, to the same extent as paid prior to
termination of employment, all group health plan, life and other similar
insurance plans or Company-sponsored arrangements providing comparable benefits
in which Executive or such Covered Dependents participate on the date of the
Executive's termination, for a period of 12 months following the Termination
Date.
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(d) Other Benefits: Pay to Executive, his estate, or his
personal representative (as appropriate) all other benefits normally paid to
employees who have died or incurred a disability.
8. Golden Parachute Limitation: The payments and benefits payable to
Executive under this Agreement and all other contracts, arrangements, or
programs with the Company shall not, in the aggregate exceed the maximum amount
that may be paid to Executive without triggering golden parachute penalties
under Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), as determined in good faith by the Company's independent auditors.
Executive agrees that, to the extent payments or benefits under this Agreement
would not be deductible under Code Section 162(m) if made or provided when
otherwise due under this Agreement, such payments and benefits shall be made or
provided later, immediately after Section 162(m) ceases to preclude their
deduction, with interest thereon at the rate provided in Code Section
1274(b)(2)(B). If even after such deferral the payments and benefits otherwise
payable to Executive must be reduced to avoid triggering such penalties, the
payments and benefits will be reduced in the priority order designated by the
Executive, or, if the Executive fails promptly to designate an order, in the
priority order designated by the Company. If an amount in excess of the limit
set forth in this Section 8 is paid to Executive, Executive shall repay the
excess amount to the Company upon demand. Executive and the Company agree to
cooperate with each other in connection with any administrative or judicial
proceedings concerning the existence or amount of golden parachute penalties on
payments or benefits received by Executive.
9. Termination Date: The date of termination of employment by the Company
shall be the date specified in a written notice of termination to Executive. The
date of resignation shall be the date specified in the written notice of
resignation from Executive to the Company. For purposes of this Agreement, no
purported termination of Executive's employment for Cause shall be effective
without delivery of such Notice of Termination.
10. Assignment: Executive's rights and obligations under this Agreement
are not assignable by Executive, but shall pass to his estate or personal
representative upon death or disability (as determined pursuant to this
Agreement).
11. Notices: Any notice required or permitted under this Agreement shall
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if sent by facsimile, or mailed to the other party
at its address set forth below in this Section 10, or at such other address as
such party may designate by written notice to the other party hereto. Any
effective notice hereunder shall be deemed given on the date personally
delivered or on the date sent by facsimile or deposited in the United States
mail (sent by certified mail, return receipt requested), as the case may be, at
the following address:
(i) If to the Company: (ii) If to Executive:
Pinnacle Micro, Inc.
19 Technology Drive
Irvine, California 92618
Attn: General Counsel
Fax: 714/789-3045
12. Disputes: Any disputes between the parties hereto shall be settled by
arbitration in Irvine, California under the auspices of, and in accordance with
the rules of, the Judicial Arbitration and Mediation Service/Endispute, by an
arbitrator who is mutually agreeable to the parties hereto, (such arbitrator or
hereinafter referred to as the "Arbitrator"). The decision in such arbitration
shall be final and conclusive on the parties, in lieu of any court action, which
is expressly waived, with the sole exception of a Company initiated injunctive
proceeding to protect its confidential information or trade secrets, judgment
upon such decision may be entered in any court having jurisdiction thereof. The
parties hereby agree that the Arbitrator shall be empowered to enter an
equitable decree mandating specific enforcement of the terms of this Agreement.
The Company and Executive shall share equally all expenses of the Arbitrator
incurred in any arbitration hereunder; provided, however, that the Company or
Executive, as the case may be, shall bear all expenses of the Arbitrator and all
of the legal fees and out-of-pocket expenses of
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the other party to the extent if the Arbitrator determines that the claim or
position of such party was without reasonable foundation.
13. Severability: If an arbitrator determines that any term or provision
hereof is invalid or unenforceable, (a) the remaining terms and provisions
hereof shall be unimpaired and (b) such arbitrator shall have the authority to
replace such invalid or unenforceable term or provision with a term or provision
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision.
14. Entire Agreement: This Agreement by and between the Company and
Executive represents the entire agreement of the parities with respect to the
matters set forth herein, and to the extent inconsistent with other prior
contracts, arrangements or understandings between the parties, supersedes all
such previous contracts, arrangements or understandings between the Company and
Executive. The Agreement may be amended only by mutual written agreement of the
parties hereto.
15. Withholding: Company shall be entitled to withhold, or cause to be
withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
16. Governing Law: This Agreement shall be construed, interpreted, and
governed in accordance with the laws of California without reference to rules
relating to conflict of law.
17. Successors: This Agreement shall be binding upon and inure to the
benefit of, and shall be enforceable by Executive and the Company, their
respective heirs, executors, administrators and assigns. In the event the
Company is merged, consolidated, liquidated by a parent corporation, or
otherwise combined into one or more corporations, the provisions of this
Agreement shall be binding upon and inure to the benefit of the parent
corporation or the corporation resulting from such merger or to which the asset
shall be sold or transferred, which corporation from and after the date of such
merger, consolidation, sale or transfer shall be deemed to be the Company for
purposes of this Agreement. In the event of any other assignment of this
Agreement by the Company, by operation of law or otherwise, the Company shall
remain primarily liable for its obligations hereunder. This Agreement shall not
be assignable by Executive.
18. Headings: The headings of sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. Counterparts: This Agreement may be executed by either of the parties
hereto in counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this in counterparts
Agreement as of the Effective Date.
COMPANY: EXECUTIVE:
PINNACLE MICRO, INC. ROGER HAY
/s/ Lawrence Goelman /s/ Roger Hay
- -------------------- -------------
Lawrence Goelman
President, Chief Executive Officer
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EXHIBIT 10.40
PINNACLE MICRO, INC.
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is made and entered into by
and between Jonathan B. Eddison ("Executive") and Pinnacle Micro, Inc., (the
"Company"), effective as of December 1, 1996 (the "Effective Date") with
reference to the following facts:
Executive has been recruited by Company to fill a critical executive
position. The Company is going through a management transition and financial
turnaround. Company and Executive desire to agree upon the services to be
rendered for such period of time upon the terms and conditions set forth herein.
The Company's Board further believes that it must provide the Executive with
certain enhanced severance benefits upon Executive's termination of employment
following a change of control (as defined below) to provide the Executive,
through enhanced financial security, incentive to continue providing services to
the Company notwithstanding the possibility of a change of control.
NOW, THEREFORE, in consideration of the premises and of the mutual
convenants and conditions set forth herein, the parties hereto agree as follows:
1. Employment; Duties: (a) Employment Period: During the period
commencing with the Effective Date and terminating 1 year for (the "Contract
Employment Period") or on the date (the "Termination Date") that Executive is
terminated in accordance with Sections 5, 6 or 7 of this Agreement or resigns
for whatever reason, (the "Employment Period"), Executive shall serve as Vice
President, General Counsel of the Company or in such other position as he
accepts prior to a Change of Control. During such employment period, Executive
shall discharge the duties of his office as shall reasonably be assigned to him
by the President and Chief Executive Officer. The Contract Employment period
shall be automatically annually extended for 12 month periods after the
expiration of the initial term unless otherwise terminated in accordance with
this Agreement.
(b) No Conflict of Interest: During the Employment Period,
Executive shall not serve as a director, employee, consultant or advisor to any
other corporation or other business enterprise without the prior written consent
of the Board; which consent shall not be unreasonably withheld. Executive may,
however, serve in any capacity with any civic, educational or charitable
organization or any trade association without the approval of the Board, so long
as such activities do not interfere with his duties and obligations under this
Agreement. If the Board views any such activities as interfering it shall notify
Executive and provide a reasonable opportunity to cure the interference.
2. Compensation:
(a) Base Salary: During the Employment Period, the Company shall
pay Executive a base salary (the "Employment Base Salary") at a rate of not less
than $150,000.00 per year, payable in equal installments no less frequently than
twice monthly.
(b) Bonuses: During the Employment Period, Executive shall
receive bonuses (i) as determined by the Compensation Committee of the Board of
Directors in consultation with the President and Chief Executive Officer; and
(ii) according to the terms of any Company executive bonus plans.
(c) Stock Options: During the Employment Period Executive will
receive such stock options or similar performance incentives as determined
separately in writing by the Compensation Committee of the Board of Directors in
its sole discretion after consultation with the President and Chief Executive
Officer. A summary of Executive's initial grant is attached hereto as Exhibit A.
3. Employee Benefits: During the Employment Period, Executive shall be
included in all employee benefit plans, programs or arrangements, including,
without limitation, any plans, programs or arrangements providing for retirement
benefits, incentive compensation, profit bonuses, disability benefits, health
and life
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insurance, vacation and paid holidays, which shall be established by the Company
for, or made available to, its senior executives and to such other benefits and
perquisites as are specifically set forth herein. The Company will obtain at
Company expense, life insurance and reasonable disability policies for
Executives and Key Employees and Executive shall participate therein on a basis
comparable to other executives.
(a) Reimbursement of Expenses: The Company shall reimburse
Executive for all out-of-pocket expenses reasonably incurred and paid by him in
the performance of his duties pursuant to this Agreement, in accordance with
written Company policies.
4. Definition of Terms: The following terms referred to in this Agreement
shall have the following meanings:
(a) Cause: "Cause" shall mean (i) any act of personal dishonesty
committed by the Executive in connection with his responsibilities as an
employee; (ii) any act which violates state or federal law, concerning or
involving dishonesty or moral tempted any settlement, order or judgment against
Executive under the federal or state securities laws and regulations; (iii) a
willful act by the Executive which is materially injurious to the Company; and
(iv) continued nonperformance (two weeks or more) by the Executive following
delivery to the Executive of a written demand for performance from the Company
which describes the basis for the Company's belief that the Executive has not
substantially performed his duties.
(b) Change of Control: "Change of Control" means the occurrence
of any of the following events:
(i) Any "person" or group (as such terms and used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board occurring
within a two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date hereof; or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors for the Company); or
(iii) The stockholders of the Company approve any
transaction which would be a reorganization under Delaware or California law and
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) less than fifty
percent (50%) of the total voting power represented by the voting securities of
the surviving entity outstanding immediately after such merger or consolidation;
or
(iv) The stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
(c) Disability: "Disability" shall mean that the Executive has
been unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, a determined by the Company (or by a physician agreed upon by the
parties or selected by the Arbitrator if the parties cannot agree) to be total
and permanent. If a court shall determine Executive is not competent to select
an Arbitration an Disability shall be deemed to exist. Termination resulting
from Disability may only be effected after at least 30 days' written notice by
the Company of its intention to terminate the Executive's employment. In the
event that the Executive resumes the performance of substantially all of his
duties hereunder
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10.40
before the termination of his employment becomes effective, the notice of intent
to terminate shall automatically be deemed to have been revoked.
