-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JvA/IPNEucE+hfqrplAhjRyLnuKQgKBdLJ3vkxQpsM6fsdEzc7ICA9n50isDNaT6 eGFJ3N15RCvcFTakJBcUFA== 0000950134-97-005019.txt : 19970701 0000950134-97-005019.hdr.sgml : 19970701 ACCESSION NUMBER: 0000950134-97-005019 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19970630 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POWER COMPUTING CORP CENTRAL INDEX KEY: 0001040478 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770359698 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30309 FILM NUMBER: 97632301 BUSINESS ADDRESS: STREET 1: 2400 SOUTH IH 35 CITY: ROUND ROCK STATE: TX ZIP: 78681 BUSINESS PHONE: 5123886868 MAIL ADDRESS: STREET 1: 2400 SOUTH IH 35 CITY: ROUND ROCK STATE: TX ZIP: 78681 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- POWER COMPUTING CORPORATION (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction 3571 77-0359698 of incorporation or (Primary Standard Industrial (I.R.S. Employer organization) Classification Code Number) Identification No.) STEPHEN S. KAHNG 2400 SOUTH IH-35 2400 SOUTH IH-35 ROUND ROCK, TEXAS 78681 ROUND ROCK, TEXAS 78681 (512) 388-6868 (512) 388-6868 (Address, including zip code, and (Name, address, including zip code, telephone number, including area code, and telephone number, including area of registrant's principal executive offices) code, of agent for service)
COPIES TO: STEVEN E. BOCHNER JEFFREY A. HERBST SUSAN P. KRAUSE DANIEL W. RABUN JOHN W. TEETS WILSON SONSINI GOODRICH & BAKER & MCKENZIE MATTHEW J. GERBER ROSATI, 4500 TRAMMELL CROW CENTER POWER COMPUTING CORPORATION PROFESSIONAL CORPORATION 2001 ROSS AVENUE 2400 SOUTH IH-35 650 PAGE MILL ROAD DALLAS, TEXAS 75201 ROUND ROCK, TEXAS 78681 PALO ALTO, CALIFORNIA 94304 (214) 978-3000 (512) 388-6868 (415) 493-9300
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. --------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] CALCULATION OF REGISTRATION FEE
======================================================================================================================= PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------- Common stock, $.01 par value........... 3,450,000 $10 $34,500,000 $10,455 =======================================================================================================================
(1) Includes 450,000 shares that may be purchased by the Underwriters from the Company to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a). --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION -- DATED , 1997 PROSPECTUS - -------------------------------------------------------------------------------- 3,000,000 Shares [POWER COMPUTING CORP. LOGO] Common Stock - -------------------------------------------------------------------------------- All of the shares of common stock, par value $.01 per share (the "Common Stock"), offered hereby are being offered by Power Computing Corporation ("Power Computing" or the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $8.00 and $10.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made to have the Common Stock approved for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "PWRC." SEE "RISK FACTORS" ON PAGES 6 TO 22 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================================================= Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) - ------------------------------------------------------------------------------------------------------------- Per Share......................... $ $ $ - ------------------------------------------------------------------------------------------------------------- Total(3).......................... $ $ $ =============================================================================================================
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $1,500,000. (3) The Company has granted the several Underwriters a 30-day over-allotment option to purchase up to 450,000 additional shares of the Common Stock on the same terms and conditions as set forth above. If all such additional shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discounts and Commissions will be $ and the total Proceeds to Company will be $ . See "Underwriting." - -------------------------------------------------------------------------------- The shares of Common Stock are offered by the several Underwriters, subject to delivery by the Company and acceptance by the Underwriters, to prior sale and to withdrawal, cancellation or modification of the offer without notice. Delivery of the shares of Common Stock to the Underwriters is expected to be made at the office of Prudential Securities Incorporated, One New York Plaza, New York, New York, on or about , 1997. PRUDENTIAL SECURITIES INCORPORATED SALOMON BROTHERS INC , 1997. 3 [ARTWORK TO COME] ------------------------ CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PowerBase, PowerCenter and PowerTower are trademarks of the Company. The Power Computing logo is a registered trademark of the Company. Apple, Macintosh and Mac are registered trademarks, and the Mac OS logo is a trademark, of Apple Computer, Inc. ("Apple"). All other trademarks or tradenames referred to in this Prospectus are the property of their respective owners. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes: (i) the conversion, upon completion of the Offering, of 5,000,000 shares of outstanding Series A Preferred Stock and 4,100,000 shares of outstanding Series B Preferred Stock into Common Stock and (ii) that the Underwriters' over-allotment option will not be exercised. See "Description of Capital Stock," "Underwriting" and Note 7 to Notes to Consolidated Financial Statements. In this Prospectus, unless the context requires otherwise, "Power Computing" and the "Company" refer to Power Computing Corporation, a Delaware corporation, and its subsidiaries. THE COMPANY Power Computing is a leading direct marketer of personal computers. To date, the Company has developed, manufactured, sold and supported a broad line of custom-configured Macintosh-compatible desktop computer systems which employ modular designs based, to the extent possible, on Wintel industry standard components. The Company intends to expand its leading position in the Macintosh-compatible market and to promote the growth of the Macintosh platform by offering new Macintosh-compatible desktop computer systems that are price/performance leaders. The Company is also planning to broaden its product portfolio to include Wintel desktop and portable computer systems, as well as Microsoft Windows NT based server products that will jointly support Macintosh and Wintel connectivity. The Company promotes its products through a targeted marketing strategy and an integrated media approach, which includes marketing its products directly to customers through its website, placing advertisements in computer trade magazines (generally in premium spots such as the inside front cover), direct mailings and Company catalogs. Direct marketing of PCs is currently growing at a rate of approximately 25% per year, and it is estimated that 27% of all PCs sold in the United States were distributed directly in calendar year 1996. The Company sells its products directly to customers over the Internet through its innovative online store, over the telephone and to larger accounts through its growing direct field sales force. The Company believes that its direct marketing strategy provides competitive advantages by allowing it to rapidly and efficiently develop, manufacture and deliver innovative products at competitive prices, to better understand and respond to customer demand for computer products and services and to effectively generate customer loyalty and brand name recognition. While the Company intends to capitalize on these competitive advantages through its continued direct marketing of Macintosh-compatible products, the Company is also now developing selected Wintel computer systems, which it plans to begin manufacturing, marketing and selling during the first half of fiscal 1998. The Company believes its direct marketing expertise, combined with its continued use of Wintel industry standard components, will facilitate its entry into certain Wintel market segments where graphics and multimedia capabilities are particularly important. Upon its entrance into the Wintel market, the Company will be the first company to manufacture and directly market both Macintosh and Wintel products. As a result, the Company's customers that use both systems will be able to purchase products from a single source that can service and support both platforms. The Company's objective is to strengthen its position as a leading direct marketer of PCs by offering a portfolio of innovative personal computing products that are price/performance leaders. To accomplish this objective, Power Computing intends to (i) leverage its direct marketing expertise and continue to capitalize on the advantages achieved by its direct marketing of Macintosh-compatible computer systems, (ii) continue to offer innovative Macintosh technology to its customers at competitive prices, (iii) identify and target certain market segments through its direct marketing strategy, (iv) introduce selected Wintel desktop and portable computer systems, (v) provide outstanding customer order, service and support programs to its customers and (vi) expand internationally and increase its international sales. In December 1994, Power Computing became the first company to receive a license from Apple for the proprietary Mac OS and Macintosh system architecture. The Company continually strives to develop a broad range of systems that incorporate innovative technological features and functions, and its award winning 3 5 products have been widely recognized by leading industry journals such as Macworld, MacUser and MacWEEK. The Company was incorporated in Delaware in November 1993. The Company's principal executive offices are located at 2400 South IH-35, Round Rock, Texas 78681, and its telephone number is (512) 388-6868. THE OFFERING Common Stock Offered Hereby............... 3,000,000 shares Common Stock to be Outstanding after the Offering.................................. 17,719,113 shares(1)(2) Use of Proceeds........................... To reduce borrowings under its credit facility, to fund the Company's initial development, manufacture and marketing of its Wintel computer systems, and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.... PWRC - --------------- (1) Based on shares outstanding as of March 31, 1997. Excludes, as of March 31, 1997, (i) 4,555,285 shares of Common Stock issuable upon exercise of outstanding stock options, under the Company's 1994 Stock Option Plan with a weighted average exercise price of $4.79 per share, (ii) 100,000 shares of Series B Preferred Stock issuable upon exercise of an outstanding warrant with an exercise price of $5.00 per share and (iii) 112,500 shares of Common Stock issuable upon exercise of an outstanding warrant with an exercise price of $0.10 per share. See "Management -- Incentive Stock Plans" and "Description of Capital Stock." (2) Includes (i) the conversion, upon completion of the Offering, of 5,000,000 shares of outstanding Series A Preferred Stock and 4,100,000 shares of outstanding Series B Preferred Stock into Common Stock and (ii) that the Underwriters' over-allotment option will not be exercised. RISK FACTORS Investors should consider the material risk factors involved in connection with an investment in the Common Stock offered hereby and the impact to investors from various events which could adversely affect the Company's business. See "Risk Factors." 4 6 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
INCEPTION FISCAL YEAR ENDED NINE MONTHS ENDED (NOV. 19, 1993) JUNE 30, MARCH 31, THROUGH JUNE 30, ------------------ ------------------ 1994(1) 1995 1996 1996 1997(2) ---------------- ------- -------- ------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.......................................... $ -- $ 3,046 $131,075 $82,413 $247,207 Gross profit....................................... -- 987 26,667 15,850 52,712 Income (loss) from operations...................... (1,037) (2,981) 5,784 2,782 13,206 Net income (loss).................................. (1,012) (2,941) 4,906 2,537 7,737 Net income (loss) per common and common equivalent share............................................ $ (0.22) $ (0.49) $ 0.35 $ 0.19 $ 0.46 Weighted average number of common and common equivalent shares outstanding.................... 4,574 5,991 14,024 13,050 17,000
THREE MONTHS ENDED ---------------------------------------------------------------------------- SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1995 1995 1996 1996 1996(2) 1996(2) 1997(2) --------- -------- -------- -------- --------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................. $21,444 $26,951 $34,018 $48,662 $64,264 $98,593 $84,350 Gross profit.............................. 4,758 3,799 7,293 10,817 14,150 21,896 16,666 Income (loss) from operations............. 1,565 (883) 2,100 3,002 4,695 6,551 1,960 Net income (loss)......................... 1,582 (978) 1,933 2,369 2,813 3,917 1,007 Net income (loss) per common and common equivalent share........................ $ 0.10 $ (0.16) $ 0.11 $ 0.14 $ 0.17 $ 0.23 $ 0.06 Weighted average number of common and common equivalent shares outstanding.... 16,019 6,150 16,981 16,944 17,046 16,896 17,059
MARCH 31, 1997(2) ------------------------ ACTUAL AS ADJUSTED(3) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $12,530 $36,140 Total assets................................................ 73,884 78,811 Total liabilities........................................... 51,233 32,550 Stockholders' equity........................................ 22,651 46,261
- --------------- (1) The Company was incorporated in November 1993 and commenced operations in January 1994. It first shipped products in May 1995. (2) On July 1, 1996 the Company changed to a 52/53 week fiscal year ending on the Sunday closest to June 30. Therefore, references to "fiscal 1997" mean the fiscal year ended June 29, 1997. References to quarterly information for fiscal 1997 mean the quarter ended on the Sunday closest to the calendar quarter end. All fiscal years set forth above included 52 weeks. (3) Adjusted to reflect the sale of the 3,000,000 shares of Common Stock offered hereby at an assumed offering price of $9.00 per share (the midpoint of the filing range), after deducting the underwriting discounts and commissions and estimated offering expenses, and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds." See also "Capitalization." 5 7 RISK FACTORS An investment in the shares of Common Stock involves a high degree of risk. Prospective investors should carefully consider the following risk factors, in addition to the other information set forth in this Prospectus, in connection with the investment in the shares of Common Stock. When used in this Prospectus, the words "may," "will," "expect," "believe," "anticipate," "continue," "estimate," "project," "intend" and similar expressions identify forward-looking statements regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial position. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described below, under the heading of "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus. Forward-looking statements included in this Prospectus are not subject to the "safe harbor" provisions for forward-looking statements contained in the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. RISKS ASSOCIATED WITH DEPENDENCE ON LICENSES FROM APPLE. The Company's Macintosh-compatible business, including all of its current and planned Macintosh-compatible products, is dependent on several license agreements entered into with Apple that permit the Company to manufacture or sell Macintosh-compatible computer systems and distribute the Macintosh operating system ("Mac OS"). In June 1997, the Company agreed to the principal business terms with Apple (the "Apple Term Sheets") for new agreements that the Company expects to enter into with Apple in the first quarter of fiscal 1998 that will grant the Company certain additional license rights and in some instances supersede the Company's current agreements with Apple. Apple and the Company have agreed to be bound by the terms in the Apple Term Sheets, to negotiate in good faith on additional licensing terms and to use their best respective reasonable efforts to reach definitive agreement on such additional terms by a date certain in the first quarter of fiscal 1998. Although the Company intends to enter into definitive agreements with Apple pursuant to the Apple Term Sheets by the date certain, there can be no assurance that such agreements will be finalized and entered into. If the Company and Apple do not enter into definitive agreements by the date certain, the Apple Term Sheets will terminate and the Company will continue to operate under its current agreements with Apple. Failure by Apple and the Company to enter into definitive agreements could result in the loss or impairment of the Company's rights to develop, manufacture or sell either Macintosh-compatible computer systems or the Mac OS, which could have a material adverse effect on the Company. In the event the definitive agreements contemplated by the Apple Term Sheets are not entered into, then the terms of the current agreements with Apple will remain in effect. The current agreements provide that upon the expiration thereof, Apple is required to license the next major release of the Mac OS to the Company based upon Apple's then standard licensing terms. If the Company is required to enter into new negotiations with Apple based on its current agreements, there can be no assurance that the terms and conditions of any new agreements, including the exact royalty terms and access to Mac OS upgrades, will be as favorable as those currently available to the Company or the same as Apple's licensing arrangements with the Company's competitors. See "Business -- Agreements with Apple." Current Agreements and Apple Term Sheets. The Company's current manufacturing agreement with Apple (the "Manufacturing Agreement") grants the Company a license to design and make certified Macintosh-compatible computers and approved boards, and to sell such products to third parties. The Company pays Apple specified royalties on each certified computer or approved board the Company sells. Under the Manufacturing Agreement, the Company is required to obtain Apple's consent before purchasing from authorized suppliers certain proprietary component parts in which Apple holds intellectual property rights. Although Apple must provide or make available necessary component parts to the Company, Apple does have the ability to control authorized suppliers of component parts critical to the Company's manufacture of Macintosh-compatible computer systems. Any delay in receiving authorizations from Apple, or Apple's refusal to provide access to such component parts, could have a material adverse effect on the Company. See 6 8 "Business -- Supplier Relations." The original term of the Manufacturing Agreement is for a period of four years beginning in July 1996, but will expire upon the termination of the Company's current Mac OS license agreement with Apple (the "Mac OS Agreement"), or, among other things, an uncured material breach by the Company of its obligations thereunder. The Mac OS Agreement grants the Company a license to reproduce and distribute the current version of the Mac OS for a specified royalty that must be prepaid on a periodic basis. The Company may install on or distribute with each of its Macintosh-compatible computers one copy of the version of the Mac OS (or the most recent full release thereof) for which the computer was certified. The Mac OS Agreement also allows the Company to reproduce and distribute, on a royalty free basis, certain maintenance releases and system updates to the Company's registered customers that have purchased a certified computer with the Mac OS. Maintenance releases and system updates do not include upgrades that are major releases of the Mac OS. The Mac OS Agreement requires Apple to offer the Company a follow-on license for Apple's next major release of the Mac OS on Apple's then standard terms and conditions for that version of the Mac OS at a royalty rate to be determined, subject to a previously agreed to royalty cap. Although the original term of the Mac OS Agreement is for a period of five years beginning in December 1996, it will automatically expire twelve months after Apple's commercial release of the next major release of the Mac OS, and could expire earlier in the event of, among other things, an uncured material breach by the Company of its obligations thereunder. The Company believes that Apple is required to offer the Company the next major release of the Mac OS (which the Company believes is Apple's operating system project code named Rhapsody) at a royalty rate not to exceed the previously agreed to cap. However, Apple considers the newly proposed Mac OS 8 (previously code named Tempo) the next major release of the Mac OS. As a result, the Company voluntarily entered into negotiations with Apple for new agreements that would settle these and other issues, resulting in the Apple Term Sheets. The Apple Term Sheets provide that Apple will grant the Company a new license to distribute Mac OS 8 on substantially the same terms as those in the Mac OS Agreement, but at an increased royalty rate. The license is contingent on Apple and the Company executing an agreement for the licensing of Mac OS 8 for use with the Common Hardware Reference Platform ("CHRP," formerly the PowerPC Platform). Similarly, the Apple Term Sheets provide that a license for Mac OS 8 on CHRP is contingent on reaching an agreement for the licensing of the non-CHRP version of Mac OS 8. In the event the Company and Apple fail to enter into the definitive agreements contemplated by the Apple Term Sheets, then the Company and Apple would not be in agreement regarding the royalty rate for Mac OS 8. There can be no assurance that the Company and Apple would be able to resolve this disagreement and if not resolved, the Company may be required to pay higher royalties to Apple to utilize Mac OS 8. This could affect the Company's ability to offer competitive Macintosh-compatible products which could have a material adverse effect on the Company. The Apple Term Sheets also state that Apple intends to institute a generally available program to license Rhapsody and that if the Company has entered into a license agreement for the proposed Mac OS 8 on CHRP and is in good standing under that agreement, when Apple institutes a Rhapsody licensing program, it will offer the Company a Rhapsody license on its then standard terms and conditions. The ability of the Company to offer Macintosh-compatible products in the future could be dependent on the Company receiving a Rhapsody license on commercially reasonable terms. Aside from the Mac OS Agreement, the Company has also recently obtained a sublicense for the Mac OS from International Business Machines Corporation ("IBM") which, along with Motorola, Inc. ("Motorola"), has the right to sublicense the Mac OS. The Company's license agreement with IBM is more favorable than the Mac OS Agreement in certain respects, and the Company is increasingly relying on this agreement for its rights to the Mac OS. However, certain provisions of the Company's agreement with IBM are less favorable than the Mac OS Agreement. In particular, the Company must agree to purchase one central processing unit ("CPU") from IBM for each Macintosh-compatible computer system it sells, and it may only purchase a limited, although very substantial, number of CPUs per quarter from IBM. Such a condition does not exist under the Mac OS Agreement. Additionally, IBM may terminate the agreement with six months prior notice. The Company's current agreements with Apple grant it a license to a CHRP version of the Mac OS on the same terms and conditions, including royalty rates, as the standard Mac OS. CHRP, which was jointly 7 9 developed by Apple, IBM and Motorola, was originally intended to provide a common hardware design to run both the Mac OS and Microsoft Corporation's ("Microsoft") Windows NT operating system ("Windows NT") platforms, thereby allowing Macintosh platforms to address the needs of the Wintel market with PowerPC based computer systems. While CHRP is intended to run multiple operating systems, the future of Windows NT on CHRP is in question since Motorola, IBM and Microsoft have indicated that versions of Windows NT beyond version 4.0 (known as "Cairo") will not be supported on CHRP. CHRP designs were originally intended to be in the public domain and would have permitted computer manufacturers to produce systems (i.e., hardware) that require no proprietary components. Unrestricted CHRP availability would allow the Company to decrease its reliance on Apple for key components (e.g., chipsets, OEM components) and no longer pay Apple royalties on hardware. Apple has announced, however, that the read only memory ("ROM") component of CHRP will be proprietary to Apple (thereby rendering a portion of CHRP proprietary), and that the Company will be required to pay royalties for such ROM. The Company currently pays Apple a minimal royalty under its ROM agreement with Apple, but the Apple Term Sheets provide that the Company will pay a significantly higher royalty for the use of Apple's CHRP ROM. The Company intends to manufacture, market and sell CHRP compliant computer systems once Apple makes such systems available to the Company. If the Company moves to CHRP, its ability to offer competitive Macintosh-compatible computer systems in the future will depend on Apple's making available and supporting future CHRP-compliant versions of the Mac OS, (i.e. a version of the standard Mac OS that is adapted or "ported" to CHRP). There can be no assurance that such Mac OS versions or related support will be made available, or in a timely manner, which could have a material adverse effect on the Company. As part of the Apple Term Sheets, the Company agreed to enter into separate CHRP agreements with Apple which provide that Apple will license various versions of Mac OS 8 for CHRP through August 31, 1999. Certification. Although Apple currently permits the Company to manufacture Macintosh-compatible board designs under a board design agreement, the Company's agreements with Apple require that its Macintosh-compatible computer systems conform to certain technical specifications set forth by Apple, and that such systems must be certified to comply with such specifications prior to shipment. Such certification is critical to the Company because it allows the Company to manufacture and sell its Macintosh-compatible computer systems, including those systems incorporating the latest available technology. The Apple Term Sheets state that Apple will certify certain boards under the current agreements in the short-term and CHRP boards when they are available. The Company's procedure to date has been to submit each new Macintosh-compatible product to Apple for certification. However, the Company has previously had problems with and delays in receiving such certifications when Apple raised non-technical issues as conditions to certification, including requiring the Company to renegotiate royalty rates. While the Company believes the terms agreed to in the Apple Term Sheets should prevent these issues from arising in the future, there can be no assurance that the Company will continue to receive certifications from Apple, that it will receive certifications on a timely or cost-effective basis, or that Apple will not place non-technical conditions on its certification of the Company's products. At least once, the Company has postponed the introduction of a new product as a result of Apple's delay in certifying the Company's products. Any delay in or failure to receive certification can have a material adverse effect on the Company. RISKS ASSOCIATED WITH ENTRY INTO THE WINTEL MARKET; NEW PRODUCT DEVELOPMENT. Since inception, the Company has developed, manufactured, marketed and sold Macintosh-compatible computer systems, and the Company currently derives all of its revenues from the sale of such products. The Company is now developing selected Wintel computer systems, which it currently plans to begin manufacturing, marketing and selling during the first half of fiscal 1998. The Company has already begun, and intends to continue, to invest significant amounts of capital in research and development, marketing and manufacturing capacity related to the introduction of its Wintel computer systems. In addition, the Company has already hired, and plans to continue hiring, new technical, marketing and manufacturing employees to staff the development, production and sale of its Wintel computer systems. There can be no assurance that the Company will be successful in entering the Wintel market on a competitive or cost-effective basis, that the Company's entry into the Wintel market will not be delayed, that costs associated with the Company's entry into the Wintel market will not exceed estimates or that defects will not be found in the Company's new Wintel products following 8 10 commencement of commercial shipments. There can also be no assurance that the Company's Wintel computer systems will gain acceptance in the Wintel market, a market in which the Company has not previously participated, or that revenues generated by sales of the Company's Wintel computer systems will be sufficient to recoup the capital outlays and expenses incurred in connection with the Company's Wintel strategy. Failure of the Company to successfully enter the Wintel market or to produce quality Wintel computer systems or failure of the Company's Wintel products to gain name recognition and market acceptance could have a material adverse effect on the Company. In connection with its entry into the Wintel market, the Company will be incurring significant expenditures in the first half of fiscal 1998. There is a substantial risk in the first and second quarters of fiscal 1998 that such expenditures could have a material adverse effect on the Company's operating results. Such result could result in increased volatility of the Company's stock price. Macintosh users are loyal to the Macintosh platform, including the Company's products. While the Company believes its customers will continue to buy its Macintosh-compatible products following its introduction of Wintel computer systems, there can be no assurance the Macintosh community will not react adversely to the Company's introduction of Wintel computer systems, which could result in a material adverse effect on demand for the Company's Macintosh-compatible products. In order to maintain its competitive position in the PC industry, the Company must continually develop and introduce systems with features, performance and pricing competitive to systems offered by its competitors. See "Business -- Overview," " -- Strategy" and " -- Research and Development." The Company also believes that it is necessary for its products to adhere to industry standards, which are subject to changes that are not within the control of the Company. There can be no assurance that the Company's product development activities will be successful, that new technologies will be available to the Company, that the Company will be able to deliver commercial quantities of new products in a timely manner, that those products will adhere to industry standards, or that the Company's products, including its Wintel computer systems, will achieve market acceptance. Some new products introduced by the Company are intended to replace existing products. Although the Company monitors the products that are intended to be replaced and attempts to phase out the manufacture of those products in a timely manner, there can be no assurance that such transitions will be executed without adversely affecting the Company. UNCERTAINTIES CONCERNING THE FUTURE OF THE MAC OS. The Mac OS is the operating system currently shipped with all of the Company's Macintosh-compatible computer systems, and the future prospects of the Company are mainly dependent on the viability of the Mac OS as an operating system. With the introduction of Microsoft's Windows 95 operating system ("Windows 95") and Windows NT, certain of the technical advantages of the Mac OS over previous versions of Windows have been narrowed or eliminated, and certain advantages of Windows have become greater. Due to more widespread market acceptance of Windows, more compatible application software is available for Windows than for the Mac OS. Continued improvements in Windows without the introduction of an improved Mac OS by Apple could have a material adverse impact on the demand for the Company's products. Apple has recently announced a new strategy for upgrading the Mac OS. The first part of this strategy involves upgrading the current Mac OS by replacing it with the proposed Mac OS 8, which Apple expects to make available in late summer 1997, and continuing to offer regularly scheduled upgrades of the current Mac OS. At the same time, Apple is currently developing Rhapsody, its next-generation operating system for PowerPC processor-based computer systems, that Apple expects to make available for general release in 1998. Apple has indicated that the proposed Mac OS 8 and Rhapsody will be designed to function with certain existing or soon to be released Macintosh software (referred to as "backward compatibility" in the PC industry). Releases of versions of the Mac OS have often been delayed by Apple. Any future delays by Apple in delivering any new or modified Mac OS (including Mac OS 8 or Rhapsody) could result in users migrating to Wintel computer systems. Moreover, any continued uncertainty regarding the future of Apple and the Mac OS, or a lack of backward compatibility in any new Mac OS, could have a material adverse impact on the continued acceptance of Apple products, the Mac OS and the Company's Macintosh- compatible computer systems. Such uncertainty could also have an adverse impact on Apple's ability to 9 11 introduce new versions of the Mac OS, or could result in other changes in Apple's strategy, which might result in a material adverse effect on the Company. Future releases of any operating system create significant issues regarding upgrading the installed base (i.e., computer systems currently being used by consumers) and converting the market (through key independent software vendors) to the new operating system. There can be no assurance that independent software vendors will create new or modified versions of their software compatible with any future releases of the Mac OS, or, if developed, that such software will be available at a reasonable price. If either or both Mac OS 8 or Rhapsody or any other releases of the Mac OS contain significant bugs, lack significant numbers of native software applications to run on them, or otherwise fail to meet market expectations, purchases of new Macintosh-compatible computer systems could be adversely affected until these issues are resolved, if at all. Partially in response to these concerns, Apple has indicated that Mac OS 8 will, to the extent practicable, include proposed Rhapsody features as they become available. There can be no assurance, however, that Apple will create such upgrades or that they will be provided on a regular basis. DEPENDENCE ON THE PROSPECTS OF APPLE. The Company's core business is the sale of Macintosh-compatible computer systems. Because the Company's revenues have been derived solely, and are expected to be derived in the foreseeable future primarily, from the sale of such systems, the Company's success is extremely dependent upon the strength of consumer demand for Macintosh and Macintosh-compatible computer systems. Because the Company's Macintosh-compatible products are alternatives to Apple Macintosh systems, much of the Company's growth depends upon broad consumer acceptance of both Apple's and the Company's products and technologies, of which there can be no assurance. Moreover, the long-term viability of Macintosh and Macintosh-compatible computer systems is dependent to a large extent on Apple's and its licensees' ability to maintain and grow the installed base. Any decrease in sales of Macintosh systems, or any failure to maintain and to attract new Macintosh customers, could have a material adverse effect on the Company. Recently, the future prospects of Apple and its Macintosh product line have again become subject to continued speculation due to Apple's declining sales, greater than expected losses, restructurings, additional layoffs and changes in management. Continued doubts regarding the financial viability of Apple and related concerns over the future prospects of the Mac OS, among other factors, have caused sales of Apple Macintosh and Macintosh-compatible computer systems as a percentage of all PC sales to decrease, while sales of Wintel computer systems as a percentage of all PC sales have increased. Recent announcements regarding the operating results of Apple and the future of the Mac OS, as well as the potential emergence of CHRP, the introduction of Windows 95 and Windows NT and the planned release of Windows 98, have all helped to create increased direct competition between manufacturers of Macintosh and Wintel computer systems. Direct competition with Wintel computer systems has reduced demand for the Macintosh platform in general and negatively affected the overall market for the Company's products. As a result of this increased direct competition and uncertainty over the future of Apple, some corporate buyers are migrating from Macintosh-compatible to Wintel computer systems in their procurement decisions. This increased direct competition, or any continued financial or other difficulties of Apple or other licensees of Apple, could have a material adverse impact on the market for Macintosh-compatible systems and a corresponding material adverse impact on the Company. LIMITED OPERATING HISTORY; FLUCTUATING RATES OF REVENUE GROWTH. The Company commenced operations in January 1994, and it shipped its first Macintosh-compatible products and recorded its first revenues in May 1995. Consequently, the Company has a limited operating history upon which prospective investors may base an evaluation of the Company and its prospects. In addition, although the Company has no history of manufacturing and selling such systems, the Company currently plans to introduce selected Wintel computer systems in the first half of fiscal 1998. The Company has experienced substantial growth in revenues relating to its Macintosh-compatible products. The Company does not expect to sustain such rate of growth, if any, in the future, including upon its introduction of Wintel computer systems. Moreover, the Company's limited operating history makes the prediction of future operating results difficult or impossible, and there can be no assurance the Company's current Macintosh-compatible products or any future Macintosh-compatible or 10 12 Wintel computer products will maintain or achieve acceptance in the marketplace. Any downturn in the acceptance of the Company's current or future products, the market for Macintosh or Wintel computer systems specifically, or PCs generally, would have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have been subject to seasonality and other fluctuations on a quarterly and an annual basis due to a wide variety of factors affecting the PC market including, but not limited to, general economic conditions, overall demand for PCs (which typically has been strongest for the PC industry during the Company's second fiscal quarter), critical component availability, the timing of new product introductions by the Company and its competitors, manufacturing and production constraints, component price fluctuations (such as market pricing for memory products), industry competition, inventory and product obsolescence, seasonal cycles common in the industry, seasonal governmental purchasing cycles, the effect of product reviews and industry awards, changes in product mix, changing patterns of product distribution and other factors. The Company expects that these factors will continue to cause its operating results to fluctuate from quarter to quarter and year to year, and such fluctuations could be accentuated upon the Company's entrance into the Wintel market. The Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and that such comparisons should not be relied on as indications of future performance. It is possible that the Company's operating results in some future quarter may fall below the expectations of public market analysts and investors, in which case the price of the Company's Common Stock could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company has only recently begun to manufacture and sell its Macintosh-compatible products in significant volumes and has yet to manufacture or ship any Wintel computer systems. The Company expects that its Macintosh-compatible business will continue to be significantly affected by the pricing of Macintosh products as well as Apple's introduction, or announcement of plans for the introduction, of new Macintosh operating systems or other products, especially CHRP and proposed new versions or upgrades to the Mac OS. See "Business -- Agreements with Apple." The Company also expects that its planned Wintel computer systems will be affected by the introduction or announcement of plans for the introduction of new products by software companies such as Microsoft, as well as by hardware companies such as Intel Corporation ("Intel"). Moreover, the Company's business, including both Macintosh-compatible and Wintel computer systems, will be significantly affected by the future rate of acceptance of, and the development of applications for, the Internet, as well as by media coverage of the Company's and its competitors' products. Although the Company has generally experienced little or no backlog at any given time, and generally has no significant firm commitments for future sales, the Company's quarterly results have been affected in the past, and could be affected in the future, by orders for the Company's products taken in one quarter which are not shipped until a succeeding quarter. See Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's operating expenditures are based primarily on expected customer demand and are to a large extent fixed. As a result, if demand does not meet the Company's expectations in any given quarter or other period, any inability by the Company to quickly adjust operating expenditures to compensate for such shortfall would have a material adverse impact on the Company. The Company is currently in the process of increasing its expenditures in expectation of higher sales of its Macintosh-compatible products and its planned introduction of Wintel computer systems, while at the same time attempting to reduce expenditures as a percentage of total revenue. If the Company is unable to reduce expenditures as a percentage of total revenue, its margins could decrease. The Company may also choose to reduce prices or further increase spending in response to competition or to pursue other new market opportunities. If these expenditures are not matched by increased sales revenues, the Company would be materially adversely affected. The PC industry is characterized by short product life cycles resulting from rapid changes in technology and consumer preferences and by declining prices. The Company's future success depends on its ability to design, develop, test, manufacture and support new products, including its currently planned Wintel computer systems, in a timely manner to meet changing customer needs and emerging industry standards, and to 11 13 respond to technological developments with competitively priced products. There can be no assurance that the Company's current or future products will be successful in meeting these demands, or that the introduction of new products or features by the Company or its competitors will not materially adversely affect the sale of the Company's existing products. In addition, there can be no assurance that the Company will be able to accurately forecast demand or effectively turn over its inventory to avoid reserves or write-downs associated with excess inventory. See "Business -- Strategy, " -- Products" and " -- Research and Development." CHANGES TO SERVICE AND SUPPORT FUNCTIONS. The Company currently plans to begin outsourcing certain of its service and support functions to third-party service providers. The Company believes that this strategy will reduce the Company's operating costs, allow the Company to better utilize its resources and ensure continued quality of service to the Company's expanding customer base. If the Company fails to effectively execute or implement its plans to outsource certain service and support functions, the quality and timeliness of service and support to the Company's customers could decline. Since the Company's service and support performance and reputation are important in attracting both new and repeat customers for the Company's products, any such decline in the quality or timeliness of the Company's service and support could result in a material adverse effect on demand for the Company's products. See "Business -- Service and Support." MANAGEMENT OF GROWTH. The Company has experienced rapid growth that has placed a significant strain upon its management and financial systems and resources. The ability of the Company to compete effectively and to manage future growth will require the Company to continue improving financial and management controls, reporting systems and procedures and to continue expanding, training and managing its workforce. The Company is in the process of implementing such controls, systems and procedures, but there can be no assurance that the Company will be able to complete this implementation without disruption to its business, that such efforts will be achieved at acceptable expense levels, that such planned financial and management controls, reporting systems and procedures will enable the Company to deliver adequate customer support or that such efforts will not distract the attention of management of the Company. Additionally, strains on the Company's systems can result in a delay of shipments, in customer service and support which could have an adverse impact on the Company. Failure to successfully implement such systems in a timely manner could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Manufacturing" and "-- Management Information Systems." The Company has recently hired a significant number of employees, including senior management personnel, and currently expects that it will continue to do so in order to meet the growth demands of the Company. There can be no assurance, however, that the management personnel in place now or in the future will function effectively as a management team. In addition, the Company's future performance depends in significant part upon attracting and retaining key technical, sales, senior management and financial personnel, as well as highly skilled design and process engineers involved in the manufacture of existing systems and the development of new systems and processes. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its key technical, sales, senior management and financial personnel or to attract, assimilate or retain other such personnel in the future. Failure to do so could have a material adverse effect on the Company. See "Business -- Employees" and "Management." DEPENDENCE ON INFORMATION SYSTEMS. The Company's growth has required it to reevaluate its current management information systems and to commence implementation of new systems. The Company's current systems combine a centralized database with similar localized work group database systems integrated throughout the Company in an extensive multi-site computer network. For a variety of reasons, such systems are not well suited to the Company's direct marketing strategy and custom-configuration program, are unable to work with multiple currencies and lack the ability to scale quickly. The Company is in the process of implementing i2, the initial phase of its new information system strategy. i2, which the Company expects will be operational by the second quarter of fiscal 1998, is a management information system focused on forecasting and factory planning. The Company's current plan is to then begin converting its entire management information system to an SAP R/3 ("SAP") distributed client/server system, which integrates all of the Company's management information systems, including 12 14 phone systems, order entry, credit approval status, website ordering, order processing, manufacturing, finance and service into one system designed to efficiently handle transactions on a worldwide basis. In addition to the benefits of total systems integration, the Company's SAP system will be capable of working with multiple currencies and should enable the Company to expand its markets more quickly and efficiently. Moreover, version 4.0 of SAP, which is expected to be released in the fourth quarter of calender year 1997, will be compatible with the i2 system that is currently being implemented by the Company. The Company believes its current implementation of i2, and the compatibility between i2 and SAP, will allow the Company to take advantage of the benefits of i2 in the immediate future while allowing for smoother transition to the full SAP system over the next two fiscal years. Since the Company does not currently expect to fully implement SAP in fiscal 1998, it has extended its agreement for its current management information system. The Company believes that information systems are integral to its ability to provide superior customer service and support and that such systems provide the Company significant competitive advantages as part of its direct marketing strategy. However, the Company's implementation of i2, conversion to SAP, and the identification and implementation of other management information system components has been, and will continue to be, extremely complex as well as time and resource consuming. Any failure by the Company to complete such implementation or conversion efficiently and on schedule could have a material adverse effect on the Company. In addition, the Company's current management information system is not equipped to handle the year 2000 problem, and, if left in place, will treat January 1, 2000 as though it is January 1, 1900. This would lead to substantial errors in all of the Company's information systems, which would have a material adverse effect on the Company. In addition, even if the Company is successful in implementing its present information strategy, there can be no assurance such strategy will be effective. Failure of i2, SAP, or any components of either, to efficiently meet the growing needs of the Company could require investment and transition by the Company to a new system, which could have a material adverse effect on the Company. See "Risk Factors -- Dependence on Information Systems." The Company relies on continuous operations of its computer systems, particularly its manufacturing system, which currently operates 22 hours a day. The failure of the operation of the Company's manufacturing information system, or any of its computer systems in full or in part, including, but not limited to, internal or external network problems, manufacturing control systems failures or phone system problems, could have a material adverse impact on the Company. HIGHLY COMPETITIVE INDUSTRY; SHORT PRODUCT LIFE CYCLES. The PC industry in general, and the market for the Company's current and planned future products in particular, are highly competitive and characterized by the frequent introduction of new products, short product life cycles, a large number of competitors, continual improvement in product performance, features and price and price sensitivity on the part of customers. The combination of an environment of rapid technological changes, short product life cycles and competitive pressures results in gross margins on specific products decreasing rapidly. Accordingly, any delay in introduction of more advanced or more cost-effective products can result in significantly lower sales and gross margins. These factors have in the past, and will likely continue in the future, to create pricing pressures and downward pressures on gross margins, and the Company expects that its current gross margins will decline in future quarters as a result of such pressures. Other competitive factors include availability of new technology, marketing and sales ability, brand recognition, breadth of product line, ease of use and quality of customer support. The Company also believes that a segment of the PC industry competes for customers primarily on the basis of price, and that certain of the Company's competitors may offer lower prices than the Company. While the Company believes it is competitive with such vendors, the Company attempts to compete on the basis of value rather than solely on the basis of price. Failure of the Company to compete successfully with Apple, other Apple licensees or manufacturers of Wintel computer systems, or on the basis of any or all of the factors listed above, could have a material adverse effect on the Company. See "Business -- Competition." In the Macintosh-compatible market, the Company currently competes directly with Apple and other manufacturers that license Macintosh technology. Although Apple has to date licensed its technology to several companies, until recently the Company was the only manufacturer that sold a broad line of Macintosh- 13 15 compatible computer systems. However, in 1996 UMAX Computer Corporation ("UMAX") and Motorola began selling Macintosh-compatible computer systems under the SuperMac and StarMax names, respectively. In addition, Apple has granted both IBM and Motorola the rights to sublicense the Macintosh technology to other manufacturers. Although IBM possesses the right to manufacture and market Macintosh products under its own name, IBM has stated that it will focus on manufacturing and marketing its own Wintel computer systems and seek to sublicense its rights to Apple technology. The Company has recently obtained a sublicense for the Mac OS from IBM. Apple has also granted Motorola the right to resell Macintosh-based OEM board products, including passing through a Mac OS license to companies wishing to enter the Macintosh-compatible market without heavy engineering or manufacturing investment. See "Business -- Agreements with Apple" and " -- Competition." An increased number of Macintosh licensees may result in an increase in the number of Macintosh-compatible computer systems available to the public, which could have a material adverse effect on demand for the Company's products. Upon the Company's planned introduction of Wintel computer systems, the Company's Wintel products will compete directly against products manufactured by Wintel competitors, including Gateway 2000, Inc. ("Gateway"), Micron Electronics, Inc. ("Micron"), Compaq Computer Corporation ("Compaq"), Dell Computer Corporation ("Dell"), and others. The Company's Macintosh-compatible products already compete to some extent against the manufacturers of Wintel computer systems and such competition is likely to increase. The introduction of Windows 95 and Windows NT, the planned release of Windows 98, recent announcements regarding the operating results of Apple and the future of the Mac OS, the potential emergence of CHRP and other factors may have the effect of creating increased direct competition between manufacturers of Macintosh and Wintel computer systems. As a result of this increased competition, the Company's planned Wintel products may also compete directly with the Company's Macintosh-compatible products. Increased competition by the Company with Apple, Macintosh-compatible and Wintel manufacturers may result in increased price competition and product confusion that could materially adversely affect the Company. See "Business -- Competition." The Company competes with many Macintosh-compatible and Wintel manufacturers that market their products through distribution channels in which the Company does not currently participate. In particular, many such manufacturers traditionally sell their products through national and regional distributors, dealers and value-added resellers, as well as through their own direct sales forces. Failure to compete with these manufacturers could have a material adverse effect on the Company. The Company and other manufacturers of Macintosh-compatible and Wintel computer systems generally have access to and make use of many of the same components, often from the same group of suppliers. Since there are generally more suppliers of Wintel components, such components have become commodities in the computer market, making it difficult for suppliers to differentiate their products. Consequently, the Company (especially upon its planned entry into the Wintel market) and other manufacturers of Wintel products will generally purchase components from the same group of suppliers on substantially equal terms. See "Business -- Supplier Relations." The prices of many Macintosh-compatible and Wintel components decline periodically, often at an accelerated pace, and the general practice of the Company and its competitors is to reduce the prices of their products to attempt to gain a competitive advantage based on these component price declines. This market factor makes it imperative that the Company acquire component parts at the best possible price. Any failure by the Company to obtain good prices for its component parts or manage its inventory of component parts could place it at a competitive disadvantage and have a material adverse effect on the Company. The Company may, at any time, find it necessary to take pricing actions in an attempt to maintain a competitive mix of price, performance and customer support services. In this regard, the Company and its competitors often introduce new products with enhanced performance and additional features without corresponding price increases. The Company attempts to mitigate the effects of price reductions by improving product mix, further reducing component costs and lowering operating costs. There can be no assurance, however, that any pricing actions taken by the Company will be effective in stimulating higher levels of sales or that any concurrent cost reduction efforts will offset the effects of pricing actions on the Company's gross margins. 14 16 Recently many of the Company's competitors, including Apple, have lowered prices substantially, and the Company expects these pricing pressures to continue. These pricing pressures have resulted in significant reductions in the gross margins achieved by the Company, Apple and other competitors of the Company. If the Company is unable to respond to pricing pressures by reductions in manufacturing costs, increases in productivity or changes in product mix, the Company's gross margins and profitability would be adversely affected. Specifically, the Company's gross margin in the fiscal quarter ended March 31, 1997 was 19.8%, as compared to a gross margin for the six month period ended December 31, 1996 of 22.1%. These lower gross margins may continue in the future and in addition may be further adversely affected by entry into the Wintel market. The Company is in the process of adopting and implementing a plan to reduce operating expenses to offset the effect of possible decreases in gross margins. There can be no assurance that the Company will be successful in reducing such operating expenses, which would have a material adverse effect on the Company's net income. Many of the Company's competitors in both the Macintosh-compatible and Wintel markets, including but not limited to Apple, Gateway, Micron, Compaq, and Dell have greater financial, marketing, manufacturing, technical and management resources, broader product lines, greater brand name recognition and larger installed customer bases than those of the Company. As a result, they may be able to respond more quickly than the Company to new or emerging technologies and changes in customer requirements, or to devote greater resources than the Company to the development, promotion and sale of products. There can be no assurance that the Company will be able to compete successfully against its current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company. See "Business --Competition." EXPANSION OF MANUFACTURING FACILITIES. The future growth of the Company will depend on the Company's ability to expand its current manufacturing capacity to meet increases in demand. Although the Company has leased property and expects to commence building new manufacturing facilities in Georgetown, Texas, there can be no assurance that the Company will be able to complete construction of such facilities in a timely or cost-effective manner or that the Company will not experience manufacturing problems resulting from the move to these new facilities. While the Company's move to these new facilities should ultimately provide it with greater manufacturing resources, short-term increases in demand that cannot be met with the Company's existing manufacturing facilities could limit the short-term growth of the Company. The Company is in the process of obtaining financing to fund the construction of the planned facilities. If the Company is unable to obtain such financing on reasonable terms, it will have to finance such construction from cash generated by operations. If the Company's operations do not generate sufficient cash to fund the construction of the facilities, the Company may exercise its purchase option on the Georgetown property and attempt to sell the property to a third party. If the Company sells the Georgetown property, the Company will need to obtain alternate facilities to house its manufacturing operations. There can be no assurance the Company will be able to secure suitable alternative manufacturing facilities on favorable terms or facilities that provide for efficient manufacturing of the Company's products, if at all. See "Business -- Manufacturing" and " -- Facilities." SOLE OR LIMITED SOURCES OF SUPPLY. The Company's manufacturing processes for both Macintosh-compatible and Wintel computer systems require high volumes of quality components that are procured from third-party suppliers. Although the Company contracts for the manufacture of components according to the Company's specifications, the Company itself does not manufacture any components used in its products. Except for components the Company must obtain from suppliers licensed by Apple, the Company purchases substantially all of its components on a turn-key basis directly from independent suppliers. Each of the Company's suppliers is chosen after an evaluation of the quality of its components. Once a supplier is chosen, the Company provides quality specifications for products ordered from that supplier. When the components are delivered to the Company's facility, Company personnel inspect representative samples of the components to ensure compliance with quality specifications. In addition, the Company works closely with many of its suppliers to perform quality control inspections at the supplier's facilities before components are shipped to the Company. 15 17 The Company obtains some component parts from a sole supplier or a limited group of suppliers. Although the Company generally attempts to use standard parts and components that are available from multiple suppliers, the Company considers single-source supplier relationships to be advantageous in some circumstances. Moreover, the Company's license agreements with Apple require that certain components obtained for use in Macintosh-compatible computer systems be procured from designated suppliers that are approved or licensed by Apple, in which case the Company purchases such components according to forecasts. For components that must be procured from Apple-licensed suppliers, the Company purchases subcomponents according to forecast and then delivers them to contract assembly houses for assembly and functional testing. See "Business -- Agreements with Apple." Examples of critical components that are available from only one or a limited number of sources, or that require a license from Apple, include system application specific integrated circuits ("ASICs"), CPUs and ROMs. With respect to Wintel computer systems in particular, Microsoft is the sole supplier of Windows, and a limited number of suppliers manufacture Wintel-compatible microprocessors. See "Business -- Supplier Relations." From time to time the Company has experienced, and in the future may experience, disruptions to its normal production schedules as a result of single-source suppliers not meeting component delivery schedules. In particular, certain components that can only be manufactured by third parties holding licenses from Apple, such as ASICs, have recently been reported to be in short supply. In addition, alternative sources of supply are not available for some of the Company's single-sourced components. Where alternative sources are available, qualification of the alternative suppliers by Apple, when necessary, and the establishment of reliable supplies of components from such sources may result in delays and could have a material adverse effect on the Company. Any delays or inability of the Company in acquiring these or any other critical component parts on commercially reasonable terms would have a material adverse effect on the Company. Because the manufacture of certain components and subassemblies involves extremely complex processes with long lead times, there can be no assurance that delays or shortages in manufacturing or acquiring such items will not occur, and such delays or shortages could have a material adverse effect on the Company. For example, ASICs used in the Company's Macintosh-compatible products have long lead times. The Company has occasionally received defective components from suppliers, which can delay the production cycle of the Company's products, decrease profit margins by increasing inspection, handling and reworking costs, and more importantly, affect the reliability and reputation of the Company's products. The Company seeks to minimize such disruptions by regularly evaluating its supply sources and seeking alternative or additional suppliers as necessary. There can be no assurance that the receipt of defective components would not have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Agreements with Apple." While the Company has supply agreements with certain suppliers, such agreements typically only specify general terms and conditions, subject to release of purchase orders by the Company and acceptance thereof by the component supplier. If, in the future, the Company enters into long-term procurement contracts to reduce the risk of shortages or secure stable prices, the Company will risk paying for more components than it ultimately needs or purchasing components at prices in excess of prevailing market conditions. The Company strives to ensure that all of its peripherals and certain other components are procured under a "just-in-time" inventory model. The benefits of a just-in-time system include a shorter cash conversion cycle, reduced production cycles, reduced amounts of capital tied up in inventory, reduced exposure to inventory damage, pilferage or obsolescence and a reduced need for warehouse space in which to store inventory. The success of just-in-time manufacturing, however, is dependent upon the Company's relationships with its suppliers and each supplier's ability and willingness to provide more numerous but smaller shipments of components according to very specific delivery schedules. Consequently, the Company is dependent upon its suppliers to provide accurate and timely deliveries of component parts, and there is a minimal margin of error. Because the just-in-time model requires maintaining minimal levels of inventory, a delay in the delivery of one type of component could delay the production of an entire end product, in which case the Company would be materially adversely affected. See "Business -- Manufacturing" and "-- Supplier Relations." 