(d) Good Reason: "Good Reason" shall mean, following a change of
control (i) without the Executive's express written consent, the significant
reduction of the Executive's duties, authority or responsibilities, relative to
the Executive's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Executive of such reduced duties,
authority or responsibilities; (ii) without the Executive's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Executive immediately prior to the Change of Control; (iii) a reduction by
the Company in the Employment Base Salary of the Executive; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Executive was entitled immediately prior to the Change of Control with the
result that the Executive's overall benefits package under Section 3 hereof is
significantly reduced (other than as contemplated by this Agreement); (v) the
relocation of the Executive to a facility or a location more than thirty (30)
miles from the Executive's then present location, without the Executive's
express written consent; (vi) any purported termination of the Executive by the
Company which is not effected for Disability or for Cause; or (vii) the failure
of the Company to obtain the assumption of this agreement by any successors
contemplated in Section 18 below;
5. Termination of Employment Prior to a Change of Control: The following
provisions shall apply with respect to termination of Executive's employment
prior to a Change of Control:
(a) Termination without Cause :
(i) General: If, prior to the end of the Employment
Period and prior to a Change of Control (A) Executive's employment is terminated
by the Company without Cause, then the Company shall:
(A) Cash Severance Payments: Pay to Executive
severance payments of one month's Employment Base Salary for a period equal to
Vice President - 12 months following the date of termination; (the "Severance
Period"). Such severance payments shall be paid at regular payroll intervals or
in one lump sum within 30 days of the Termination Date as determined by Company.
(B) Accelerated Vesting Option: Give Executive
(or his legal representative if he is Disabled) 30 days to elect to accelerate
the vesting of 80% all unvested equity compensation (forfeiting the 20% balance
of unvested equity compensation) to the same extent as if it would have vested
if Executive remained employed through the required vesting period.
(C) Continued Group Health and Insurance Benefits:
Continue to make available to the Executive and the covered dependents, and to
pay directly or indirectly for, to the same extent as paid prior to the
Termination Date, all group health plan, life and other similar insurance plans
or Company-sponsored arrangements providing comparable benefits in which
Executive or such covered dependents participate on the Termination Date through
the Severance Period.
(ii) Death: In the event of Executive's death while he
is receiving benefits pursuant to Section 6(a)(i)(C) hereof, the Company shall
continue providing and paying severance and for group health plan, life and
similar insurance coverage or Company-sponsored arrangements providing
comparable benefits for the covered dependents through the Severance Period.
(iii) All vested options or other equity compensation
must be exercised within 12 months of the Termination Date.
(b) Termination for Cause; Resignation: If, during the
Employment Period and prior to a Change of Control, Executive's employment is
terminated by the Company for Cause, or if Executive resigns from his
employment, then Executive shall be entitled only to payment of all amounts
including benefits earned or owed to Executive and only to such equity
compensation as is fully vested as of the Termination Date.
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10.40
6. Termination of Employment Following a Change of Control: The following
provisions shall apply to termination of Executive's employment on or following
a Change of Control:
(a) Termination without Cause; Resignation for Good Reason:
(i) General: If, following a Change of Control (A)
Executive's employment is terminated by the Company without Cause, or (B)
Executive resigns from his employment hereunder for Good Reason, then the
Company shall:
(A) Cash Severance Payments: Pay to Executive
severance payments of one month's Employment Base Salary for a period equal to
Vice President - 12 months following the date of termination; (the "Severance
Period"). Such severance payments shall be paid at regular payroll intervals or
in a lump sum within 30 days of the Termination Date as determined by the
Company.
(B) Accelerated Vesting: Cause the vesting of all
restricted stock, stock options and other equity-based compensation held on the
date of termination by Executive, to fully accelerate, as of the date of
termination, so that they become 100% vested in the stock of the Controlling
entity.
(C) Continued Group Health and Insurance Benefits:
Continue to make available to the Executive and the Covered Dependents, and pay
for, to the same extent as paid prior to the Change of Control and termination
of the employment or consulting relationship, all group health plan, life and
other similar insurance plans or Company-sponsored arrangements providing
comparable benefits in which Executive or such Covered Dependents participate on
the date of the Executive's termination, through the Change of Control Severance
Period.
(ii) Death During Severance Period: In the event of
Executive's death while he is receiving benefits pursuant to Section 6(a)(i)(C)
hereof, the Company shall continue providing and paying for group health plan,
life and similar insurance plan coverage or Company-sponsored arrangements
providing comparable benefits to the covered dependents through the Change of
Control Severance Period.
(b) Termination for Cause; Resignation Without Good Reason: If,
following a Change of Control, Executive's employment is terminated by the
Company for Cause, or if Executive resigns from his employment hereunder other
than for Good Reason, then Executive shall be entitled only to payment of all
amounts (including benefits) earned or owed to Executive, and only to such
equity compensation as is fully vested as of the Termination Date.
(iii) All stock options or warrants so vested must be
exercised within 12 months of the Termination Date.
7. Death or Permanent Disability: In the event Executive's employment
terminates due to Executive's death or Disability, whether or not there has been
a Change of Control, the Company shall:
(a) Cash Lump-Sum Payment: Pay to Executive, his estate, or his
personal representative (as appropriate) a lump-sum cash payment equal to 12
months' Employment Base Salary to be paid within 30 days after the date the
Company receives notice of Executive's death, or within 30 days after the date
it has been determined that Executive has incurred a Disability.
(b) Equity Compensation: Allow the estate or representative of
the Executive 12 months from the Termination Date to exercise equity
compensation vested as of the Termination Date.
(c) Continued Group Health and Insurance Benefits: Continued to
make available to the Executive (if alive) and the Covered Dependents (whether
or not Executive is alive) and pay for, to the same extent as paid prior to
termination of employment, all group health plan, life and other similar
insurance plans or
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Company-sponsored arrangements providing comparable benefits in which Executive
or such Covered Dependents participate on the date of the Executive's
termination, for a period of 12 months following the Termination Date.
(d) Other Benefits: Pay to Executive, his estate, or his
personal representative (as appropriate) all other benefits normally paid to
employees who have died or incurred a disability.
8. Golden Parachute Limitation: The payments and benefits payable to
Executive under this Agreement and all other contracts, arrangements, or
programs with the Company shall not, in the aggregate exceed the maximum amount
that may be paid to Executive without triggering golden parachute penalties
under Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), as determined in good faith by the Company's independent auditors.
Executive agrees that, to the extent payments or benefits under this Agreement
would not be deductible under Code Section 162(m) if made or provided when
otherwise due under this Agreement, such payments and benefits shall be made or
provided later, immediately after Section 162(m) ceases to preclude their
deduction, with interest thereon at the rate provided in Code Section
1274(b)(2)(B). If even after such deferral the payments and benefits otherwise
payable to Executive must be reduced to avoid triggering such penalties, the
payments and benefits will be reduced in the priority order designated by the
Executive, or, if the Executive fails promptly to designate an order, in the
priority order designated by the Company. If an amount in excess of the limit
set forth in this Section 8 is paid to Executive, Executive shall repay the
excess amount to the Company upon demand. Executive and the Company agree to
cooperate with each other in connection with any administrative or judicial
proceedings concerning the existence or amount of golden parachute penalties on
payments or benefits received by Executive.
9. Termination Date: The date of termination of employment by the Company
shall be the date specified in a written notice of termination to Executive. The
date of resignation shall be the date specified in the written notice of
resignation from Executive to the Company. For purposes of this Agreement, no
purported termination of Executive's employment for Cause shall be effective
without delivery of such Notice of Termination.
10. Assignment: Executive's rights and obligations under this Agreement
are not assignable by Executive, but shall pass to his estate or personal
representative upon death or disability (as determined pursuant to this
Agreement).
11. Notices: Any notice required or permitted under this Agreement shall
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if sent by facsimile, or mailed to the other party
at its address set forth below in this Section 10, or at such other address as
such party may designate by written notice to the other party hereto. Any
effective notice hereunder shall be deemed given on the date personally
delivered or on the date sent by facsimile or deposited in the United States
mail (sent by certified mail, return receipt requested), as the case may be, at
the following address:
(i) If to the Company: (ii) If to Executive:
Pinnacle Micro, Inc.
19 Technology Drive
Irvine, California 92618
Attn: General Counsel
Fax: 714/789-3045
12. Disputes: Any disputes between the parties hereto shall be settled by
arbitration in Irvine, California under the auspices of, and in accordance with
the rules of, the Judicial Arbitration and Mediation Service/Endispute, by an
arbitrator who is mutually agreeable to the parties hereto, (such arbitrator or
hereinafter referred to as the "Arbitrator"). The decision in such arbitration
shall be final and conclusive on the parties, in lieu of any court action, which
is expressly waived, with the sole exception of a Company initiated injunctive
proceeding to protect its confidential information or trade secrets, judgment
upon such decision may be entered in any court having jurisdiction thereof. The
parties hereby agree that the Arbitrator shall be empowered to enter an
equitable decree mandating specific enforcement of the terms of this Agreement.
The Company and Executive shall share equally all
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10.40
expenses of the Arbitrator incurred in any arbitration hereunder; provided,
however, that the Company or Executive, as the case may be, shall bear all
expenses of the Arbitrator and all of the legal fees and out-of-pocket expenses
of the other party to the extent if the Arbitrator determines that the claim or
position of such party was without reasonable foundation.
13. Severability: If an arbitrator determines that any term or provision
hereof is invalid or unenforceable, (a) the remaining terms and provisions
hereof shall be unimpaired and (b) such arbitrator shall have the authority to
replace such invalid or unenforceable term or provision with a term or provision
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision.
14. Entire Agreement: This Agreement by and between the Company and
Executive represents the entire agreement of the parities with respect to the
matters set forth herein, and to the extent inconsistent with other prior
contracts, arrangements or understandings between the parties, supersedes all
such previous contracts, arrangements or understandings between the Company and
Executive. The Agreement may be amended only by mutual written agreement of the
parties hereto.