16 18 INVENTORY MANAGEMENT. The Company's products require components that incorporate the latest technological developments in the industry, and the Company's ability to compete successfully in the future will depend in large part on its ability to effectively manage its inventories of components. The Company has experienced in the past, and could experience in the future, inventory buildups and obsolescence resulting from, among other things, the fast pace of technological developments in the industry and the short product life cycles of PC systems and components. To be successful in the future, the Company must accurately anticipate demand for its products and obtain adequate supplies of components to meet such demand. The failure of the Company to manage its inventories effectively could result in inventory obsolescence, excess inventories, component shortages and untimely shipment of products, any of which could have a material adverse effect on the Company. DEPENDENCE ON DIRECT MARKETING STRATEGY. The Company's products are primarily marketed through a customer-focused, targeted marketing strategy and integrated media approach, which includes placing advertisements in computer trade magazines (generally in premium spots such as the inside front cover), selling directly to customers over the telephone and through its website, and soliciting orders by direct mailings and Company catalogs. The Company markets its products and services, primarily through direct marketing and, to a lesser extent, through mail order companies and a growing field sales force calling on major customers. See "Business -- Overview," "-- Strategy" and "-- Marketing and Sales." Accordingly, the Company is dependent on the continued growth of direct distribution channels in which to sell its products and services. There can be no assurance that the Company's direct marketing channels will experience growth or even be maintained at current levels. Moreover, the Company's exclusive use of direct marketing may make it difficult for the Company to penetrate specific new markets, such as first-time computer buyers or small business owners, who may prefer to examine or try out a new system before making a purchase decision. As the Company seeks to expand its market share and brand recognition, the Company may increasingly utilize other distribution channels, especially in international markets. See "Business -- Strategy" and "Business -- Marketing and Sales." In this regard, the Company expects that any material increase in sales through indirect distribution channels as a percentage of total revenues will adversely affect the Company's average selling prices and gross margins due to the lower unit prices that are typically charged when selling through indirect channels. Moreover, there can be no assurance that the Company will be able to effectively sell its products through such indirect distribution channels or that the Company will be able to manage conflicts among its distribution channels. The inability to establish, manage or retain direct and indirect distribution channels, or the Company's inability to penetrate market segments, could materially adversely affect the Company. See "Business -- Marketing and Sales." The Company also plans to expand its field and outbound sales forces and its telemarketing and telesales organizations, but there can be no assurance that such expansion will be successfully completed, that the revenues from such expansion will recoup the costs incurred, or that the Company's sales and marketing organization will be able to successfully compete against more extensive and well-funded sales and marketing operations of many of the Company's current and potential competitors. Accordingly, the Company's inability to effectively manage the expansion of its sales and marketing efforts could have a material adverse effect on the Company. The Company's direct marketing strategy and future success depend in part on its ability to deliver systems to its customers promptly after receipt of customers' orders. At the same time, the Company believes that its competitors' production facilities use assembly and testing methods far more advanced than those currently used by the Company, and there can be no assurance that the Company will be able to develop facilities of comparable efficiency or capacity. Failure of the Company to successfully manufacture in present or future facilities, or compete with its competitors' manufacturing facilities, could have a material adverse effect on the Company. See "Business -- Manufacturing" and "-- Facilities." The Company currently plans to begin manufacturing and selling Wintel computer systems through its existing direct marketing network for Macintosh-compatible computer systems. Currently, the direct marketing of Wintel computer systems is dominated by Gateway, Micron and Dell, and the Company believes other competitors, such as Packard Bell NEC, Inc., IBM and Compaq, may soon attempt to offer their own 17 19 products through direct marketing channels. To compete in the direct sales channel for Wintel computer systems, the Company must establish and maintain brand name recognition among users of Wintel computer systems. In this regard, the Company believes that it must offer products, services and support of a quality that will be recognized by customers and trade publications on the basis of their price, reliability and performance. There can be no assurance that the Company can establish brand name recognition of its planned Wintel computer systems or, to the extent brand recognition is achieved, that the Company can maintain such recognition in the future. Failure of the Company to establish and maintain brand name recognition and consumer acceptance of its Wintel products would have a material adverse effect on the Company. The Company believes that the future success of its direct marketing strategy of Wintel computer systems will depend in part on the growth of the overall direct sales channel within the PC industry. However, there can be no assurance that direct sales as a percentage of industry-wide PC sales will increase or that the Company will be able to seize and maintain a competitive share of the direct sales market for PCs. There can also be no assurance that the Company's competitors that currently distribute Wintel products primarily through distributors and resellers will not implement or devote additional resources to a direct sales strategy. Any decline in the rate of growth of the direct sales channel, or the Company's failure to compete successfully in the direct sales channel, would have a material adverse effect on the Company. PRODUCT DEFECTS. Given their inherent complexity, the Company's products may contain undetected software or hardware errors when first introduced or as new versions are released. This may be especially true for the Company's currently planned Wintel computer systems, since the Company has not previously sold such products. Such errors may result from actions or inactions by the Company or suppliers of software or hardware components to the Company. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in products after commencement of commercial shipments and, from time to time, the Company may need to incur the costs of repairing or replacing defective systems or components. The Company generally establishes reserves for such costs, but there can be no assurance that such reserves will be adequate. Once detected, there is no assurance errors can be corrected in a timely manner, if at all. In particular, software errors may take several months to correct, if they can be corrected at all, and hardware errors may take even longer. The occurrence of such system errors, as well as any delays in correcting them, could result in the delay or loss of market acceptance of the Company's current or future products, additional warranty expenses, diversion of engineering and other resources from the Company's product development efforts or the loss of credibility with the Company's customers, any of which could have a material adverse effect on the Company. INTELLECTUAL PROPERTY RIGHTS. The Company relies on a combination of copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect its proprietary technology. Although the Company's only patent pending relates to the software used in its online configurator, continuing new developments in research and development may create a necessity or desire by the Company to patent additional technology. From time to time, other companies and individuals assert exclusive patent, copyright, trademark and other intellectual property rights to technologies or marks that are important to the PC industry or the Company's business. See "Business -- Intellectual Property." There can be no assurance that such infringement claims will not be asserted by third parties in the future and the Company's involvement in any patent or other intellectual property dispute or action could have a material adverse effect on the Company. In particular, adverse determinations in any litigation may subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and prevent the Company from manufacturing and selling its systems. Moreover, if the Company seeks licenses from third parties, there can be no assurance that the Company will be able to obtain such licenses on commercially reasonable terms, if at all. In addition, the Company could be at a disadvantage if its competitors obtain licenses for protected technologies, including Apple technology, on more favorable terms than the Company. In addition, if the Company or its suppliers are unable to license protected technology used in the Company's products, the Company could be required to eliminate certain features from such products, or could even be prohibited from marketing such products entirely. The Company could also incur substantial costs to redesign its products or to defend any legal action taken against the Company and, if the Company's products should be found to infringe protected technology, the Company could be enjoined from 18 20 further infringement and required to pay substantial damages to the infringed party, including punitive or consequential damages, and attorney's fees and interest. Any of the foregoing could have a material adverse effect on the Company. See "Business -- Agreements with Apple" and "-- Intellectual Property." RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION. A key component of the Company's strategy is further expansion into international markets. If the revenues generated by international operations are not adequate to offset the expense of establishing and maintaining such operations, the Company would be materially adversely affected. To date, the Company has limited experience in developing localized versions of its products and marketing and distributing them internationally, and there can be no assurance that the Company will successfully market, sell and deliver its products internationally. Moreover, there are certain risks inherent in doing business internationally, such as unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, seasonal reductions in business activity during the summer months in certain parts of the world and potentially adverse tax consequences. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company. See "Business -- Overview," "-- Strategy" and "-- Marketing and Sales." STATE TAXATION. More than one state has enacted legislation that would require out of state direct marketers to collect and remit sales and use taxes based on certain limited contacts with the state. Taxation authorities in certain states have, from time to time, solicited information from the Company to determine whether the Company has sufficient contacts with such states to require collection and remittance of sales and use taxes on its systems sold to customers in those states. As a result, the Company could be required to collect and remit sales and use taxes, as well as income and franchise taxes related to the Company's operations in prior periods, which could have a material adverse effect on the Company. In addition, since the Company may be increasing its contacts and presence in various states as it pursues its business strategies, the Company may be required to collect and remit such sales and use taxes, as well as income and franchise taxes in the future, which could have a material adverse effect on the Company. CONCENTRATION OF OWNERSHIP BY MANAGEMENT; EFFECT OF CERTAIN CHARTER PROVISIONS. The officers and directors of the Company and their affiliates, as a group, currently hold or are deemed to beneficially own over 65.7% of the Company's outstanding Common Stock and upon completion of the Offering will hold or be deemed to beneficially own approximately 54.6% of the outstanding Common Stock. As such, existing management has and will continue to hold sufficient voting power over all matters requiring approval of the stockholders of the Company to enable them to control the business and affairs of the Company, including without limitation, electing or removing the Company's Board of Directors, changing the core business of the Company, causing the Company to engage in transactions with affiliated companies, causing or restricting the sale of the Company and controlling the Company's dividend policy. See "Management" and "Principal Stockholders." Such concentration of ownership may also have the effect of delaying, deferring or preventing a change in control of the Company. EFFECT OF ANTI-TAKEOVER PROVISIONS. Upon completion of the Offering, certain provisions of the Company's Certificate of Incorporation and Bylaws and certain provisions of Delaware law could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that investors might be willing to pay in the future for the Company's Common Stock. These provisions permit the issuance of "blank check" preferred stock by the board of directors without stockholder approval, require super-majority approval to amend certain provisions in the Certificate of Incorporation and Bylaws, require that all stockholder actions be taken at duly called annual or special meetings and not by written consent, divides the board of directors into three classes with only one class standing for election each year and impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. Furthermore, the Company will be subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. 19 21 Such application of Section 203 could also have the effect of delaying or preventing a change of control of the Company. See "Management," "Principal Stockholders," "Certain Transactions" and "Description of Capital Stock." IMPACT OF REGULATION AND LITIGATION. The Company's products must meet standards established by the Federal Communications Commission and similar agencies in other countries for radio frequency emissions and must receive appropriate certification prior to being marketed. Any delay or inability to obtain certification may delay or prevent the Company from introducing new products or features, either of which could materially and adversely affect the Company. Any adverse change in or modification of these laws or regulations or the application thereof could have a material adverse effect on the Company. In addition, the Company's advertising, shipping and other operations are subject to regulations of the Federal Trade Commission, the U.S. Department of Commerce and similar foreign agencies in other jurisdictions. Even inadvertent or sporadic failure to comply with such regulations can result in significant fines, penalties and forced rebates levied against the Company or special restrictions placed on the Company's ability to ship products outside of the United States. While the Company has not been subject to any enforcement penalties to date, and while the Company continues to use its best efforts to comply with all applicable foreign and domestic governmental regulations, there is no assurance that claims of noncompliance will not be asserted against the Company in the future. Industry participants are named from time to time as defendants in litigation involving alleged violations of federal and state consumer or other similar laws and regulations. A significant judgment against the Company in connection with any litigation could have a material adverse effect on the Company. DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the continued services and management experience of Stephen S. Kahng, its Chairman of the Board and Chief Executive Officer, Joel J. Kocher, its President and Chief Operating Officer, and the Company's other executive officers. Although the Company currently carries key man life insurance on Mr. Kahng, if the Company were to lose the services of Mr. Kahng, or any of such other executive officers, the Company's operating results could be materially adversely affected. In addition, the Company's continued growth depends on its ability to attract and retain skilled employees and on the ability of its officers and key employees to manage growth successfully. See "Management." NEED FOR ADDITIONAL FINANCING. The Company requires substantial capital to manufacture and market its products, purchase component parts and perform research and development. Consequently, the Company's ability to grow and the future of its operations will be affected by the availability of future financing and the terms thereof. The Company believes that the net proceeds from this Offering, together with available funds and cash flows expected to be generated by operations and increased borrowings under its credit facility, will be sufficient to meet its projected working capital and other cash requirements for at least the next twelve months. The Company's future capital requirements, however, depend on numerous factors, including, without limitation: the success of marketing, sales and distribution efforts; the progress of its research and development programs; competition; competing technological and market developments; the effectiveness of product commercialization activities and arrangements; and the costs involved with protecting intellectual property rights. If cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may sell additional equity or debt securities or obtain additional credit facilities. If additional capital is required, there is no assurance that it will be available to the Company on favorable terms or at all. The sale of additional equity or other securities will result in further dilution to the Company's stockholders. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this Offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active trading market for the Common Stock will develop or, if developed, be sustained after this Offering. The Company believes that a variety of factors could cause the price of the Company's Common Stock to fluctuate, perhaps substantially, including: announcements of developments related to the Company's business; announcements by Apple; the success, or lack thereof, of the Company's current planned Wintel 20 22 products; fluctuations in the Company's operating results and order levels; general conditions in the PC industry or general economic conditions; announcements of technological innovations; new products or product enhancements by the Company, Apple or its competitors; developments in patent or other intellectual property rights; and developments in the Company's relationships with Apple or its customers, distributors and suppliers. In addition, in recent years the stock market in general, and the market for shares of equity securities of many high technology companies in particular, has experienced extreme price fluctuations that have often been unrelated to the operating performance of such companies. Such fluctuations may adversely affect the market price of the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering assuming no exercise of options or warrants after June 18, 1997, the Company will have outstanding 17,666,647 shares of Common Stock (18,216,647 shares if the Underwriters' over-allotment option is exercised in full). Of these shares, the 3,000,000 shares offered hereby (3,450,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 14,666,647 shares of Common Stock outstanding upon completion of the Offering are "restricted securities" as that term is defined in Rule 144, as amended, under the Securities Act ("Rule 144"). Of such shares, 15,000 shares will be eligible for immediate sale in the public market after commencement of the Offering and 284,987 shares will become eligible for sale 90 days after commencement of the Offering. Beginning 90 and 180 days after commencement of the Offering, 1,174,046 and 410,436 shares, respectively, subject to stock options vested as of such dates could also be sold pursuant to Rule 701 under the Securities Act ("Rule 701"), subject in some cases to compliance with certain volume limitations as described below. Certain stockholders owning upon completion of the Offering, in the aggregate, 14,466,660 shares of Common Stock, have contractually agreed to execute lock-up agreements pursuant to which each will agree that they will not directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock of the Company or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock, or other capital stock of the Company without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters. Further, holders of outstanding warrants and vested stock options for, in the aggregate, an additional 212,500 shares of Common Stock are subject to 180 day lock-up agreements with the Company. The Company has agreed to use its best efforts to seek such lock-up agreements from all of the Company's officers, directors, stockholders and option holders. In addition, the Company has agreed that it will not, for a period of 180 days from the date of this Prospectus, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock of the Company or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock, or other capital stock of the Company without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, except that such agreement does not prevent the Company from granting additional options under the Company's 1994 Stock Option Plan. Upon the expiration of or release from such lock-up agreements, 9,203,016 shares will be eligible for immediate sale under Rule 144 or Rule 701 and 410,436 additional shares subject to outstanding warrants and vested stock options could also be sold, subject in some cases to compliance with certain volume limitations. The remaining 5,263,644 shares held by existing stockholders will become eligible for sale at various times over a period of less than one year. Prudential Securities Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the securities subject to lock-up agreements. Sales of such shares in the future could adversely affect the prevailing market price of the Common Stock. No prediction can be made as to the effect, if any, that future sales of shares or the availability of shares for sale will have on the market price for Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception of the availability of shares for sale, could adversely affect the prevailing market price of the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. The holders of an aggregate of 14,679,160 shares of Common Stock of the Company which are "restricted securities" (assuming the conversion of 9,100,000 shares of Preferred Stock upon completion of the Offering and including 212,500 21 23 shares purchasable upon exercise of outstanding warrants) will be entitled to certain rights with respect to registration of such shares. If exercised, such registration rights could result in the such shares being sold earlier than otherwise allowable under Rule 144, and could adversely affect the prevailing market price of the Common Stock. See "Description of Capital Stock -- Registration Rights of Certain Holders" and "Shares Eligible for Future Sale." NO CASH DIVIDENDS. The Company has never paid and has no present plans to pay any cash dividends on its Common Stock. The Company currently intends to retain its earnings to finance the growth and development of its business. In addition, the Company's credit facility prohibits the payment of cash dividends without the lender's consent. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Dividend Policy." DILUTION. Purchasers of the Common Stock offered hereby will experience an immediate and substantial dilution of $6.39 per share based on an assumed initial public offering price of $9.00 per share (the midpoint of the filing range) in the net tangible book value of the Common Stock. To the extent that outstanding options to purchase the Company's Common Stock are exercised, there will be further dilution. See "Dilution." 22 24 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock offered hereby are estimated to be $23,610,000 ($27,376,500 if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $9.00 per share (the midpoint of the filing range), and after deducting the underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds to reduce borrowings under its credit facility, to fund the Company's initial development, manufacture and marketing of Wintel computer systems and for working capital and other general corporate purposes. See "Business -- Strategy" and "-- Manufacturing." Pending such uses, the Company intends to invest the net proceeds in short-term, investment grade, interest bearing securities. DIVIDEND POLICY The Company has never paid and has no present plans to pay any cash dividends on its Common Stock. The Company currently intends to retain its earnings to finance the growth and development of its business. In addition, the Company's credit facility prohibits the payment of cash dividends without the lender's consent. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 23 25 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of March 31, 1997 and as adjusted to (a) give effect to this Offering at an assumed initial public offering price of $9.00 per share (the midpoint of the filing range), after deducting the underwriting discounts and commissions and estimated offering expenses, (b) the application of the estimated net proceeds therefrom as described under "Use of Proceeds," and (c) the conversion of the Company's Preferred Stock into 9,100,000 shares of Common Stock upon completion of the Offering. See "Description of Capital Stock."
MARCH 31, 1997 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Credit facility(1).......................................... $18,683 $ -- ------- ------- Stockholders' equity: Preferred stock, $.01 par value Series A Preferred Stock, 5,000,000 shares authorized; 5,000,000 shares outstanding; no shares outstanding as adjusted(2)............................................ 50 -- Series B Preferred Stock, 4,200,000 shares authorized; 4,100,000 shares outstanding; no shares outstanding as adjusted(2)(3)......................................... 41 -- Common stock, $.01 par value 18,800,000 shares authorized; 5,619,113 shares outstanding; 17,719,113 shares outstanding as adjusted(4)............................................ 56 177 Additional paid-in capital................................ 13,884 37,464 Note receivable from stockholders......................... (70) (70) Retained earnings......................................... 8,690 8,690 ------- ------- Total stockholders' equity........................... 22,651 46,261 ------- ------- Total capitalization.............................. $41,334 $46,261 ======= =======
- --------------- (1) See Consolidated Financial Statements. (2) All of the shares of the Company's outstanding Preferred Stock will automatically convert into shares of Common Stock upon completion of the Offering. See "Description of Capital Stock." (3) Excludes 100,000 shares of Series B Preferred Stock issuable upon exercise of an outstanding warrant. (4) Excludes 112,500 shares of Common Stock issuable upon exercise of an outstanding warrant and 4,555,285 shares of Common Stock issuable upon the exercise of outstanding stock options. 24 26 DILUTION Purchasers of the Common Stock offered hereby will experience an immediate and substantial dilution in the pro forma net tangible book value of the Common Stock from the assumed initial public offering price. The pro forma net tangible book value of the Company as of March 31, 1997, giving effect to the conversion of all outstanding shares of the Company's Preferred Stock into 9,100,000 shares of Common Stock which will occur at the closing of this Offering, was $22,651,000, or $1.54 per share. See "Description of Capital Stock." Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the pro forma number of shares of Common Stock outstanding. After giving effect to the sale by the Company of the 3,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share (the midpoint of the filing range), and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, such pro forma net tangible book value of the Company as of March 31, 1997, would have been $46,261,000, or $2.61 per share, representing an immediate increase in pro forma net tangible book value of $1.07 per share to existing stockholders and an immediate dilution of $6.39 per share to new investors purchasing shares at the initial public offering price. The following table illustrates the per share dilution in pro forma net tangible book value per share to new investors: Assumed initial public offering price....................... $9.00 Pro forma net tangible book value as of March 31, 1997.... $1.54 Increase per share attributable to new investors.......... 1.07 ----- Pro forma net tangible book value after the Offering........ 2.61 ----- Dilution per share to new investors......................... $6.39 =====
The following table summarizes, as of March 31, 1997, the difference between existing stockholders and new investors with respect to the number of shares purchased from the Company, the total consideration paid to the Company and the average price paid per share, giving pro forma effect to (a) the sale of the shares offered hereby at an assumed initial public offering price of $9.00 per share and (b) the conversion of all outstanding shares of the Company's Preferred Stock into 9,100,000 shares of Common Stock upon completion of the Offering.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders........ 14,719,113 83.1% $14,031,000 34.2% $0.95 New investors................ 3,000,000 16.9% 27,000,000 65.8% $9.00 Total........................ 17,719,113 100.0% $41,031,000 100.0%
The computations in both of the foregoing tables assume that the Underwriters' over-allotment option will not be exercised, and do not include 4,555,285 shares of Common Stock issuable upon exercise of options outstanding on March 31, 1997, with an average exercise price of $4.79 per share, 112,500 shares of Common Stock issuable upon exercise in full of a warrant with an exercise price of $0.10 per share and 100,000 shares of Series B Preferred Stock issuable upon exercise of a warrant with an exercise price of $5.00 per share. See "Management -- Incentive Stock Plans," "Underwriting" and Note 7 of the Notes to Consolidated Financial Statements. 25 27 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The consolidated statement of operations data for the eight months ended June 30, 1994, the fiscal years ended June 30, 1995 and 1996, the nine months ended March 31, 1997 and the consolidated balance sheet data at June 30, 1994, June 30, 1995, June 30, 1996 and March 31, 1997 are derived from the consolidated financial statements of the Company included elsewhere in this Prospectus, which have been audited by the Company's independent auditors. The consolidated statement of operations data for the three months ended September 30, 1995, December 31, 1995, March 31, 1996, June 30, 1996, September 30, 1996, December 31, 1996 and March 31, 1997, are derived from unaudited consolidated financial statements of the Company not included herein. The consolidated statement of operations data for the nine months ended March 31, 1996 have been derived from unaudited consolidated financial statements of the Company not included herein. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in the opinion of management, include all adjustments necessary for a fair presentation of the Company's results of operations. The data set forth below should be read in conjunction with the consolidated financial statements of the Company, and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein.
INCEPTION (NOV. 19, 1993) FISCAL YEAR ENDED NINE MONTHS ENDED THROUGH JUNE 30, MARCH 31, JUNE 30, ------------------ ------------------ 1994(1) 1995 1996 1996 1997(2) --------------- ------- -------- ------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales....................................... $ -- $ 3,046 $131,075 $82,413 $247,207 Cost of goods sold.............................. -- 2,059 104,408 66,563 194,495 ------- ------- -------- ------- -------- Gross profit.................................. -- 987 26,667 15,850 52,712 Costs and expenses: Sales, general and administrative............. 413 1,602 17,458 10,814 35,544 Research and development...................... 624 2,366 3,425 2,254 3,962 ------- ------- -------- ------- -------- Total costs and expenses............... 1,037 3,968 20,883 13,068 39,506 ------- ------- -------- ------- -------- Income (loss) from operations................... (1,037) (2,981) 5,784 2,782 13,206 Interest income (expense), other................ 25 40 (416) (245) (853) ------- ------- -------- ------- -------- Income (loss) before income taxes............... (1,012) (2,941) 5,368 2,537 12,353 Income taxes.................................... -- -- 462 -- 4,616 ------- ------- -------- ------- -------- Net income (loss)............................... $(1,012) $(2,941) $ 4,906 $ 2,537 $ 7,737 ======= ======= ======== ======= ======== Net income (loss) per common and common equivalent share.............................. $ (0.22) $ (0.49) $ 0.35 $ 0.19 $ 0.46 ======= ======= ======== ======= ======== Weighted average number of common and common equivalent shares outstanding................. 4,574 5,991 14,024 13,050 17,000
26 28 SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED ---------------------------------------------------------------------------- SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1995 1995 1996 1996 1996(2) 1996(2) 1997(2) --------- -------- -------- -------- --------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.............................. $21,444 $26,951 $34,018 $48,662 $64,264 $98,593 $84,350 Cost of goods sold..................... 16,686 23,152 26,725 37,845 50,114 76,697 67,684 ------- ------- ------- ------- ------- ------- ------- Gross profit......................... 4,758 3,799 7,293 10,817 14,150 21,896 16,666 Costs and expenses: Selling, general and administrative..................... 2,514 3,951 4,349 6,644 8,086 14,204 13,254 Research and development............. 679 731 844 1,171 1,369 1,141 1,452 ------- ------- ------- ------- ------- ------- ------- Total costs and expenses...... 3,193 4,682 5,193 7,815 9,455 15,345 14,706 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations.......... 1,565 (883) 2,100 3,002 4,695 6,551 1,960 Interest income (expense), other....... 17 (95) (167) (171) (205) (296) (352) ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes...... 1,582 (978) 1,933 2,831 4,490 6,255 1,608 Income taxes........................... -- -- -- 462 1,677 2,338 601 ------- ------- ------- ------- ------- ------- ------- Net income (loss)...................... $ 1,582 $ (978) $ 1,933 $ 2,369 $ 2,813 $ 3,917 $ 1,007 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per common and common equivalent share..................... $ 0.10 $ (0.16) $ 0.11 $ 0.14 $ 0.17 $ 0.23 $ 0.06 ======= ======= ======= ======= ======= ======= ======= Weighted average number of common and common equivalent shares outstanding.......................... 16,019 6,150 16,981 16,944 17,046 16,896 17,059
JUNE 30 ---------------------------- MARCH 31, 1994 1995 1996 1997(2) ------ ------- ------- ---------- CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $2,089 $ 8,096 $12,612 $12,530 Total assets................................................ 2,521 11,427 49,059 73,884 Total liabilities........................................... 106 2,942 34,498 51,233 Stockholders' equity........................................ 2,415 8,485 14,561 22,651
- --------------- (1) The Company was incorporated in November 1993 and commenced operations in January 1994. It first shipped products in May 1995. (2) On July 1, 1996 the Company changed to a 52/53 week fiscal year ending on the Sunday closest to June 30. Therefore, references to "fiscal 1997" mean the fiscal year ended June 29, 1997. References to quarterly information for fiscal 1997 mean the quarter ended on the Sunday closest to the calendar quarter end. References to quarterly information for fiscal 1997 mean the Sunday closest to the calendar quarter end. All fiscal years set forth above included 52 weeks 27 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussions in this Prospectus contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the section entitled "Risk Factors" as well as those discussed elsewhere in this Prospectus. OVERVIEW Power Computing is a leading direct marketer of personal computers. To date, the Company has developed, manufactured, sold and supported a broad line of custom-configured Macintosh-compatible desktop computer systems which employ modular designs based, to the extent possible, on Wintel industry standard components. The Company intends to expand its leading position in the Macintosh-compatible market and to promote the growth of the Macintosh platform by offering new desktop and portable computer systems that are price/performance leaders. The Company is also planning to broaden its product portfolio to include Wintel desktop and portable computer systems, as well as Microsoft Windows NT based server products that will jointly support Macintosh and Wintel connectivity. The Company promotes its products through a targeted marketing strategy and an integrated media approach, which includes marketing its products directly to customers through its website, placing advertisements in computer trade magazines (generally in premium spots such as the inside front cover), direct mailings and Company catalogs. Direct marketing of PCs is currently growing at a rate of approximately 25% per year, and it is estimated that 27% of all PCs sold in the United States were distributed directly in calendar year 1996. The Company sells its products directly to customers over the Internet through its innovative online store, over the telephone and to larger accounts through its growing direct field sales force. The Company plans to pursue additional sales of products in markets outside of the United States. The Company's net sales have increased from $82.4 million for the nine months ended March 31, 1996 to $247.2 million for the nine months ended March 31, 1997. The Company commenced operations in January 1994, and shipped its first Macintosh-compatible products and recorded its first revenues in May 1995. Consequently, the Company has a limited operating history. The Company has experienced substantial growth in revenues relating to its Macintosh-compatible products. The Company does not expect to sustain such rate of growth, if any, in the future, including upon its introduction of Wintel computer systems. Moreover, the Company's limited operating history makes the prediction of future operating results difficult or impossible. See "Risk Factors -- Limited Operating History; Fluctuating Rates of Revenue Growth." In December 1994, the Company became the first company to receive a license from Apple for the proprietary Mac OS and Macintosh system architecture. Since inception, the Company has developed, manufactured, marketed and sold Macintosh-compatible desktop computer systems under a license from Apple, and the Company currently derives substantially all of its revenues from the sale of such systems. The Company's Macintosh-compatible business, including all of the Company's current and planned Macintosh-compatible products, is dependent on the Company's business relationship with Apple. The Company's agreements with Apple permit it to manufacture and sell Macintosh-compatible computer systems and reproduce and distribute the current version of the Mac OS for specified royalties that must be prepaid to Apple on a periodic basis. See "Risk Factors -- Risks Associated with Dependence on Licenses from Apple" and "Business -- Agreements with Apple." Management currently expects no material effect on royalty costs over the next 12 months as a result of the recently negotiated Apple Term Sheets. 28 30 The Company primarily markets and sells its products through direct sales channels. For the nine months ended March 31, 1997, approximately 65% of the Company's Macintosh-compatible computer systems were distributed through its direct sales channels, with the balance distributed through indirect sales channels. The Company's direct marketing strategy, which eliminates dealer markups and certain other distribution channel expenses, generally provides the Company with higher margins than can be achieved from its indirect sales channels. In this regard, the Company expects that any material increase in sales through indirect channels as a percentage of total revenues will adversely affect the Company's average selling prices and gross margins due to the lower unit prices that are typically charged by the Company when selling through indirect channels. See "Risk Factors -- Dependence on Direct Marketing Strategy." Most of the Company's Macintosh-compatible computer systems are sold domestically, while approximately 10% of its products are sold outside the United States, primarily through indirect sales channels. The Company currently intends to expand its direct marketing strategy into selected international markets to increase the sale of its products outside the United States. See "Risk Factors -- Risks Associated with International Expansion." The Company recognizes revenue, net of customer returns and customer allowances, as of the date product is shipped to customers. Revenues from separately priced maintenance and extended warranty agreements are recognized ratably over the terms of the agreements. The Company is developing selected Wintel desktop and portable computer systems that it currently plans to begin manufacturing, marketing and selling in the first half of fiscal 1998. The Company has already begun and intends to continue to invest significant amounts of capital in research and development, marketing and manufacturing to facilitate its introduction of Wintel computer systems. The Company also plans to continue hiring new technical, manufacturing and marketing employees to staff the development, production and sale of Wintel computer systems. The Wintel market has historically operated at lower overall margins than the Macintosh market and, as the Company enters the Wintel desktop market, it expects its overall gross margins to decrease accordingly. See "Risk Factors -- Risks Associated with Entry into the Wintel Market; New Product Development." The Company has only recently begun to manufacture and sell its Macintosh-compatible products in significant volumes and has yet to manufacture or sell any Wintel computer systems. The Company expects that its Macintosh-compatible business will continue to be significantly affected by the pricing of Macintosh products as well as Apple's introduction, or announcement of plans for the introduction, of new Macintosh operating systems or other products, especially CHRP and proposed new versions or upgrades to the Mac OS. See "Risk Factors -- Risks Associated with Dependence on Licenses from Apple," "-- Highly Competitive Industry; Short Product Life Cycles," and "Business -- Agreements with Apple." The Company also expects that sales of its planned Wintel computer systems will be affected by the factors affecting the highly competitive Wintel PC industry, the introduction or announcement of plans for the introduction of new products by software companies such as Microsoft, as well as technological innovations by hardware companies such as Intel. See "Risk Factors -- Highly Competitive Industry; Short Product Life Cycles." Moreover, all facets of the Company's business, including both Macintosh-compatible and Wintel computer systems, will be significantly affected by the future rate of acceptance of, and the development of applications for, the Internet, as well as by media coverage of the Company's and its competitors' products. Although the Company has generally experienced little or no backlog at any given time, and generally has no significant firm commitments for future sales, the Company's quarterly results have been affected in the past, and could be affected in the future by orders for the Company's products taken in one quarter which are not shipped until a succeeding quarter. For example, the Company's revenues during the quarter ended December 31, 1996 were positively affected by sales of the Company's products which were ordered in the prior quarter. The Company's operating expenditures are based primarily on expected customer demand and are to a large extent fixed. As a result, if demand does not meet the Company's expectations in any given quarter or other period, any inability by the Company to quickly adjust operating expenditures to compensate for such shortfall would have a material adverse impact on the Company. The Company is currently in the process of 29 31 increasing its expenditures in expectation of higher sales of its Macintosh-compatible products and its planned introduction of Wintel computer systems, while at the same time attempting to reduce expenditures as a percentage of total revenue. If the Company is unable to reduce expenditures as a percentage of total revenue, its margins could decrease. The Company may also choose to reduce prices or further increase spending in response to competition or to pursue other new market opportunities. If these expenditures are not matched by increased sales revenues, the Company would be materially adversely affected. See "Risk Factors -- Fluctuations in Operating Results." The PC industry in general, and the market for the Company's current and planned future products in particular, are highly competitive and characterized by the frequent introduction of new products, short product life cycles, a large number of competitors, continual improvement in product performance, features and price, and price sensitivity on the part of customers. The combination of an environment of rapid technological changes, short product life cycles and competitive pressures often results in gross margins on specific products decreasing rapidly. Accordingly, any delay in introduction of more advanced or cost-effective products could result in significantly lower sales and gross margins. See "Risk Factors -- Highly Competitive Industry; Short Product Life Cycles." The Company's products require components that incorporate the latest technological developments in the industry, and the Company's ability to compete successfully in the future will depend in large part on its ability to effectively manage its inventories of components. The Company has experienced in the past, and could experience in the future, inventory buildups and obsolescence resulting from, among other things, the fast pace of technological developments in the industry and the short product life cycles of PC systems and components. To be successful in the future, the Company must accurately anticipate demand for its products and obtain adequate supplies of components to meet such demand. The failure of the Company to manage its inventories effectively could result in inventory obsolescence, excess inventories, component shortages and untimely shipment of products, any of which could have a material adverse effect on the Company. See "Risk Factors -- Sole or Limited Sources of Supply;" "-- Inventory Management" and "Business -- Supplier Relations." RESULTS OF OPERATIONS From inception through May 1995 the Company was principally engaged in research and product development, recruiting personnel, raising capital and creating strategic relationships. The Company shipped its first product and recorded its first revenue in May 1995. The quarter ended September 30, 1995 is the first quarter in which the Company shipped products during the entire quarter and recorded meaningful net sales. As a result, the Company believes that financial analysis of fiscal periods prior to June 30, 1995 and quarters ended prior to September 30, 1995 are not meaningful. 30 32 The following table sets forth, for the periods indicated, certain items from the Company's consolidated statements of operations, expressed as a percentage of net sales:
FISCAL YEAR ENDED NINE MONTHS ENDED JUNE 30, MAR. 31, ------------------ ------------------ 1995 1996 1996 1997 ------ ------ ------ ------ Net sales............................................. 100.0% 100.0% 100.0% 100.0% Cost of goods sold.................................... 67.6 79.7 80.8 78.7 ----- ----- ----- ----- Gross margin........................................ 32.4 20.3 19.2 21.3 Costs and expenses: Selling, general and administrative................. 52.6 13.3 13.1 14.4 Research and development............................ 77.7 2.6 2.7 1.6 ----- ----- ----- ----- Total costs and expenses.............................. 130.3 15.9 15.8 16.0 ----- ----- ----- ----- Income (loss) from operations......................... (97.9) 4.4 3.4 5.3 Interest income (expense), other...................... 1.3 (0.3) (0.3) (0.3) ----- ----- ----- ----- Income (loss) before income taxes..................... (96.6) 4.1 3.1 5.0 Income taxes.......................................... -- 0.4 -- 1.9 ----- ----- ----- ----- Net income (loss)..................................... (96.6)% 3.7% 3.1% 3.1% ===== ===== ===== =====
Nine Months Ended March 31, 1996 Compared to Nine Months Ended March 31, 1997 Net Sales. Net sales increased from $82.4 million for the nine months ended March 31, 1996 to $247.2 million for the same period in 1997, an increase of $164.8 million, or 200%. This increase was primarily attributable to the Company's timely introduction of new product offerings with competitive price/performance features, increased name recognition and market acceptance of the Company's Power Computing brand of Macintosh-compatible computer systems, and continued growth and customer acceptance of the Company's direct sales channel. Gross Profit. Gross profit increased from $15.9 million for the nine months ended March 31, 1996 to $52.7 million for the same period in 1997, an increase of $36.8 million, or 233%. Gross margin increased from 19.2% for the nine months ended March 31, 1996 to 21.3% for the same period in 1997. Gross margin for the nine month period ended March 31, 1996 were adversely impacted by the liquidation of end-of-life products and the incurrence of higher than normal warranty costs associated with one of the Company's product lines. Gross margin for the three month period ended March 31, 1997 decreased to 19.8% from 22.1% for the six month period ended December 31, 1996 as a result of the Company lowering prices in response to pricing pressures. As the market for Macintosh systems becomes more competitive, the Company expects its gross margins to decrease. In addition, the Wintel market has historically operated at lower overall margins than the Macintosh market and, as the Company enters the Wintel desktop market, it expects its overall gross margins to decrease accordingly. Selling, General and Administrative. Selling, general and administrative expenses increased from $10.8 million for the nine months ended March 31, 1996 to $35.5 million for the same period in 1997, an increase of $24.7 million, or 229%. As a percentage of sales, these expenses increased from 13.1% for the nine month period ended March 31, 1996 to 14.4% for the same period in 1997. The increase in absolute spending and spending as a percentage of sales was primarily a result of higher personnel costs and marketing demand generation programs associated with the Company's accelerated sales growth. During the nine month period ended March 31, 1997, the Company sought out and hired additional key members of management. In addition, the increase can be partially attributed to costs associated with the Company's management information systems. The Company is in the process of adopting and implementing a plan to reduce selling, general and administrative expenses in an effort to reduce operating expenses as a percentage of sales. There can be no assurance that the Company will be successful in reducing such operating expenses, which would have a material adverse effect on the Company's net income. See "Risk Factors -- Risk Associated with Entry into the Wintel Market; New Product Development." 31 33 Research and Development. Research and development expenses increased from $2.3 million for the nine months ended March 31, 1996 to $4.0 million for the same period in 1997, an increase of $1.7 million. Research and development expenses decreased as a percentage of sales from 2.7% for the nine months ended March 31, 1996 to 1.6% for the nine months ended March 31, 1997. The increase in absolute expenses was primarily due to increased spending as a result of the Company expansion of its product offerings. The Company expects to continue to increase its research and development expenditures in absolute dollars in future periods as the Company continues to diversify its product offerings. Operating Income. Due to the factors discussed above, for the nine months ended March 31, 1996 the Company had operating income of $2.8 million compared to operating income of $13.2 million for the same period in 1997, an increase of $10.4 million, or 375%. Income Taxes. The Company's effective income tax rate was 37.4% for the nine months ended March 31, 1997. The Company paid no taxes for the nine months ended March 31, 1996. During the nine month period ended March 31, 1996 the Company utilized net operating loss carryforwards and federal research and development credits to eliminate its tax liability. Prior to the nine month period ended March 31, 1997 the Company had completely utilized its net operating loss carryforwards and federal research and development tax credit carryforwards. Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1996 From inception through May 1995 the Company was engaged principally in research and product development, recruiting personnel, raising capital and creating strategic relationships. The Company shipped its first product and recorded its first revenue in May 1995. For the year ended June 30, 1995 the Company had net sales of $3.0 million and gross profit of $987,000, or 32.4% of net sales. For the fiscal year ended June 30, 1996, the first full fiscal year in which the Company shipped product, the Company had net sales of $131.1 million and gross profit of $26.7 million, or 20.3% of net sales. Selling, general and administrative expenses increased from $1.6 million for the fiscal year ended June 30, 1995 to $17.5 million for the fiscal year ended June 30, 1996. This increase was due to the additional expenditures incurred by the Company to support its rapid increase in sales growth, expenses relating to the Company's moving from a subleased property shared with another computer manufacturer to a direct leased property, and the expenditures to establish the Company's management information systems. Research and development expenses increased from $2.4 million for the fiscal year ended June 30, 1995 to $3.4 million for the fiscal year ended June 30, 1996. The increase in expenses in fiscal 1996 was primarily due to increased spending as a result of the Company's beginning to expand its product offerings. Eight Months Ended June 30, 1994 During the eight month period ended June 30, 1994, the Company was in the development stage. The Company was engaged principally in research and product development, recruiting personnel, raising capital and creating strategic relationships. QUARTERLY FINANCIAL DATA The Company's operating results have been subject to seasonality and other fluctuations on a quarterly and an annual basis due to a wide variety of factors affecting the PC market including, but not limited to, general economic conditions, overall demand for PCs (which typically has been strongest for the PC industry during the Company's second fiscal quarter), critical component availability, the timing of new product introductions by the Company and its competitors, manufacturing and production constraints, component price fluctuations (such as market pricing for memory products), industry competition, inventory and product obsolescence, seasonal cycles common in the industry, seasonal governmental purchasing cycles, the effect of product reviews and industry awards, changes in product mix, changing patterns of product distribution and other factors. The Company expects that these factors will continue to cause its operating results to fluctuate from quarter to quarter, and such fluctuations could become more severe upon the Company's entry into the Wintel market. The Company believes that quarter-to-quarter comparisons of its operating results are not 32 34 necessarily meaningful and that such comparisons should not be relied on as indications of future performance. It is likely that the Company's operating results in some future quarter will fall below the expectations of public market analysts and investors, in which case the price of the Company's Common Stock could be materially adversely affected. See "Risk Factors--Fluctuations in Operating Results." The following table presents unaudited quarterly financial data for the Company since the first quarter in which it shipped products for the entire quarter. The unaudited data has been prepared on the same basis as the Company's audited financial statements, and in the opinion of management, reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the data for the periods presented. The financial data should be read only in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this Prospectus. Although the Company has generally experienced revenue growth, the Company believes such growth rates are not sustainable and should not be considered indicative of future operating results.
THREE MONTHS ENDED --------------------------------------------------------------------------------- SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31 MAR. 31, 1995 1995 1996 1996 1996 1996 1997 --------- -------- -------- -------- --------- ------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.................................. $21,444 $26,951 $34,018 $48,662 $64,264 $98,593 $84,350 Cost of goods sold......................... 16,686 23,152 26,725 37,845 50,114 76,697 67,684 ------- ------- ------- ------- ------- ------- ------- Gross profit............................. 4,758 3,799 7,293 10,817 14,150 21,896 16,666 Costs and expenses: Selling, general and administrative...... 2,514 3,951 4,349 6,644 8,086 14,204 13,254 Research and development................. 679 731 844 1,171 1,369 1,141 1,452 ------- ------- ------- ------- ------- ------- ------- Total costs and expenses........... 3,193 4,682 5,193 7,815 9,455 15,345 14,706 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations.............. 1,565 (883) 2,100 3,002 4,695 6,551 1,960 Interest income (expense), other........... 17 (95) (167) (171) (205) (296) (352) ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes.......... 1,582 (978) 1,933 2,831 4,490 6,255 1,608 Income taxes............................... -- -- -- 462 1,677 2,338 601 ------- ------- ------- ------- ------- ------- ------- Net income (loss).......................... $ 1,582 $ (978) $ 1,933 $ 2,369 $ 2,813 $ 3,917 $ 1,007 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per common and common equivalent share......................... $ 0.10 $ (0.16) $ 0.11 $ 0.14 $ 0.17 $ 0.23 $ 0.06 ======= ======= ======= ======= ======= ======= ======= Weighted average number of common and common equivalent shares outstanding..... 16,019 6,150 16,981 16,944 17,046 16,896 17,059 PERCENTAGE OF TOTAL REVENUE DATA: Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold......................... 77.8 85.9 78.6 77.8 78.0 77.8 80.2 ------- ------- ------- ------- ------- ------- ------- Gross margin............................. 22.2 14.1 21.4 22.2 22.0 22.2 19.8 Costs and expenses: Selling, general and administrative...... 11.7 14.7 12.8 13.7 12.6 14.4 15.7 Research and development................. 3.2 2.7 2.5 2.4 2.1 1.2 1.7 ------- ------- ------- ------- ------- ------- ------- Total costs and expenses........... 14.9 17.4 15.3 16.1 14.7 15.6 17.4 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations.............. 7.3 (3.3) 6.1 6.1 7.3 6.6 2.4 Interest income (expense), other........... 0.1 (0.4) (0.5) (0.4) (0.3) (0.3) (0.4) ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes.......... 7.4 (3.7) 5.6 5.7 7.0 6.3 2.0 Income taxes............................... -- -- -- 0.9 2.6 2.4 0.7 ------- ------- ------- ------- ------- ------- ------- Net income (loss).......................... 7.4% (3.7)% 5.6% 4.8% 4.4% 3.9% 1.3% ======= ======= ======= ======= ======= ======= =======
The Company experienced consistent growth in sequential quarterly revenue on a quarter-to-quarter basis from the quarter ended June 30, 1995 through the quarter ended December 31, 1996. Revenue increased in the quarter ended December 31, 1996 by $34.3 million from the quarter ended September 30, 1996, or an increase of 53.4%. This increase was primarily due to the Company's receiving substantial orders in the quarter ended September 30, 1996 that were not shipped until the quarter ended December 31, 1996. This delay in shipment was primarily attributable to unanticipated significant demand for the Company's newly introduced 33 35 products during this quarter and a delay in increasing manufacturing capacity to meet such demand. Revenue decreased from $98.6 million in the quarter ended December 31, 1996 to $84.4 million in the quarter ended March 31, 1997, a decrease of $14.2 million. Excluding the effect of the increased sales in the quarter ended December 31, 1996 from delayed product shipments, sales for the quarter ended March 31, 1997 were comparable to the quarter ended December 31, 1996. During the quarter ended December 31, 1995, gross margin decreased to 14.1% due to the liquidation of end-of-life products and higher than normal warranty costs associated with one of the Company's product lines. During the quarter ended March 31, 1997, the gross margin was adversely impacted by a decrease in the Company's selling prices in response to a similar decrease by Apple. The Company's historical gross margins are not sustainable in the Wintel market place and cannot be considered indicative of future operating results. Selling, general and administrative expenses increased in the quarter ended December 31, 1996 as a result of increases in bad debt reserves, higher than normal expenditures on management information systems and increases in professional expenses. Research and development expenses have increased in absolute spending for all quarters except the quarter ended December 31, 1996 due primarily to additional product offerings. The decrease in absolute spending during the quarter ended December 31, 1996 is primarily due to lower prototype development expenditures. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997 the Company had cash and cash equivalents of $3.4 million, an increase of approximately $1.3 million from June 30, 1996. The Company has financed its operations to date primarily through revenue generated from operations, from borrowings under its credit facilities, and the private sale of equity securities. See "Certain Transactions." Cash generated from operations was $431,000 for the nine months ended March 31, 1997 compared to cash used in operations of $549,000, $4.6 million, and $10.8 million for periods ended June 30, 1994, 1995 and 1996, respectively. Net cash used in operating activities during the years ended June 30, 1995 and 1996 represents investments in working capital, primarily increased accounts receivable and inventory, partially offset by increases in accounts payable which were necessary to support the Company's increased volume of business. Net cash used in investing activities was approximately $244,000, $239,000, $2.4 million and $10.0 million for the fiscal periods ended June 30, 1994, 1995, 1996 and the nine months ended March 31, 1997, respectively, due primarily for capital expenditures. The increase in capital expenditures during the nine month period ended March 31, 1997 relates primarily to the acquisition of land and other costs for the Company's future corporate headquarters in Georgetown, Texas, additional administrative facilities, manufacturing line expansion, change in the Company's management information systems and for capital expenditures consistent with the increase in the Company's headcount. Cash flows from financing activities of $10.8 million in the nine months ended March 31, 1997 are primarily attributable to net borrowings of $10.7 million under the Company's credit facilities. In March 1997 the Company entered into a $50 million revolving credit facility, which expires in March 1998 and bears interest at the bank's base rate plus 0.5% (9% at March 31, 1997). Borrowings under this facility are subject to a borrowing base limitation (based upon a combination of certain eligible accounts receivable and inventory) and are collateralized by substantially all of the Company's assets. The credit facility requires that the Company maintain a lock box at the financial institution for collection of its accounts receivable. Collections via the lock box are restricted for payment of the interest and principal balance under the facility. The facility also limits the Company's annual capital expenditures and requires the Company to maintain a minimum net worth and meet certain financial ratios. In June 1997, the credit facility was amended to reduce the revolving credit facility to $30 million, amend certain covenant requirements and to modify the formula used to compute the borrowing base resulting in an increased borrowing base. Upon meeting certain conditions, including completion of an initial public offering prior to December 31, 1997 generating at least $35 million in net proceeds to the Company, the credit facility converts to a $30 million revolving line of credit maturing in March 1999. 34 36 In February 1997, the Company entered into a lease agreement in which it agreed to lease certain land and facilities to be constructed and located in Georgetown, Texas until December 2009. See Note 5 to "Notes to Consolidated Financial Statements." At any time during the lease term, the Company has the option of purchasing the premises for a nominal amount. Monthly lease payments are set to be equal to the monthly cost incurred by the lessor related to the leased premises, and these costs will fluctuate as land is purchased and construction costs of the facilities are incurred. The Company estimates that the total cost of the land and facilities construction will be approximately $25 million. At March 31, 1997, approximately $4.7 million related to the acquisition of land and certain construction costs had been paid or accrued. The Company is in the process of obtaining financing to fund the construction of the planned facilities. If the Company is unable to obtain such financing on reasonable terms, it will have to finance such construction from cash generated by operations. If the Company's operations do not generate sufficient cash to fund the construction of the facilities, the Company may exercise its purchase option on the Georgetown property and attempt to sell the property to a third party. If the Company sells the Georgetown property, the Company will need to obtain alternate facilities to house its manufacturing operations. There can be no assurance the Company will be able to secure suitable alternative manufacturing facilities on favorable terms or facilities that provide for efficient manufacturing of the Company's products, if at all. See "Risk Factors -- Need for Additional Financing" and " -- Expansion of Manufacturing Facilities." As of March 31, 1997, the Company had no material commitments other than unconditional firm purchase commitments in the ordinary course of business. The Company has not invested in derivative securities or any other financial instrument that involves a high level of complexity or risk. In the future, cash in excess of current requirements will be invested in investment-grade, interest-bearing securities. The Company believes that the net proceeds from this Offering, together with available funds and cash flows expected to be generated by operations and increased borrowings under its credit facility, will be sufficient to meet its projected working capital and other cash requirements for at least the next twelve months. The Company's future capital requirements, however, depend on numerous factors, including, without limitation: the success of marketing, sales and distribution efforts; the progress of its research and development programs; competition; competing technological and market developments; and the effectiveness of product commercialization activities and arrangements; and the costs involved with protecting intellectual property rights. If cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may sell additional equity or debt securities or obtain additional credit facilities. If additional capital is required, there is no assurance that it will be available to the Company on favorable terms or at all. The sale of additional equity or other securities will result in further dilution of the Company's stockholders. 