15. Withholding: Company shall be entitled to withhold, or cause to be
withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
16. Governing Law: This Agreement shall be construed, interpreted, and
governed in accordance with the laws of California without reference to rules
relating to conflict of law.
17. Successors: This Agreement shall be binding upon and inure to the
benefit of, and shall be enforceable by Executive and the Company, their
respective heirs, executors, administrators and assigns. In the event the
Company is merged, consolidated, liquidated by a parent corporation, or
otherwise combined into one or more corporations, the provisions of this
Agreement shall be binding upon and inure to the benefit of the parent
corporation or the corporation resulting from such merger or to which the asset
shall be sold or transferred, which corporation from and after the date of such
merger, consolidation, sale or transfer shall be deemed to be the Company for
purposes of this Agreement. In the event of any other assignment of this
Agreement by the Company, by operation of law or otherwise, the Company shall
remain primarily liable for its obligations hereunder. This Agreement shall not
be assignable by Executive.
18. Headings: The headings of sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. Counterparts: This Agreement may be executed by either of the parties
hereto in counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this in counterparts
Agreement as of the Effective Date.
COMPANY: EXECUTIVE:
PINNACLE MICRO, INC. JONATHAN B. EDDISON
/s/ Lawrence Goelman /s/ Jonathan B. Eddison
- -------------------- -----------------------
Lawrence Goelman
President, Chief Executive Officer
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EXHIBIT 10.41
PINNACLE MICRO, INC.
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is made and entered into by
and between Kevin Lehnert ("Executive") and Pinnacle Micro, Inc., (the
"Company"), effective as of December 1, 1996 (the "Effective Date") with
reference to the following facts:
Executive has been recruited by Company to fill a critical executive
position. The Company is going through a management transition and financial
turnaround. Company and Executive desire to agree upon the services to be
rendered for such period of time upon the terms and conditions set forth herein.
The Company's Board further believes that it must provide the Executive with
certain enhanced severance benefits upon Executive's termination of employment
following a change of control (as defined below) to provide the Executive,
through enhanced financial security, incentive to continue providing services to
the Company notwithstanding the possibility of a change of control.
NOW, THEREFORE, in consideration of the premises and of the mutual
convenants and conditions set forth herein, the parties hereto agree as follows:
1. Employment; Duties: (a) Employment Period: During the period
commencing with the Effective Date and terminating one year thereafter (the
"Contract Employment Period") or on the date (the "Termination Date") that
Executive is terminated in accordance with Sections 5, 6 or 7 of this Agreement
or resigns for whatever reason, (the "Employment Period"), Executive shall serve
as Vice President and Controller of the Company or in such other position as he
accepts prior to a Change of Control. During such employment period, Executive
shall discharge the duties of his office as shall reasonably be assigned to him
by the President and Chief Executive Officer. The Contract Employment period
shall be automatically annually extended for 12 month periods after the
expiration of the initial term unless otherwise terminated in accordance with
this Agreement.
(b) No Conflict of Interest: During the Employment Period,
Executive shall not serve as a director, employee, consultant or advisor to any
other corporation or other business enterprise without the prior written consent
of the Board; which consent shall not be unreasonably withheld. Executive may,
however, serve in any capacity with any civic, educational or charitable
organization or any trade association without the approval of the Board, so long
as such activities do not interfere with his duties and obligations under this
Agreement. If the Board views any such activities as interfering it shall notify
Executive and provide a reasonable opportunity to cure the interference.
2. Compensation:
(a) Base Salary: During the Employment Period, the Company shall
pay Executive a base salary (the "Employment Base Salary") at a rate of not less
than $108,000.00 per year, payable in equal installments no less frequently than
twice monthly.
(b) Bonuses: During the Employment Period, Executive shall
receive bonuses (i) as determined by the Compensation Committee of the Board of
Directors in consultation with the President and Chief Executive Officer; and
(ii) according to the terms of any Company executive bonus plans.
(c) Stock Options: During the Employment Period Executive will
receive such stock options or similar performance incentives as determined
separately in writing by the Compensation Committee of the Board of Directors in
its sole discretion after consultation with the President and Chief Executive
Officer. A summary of Executive's initial grant is attached hereto as Exhibit A.
3. Employee Benefits: During the Employment Period, Executive shall be
included in all employee benefit plans, programs or arrangements, including,
without limitation, any plans, programs or arrangements providing for retirement
benefits, incentive compensation, profit bonuses, disability benefits, health
and life
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10.41
insurance, vacation and paid holidays, which shall be established by the Company
for, or made available to, its senior executives and to such other benefits and
perquisites as are specifically set forth herein. The Company will obtain at
Company expense, life insurance and reasonable disability policies for
Executives and Key Employees and Executive shall participate therein on a basis
comparable to other executives.
(a) Reimbursement of Expenses: The Company shall reimburse
Executive for all out-of-pocket expenses reasonably incurred and paid by him in
the performance of his duties pursuant to this Agreement, in accordance with
written Company policies.
4. Definition of Terms: The following terms referred to in this Agreement
shall have the following meanings:
(a) Cause: "Cause" shall mean (i) any act of personal dishonesty
committed by the Executive in connection with his responsibilities as an
employee; (ii) any act which violates state or federal law, concerning or
involving dishonesty or moral tempted any settlement, order or judgment against
Executive under the federal or state securities laws and regulations; (iii) a
willful act by the Executive which is materially injurious to the Company; and
(iv) continued nonperformance (two weeks or more) by the Executive following
delivery to the Executive of a written demand for performance from the Company
which describes the basis for the Company's belief that the Executive has not
substantially performed his duties.
(b) Change of Control: "Change of Control" means the occurrence
of any of the following events:
(i) Any "person" or group (as such terms and used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board occurring
within a two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date hereof; or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors for the Company); or
(iii) The stockholders of the Company approve any
transaction which would be a reorganization under Delaware or California law and
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) less than fifty
percent (50%) of the total voting power represented by the voting securities of
the surviving entity outstanding immediately after such merger or consolidation;
or
(iv) The stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
(c) Disability: "Disability" shall mean that the Executive has
been unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, a determined by the Company (or by a physician agreed upon by the
parties or selected by the Arbitrator if the parties cannot agree) to be total
and permanent. If a court shall determine Executive is not competent to select
an Arbitration an Disability shall be deemed to exist. Termination resulting
from Disability may only be effected after at least 30 days' written notice by
the Company of its intention to terminate the Executive's employment. In the
event that the Executive resumes the performance of substantially all of his
duties hereunder before the termination of his employment becomes effective, the
notice of intent to terminate shall automatically be deemed to have been
revoked.
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10.41
(d) Good Reason: "Good Reason" shall mean, following a change of
control (i) without the Executive's express written consent, the significant
reduction of the Executive's duties, authority or responsibilities, relative to
the Executive's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Executive of such reduced duties,
authority or responsibilities; (ii) without the Executive's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Executive immediately prior to the Change of Control; (iii) a reduction by
the Company in the Employment Base Salary of the Executive; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Executive was entitled immediately prior to the Change of Control with the
result that the Executive's overall benefits package under Section 3 hereof is
significantly reduced (other than as contemplated by this Agreement); (v) the
relocation of the Executive to a facility or a location more than 30 miles from
the Executive's then present location, without the Executive's express written
consent; (vi) any purported termination of the Executive by the Company which is
not effected for Disability or for Cause; or (vii) the failure of the Company to
obtain the assumption of this agreement by any successors contemplated in
Section 18 below;
5. Termination of Employment Prior to a Change of Control: The following
provisions shall apply with respect to termination of Executive's employment
prior to a Change of Control:
(a) Termination without Cause :
(i) General: If, prior to the end of the Employment
Period and prior to a Change of Control (A) Executive's employment is terminated
by the Company without Cause, then the Company shall:
(A) Cash Severance Payments: Pay to Executive
severance payments of one month's Employment Base Salary for a period equal to
12 months following the date of termination; (the "Severance Period"). Such
severance payments shall be paid at regular payroll intervals or in one lump sum
within 30 days of the Termination Date as determined by Company.
(B) Accelerated Vesting Option: Give Executive
(or his legal representative if he is Disabled) 30 days to elect to accelerate
the vesting of 80% all unvested equity compensation (forfeiting the 20% balance
of unvested equity compensation) to the same extent as if it would have vested
if Executive remained employed through the required vesting period.
(C) Continued Group Health and Insurance
Benefits: Continue to make available to the Executive and the covered
dependents, and to pay directly or indirectly for, to the same extent as paid
prior to the Termination Date, all group health plan, life and other similar
insurance plans or Company-sponsored arrangements providing comparable benefits
in which Executive or such covered dependents participate on the Termination
Date through the Severance Period.
(ii) Death: In the event of Executive's death while he
is receiving benefits pursuant to Section 6(a)(i)(C) hereof, the Company shall
continue providing and paying severance and for group health plan, life and
similar insurance coverage or Company-sponsored arrangements providing
comparable benefits for the covered dependents through the Severance Period.
(iii) All vested options or other equity compensation
must be exercised within 12 months of the Termination Date.
(b) Termination for Cause; Resignation: If, during the
Employment Period and prior to a Change of Control, Executive's employment is
terminated by the Company for Cause, or if Executive resigns from his
employment, then Executive shall be entitled only to payment of all amounts
including benefits earned or owed to Executive and only to such equity
compensation as is fully vested as of the Termination Date.
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10.41
6. Termination of Employment Following a Change of Control: The
following provisions shall apply to termination of Executive's employment on or
following a Change of Control:
(a) Termination without Cause; Resignation for Good Reason:
(i) General: If, following a Change of Control (A) Executive's
employment is terminated by the Company without Cause, or (B) Executive resigns
from his employment hereunder for Good Reason, then the Company shall:
(A) Cash Severance Payments: Pay to Executive severance
payments of one month's Employment Base Salary for a period equal to 12 months
following the date of termination; (the "Severance Period"). Such severance
payments shall be paid at regular payroll intervals or in a lump sum within 30
days of the Termination Date as determined by the Company.
(B) Accelerated Vesting: Cause the vesting of all
restricted stock, stock options and other equity-based compensation held on the
date of termination by Executive, to fully accelerate, as of the date of
termination, so that they become 100% vested in the stock of the Controlling
entity.
(C) Continued Group Health and Insurance Benefits:
Continue to make available to the Executive and the Covered Dependents, and pay
for, to the same extent as paid prior to the Change of Control and termination
of the employment or consulting relationship, all group health plan, life and
other similar insurance plans or Company-sponsored arrangements providing
comparable benefits in which Executive or such Covered Dependents participate on
the date of the Executive's termination, through the Change of Control Severance
Period.