35 37 BUSINESS OVERVIEW Power Computing is a leading direct marketer of personal computers. To date, the Company has developed, manufactured, sold and supported a broad line of custom-configured Macintosh-compatible desktop computer systems which employ modular designs, based to the extent possible, on Wintel industry standard components. The Company intends to expand its leading position in the Macintosh-compatible market and to promote the growth of the Macintosh platform by offering new Macintosh-compatible desktop computer systems that are price/performance leaders. The Company is also planning to broaden its product portfolio to include Wintel desktop and portable computer systems, as well as Microsoft Windows NT based server products that will jointly support Macintosh and Wintel connectivity. The Company promotes its products through a targeted marketing strategy and an integrated media approach, which includes marketing its products directly to customers through its website, placing advertisements in computer trade magazines (generally in premium spots such as the inside front cover), direct mailings and Company catalogs. Direct marketing of PCs is currently growing at a rate of approximately 25% per year, and it is estimated that 27% of all PCs sold in the United States were distributed directly in calendar year 1996. The Company sells its products directly to customers over the Internet through its innovative online store, over the telephone and to larger accounts through its growing direct field sales force. The Company intends to pursue additional sales of products in markets outside of the United States. The Company believes that its direct marketing strategy provides competitive advantages by allowing it to rapidly and efficiently develop, manufacture and deliver innovative products at competitive prices, to better understand and respond to customer demand for computer products and services and to effectively generate customer loyalty and brand name recognition. While the Company intends to capitalize on these competitive advantages through its continued direct marketing of Macintosh-compatible products, the Company is also now developing selected Wintel computer systems, which it plans to begin manufacturing, marketing and selling during the first half of fiscal 1998. The Company believes its direct marketing expertise, combined with its continued use of Wintel industry standard components, will facilitate its entry into certain Wintel market segments where graphics and multimedia capabilities are particularly important. Upon its entrance into the Wintel market, the Company will be the first company to manufacture and directly market both Macintosh and Wintel products. As a result, the Company's customers that use both systems will be able to purchase products from a single source that can service and support both platforms. In December 1994, Power Computing became the first company to receive a license from Apple for the proprietary Mac OS and Macintosh system architecture. The Company continually strives to develop a broad range of systems that incorporate innovative technological features and functions, and its products have been widely recognized by leading industry journals such as Macworld, MacUser and MacWEEK. The Company's net sales have increased from $82.4 million for the nine months ended March 31, 1996 to $247.2 million for the nine months ended March 31, 1997. INDUSTRY BACKGROUND The PC industry is primarily comprised of two distinct operating platforms: Wintel computer systems, which operate using Windows and an Intel or compatible microprocessor, and Macintosh computer systems (including Apple Macintosh and Macintosh-compatibles), which operate using the Mac OS and the PowerPC microprocessor (jointly developed by Apple, IBM and Motorola). Apple first introduced Macintosh computers in 1984. These computers are characterized by their ease-of-use, intuitive point-and-click interface and built-in networking, graphics and multimedia capabilities. Macintosh computer systems were designed, developed, manufactured and marketed exclusively by Apple until December 1994 when, in an effort to broaden acceptance of the Mac OS, Apple granted the Company the first license to the proprietary Mac OS and Macintosh system architecture. Although Apple has announced several Macintosh licenses to date, Power Computing was the only company selling a broad line of Macintosh- 36 38 compatible computer systems until 1996, when UMAX and Motorola began selling Macintosh-compatible computer systems under the SuperMac and StarMax names, respectively. In contrast to the Macintosh market, the Wintel market is characterized by a larger number of PC manufacturers and broader competition. The Wintel market has traditionally been served through a wide range of distribution channels including, among others, direct marketing, mail order, retail, multi-tier distribution networks and value added resellers. Certain companies, such as Gateway, Micron, Dell and others, have developed direct marketing strategies focused on marketing and selling PCs directly to customers. Apple has traditionally focused its marketing efforts on indirect sales channels such as retail stores, distributors and resellers. Other than a brief direct marketing effort by Apple that met resistance from retailers, a direct marketing strategy had not previously been implemented in the sale of Macintosh computer systems until Power Computing entered the market in May 1995. The Company believes that, similar to the Wintel market in general, Macintosh users have begun to accept the direct marketing approach. STRATEGY The Company's objective is to strengthen its position as a leading direct marketer of PCs by offering a portfolio of innovative personal computing products that are price/performance leaders. Key elements of the Company's business strategy include: Leverage its direct marketing expertise. The Company intends to continue to capitalize on the advantages achieved by its direct marketing of Macintosh-compatible computer systems, which includes the marketing and selling of the Company's products through its Internet online store. The Company also plans to leverage its direct marketing expertise to facilitate its entry into the Wintel market. The Company believes opportunities exist to increase sales through its Internet online store, while it continues to focus on traditional direct marketing methods. The Company's direct marketing strategy allows the Company to target computer users who evaluate products based on price, performance, reliability and support and to quickly respond to changes in customer demand and to rapidly introduce new products and technologies. The Company believes that, as the number of buyers of second and third computers increases, many of these purchasers will buy through direct sales channels such as those provided by the Company. Offer innovative Macintosh technology to its customers at competitive prices. The Company's goal is to offer its customers innovative Macintosh-compatible desktop and portable products that are price/ performance leaders. Since inception, the Company has introduced new products to the market, from entry level to high end performance systems, some of which offer features and functions that are unavailable from Apple and its Macintosh-compatible competitors. This "first to the market" strategy is designed to enable the Company to obtain initial customer acceptance of its products before its competitors introduce competing products. Identifying and targeting certain market segments. The Company intends to expand the targeting of certain market segments through its direct marketing strategy. The Company believes the ability to market its products directly to customers allows it the flexibility to identify profitable market segments and quickly adapt and target its marketing efforts accordingly. The Company utilizes a variety of marketing techniques, including direct response advertising, database-driven direct mail and telemarketing, and targeted web banners, to test and penetrate new market segments. Introduce Wintel products. The Company intends to broaden its product offerings to include selected Wintel computer systems that it currently plans to begin manufacturing, marketing and selling during the first half of fiscal 1998. The Company plans to offer selected Wintel desktop and portable computer systems with some features and functions the Company believes are not currently available from other manufacturers of Wintel computer systems. In addition, the Company is developing Microsoft Windows NT-based server products that will jointly support Macintosh and Wintel connectivity. Similar to its strategy in the Macintosh market, the Company's goal is to provide products that are price/ performance leaders in certain market segments. 37 39 Provide outstanding customer order, service and support programs. The Company seeks to provide superior customer order, service and support programs to its customers. For example, the Company's Internet website allows for the purchase of products through the Company's online store, which includes a proprietary, user-friendly, custom-configuration tool. The Company's website also provides access to frequently asked questions, software upgrades and special product offerings. Such programs build brand awareness and create customer loyalty, which the Company believes are essential for its long-term success. The Company also seeks to make its products convenient to buy through its toll-free telephone numbers, direct mail, catalogs and rapid delivery of its products, often within 48 hours of receipt of an order for standard configurations. The Company's introduction of Wintel products will also permit the Company's customers that use both Macintosh and Wintel computer systems to purchase products from a single source that can service and support both platforms. Expand internationally. While Apple has reported that it sells approximately 50% of its products outside of the United States, international sales represented approximately 10% of the Company's sales during the nine months ended March 31, 1997. To increase international sales, the Company intends to target markets where Macintosh computer systems have a large installed base and markets into which the Company believes it can most easily implement its sales and marketing strategies. Recognizing that direct marketing has not yet been as widely accepted in markets outside of the United States, the Company's marketing strategies in many international markets will include a balance between direct and indirect marketing tailored to the needs of the local markets. PRODUCTS The Company currently manufactures and sells three distinct Macintosh-compatible desktop system product families: PowerTower Pro, PowerCenter Pro and PowerBase. All products utilize a modular design, based to the extent possible on Wintel industry standard components, that allows for custom-configuration and simple upgradeability. The Company currently manufactures and markets its fourth generation of custom-configured Macintosh-compatible desktop systems. To achieve compatibility with the Mac OS, all of the Company's Macintosh-compatible products rely extensively on the designs for Apple's Power Macintosh system architectures. However, the Company uses enclosure designs, power supplies and board form factors consistent with those used for Wintel computer systems, but that still maintain Macintosh-compatibility. The Company believes that its use of Wintel-compatible components has allowed it to provide a wide range of options to its customers at prices more competitive than those offered by Apple. While the Company intends to aggressively continue to pursue its Macintosh-compatible business, the Company is also developing selected Wintel computer systems that it plans to begin manufacturing, marketing and selling during the first half of fiscal 1998. The Company has already begun, and intends to continue, to invest significant amounts of capital in research and development, marketing and manufacturing capacity to facilitate its introduction of desktop and portable Wintel computer systems. The Company also plans to continue hiring new technical and manufacturing employees to staff the development, production and sale of Wintel computer systems. The Company believes its direct marketing expertise, combined with its continued use of Wintel industry standard components, will facilitate its entry into selected Wintel market segments where graphics and multimedia capabilities are particularly important. The Company's currently available Macintosh-compatible product lines include the following: The PowerTower Pro product line was introduced in August 1996 and consists of a highly-expandable tower system targeted at performance-driven market segments such as web and multimedia production, audio and video production, prepress production, graphic design and webservers. Base model pricing (excluding monitors) currently ranges from $2,695 to $4,495 with expandability, upgradability and custom-configuration options optimized for the content creation and multimedia market segments. The PowerCenter Pro product line was introduced in April 1997 and consists of a desktop or mini-tower system targeted at the mainstream enterprise business market segment. Base model pricing (excluding 38 40 monitors) currently ranges from $1,995 to $2,395 with a high level of expandability, upgradability and custom-configuration options. The PowerBase product line was introduced in August 1996 and is targeted at the entry level market segment. PowerBase is distinct from other entry-level Macintosh-compatible computer systems because it is offered with three dimensional graphics acceleration as a standard component, a choice of desktop or mini-tower configuration and 200 to 240 megahertz PowerPC microprocessor. These features, coupled with aggressive pricing, introduce high end capabilities previously not available in the entry level market. Base model pricing (excluding monitors) currently ranges from $1,399 to $1,599 with expandability, upgradability capabilities and custom-configuration options. 39 41 The range of configurations available for the Company's current products include:
FEATURES POWERTOWER PRO POWERCENTER PRO POWERBASE -------- -------------- --------------- --------- Processors(1) 225 MHz 604e 180 MHz 604e 200 MHz 603e 250 MHz 604e 210 MHz 604e 240 MHz 603e Memory 32MB -- 1GB 16MB -- 512MB 16MB -- 160MB Cache 1MB 1MB 256KB Video 2D/3D accelerated 3D accelerated 2D/3D accelerated Video RAM 8MB 2/4MB 1/2MB Disk 2GB -- 8GB 1.2GB -- 8GB 1.2GB -- 4GB CD-ROM 16x 16x 12x Enclosure Tower only Low profile desktop Low profile desktop Mini Tower Mini Tower Other Keyboard, mouse Keyboard, mouse Keyboard, mouse Mac OS Mac OS Mac OS Software bundle Software bundle Software bundle Floppy drive Floppy drive Floppy drive Ethernet Ethernet Dual high speed SCSI channels 9 Drive bays Options AV card AV card AV card Internet kit Internet kit Internet kit ZIP or Jaz drives ZIP or Jaz drives ZIP or Jaz drives Software Software Software Modems Modems Modems 100BaseT 100BaseT Ethernet card RAID Monitors 15" -- 20" 15" -- 20" 15" -- 20" Selected Awards MacWorld's Editors MacWorld's Editors MacWorld's Editors Choice Award for Choice Award for Choice Award for Image Editing and 3D Office System and for Small Office/Home Graphics System and Publishing and Design Office System and for for Publishing and System in August 1997 Education System in Design Systems in issue August 1997 issue August 1997 issue Rated 5S (Excellent) by Rated 4Q/8.5-8.6 (Very MacWEEK in July 22, Good) by MacWorld in 1996 issue August 1997 issue Rated 5 Mice Rated 5S by MacWorld in Rated 5S by MacWEEK in Outstanding by May 12, 1997 issue August 5, 1997 issue MacUser in September 1996 issue
- --------------- (1) The 604e chips provide comparable performance to Intel's Pentium Pro microprocessors and the 603e chips provide comparable performance to Intel's Pentium microprocessors. In addition to its standard systems, and pursuant to its custom-configuration strategy, the Company offers a wide range of bundled software and hardware options with its products that provide customers with the 40 42 convenience of one-stop shopping, complete installation and custom-configuration at the factory. The Company continues to expand the hardware and software options available with its products, which increases the selling price and margins of systems being shipped. MARKETING AND SALES Overview. The Company promotes its products through a targeted marketing strategy and an integrated media approach, which includes marketing its products directly to customers through its website, placing advertisements in computer trade magazines (generally in premium spots such as the inside front cover), direct mailings and Company catalogs. The Company sells its products directly to customers over the Internet through its innovative online store, over the telephone and to larger accounts through its growing direct field sales force. In support of the Company's direct marketing strategy, the Company also organizes targeted public relations activities, maintains a high profile at industry conferences and prepares creative event marketing at industry tradeshows. The Company's advertisements include product information and the Company's toll-free telephone numbers and website address. The Company also has a team of major account sales personnel who are engaged in direct selling to large institutions and major corporate customers. While a direct marketing strategy had not previously been implemented in the sale of Macintosh computer systems until Power Computing entered the market in May 1995, the Company believes that, similar to the Wintel market in general, Macintosh users have begun to accept the direct marketing approach. The Company's direct marketing strategy eliminates dealer mark-ups and certain other distribution channel expenses, reduces the risks of inventory obsolescence associated with rapidly changing technological markets, limits inventory and carrying costs, provides efficiencies generally not possible in indirect sales channels and allows the Company to target computer users who evaluate products based on price, performance, reliability and support. It also allows the Company, through direct contact with its customers, to maintain, monitor and update a database of information about its customers that it uses to develop future product offerings and post-sale service and support programs. The Company believes that its direct marketing strategy provides it competitive advantages by allowing it to rapidly and efficiently develop, manufacture and deliver innovative products at competitive prices, to better understand and respond to customer demand for computer products and services and to effectively generate customer loyalty and develop brand name recognition. To further improve its direct marketing strategy, the Company has hired numerous management personnel with significant prior expertise in the development and management of the direct marketing of PCs. The Company seeks to provide superior customer order programs to its customers. For example, the Company's website allows for the purchase of products through the Company's online store, which includes a proprietary, user friendly custom-configuration tool. The Company also seeks to make its products convenient to buy through its toll-free telephone numbers, direct mail, catalogs and