(ii) Death During Severance Period: In the event of
Executive's death while he is receiving benefits pursuant to Section 6(a)(i)(C)
hereof, the Company shall continue providing and paying for group health plan,
life and similar insurance plan coverage or Company-sponsored arrangements
providing comparable benefits to the covered dependents through the Change of
Control Severance Period.
(b) Termination for Cause; Resignation Without Good Reason: If,
following a Change of Control, Executive's employment is terminated by the
Company for Cause, or if Executive resigns from his employment hereunder other
than for Good Reason, then Executive shall be entitled only to payment of all
amounts (including benefits) earned or owed to Executive, and only to such
equity compensation as is fully vested as of the Termination Date.
(iii) All stock options or warrants so vested must be exercised
within 12 months of the Termination Date.
7. Death or Permanent Disability: In the event Executive's employment
terminates due to Executive's death or Disability, whether or not there has been
a Change of Control, the Company shall:
(a) Cash Lump-Sum Payment: Pay to Executive, his estate, or his
personal representative (as appropriate) a lump-sum cash payment equal to 12
months' Employment Base Salary to be paid within 30 days after the date the
Company receives notice of Executive's death, or within 30 days after the date
it has been determined that Executive has incurred a Disability.
(b) Equity Compensation: Allow the estate or representative of
the Executive 12 months from the Termination Date to exercise equity
compensation vested as of the Termination Date.
(c) Continued Group Health and Insurance Benefits: Continued to
make available to the Executive (if alive) and the Covered Dependents (whether
or not Executive is alive) and pay for, to the same extent as paid prior to
termination of employment, all group health plan, life and other similar
insurance plans or Company-sponsored arrangements providing comparable benefits
in which Executive or such Covered Dependents participate on the date of the
Executive's termination, for a period of 12 months following the Termination
Date.
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10.41
(d) Other Benefits: Pay to Executive, his estate, or his
personal representative (as appropriate) all other benefits normally paid to
employees who have died or incurred a disability.
8. Golden Parachute Limitation: The payments and benefits payable to
Executive under this Agreement and all other contracts, arrangements, or
programs with the Company shall not, in the aggregate exceed the maximum amount
that may be paid to Executive without triggering golden parachute penalties
under Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), as determined in good faith by the Company's independent auditors.
Executive agrees that, to the extent payments or benefits under this Agreement
would not be deductible under Code Section 162(m) if made or provided when
otherwise due under this Agreement, such payments and benefits shall be made or
provided later, immediately after Section 162(m) ceases to preclude their
deduction, with interest thereon at the rate provided in Code Section
1274(b)(2)(B). If even after such deferral the payments and benefits otherwise
payable to Executive must be reduced to avoid triggering such penalties, the
payments and benefits will be reduced in the priority order designated by the
Executive, or, if the Executive fails promptly to designate an order, in the
priority order designated by the Company. If an amount in excess of the limit
set forth in this Section 8 is paid to Executive, Executive shall repay the
excess amount to the Company upon demand. Executive and the Company agree to
cooperate with each other in connection with any administrative or judicial
proceedings concerning the existence or amount of golden parachute penalties on
payments or benefits received by Executive.
9. Termination Date: The date of termination of employment by the Company
shall be the date specified in a written notice of termination to Executive. The
date of resignation shall be the date specified in the written notice of
resignation from Executive to the Company. For purposes of this Agreement, no
purported termination of Executive's employment for Cause shall be effective
without delivery of such Notice of Termination.
10. Assignment: Executive's rights and obligations under this Agreement
are not assignable by Executive, but shall pass to his estate or personal
representative upon death or disability (as determined pursuant to this
Agreement).
11. Notices: Any notice required or permitted under this Agreement shall
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if sent by facsimile, or mailed to the other party
at its address set forth below in this Section 10, or at such other address as
such party may designate by written notice to the other party hereto. Any
effective notice hereunder shall be deemed given on the date personally
delivered or on the date sent by facsimile or deposited in the United States
mail (sent by certified mail, return receipt requested), as the case may be, at
the following address:
(i) If to the Company: (ii) If to Executive:
Pinnacle Micro, Inc.
19 Technology Drive
Irvine, California 92618
Attn: General Counsel
Fax: 714/789-3045
12. Disputes: Any disputes between the parties hereto shall be settled by
arbitration in Irvine, California under the auspices of, and in accordance with
the rules of, the Judicial Arbitration and Mediation Service/Endispute, by an
arbitrator who is mutually agreeable to the parties hereto, (such arbitrator or
hereinafter referred to as the "Arbitrator"). The decision in such arbitration
shall be final and conclusive on the parties, in lieu of any court action, which
is expressly waived, with the sole exception of a Company initiated injunctive
proceeding to protect its confidential information or trade secrets, judgment
upon such decision may be entered in any court having jurisdiction thereof. The
parties hereby agree that the Arbitrator shall be empowered to enter an
equitable decree mandating specific enforcement of the terms of this Agreement.
The Company and Executive shall share equally all expenses of the Arbitrator
incurred in any arbitration hereunder; provided, however, that the Company or
Executive, as the case may be, shall bear all expenses of the Arbitrator and all
of the legal fees and out-of-pocket expenses of
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10.41
the other party to the extent if the Arbitrator determines that the claim or
position of such party was without reasonable foundation.
13. Severability: If an arbitrator determines that any term or provision
hereof is invalid or unenforceable, (a) the remaining terms and provisions
hereof shall be unimpaired; and (b) such arbitrator shall have the authority to
replace such invalid or unenforceable term or provision with a term or provision
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision.
14. Entire Agreement: This Agreement by and between the Company and
Executive represents the entire agreement of the parities with respect to the
matters set forth herein, and to the extent inconsistent with other prior
contracts, arrangements or understandings between the parties, supersedes all
such previous contracts, arrangements or understandings between the Company and
Executive. The Agreement may be amended only by mutual written agreement of the
parties hereto.
15. Withholding: Company shall be entitled to withhold, or cause to be
withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
16. Governing Law: This Agreement shall be construed, interpreted, and
governed in accordance with the laws of California without reference to rules
relating to conflict of law.
17. Successors: This Agreement shall be binding upon and inure to the
benefit of, and shall be enforceable by Executive and the Company, their
respective heirs, executors, administrators and assigns. In the event the
Company is merged, consolidated, liquidated by a parent corporation, or
otherwise combined into one or more corporations, the provisions of this
Agreement shall be binding upon and inure to the benefit of the parent
corporation or the corporation resulting from such merger or to which the asset
shall be sold or transferred, which corporation from and after the date of such
merger, consolidation, sale or transfer shall be deemed to be the Company for
purposes of this Agreement. In the event of any other assignment of this
Agreement by the Company, by operation of law or otherwise, the Company shall
remain primarily liable for its obligations hereunder. This Agreement shall not
be assignable by Executive.
18. Headings: The headings of sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. Counterparts: This Agreement may be executed by either of the parties
hereto in counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this in counterparts
Agreement as of the Effective Date.
COMPANY: EXECUTIVE:
PINNACLE MICRO, INC. KEVIN LEHNERT
/s/ Lawrence Goelman /s/ Kevin Lehnert
-------------------- -----------------
Lawrence Goelman
President, Chief Executive Officer
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EXHIBIT 10.42
PINNACLE MICRO, INC.
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is made and entered into by
and between David Ooley ("Executive") and Pinnacle Micro, Inc. (the "Company"),
effective as of December 1, 1996 (the "Effective Date") with reference to the
following facts:
Executive has been recruited by Company to fill a critical executive
position. The Company is going through a management transition and financial
turnaround. Company and Executive desire to agree upon the services to be
rendered for such period of time upon the terms and conditions set forth herein.
The Company's Board further believes that it must provide the Executive with
certain enhanced severance benefits upon Executive's termination of employment
following a change of control (as defined below) to provide the Executive,
through enhanced financial security, incentive to continue providing services to
the Company notwithstanding the possibility of a change of control.
NOW, THEREFORE, in consideration of the premises and of the mutual
convenants and conditions set forth herein, the parties hereto agree as follows:
1. Employment; Duties: (a) Employment Period: During the period
commencing with the Effective Date and terminating one year thereafter (the
"Contract Employment Period") or on the date (the "Termination Date") that
Executive is terminated in accordance with Sections 5, 6 or 7 of this Agreement
or resigns for whatever reason, (the "Employment Period"), Executive shall serve
as Vice President, Sales of the Company or in such other position as he accepts
prior to a Change of Control. During such employment period, Executive shall
discharge the duties of his office as shall reasonably be assigned to him by the
President and Chief Executive Officer. The Contract Employment period shall be
automatically annually extended for 12 month periods after the expiration of the
initial term unless otherwise terminated in accordance with this Agreement.
(b) No Conflict of Interest: During the Employment Period,
Executive shall not serve as a director, employee, consultant or advisor to any
other corporation or other business enterprise without the prior written consent
of the Board; which consent shall not be unreasonably withheld. Executive may,
however, serve in any capacity with any civic, educational or charitable
organization or any trade association without the approval of the Board, so long
as such activities do not interfere with his duties and obligations under this
Agreement. If the Board views any such activities as interfering it shall notify
Executive and provide a reasonable opportunity to cure the interference.
2. Compensation:
(a) Base Salary: During the Employment Period, the Company shall
pay Executive a base salary (the "Employment Base Salary") at a rate of not less
than $125,000.00 per year, payable in equal installments no less frequently than
twice monthly.
(b) Bonuses: During the Employment Period, Executive shall
receive bonuses (i) as determined by the Compensation Committee of the Board of
Directors in consultation with the President and Chief Executive Officer; and
(ii) according to the terms of any Company executive bonus plans.
(c) Stock Options: During the Employment Period Executive will
receive such stock options or similar performance incentives as determined
separately in writing by the Compensation Committee of the Board of Directors in
its sole discretion after consultation with the President and Chief Executive
Officer. A summary of Executive's initial grant is attached hereto as Exhibit A.
3. Employee Benefits: During the Employment Period, Executive shall be
included in all employee benefit plans, programs or arrangements, including,
without limitation, any plans, programs or arrangements providing for retirement
benefits, incentive compensation, profit bonuses, disability benefits, health
and life
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10.42
insurance, vacation and paid holidays, which shall be established by the Company
for, or made available to, its senior executives and to such other benefits and
perquisites as are specifically set forth herein. The Company will obtain at
Company expense, life insurance and reasonable disability policies for
Executives and Key Employees and Executive shall participate therein on a basis
comparable to other executives.
(a) Reimbursement of Expenses: The Company shall reimburse
Executive for all out-of-pocket expenses reasonably incurred and paid by him in
the performance of his duties pursuant to this Agreement, in accordance with
written Company policies.
4. Definition of Terms: The following terms referred to in this Agreement
shall have the following meanings:
(a) Cause: "Cause" shall mean (i) any act of personal dishonesty
committed by the Executive in connection with his responsibilities as an
employee; (ii) any act which violates state or federal law, concerning or
involving dishonesty or moral tempted any settlement, order or judgment against
Executive under the federal or state securities laws and regulations; (iii) a
willful act by the Executive which is materially injurious to the Company; and
(iv) continued nonperformance (two weeks or more) by the Executive following
delivery to the Executive of a written demand for performance from the Company
which describes the basis for the Company's belief that the Executive has not
substantially performed his duties.
(b) Change of Control: "Change of Control" means the occurrence
of any of the following events:
(i) Any "person" or group (as such terms and used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board occurring
within a two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date hereof; or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors for the Company); or
(iii) The stockholders of the Company approve any
transaction which would be a reorganization under Delaware or California law and
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) less than fifty
percent (50%) of the total voting power represented by the voting securities of
the surviving entity outstanding immediately after such merger or consolidation;
or
(iv) The stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
(c) Disability: "Disability" shall mean that the Executive has
been unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, a determined by the Company (or by a physician agreed upon by the
parties or selected by the Arbitrator if the parties cannot agree) to be total
and permanent. If a court shall determine Executive is not competent to select
an Arbitration an Disability shall be deemed to exist. Termination resulting
from Disability may only be effected after at least 30 days' written notice by
the Company of its intention to terminate the Executive's employment. In the
event that the Executive resumes the performance of substantially all of his
duties hereunder before the termination of his employment becomes effective, the
notice of intent to terminate shall automatically be deemed to have been
revoked.
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(d) Good Reason: "Good Reason" shall mean, following a change of
control (i) without the Executive's express written consent, the significant
reduction of the Executive's duties, authority or responsibilities, relative to
the Executive's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Executive of such reduced duties,
authority or responsibilities; (ii) without the Executive's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Executive immediately prior to the Change of Control; (iii) a reduction by
the Company in the Employment Base Salary of the Executive; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Executive was entitled immediately prior to the Change of Control with the
result that the Executive's overall benefits package under Section 3 hereof is
significantly reduced (other than as contemplated by this Agreement); (v) the
relocation of the Executive to a facility or a location more than 30 miles from
the Executive's then present location, without the Executive's express written
consent; (vi) any purported termination of the Executive by the Company which is
not effected for Disability or for Cause; or (vii) the failure of the Company to
obtain the assumption of this agreement by any successors contemplated in
Section 18 below;
5. Termination of Employment Prior to a Change of Control: The following
provisions shall apply with respect to termination of Executive's employment
prior to a Change of Control:
(a) Termination without Cause:
(i) General: If, prior to the end of the Employment
Period and prior to a Change of Control (A) Executive's employment is terminated
by the Company without Cause, then the Company shall:
(A) Cash Severance Payments: Pay to Executive
severance payments of one month's Employment Base Salary for a period equal to
12 months following the date of termination; (the "Severance Period"). Such
severance payments shall be paid at regular payroll intervals or in one lump sum
within 30 days of the Termination Date as determined by Company.
(B) Accelerated Vesting Option: Give Executive
(or his legal representative if he is Disabled) 30 days to elect to accelerate
the vesting of 80% all unvested equity compensation (forfeiting the 20% balance
of unvested equity compensation) to the same extent as if it would have vested
if Executive remained employed through the required vesting period.
(C) Continued Group Health and Insurance
Benefits: Continue to make available to the Executive and the covered
dependents, and to pay directly or indirectly for, to the same extent as paid
prior to the Termination Date, all group health plan, life and other similar
insurance plans or Company-sponsored arrangements providing comparable benefits
in which Executive or such covered dependents participate on the Termination
Date through the Severance Period.
(ii) Death: In the event of Executive's death while he
is receiving benefits pursuant to Section 6(a)(i)(C) hereof, the Company shall
continue providing and paying severance and for group health plan, life and
similar insurance coverage or Company-sponsored arrangements providing
comparable benefits for the covered dependents through the Severance Period.
(iii) All vested options or other equity compensation
must be exercised within 12 months of the Termination Date.
(b) Termination for Cause; Resignation: If, during the
Employment Period and prior to a Change of Control, Executive's employment is
terminated by the Company for Cause, or if Executive resigns from his
employment, then Executive shall be entitled only to payment of all amounts
including benefits earned or owed to Executive and only to such equity
compensation as is fully vested as of the Termination Date.
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10.42
6. Termination of Employment Following a Change of Control: The following
provisions shall apply to termination of Executive's employment on or following
a Change of Control:
(a) Termination without Cause; Resignation for Good Reason:
(i) General: If, following a Change of Control (A)
Executive's employment is terminated by the Company without Cause, or (B)
Executive resigns from his employment hereunder for Good Reason, then the
Company shall:
(A) Cash Severance Payments: Pay to Executive
severance payments of one month's Employment Base Salary for a period equal to
12 months following the date of termination; (the "Severance Period"). Such
severance payments shall be paid at regular payroll intervals or in a lump sum
within 30 days of the Termination Date as determined by the Company.
(B) Accelerated Vesting: Cause the vesting of
all restricted stock, stock options and other equity-based compensation held on
the date of termination by Executive, to fully accelerate, as of the date of
termination, so that they become 100% vested in the stock of the Controlling
entity.
(C) Continued Group Health and Insurance
Benefits: Continue to make available to the Executive and the Covered
Dependents, and pay for, to the same extent as paid prior to the Change of
Control and termination of the employment or consulting relationship, all group
health plan, life and other similar insurance plans or Company-sponsored
arrangements providing comparable benefits in which Executive or such Covered
Dependents participate on the date of the Executive's termination, through the
Change of Control Severance Period.
(ii) Death During Severance Period: In the event of
Executive's death while he is receiving benefits pursuant to Section 6(a)(i)(C)
hereof, the Company shall continue providing and paying for group health plan,
life and similar insurance plan coverage or Company-sponsored arrangements
providing comparable benefits to the covered dependents through the Change of
Control Severance Period.
(b) Termination for Cause; Resignation Without Good Reason: If,
following a Change of Control, Executive's employment is terminated by the
Company for Cause, or if Executive resigns from his employment hereunder other
than for Good Reason, then Executive shall be entitled only to payment of all
amounts (including benefits) earned or owed to Executive, and only to such
equity compensation as is fully vested as of the Termination Date.
(iii) All stock options or warrants so vested must be
exercised within 12 months of the Termination Date.
7. Death or Permanent Disability: In the event Executive's employment
terminates due to Executive's death or Disability, whether or not there has been
a Change of Control, the Company shall:
(a) Cash Lump-Sum Payment: Pay to Executive, his estate, or his
personal representative (as appropriate) a lump-sum cash payment equal to 12
months' Employment Base Salary to be paid within 30 days after the date the
Company receives notice of Executive's death, or within 30 days after the date
it has been determined that Executive has incurred a Disability.
(b) Equity Compensation: Allow the estate or representative of
the Executive 12 months from the Termination Date to exercise equity
compensation vested as of the Termination Date.
(c) Continued Group Health and Insurance Benefits: Continued to
make available to the Executive (if alive) and the Covered Dependents (whether
or not Executive is alive) and pay for, to the same extent as paid prior to
termination of employment, all group health plan, life and other similar
insurance plans or Company-sponsored arrangements providing comparable benefits
in which Executive or such Covered Dependents participate on the date of the
Executive's termination, for a period of 12 months following the Termination
Date.
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10.42
(d) Other Benefits: Pay to Executive, his estate, or his
personal representative (as appropriate) all other benefits normally paid to
employees who have died or incurred a disability.
8. Golden Parachute Limitation: The payments and benefits payable to
Executive under this Agreement and all other contracts, arrangements, or
programs with the Company shall not, in the aggregate exceed the maximum amount
that may be paid to Executive without triggering golden parachute penalties
under Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), as determined in good faith by the Company's independent auditors.
Executive agrees that, to the extent payments or benefits under this Agreement
would not be deductible under Code Section 162(m) if made or provided when
otherwise due under this Agreement, such payments and benefits shall be made or
provided later, immediately after Section 162(m) ceases to preclude their
deduction, with interest thereon at the rate provided in Code Section
1274(b)(2)(B). If even after such deferral the payments and benefits otherwise
payable to Executive must be reduced to avoid triggering such penalties, the
payments and benefits will be reduced in the priority order designated by the
Executive, or, if the Executive fails promptly to designate an order, in the
priority order designated by the Company. If an amount in excess of the limit
set forth in this Section 8 is paid to Executive, Executive shall repay the
excess amount to the Company upon demand. Executive and the Company agree to
cooperate with each other in connection with any administrative or judicial
proceedings concerning the existence or amount of golden parachute penalties on
payments or benefits received by Executive.
9. Termination Date: The date of termination of employment by the Company
shall be the date specified in a written notice of termination to Executive. The
date of resignation shall be the date specified in the written notice of
resignation from Executive to the Company. For purposes of this Agreement, no
purported termination of Executive's employment for Cause shall be effective
without delivery of such Notice of Termination.
10. Assignment: Executive's rights and obligations under this Agreement
are not assignable by Executive, but shall pass to his estate or personal
representative upon death or disability (as determined pursuant to this
Agreement).
11. Notices: Any notice required or permitted under this Agreement shall
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if sent by facsimile, or mailed to the other party
at its address set forth below in this Section 10, or at such other address as
such party may designate by written notice to the other party hereto. Any
effective notice hereunder shall be deemed given on the date personally
delivered or on the date sent by facsimile or deposited in the United States
mail (sent by certified mail, return receipt requested), as the case may be, at
the following address:
(i) If to the Company: (ii) If to Executive:
Pinnacle Micro, Inc.
19 Technology Drive
Irvine, California 92618
Attn: General Counsel
Fax: 714/789-3045
12. Disputes: Any disputes between the parties hereto shall be settled by
arbitration in Irvine, California under the auspices of, and in accordance with
the rules of, the Judicial Arbitration and Mediation Service/Endispute, by an
arbitrator who is mutually agreeable to the parties hereto, (such arbitrator or
hereinafter referred to as the "Arbitrator"). The decision in such arbitration
shall be final and conclusive on the parties, in lieu of any court action, which
is expressly waived, with the sole exception of a Company initiated injunctive
proceeding to protect its confidential information or trade secrets, judgment
upon such decision may be entered in any court having jurisdiction thereof. The
parties hereby agree that the Arbitrator shall be empowered to enter an
equitable decree mandating specific enforcement of the terms of this Agreement.
The Company and Executive shall share equally all
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10.42
expenses of the Arbitrator incurred in any arbitration hereunder; provided,
however, that the Company or Executive, as the case may be, shall bear all
expenses of the Arbitrator and all of the legal fees and out-of-pocket expenses
of the other party to the extent if the Arbitrator determines that the claim or
position of such party was without reasonable foundation.
13. Severability: If an arbitrator determines that any term or provision
hereof is invalid or unenforceable, (a) the remaining terms and provisions
hereof shall be unimpaired; and (b) such arbitrator shall have the authority to
replace such invalid or unenforceable term or provision with a term or provision
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision.
14. Entire Agreement: This Agreement by and between the Company and
Executive represents the entire agreement of the parities with respect to the
matters set forth herein, and to the extent inconsistent with other prior
contracts, arrangements or understandings between the parties, supersedes all
such previous contracts, arrangements or understandings between the Company and
Executive. The Agreement may be amended only by mutual written agreement of the
parties hereto.
15. Withholding: Company shall be entitled to withhold, or cause to be
withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
16. Governing Law: This Agreement shall be construed, interpreted, and
governed in accordance with the laws of California without reference to rules
relating to conflict of law.
17. Successors: This Agreement shall be binding upon and inure to the
benefit of, and shall be enforceable by Executive and the Company, their
respective heirs, executors, administrators and assigns. In the event the
Company is merged, consolidated, liquidated by a parent corporation, or
otherwise combined into one or more corporations, the provisions of this
Agreement shall be binding upon and inure to the benefit of the parent
corporation or the corporation resulting from such merger or to which the asset
shall be sold or transferred, which corporation from and after the date of such
merger, consolidation, sale or transfer shall be deemed to be the Company for
purposes of this Agreement. In the event of any other assignment of this
Agreement by the Company, by operation of law or otherwise, the Company shall
remain primarily liable for its obligations hereunder. This Agreement shall not
be assignable by Executive.
18. Headings: The headings of sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. Counterparts: This Agreement may be executed by either of the parties
hereto in counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this in counterparts
Agreement as of the Effective Date.
COMPANY: EXECUTIVE:
PINNACLE MICRO, INC. DAVID OOLEY
/s/ Lawrence Goelman /s/ David Ooley
-------------------- ---------------
Lawrence Goelman
President, Chief Executive Officer
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EXHIBIT 10.43
PINNACLE MICRO, INC.
19 Technology Drive
Irvine, California
December 8, 1996
Mr. Scott A. Blum
Mr. William F. Blum
Re: Stand-still and Voting Agreement with Pinnacle Micro, Inc.
Gentlemen:
1. The purpose of this letter is to confirm the agreements set
forth below between Pinnacle Micro, Inc. (the "Company") and each of Scott A.
Blum, William F. Blum, individually and as trustee and/or settler of certain
revocable trusts (individually a "Blum Family Trust" and collectively the "Blum
Family Trusts") (each a "Stockholder") relating to the Stockholders' ownership
of common stock of the Company ("Common Stock"), Board representation and
related matters.
2. Each Stockholder agrees not to acquire, agree to acquire or
make any proposal to acquire, directly or indirectly, any Common Stock, any
other securities issued by the Company, a material portion of the Company's
assets or property, any equity interest in the Company or any options or other
rights to purchase any such securities, assets, property or equity interest
(other than property transferred by the Company in the ordinary course of
business), except for
(a) Common Stock owned by it as of the date of this letter,
(b) with respect to Scott Blum, any options that may be
granted to him in connection with his proposed severance
agreement with the Company,
(c) Common Stock acquired pursuant to the exercise of options
it already owns; or
(d) transfers from one Stockholder to another. Sales under the
registration statement described below will not be limited by
this Agreement.
3. Each Stockholder further agrees that, without the prior
written approval of the Company's Board of Directors, it will not
(a) propose to enter into or negotiate or agree for the
Company to enter into, directly or indirectly, any merger or
business combination involving the Company or an agreement
concerning the possible sale or purchase of, directly or
indirectly, a material portion of the assets of the Company,
(b) make, or in any way participate, directly or indirectly,
in any "solicitation" of "proxies" (as such terms are used in
the proxy rules of the United States Securities and
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December 8, 1996 10.43
Exchange Commission) to vote, or seek to advise or influence
any person with respect to the voting of, any voting
securities of the Company,
(c) form, join or in any way participate in a partnership,
limited partnership, syndicate or a "group" (within the
meaning of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended) with respect to any acquiring, holding,
voting or disposing of securities of the Company,
(d) otherwise act, alone or in concert with others, to seek to
change, control or influence the membership of the Board of
Directors, the management or policies of the Company or for
the purpose of acquiring, holding, voting or disposing of
Common Stock or other securities, assets, or property of the
Company or an equity interest in the Company,
(e) without the consent of the Board of Director's seek to
call or assist any other person to call, a special meeting of
the Company's stockholders or
(f) advise, assist or encourage any other persons in
connection with any of the foregoing.
Actions by William Blum as a director will not be subject to
these restrictions.
4. Each Stockholder also agrees not to bind or obligate the
Company and not to sign any contracts, agreements or other documents or incur
any expense, liability or obligation or make any other commitments on behalf of
the Company, and not to negotiate or attempt to negotiate on behalf of the
Company, and not to solicit any person or entity for any possible sale of the
Company.
5. Each Stockholder also agrees that until the earlier of (i)
the first anniversary of the date of this letter and (ii) the date on which the
Stockholder no longer owns, directly or indirectly, any Common Stock or options
to acquire Common Stock, the Stockholder will vote all shares of Common Stock
owned by it and all other shares of Common Stock the voting of which is in its
control in favor of the slate of directors recommended by the Company's Board of
Directors and on all matters, except those described in clause 3(a) above, as
recommended by the Company's Board of Directors. The Company agrees to include
on the slate up to two (2) director(s) to be recommended by the Stockholders
(acting through William F. Blum) that are reasonably acceptable to the Company's
Board of Directors and confirms that William F. Blum is acceptable. Stockholders
agree not to recommend any person related to any Stockholder by birth or
marriage except for William F. Blum. Any shares sold under a "shelf"
registration statement will not be subject to this voting requirement after the
sale.
6. In return for the agreements set forth above, the Company
agrees that within a reasonable time after it files its Form 10-K for the fiscal
year ending December 31, 1996, the Company will file with the Securities and
Exchange Commission a "shelf" registration statement providing for the orderly
sale, in the public market, of up to all shares of Common Stock owned by the
Stockholders (with the number of such shares to be specified by William F. Blum
on behalf of the Stockholders except that Scott Blum may require the inclusion
of up to all shares owned directly by him), pursuant to a registration rights
agreement to be entered into by the Company and the Stockholders. The
registration rights agreement will include customary terms (including customary
indemnification provisions and Company's agreement to keep the shelf
registration effective for one year) and will provide that all costs relating to
the registration customarily paid by stockholders in secondary offerings will be
borne by the Stockholders; provided however that the Stockholders will not be
required to reimburse the Company for the time spent by the Company's directors,
officers and other employees devoted to the preparation and filing of the
registration statement, or for any fees charged by the Company's outside
accountants except for a
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December 8, 1996 10.43
reasonable and customary fee for (i) consenting to the inclusion of such
accountants' opinion in the registration statement, or (ii) furnishing a "cold
comfort" letter requested by underwriters if Stockholders decide to retain an
underwriting firm.
7. Stockholders hereby agree that the Secretary of the Company
and the inspector of election at any meeting of the Company's stockholders may
treat this Agreement or a copy hereof as a valid proxy in favor of the proxy
holders named by the directors. Stockholders understand that the proxy hereby
granted is not revocable.
8. Stockholders will likely learn of material non-public
information regarding the Company. Accordingly, Stockholders agree to keep the
information confidential and agree not to use it to the detriment of the
Company. Stockholders are advised that receipt of such information may interfere
with their ability to trade in securities of the Company and other companies
that are the subject of the information.
9. Scott Blum resigns as a director of the Company and
confirms he has resigned as an officer and employee. He agrees he waived notice
of and consented to the holding of, a special meeting of the board of directors
of the Company on December 8, 1996.
10. Please confirm and acknowledge your agreement with all of
the provisions set forth above by executing and returning the copy of this
letter included herewith to Jonathan Eddison, Esq., Pinnacle Micro, Inc., 19
Technology Drive, Irvine 92618, via facsimile at (714) 789-3045 and followed by
mail or courier, with a copy to Peter J. Tennyson, Esq., Paul, Hastings,
Janofsky & Walker LLP, 695 Town Center Drive, Seventeenth Floor, Irvine
92626-1924 (facsimile 714-979-1921).
Sincerely,
ACKNOWLEDGED, CONFIRMED
AND AGREED
/s/ Scott A. Blum
- -----------------
Scott A. Blum
/s/ William F. Blum
- -------------------
William F. Blum
Scott Blum and William Blum hereby confirm that they are signing on
behalf of all trusts established by either of them for any stock now or formerly
held by either of them, and confirm that they have authority to do so, and have
not appointed any other trustees, agents or other representatives to vote,
control or sell any shares of Pinnacle Micro, Inc.
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EXHIBIT 10.44
SEVERANCE AGREEMENT AND MUTUAL RELEASE
This SEVERANCE AGREEMENT AND MUTUAL RELEASE (the "Agreement") is
made and entered into as of February 1, 1997, by and between SCOTT A. BLUM, an
individual ("Blum") and PINNACLE MICRO, INC., a Delaware corporation ("Pinnacle"
or "the Company").
W I T N E S S E T H:
WHEREAS, Blum has been a Director of the Company and has been
employed in various management positions with the Company, including, since July
1, 1996, as Vice President, Marketing; and
WHEREAS, Blum and the Company had been parties to an Employment
Agreement entered into as of February 26, 1996 ("the Employment Agreement"); and
WHEREAS, on August 1, 1996, Blum and the Company mutually agreed
to rescind and cancel the Employment Agreement; and
WHEREAS, Blum and the Company have previously entered into a
Letter Agreement dated September 27, 1996 ("the Letter Agreement") in which Blum
agreed to resign from his position as an officer and employee of the Company,
effective as of the close of business on September 30, 1996, and agreed to more
fully document said agreement in the form of a formal severance agreement; and
WHEREAS, Blum and the Company entered into a stock option
agreement dated January 3, 1995, whereby Blum was granted options to purchase
450,000 shares of the Company's common stock at an exercise price of $6.41 per
share (the "Initial Blum Option"); and
WHEREAS, because the Initial Blum Option was based on continuing
employment with the Company, the options granted under the Initial Blum Option
terminated as of September 30, 1996 due to Blum's resignation as an officer and
employee, and therefore two-thirds of the options granted under the Initial Blum
Option have not vested and one-third of such options vested as of the date of
Blum's resignation from the Company, which such options have expired by the date
of this Agreement; and
WHEREAS, Blum desires to waive his rights under the Initial Blum
Option in exchange for a grant of new options; and
WHEREAS, Blum resigned as a director of the Company on December
8, 1996, and on the same date entered into a Stand-still and Voting Agreement
with the Company; and
WHEREAS, Blum and the Company desire to fully document the terms
of the September 27, 1996 Letter Agreement in the form of a formal severance
agreement and to make certain other modifications in the terms of the Letter
Agreement, and Blum and the Company desire to replace and supersede the Letter
Agreement in its entirety with this Severance Agreement;
NOW, THEREFORE, in consideration of the covenants herein
contained, the parties hereto agree as follows:
1. Resignation. By signing this Agreement, and in
consideration of the mutual covenants contained in this Agreement, Blum confirms
the resignation of his employment with the Company as Vice President, Marketing,
effective as of the close of business on September 30, 1996. His personnel
records will be marked accordingly. Should any employer or prospective employer
inquire of the Company regarding Blum's reason for leaving the employment of
Pinnacle, the President or General Counsel of the Company will give "mutual
agreement of the parties" as the reason.
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10.44
2. Severance Benefits. Upon execution of this Agreement,
Pinnacle shall provide Blum with the following benefits:
(a) Pinnacle will make severance payments to Blum in the gross
amount of $16,667 per month, representing his salary immediately prior to his
resignation from employment, less the minimum legally required deductions and
withholdings, for a period of thirty-six (36) months beginning October 1, 1996
and continuing until September 30, 1999; such amounts shall be paid in
bi-monthly installments on the same days as the Company's regular payroll
payments. The amounts previously paid to Blum as severance benefits shall be
retroactively adjusted as follows: within ten (10) days of the execution of this
Agreement, Pinnacle shall pay to Blum a lump-sum amount representing the
difference between the severance payments agreed to above and the amount
actually paid to Blum from October 1, 1996 through the date of execution of this
Agreement, less applicable withholding taxes.
(b) Pinnacle shall provide those rights and benefits Pinnacle
customarily provides pursuant to the Comprehensive Omnibus Retirement Act of
1974 ("COBRA") to an employee who voluntarily resigns from employment with
Pinnacle.
3. Stock Options. Pinnacle shall grant to Blum, subject to the
terms of a Pinnacle Micro Stock Option Agreement (Nonstatutory Option) attached
hereto as Exhibit "A", non-statutory stock options to purchase 450,000 shares of
Pinnacle common stock at the exercise price of $6.41 per share (the same
exercise price as the Initial Blum Option), vesting immediately upon the
execution of this Agreement. These new options, which will be granted directly
by the Company and not pursuant to any stock option plan, will expire,
regardless of vesting, if not exercised by September 30, 1998.
4. Releases.
(a) By Blum. Blum hereby releases, acquits and forever
discharges Pinnacle and its current and former officers, directors, employees,
agents and professional advisors from any and all claims, causes of action,
charges, suits, actions, complaints, liabilities and obligations of any nature
whatsoever, whether known or unknown, relating to Blum's employment with
Pinnacle and the cessation of such employment, including, but not limited to,
(i) actions alleging wrongful termination of employment; (ii) actions under
Title VII of the Civil Rights Act of 1964, Section 1981 of the Civil Rights Act
of 1866, the Age Discrimination in Employment Act of 1967, the Americans with
Disabilities Act of 1990, any amendment to any of the foregoing, or any other
State, Federal or local law concerning age, race, religion, national origin,
gender, handicap, or any other form of discrimination; and (iii) any common law
contract, tort or other claim relating to Blum's employment with the Company and
the cessation thereof, from the beginning of Blum's employment by Pinnacle up to
and including the date of execution of this Agreement. Notwithstanding the
foregoing, nothing herein is intended to, nor shall it, affect any right or
claim of Blum for indemnification from the Company pursuant to the Company's
Articles of Incorporation and By-Laws and that certain Indemnification Agreement
with the Company dated March 18, 1993, for claims by third parties arising from
his service as an officer or director of the Company, and Blum does not release
Pinnacle or its affiliates from any such claims for indemnification.
(b) By the Company. Pinnacle hereby releases, acquits and
forever discharges Blum from any and all claims, causes of action, charges,
suits, actions, complaints, liabilities and obligations of any nature
whatsoever, whether known or unknown, relating to Blum's employment with the
Company and the cessation thereof from the beginning of Blum's employment by
Pinnacle up to and including the date of execution of this Agreement.
Notwithstanding the foregoing, nothing herein is intended to, nor shall it,
affect any right or claim Pinnacle may have under the General Corporation Law of
Delaware, the law of any other state or the federal securities laws for
indemnity or contribution from Blum with respect to claims by third parties
arising from Blum's service as an officer or director of the Company or any
claim arising from any transactions in the Company's stock or taken as a
controlling shareholder of the Company, and the Company does not release Blum
from any such claim.
97
<PAGE> 3
10.44
5. Knowing and Voluntary Waiver. With respect to unknown
claims subject to the foregoing release, Blum and the Company understand that
California law includes Civil Code Section 1542, which says that releases
usually do not apply to certain unknown claims. Specifically, Section 1542
states as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor."
Blum and the Company hereby agree that Section 1542 does not apply to this
Agreement, and that this Agreement releases any and all claims of the type
released above that Blum and the Company do not know about or suspect may exist
in his or its favor at the time of the execution of this Agreement.
6. No Present Claims. Blum represents that he has not filed,
and has no present knowledge of, any complaints, charges or claims which he or
anyone claiming on his behalf may have against Pinnacle or any of its officers,
directors, executives, employees, agents, parent, related and subsidiary
entities and affiliates, successors and assigns, in any court or administrative
forum, or before any governmental agency or entity. Pinnacle represents that it
has not filed, and has no present knowledge of, any complaints, charges or
claims which it or anyone claiming on its behalf may have against Blum in any
court or administrative forum, or before any governmental agency or entity.
7. Trade Secrets. Blum understands and agrees that in the
course of his employment with Pinnacle, he has acquired privileged and/or
confidential, proprietary information and trade secrets concerning Pinnacle's
operations, its future plans and its methods of doing business ("Trade
Secrets"), which information Blum understands and agrees would be extremely
damaging to Pinnacle if disclosed to a competitor or made available to any other
person or corporation. Blum understands and agrees that such Trade Secrets have
been divulged to him in confidence and that he will keep such Trade Secrets
secret and confidential, and will not, directly or indirectly, use or disclose,
for his own benefit or the benefit of another, any of the Trade Secrets of
Pinnacle.
8. No Derogatory Comments.
(a) By Blum. Blum represents and agrees that, during the
36-month period of time when he is entitled to the payment of severance benefits
pursuant to Paragraph 2(a) above, and for six months thereafter, he shall
refrain from making any derogatory statements to third parties or current
employees concerning the Company or its products, or its officers, directors,
employees or representatives.
(b) By the Company. Pinnacle shall refrain, and shall use its
best efforts to cause its officers, directors, employees and representatives to
refrain, from making any derogatory statements to third parties or current
employees concerning Blum during the 36-month period of time when Blum is
entitled to the payment of severance benefits pursuant to Paragraph 2(a) above,
and for six months thereafter.
9. Defense of Legal Actions. Notwithstanding his termination
of employment with the Company, Blum and the Company hereby agree mutually to
cooperate with one another and use their best efforts to assist each other in
the defense of any existing, threatened or future lawsuit, arbitration,
administrative hearing or other regulatory proceeding, or other similar legal
action against either the Company and/or Blum wherein the Company or Blum
determines that the other's cooperation and/or assistance is needed for
preparation of an effective defense of such action(s). Notwithstanding the
foregoing, in the event it is determined that a conflict of interest has
developed in connection with that certain class action lawsuit entitled Wills v.
William F. Blum, et al., Action No. SA CV 96-261 GLT, pending in the United
States District Court for the Central District of California, such that Blum is
required to retain separate counsel to represent his interests, nothing herein
shall prevent Blum or the Company, in consultation with his or its counsel, from
taking whatever action or position he or it determines, in his or its sole
discretion, is in his or its best interest.
98
<PAGE> 4
10.44
10. Non-Interference with Management. Blum agrees that (i) all
of his communication with the Company, whether verbally or in writing, shall be
directed solely to the President or the General Counsel of the Company; and (ii)
Blum will not, without the President's express prior approval, initiate any
communication with any other person at or associated with the Company, including
but not limited to any employees, consultants or suppliers of the Company,
during normal business hours on any matter relating to the business affairs of
the Company, provided that if any person at or associated with the Company,
including but not limited to any employees, consultants or suppliers of the
Company, initiates any communication with Blum during normal business hours on
any matter relating to the business affairs of the Company, Blum shall explain
that such communications are not appropriate and politely decline to participate
in such communication. Notwithstanding the foregoing, it is understood and
agreed that nothing about this provision shall prevent Blum from communicating
with his father, William F. Blum, a director of the Company, at any time and on
any subject, so long as William F. Blum remains a director of the Company.
11. Withholding. The Company shall be entitled to withhold, or
cause to be withheld, the minimum amount of federal and state withholding taxes,
including the employer's FICA contribution, required by federal and state law
with respect to payments made to Blum hereunder. Blum agrees that any federal,
state, municipal or other taxes or contributions that may be owed or payable on
the sums paid to him under this Agreement and the exhibits referred to therein
are his sole and exclusive responsibility.
12. Consultation with Counsel. Blum represents that he has had
the opportunity to obtain legal counsel of his choice, that he has discussed all
aspects of this Agreement with his legal counsel prior to entering into this
Agreement, that he has carefully read and fully understands all of the
provisions of this Agreement, and that he is voluntarily entering into this
Agreement.
13. Reimbursement of Fees and Costs. Pinnacle shall promptly
reimburse Blum for legal and accounting fees and costs incurred by Blum in
connection with or related to the negotiation, execution and delivery of this
Agreement, up to a maximum amount of $5,000.
14. No Admission of Liability. This Agreement shall not in any
way be construed as an admission by the parties that either of them has acted
wrongfully with respect to the other or any other person.
15. Governing Law. This Agreement shall be construed,
interpreted and governed in accordance with the laws of the State of California.
16. Arbitration. Except as specifically stated below, any
dispute that arises out of or in connection with this Agreement, including
disputes concerning the interpretation, breach, enforcement or scope of this
Agreement or the parties' rights and obligations hereunder, shall be arbitrated
under the auspices of the American Arbitration Association ("AAA") pursuant to
the AAA Commercial Arbitration Rules then in effect. Any and all such disputes
will be submitted to arbitration before a single neutral mutually acceptable
qualified arbitrator in Orange County under such rules, except that the Company
retains the right to seek injunctive or equitable relief for violations of
Paragraph 7 (Trade Secrets) above or any alleged breach of the Stand-still and
Voting Agreement dated December 8, 1996, without arbitration. If a demand for
arbitration is made by the Company, all sums due and owing Blum under the terms
of this Agreement will be deposited in escrow pending resolution of the claim.
The Arbitrator shall have no authority or discretion to vary, alter, amend, add
to, delete, or otherwise change any of the terms of this Agreement. Any
arbitration hearing held pursuant to this clause shall be expedited, so that the
arbitration hearing is concluded no more than one hundred twenty (120) days from
the date of filing of a demand for arbitration with the AAA or the service of
such demand on the responding party(ies), whichever is later. The arbitration
hearing shall take place in Orange County, California. The arbitrator, who shall
be selected from the AAA's applicable Large Complex Case Panel, shall decide all
disputes referred to above and shall have authority to award any relief
awardable by a court. In connection with any such arbitration proceeding, the
arbitrator shall have discretion to permit such discovery of documents or
tangible materials in the possession of the parties as the arbitrator concludes
are reasonably necessary to a fair and thorough hearing. Except as otherwise
provided in this paragraph or in the AAA rules referred to above, the
arbitration provided by this paragraph is governed by the
99
<PAGE> 5
10.44
Federal Arbitration Act. In the event of any dispute subject to arbitration
under this paragraph, the prevailing party shall be entitled to an award of the
reasonable costs and attorneys' fees incurred in connection with such dispute.
17. Entire Agreement. Except for the (a) Pinnacle Micro Stock
Option Agreement (Nonstatutory Option) of even date herewith, (b) that certain
Stand-still and Voting Agreement dated December 8, 1996, and (c) that certain
Indemnification Agreement with the Company dated March 18, 1993, this Agreement
represents the entire agreement of the parties and shall supersede any and all
previous contracts, arrangements or understandings between the Company and Blum.
This Agreement may be amended at any time only by mutual written agreement
signed by the parties hereto.
18. Cross-Default. Any breach by Blum or by Pinnacle of any
provision contained in the Pinnacle Micro Stock Option Agreement (Nonstatutory
Option) of even date herewith, the Stand-still and Voting Agreement dated
December 8, 1996, or the Indemnification Agreement dated March 18, 1993, shall
also be deemed a breach of this Agreement.
19. Notice and Opportunity to Cure. If either party to this
Agreement contends that the other party has breached or is about to breach any
provision of this Agreement or any of the other agreements referred to in
Paragraph 14 above, said party shall give the other party immediate written
notice of such claimed breach and shall give the other party if the breach or
alleged breach is reasonably capable of correction the opportunity within ten
(10) days to cure such claimed breach before filing a notice of arbitration or
invoking any other remedy under this Agreement or otherwise. Any and all notices
required hereunder shall be in writing, addressed and telecopied, delivered by
overnight delivery service or mailed by expedited mail to the intended recipient
at the telecopy number or address specified below:
For Pinnacle Micro: For Scott Blum:
------------------- ---------------
Jonathan B. Eddison, Esq. Robert E. Gooding, Jr., Esq.
Vice President Howard, Rice, Nemerovski,
and General Counsel Canady, Falk & Rabkin
Pinnacle Micro, Inc. A Professional Corporation
19 Technology 610 Newport Center Drive
Irvine, CA 92718 Suite 450
Newport Beach, CA 92660
Either party may change the address to which notices shall be sent by a notice
in accordance with this section.
20. Tender of Proceeds as Condition to Challenging
Enforceability of Agreement. Blum understands that this Agreement is final and
binding when executed by him and by Pinnacle, and agrees not to thereafter
challenge its enforceability. Should Blum nevertheless attempt to challenge the
enforceability of this Agreement, as a further limitation on any right to make
such a challenge, he shall initially tender to Pinnacle, by certified check
delivered to Pinnacle, all monies received by Blum pursuant to this Agreement,
plus interest at the rate of Ten Percent (10%) per annum from the date of his
receipt of such monies, and invite Pinnacle to retain such monies and agree with
Blum to cancel this Agreement. In the event Pinnacle accepts this offer,
Pinnacle shall retain such monies and this Agreement shall be canceled. In the
event Pinnacle does not accept such offer, Pinnacle shall so notify Blum, and
shall place such monies in an interest-bearing escrow account pending resolution
of the dispute as to whether or not this Agreement shall be set aside and/or
otherwise rendered unenforceable.
21. Headings. The headings of Sections herein are included
solely for convenience or reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
22. Counterparts. This Agreement may be executed in one or
more counterparts and each such counterpart shall be deemed an original, but all
of which taken together shall constitute one and the same agreement.
100
<PAGE> 6
10.44
23. Miscellaneous. Any provision of this Agreement which is
rendered unenforceable by a court of competent jurisdiction or pursuant to an
arbitration conducted in accordance with the provisions herein shall be
ineffective only to the extent of such prohibition or invalidity and shall not
invalidate or otherwise render ineffective any or all of the remaining
provisions of this Agreement. The language contained herein shall in all events
be construed simply and in accordance with its fair meaning, and not strictly
for or against any party to this Agreement, and, in any event, without reference
to which party drafted this Agreement or any language contained herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of February 13, 1997.
PINNACLE MICRO, INC.
By: /s/ Kenneth C. Cambell
----------------------
Its [Position]
/s/ Scott A. Blum
-----------------
SCOTT A. BLUM
APPROVED AS TO FORM:
/s/ Jonathan B. Eddison, Esq.
-----------------------------
Attorney for Pinnacle Micro, Inc.
/s/ Robert E. Gooding, Esq.
---------------------------
Attorney for Scott A. Blum
101
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Pinnacle Micro, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement (No. 33-65872) on Form S-8 of our report dated February 14, 1997,
relating to the financial statements and financial statement schedule of
Pinnacle Micro, Inc. appearing in the Company's Annual Report on Form 10-K for
the year ended December 28, 1996.
BDO Seidman, LLP
Costa Mesa, California
March 31, 1997
43
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Pinnacle Micro, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement (No. 33-65872) on Form S-8 of our report dated May 15, 1995, relating
to the financial statements and financial statement schedule of Pinnacle Micro,
Inc. appearing in the Company's Annual Report on Form 10-K for the year ended
December 28, 1996.
Coopers & Lybrand L.L.P.
Newport Beach, California
March 31, 1997
44
<PAGE> 1
EXHIBIT 24.1
PINNACLE MICRO, INC.
POWER OF ATTORNEY
Each of the undersigned directors and officers of Pinnacle Micro, Inc.,
hereby constitutes and appoints each of Kenneth C. Campbell and Roger Hay as his
true lawful attorney-in-fact and agent, with full powers of substitution to do
any and all acts and things in his name and behalf in his capacity as director
and officer and to execute any and all instruments for him and in his name in
the capacity indicated below, which said attorney-in-fact and agent may deem
necessary or advisable to enable said corporation to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with Pinnacle Micro,
Inc.'s Annual Report on Form 10-K, for the period ended December 28, 1996,
including specifically but without limitation, power and authority to sign for
each in his name in his capacity as a member of the board of directors, and any
and all amendments thereto; and each does hereby ratify and confirm all that
each said attorney-in-fact and agent may lawfully do or cause to be done by
virtue hereof.
March 26, 1997 By: /s/ Kenneth C. Campbell
------------------------------------
Date Kenneth C. Campbell, President and
Director
March 26, 1997 By: /s/ Roger Hay
------------------------------------
Date Roger Hay, Executive Vice President,
Chief Financial Officer, Chief
Accounting Officer and Director
March 25, 1997 By: /s/ Daryl White
-------------------------------------
Date Daryl White, Chairman of the Board of
Directors
March 21, 1997 By: /s/ John E. Koehler
-------------------------------------
Date John E. Koehler, Director
March 20, 1997 By: /s/ Hans Imhof
-------------------------------------
Date Hans Imhof, Director
March 20, 1997 By: /s/ William F. Blum
-------------------------------------
Date William F. Blum, Director
45
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed balance sheet as of December 28, 1996 and the unaudited
condensed balance sheet as of December 28, 1996 and the unaudited condensed
statement of operations for the fifty-two weeks ended December 26, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 5,455
<SECURITIES> 0
<RECEIVABLES> 13,710
<ALLOWANCES> 748
<INVENTORY> 17,714
<CURRENT-ASSETS> 37,094
<PP&E> 5,215
<DEPRECIATION> 3,476
<TOTAL-ASSETS> 40,238
<CURRENT-LIABILITIES> 24,384
<BONDS> 6,442
0
0
<COMMON> 10
<OTHER-SE> 8,493
<TOTAL-LIABILITY-AND-EQUITY> 40,238
<SALES> 59,921
<TOTAL-REVENUES> 59,921
<CGS> 48,092
<TOTAL-COSTS> 48,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,270
<INCOME-PRETAX> (20,649)
<INCOME-TAX> 184
<INCOME-CONTINUING> (20,833)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,833)
<EPS-PRIMARY> (2.52)
<EPS-DILUTED> (2.52)
</TABLE>