rapid delivery of products, often within 48 hours of receipt of an order for standard configurations. The Company's online store provides complete details on all product options and accessories, allows customers to custom configure and order their system, check pricing and availability and, in the future, track orders. The Company's introduction of Wintel products will also permit the Company's customers that use both Macintosh and Wintel computer systems to purchase products from a single source that can service and support both platforms. The Company's direct marketing strategy addresses both inbound and outbound telemarketing activities. The Company's telephone center currently operates fifteen hours a day, Monday through Friday, and eight hours a day, Saturday and Sunday. Expansion opportunities. While Apple has reported that it sells approximately 50% of its products outside of the United States, international sales only represented approximately 10% of the Company's sales during the nine months ended March 31, 1997. To increase international sales, the Company intends to target markets where Macintosh computer systems have a large installed base and markets into which the Company believes it can most easily implement its sales and marketing strategies. Recognizing that direct marketing has not yet been as widely accepted in markets outside of the United States, the Company's marketing strategies in many international markets will include a balance between direct and indirect marketing tailored to the needs of the local markets. Recently, companies such as Gateway and Dell have established variations on the direct marketing systems in Europe, Japan and Australia. The Company has recently hired staff in Europe 41 43 focused on transitioning to a direct marketing system in support of this business. See "-- Strategy" and "Risk Factors -- Risks Associated with International Expansion." As the Company seeks to expand its market share and brand recognition, the Company may increasingly utilize other distribution channels, especially in international markets. In this regard, the Company expects that any material increase in sales through indirect distribution channels as a percentage of total revenues will adversely affect the Company's average selling prices and gross margins due to the lower unit prices that are typically charged when selling through indirect channels. Moreover, there can be no assurance that the Company will be able to effectively sell its products through such indirect distribution channels or that the Company will be able to manage conflicts among its distribution channels. The inability to establish, manage or retain direct and indirect distribution channels, or the Company's inability to penetrate market segments, could materially adversely affect the Company. See "Risk Factors -- Dependence on Direct Marketing Strategy." The Company also plans to expand its field and outbound sales forces and its telemarketing organizations, but there can be no assurance that such expansion will be successfully completed, that the revenues from such expansion will recoup the costs incurred, or that the Company's sales and marketing organization will be able to successfully compete against the more extensive and well-funded sales and marketing operations of many of the Company's current and potential competitors. Accordingly, the Company's inability to effectively manage the expansion of its sales and marketing efforts could have a material adverse effect on the Company. See "Risk Factors -- Dependence on Direct Marketing Strategy." The Company intends to expand the targeting of certain market segments through its direct marketing strategy. The Company believes the ability to market its products directly to customers allows it the flexibility to identify profitable market segments and quickly adapt and target its marketing efforts accordingly. The Company utilizes a variety of marketing techniques, including direct response advertising, database-driven direct mail and telemarketing, and targeted web banners, to test and penetrate new market segments. The Wintel market. The Company currently plans to begin manufacturing and selling Wintel computer systems through its existing direct marketing network for Macintosh-compatible computer systems during the first half of fiscal 1998. Currently, the direct marketing of Wintel computer systems is dominated by Gateway, Micron and Dell, and the Company believes other competitors, such as Packard Bell NEC, Inc., IBM and Compaq, may soon attempt to offer their own products through direct marketing channels. To compete in the direct sales channel for Wintel computer systems, the Company must establish and maintain brand name recognition among users of Wintel computer systems. In this regard, the Company believes that it must offer products, services and support of a quality that will be recognized by customers and trade publications on the basis of their price, reliability and performance. There can be no assurance that the Company can establish brand name recognition of its planned Wintel computer systems or, to the extent brand recognition is achieved, that the Company can maintain such recognition in the future. The Company believes that the future success of its direct marketing strategy of Wintel computer systems will depend in part on the growth of the overall direct sales channel within the PC industry. However, there can be no assurance that direct sales as a percentage of industry-wide PC sales will increase or that the Company will be able to seize and maintain a competitive share of the direct sales market for PCs. There can also be no assurance that the Company's competitors that currently distribute Wintel products primarily through distributors and resellers will not implement or devote additional resources to a direct sales strategy. Sales and marketing personnel. A significant number of the Company's employees are engaged in sales and marketing activities. The Company intends to continue to expand its sales and marketing staff and make additional investments in marketing and advertising in fiscal 1997 to further its direct marketing strategy and commence sales of its Wintel computer systems. AGREEMENTS WITH APPLE The Company's Macintosh-compatible business, including all of its current and planned Macintosh-compatible products, is dependent on several license agreements entered into with Apple that permit the 42 44 Company to manufacture or sell Macintosh-compatible computer systems and distribute the Mac OS. In June 1997, the Company agreed to the principal business terms contained in the Apple Term Sheets for new agreements that the Company expects to enter into with Apple in the first quarter of fiscal 1998 that will grant the Company certain additional license rights and in some instances supersede the Company's current agreements with Apple. Apple and the Company have agreed to be bound by the terms in the Apple Term Sheets, to negotiate in good faith on additional licensing terms and to use their best respective reasonable efforts to reach definitive agreement on such additional terms by a date certain in the first quarter of fiscal 1998. Although the Company intends to enter into definitive agreements with Apple pursuant to the Apple Term Sheets by the date certain, there can be no assurance that such agreements will be finalized and entered into. If the Company and Apple do not enter into definitive agreements by the date certain, the Apple Term Sheets will terminate and the Company will continue to operate under its current agreements with Apple. Failure by Apple and the Company to enter into definitive agreements could result in the loss or impairment of the Company's rights to develop, manufacture or sell either Macintosh-compatible computer systems or the Mac OS, which could have a material adverse effect on the Company. In the event the definitive agreements contemplated by the Apple Term Sheets are not entered into, then the terms of the current agreements with Apple will remain in effect. The current agreements provide that upon the expiration thereof, Apple is required to license the next major release of the Mac OS to the Company based upon Apple's then standard licensing terms. If the Company is required to enter into new negotiations with Apple based on its current agreements, there can be no assurance that the terms and conditions of any new agreements, including the exact royalty terms and access to Mac OS upgrades, will be as favorable as those currently available to the Company or the same as Apple's licensing arrangements with the Company's competitors. See "Business -- Agreements with Apple." Current Agreements and Apple Term Sheets. The Manufacturing Agreement grants the Company a license to design and make certified Macintosh-compatible computers and approved boards, and to sell such products to third parties. The Company pays Apple specified royalties on each certified computer or approved board the Company sells. Under the Manufacturing Agreement, the Company is required to obtain Apple's consent before purchasing from authorized suppliers certain proprietary component parts in which Apple holds intellectual property rights. Although Apple must provide or make available necessary component parts to the Company, Apple does have the ability to control authorized suppliers of component parts critical to the Company's manufacture of Macintosh-compatible computer systems. Any delay in receiving authorizations from Apple, or Apple's refusal to provide access to such component parts, could have a material adverse effect on the Company. See "Business -- Supplier Relations." The original term of the Manufacturing Agreement is for a period of four years beginning in July 1996, but will expire upon the termination of the Company's current Mac OS license agreement with Apple (the "Mac OS Agreement"), or, among other things, an uncured material breach by the Company of its obligations thereunder. The Mac OS Agreement grants the Company a license to reproduce and distribute the current version of the Mac OS for a specified royalty that must be prepaid on a periodic basis. The Company may install on or distribute with each of its Macintosh-compatible computers one copy of the version of the Mac OS (or the most recent full release thereof) for which the computer was certified. The Mac OS Agreement also allows the Company to reproduce and distribute, on a royalty free basis, certain maintenance releases and system updates to the Company's registered customers that have purchased a certified computer with the Mac OS. Maintenance releases and system updates do not include upgrades that are major releases of the Mac OS. The Mac OS Agreement requires Apple to offer the Company a follow-on license for Apple's next major release of the Mac OS on Apple's then standard terms and conditions for that version of the Mac OS at a royalty rate to be determined, subject to a previously agreed to royalty cap. Although the original term of the Mac OS Agreement is for a period of five years beginning in December 1996, it will automatically expire twelve months after Apple's commercial release of the next major release of the Mac OS, and could expire earlier in the event of, among other things, an uncured material breach by the Company of its obligations thereunder. The Company believes that Apple is required to offer the Company the next major release of the Mac OS (which the Company believes is Apple's operating system project code named Rhapsody) at a royalty rate not to 43 45 exceed the previously agreed to cap. However, Apple considers the newly proposed Mac OS 8 (previously code named Tempo) is next major release of the Mac OS. As a result, the Company voluntarily entered into negotiations with Apple for new agreements that would settle these and other issues, resulting in the Apple Term Sheets. The Apple Term Sheets provide that Apple will grant the Company a new license to distribute Mac OS 8 on substantially the same terms as those in the Mac OS Agreement, but at an increased royalty rate. The license is contingent on Apple and the Company executing an agreement for the licensing of Mac OS 8 for use with CHRP. Similarly, the Apple Term Sheets provide that a license for Mac OS 8 on CHRP is contingent on reaching an agreement for the licensing of the non-CHRP version of Mac OS 8. In the event the Company and Apple fail to enter into the definitive agreements contemplated by the Apple Term Sheets, then the Company and Apple would not be in agreement regarding the royalty rate for Mac OS 8. There can be no assurance that the Company and Apple would be able to resolve this disagreement and if not resolved, the Company may be required to pay higher royalties to Apple to utilize Mac OS 8. This could affect the Company's ability to offer competitive Macintosh-compatible products which could have a material adverse effect on the Company. The Apple Term Sheets also state that Apple intends to institute a generally available program to license Rhapsody and that if the Company has entered into a license agreement for the proposed Mac OS 8 on CHRP and is in good standing under that agreement, when Apple institutes a Rhapsody licensing program, it will offer the Company a Rhapsody license on its then standard terms and conditions. The ability of the Company to offer Macintosh-compatible products in the future could be dependent on the Company receiving a Rhapsody license on commercially reasonable terms. Aside from the Mac OS Agreement, the Company has also recently obtained a sublicense for the Mac OS from IBM which, along with Motorola, has the right to sublicense the Mac OS. The Company's license agreement with IBM is more favorable than the Mac OS Agreement in certain respects, and the Company is increasingly relying on this agreement for its rights to the Mac OS. However, certain provisions of the Company's agreement with IBM are less favorable than the Mac OS Agreement. In particular, the Company must agree to purchase one central processing unit ("CPU") from IBM for each Macintosh-compatible computer system it sells, and it may only purchase a limited, although very substantial, number of CPUs per quarter from IBM. Such a condition does not exist under the Mac OS Agreement. Additionally, IBM may terminate the agreement with six months prior notice. The Company's current agreements with Apple grant it a license to a CHRP version of the Mac OS on the same terms and conditions, including royalty rates, as the standard Mac OS. CHRP, which was jointly developed by Apple, IBM and Motorola, was originally intended to provide a common hardware design to run both the Mac OS and Windows NT platforms, thereby allowing Macintosh platforms to address the needs of the Wintel market with PowerPC based computer systems. While CHRP is intended to run multiple operating systems, the future of Windows NT on CHRP is in question since Motorola, IBM and Microsoft have indicated that versions of Windows NT beyond version 4.0 (known as "Cairo") will not be supported on CHRP. CHRP designs were originally intended to be in the public domain and would have permitted computer manufacturers to produce systems (i.e., hardware) that require no proprietary components. Unrestricted CHRP availability would allow the Company to decrease its reliance on Apple for key components (e.g., chipsets, OEM components) and no longer pay Apple royalties on hardware. Apple has announced, however, that the ROM component of CHRP will be proprietary to Apple (thereby rendering a portion of CHRP proprietary), and that the Company will be required to pay royalties for such ROM. The Company currently pays Apple a minimal royalty under its ROM agreement with Apple, but the Apple Term Sheets provide that the Company will pay a significantly higher royalty for the use of Apple's CHRP ROM. The Company intends to manufacture, market and sell CHRP compliant computer systems, once Apple makes such systems available to the Company. If the Company moves to CHRP, its ability to offer competitive Macintosh-compatible computer systems in the future will depend on Apple's making available and supporting future CHRP-compliant versions of the Mac OS, (i.e. a version of the standard Mac OS that is adapted or "ported" to CHRP). There can be no assurance that such Mac OS versions or related support will be made available, or in a timely manner, which could have a material adverse effect on the Company. As 44 46 part of the Apple Term Sheets, the Company agreed to enter into separate CHRP agreements with Apple which provide that Apple will license various versions of Mac OS 8 for CHRP through August 31, 1999. Certification. Although Apple currently permits the Company to manufacture Macintosh-compatible board designs under a board design agreement, the Company's agreements with Apple require that its Macintosh-compatible computer systems conform to certain technical specifications set forth by Apple, and that such systems must be certified to comply with such specifications prior to shipment. Such certification is critical to the Company because it allows the Company to manufacture and sell its Macintosh-compatible computer systems, including those systems incorporating the latest available technology. The Apple Term Sheets state that Apple will certify certain boards under the current agreements in the short-term and CHRP boards when they are available. The Company's procedure to date has been to submit each new Macintosh-compatible product to Apple for certification. However, the Company has previously had problems with and delays in receiving such certifications when Apple raised non-technical issues as conditions to certification, including requiring the Company to renegotiate royalty rates. While the Company believes the terms agreed to in the Apple Term Sheets should prevent these issues from arising in the future, there can be no assurance that the Company will continue to receive certifications from Apple, that it will receive certifications on a timely or cost-effective basis, or that Apple will not place non-technical conditions on its certification of the Company's products. At least once, the Company has postponed the introduction of a new product as a result of Apple's delay in certifying the Company's products. Any delay in or failure to receive certification can have a material adverse effect on the Company. SERVICE AND SUPPORT The Company seeks to provide superior customer order, service and support programs to its customers. For example, the Company's website allows for the purchase of products through the Company's online store, which includes a proprietary, user-friendly, custom-configuration tool. The Company's website also provides access to frequently asked questions, user tips, software upgrades and special product offerings. Such programs build brand awareness and create customer loyalty, which the Company believes are essential for its long-term success. The Company also seeks to make its products convenient to buy through its toll-free telephone numbers, direct mail, catalogs and rapid delivery of its products, often within 48 hours of receipt of an order for standard configurations. See "-- Strategy" and "-- Marketing and Sales." The Company offers seven day a week customer support phone lines. An electronic bulletin board is also available so customers can exchange information with customer service, have their questions answered by the customer support staff and obtain instant access to the Company's most recent product data sheets and information. The Company also currently offers a fax back service and monitors forums on several public electronic bulletin boards to ensure that timely and factual information is available about the Company and its products for Internet users. The Company's direct business strategy requires that the Company provide customers with value, convenience and satisfaction to achieve brand loyalty and expanded market share. In order to more effectively focus the Company's products, service and support on its customers, the Company has recently instituted a company-wide program called Customer Care. This includes re-aligning all the Company's internal processes that affect the Company's customers, including order management, financial reporting services, customer support, technical support, marketing communications, product design, manufacturing, and shipping and logistics management. Additionally, to increase customer satisfaction the Company offers a 30-day money back guarantee, a standard one-year factory warranty and lifetime toll-free technical support. Customers also have the option of purchasing one, two or three year onsite service contracts offered by third-party providers. This onsite service currently provides coverage in the continental United States. Another important element in the success of the service and support staff is the Company's PowerTrak Information System, which provides service and support personnel accurate and timely access to customer history and records through a sophisticated relational database. The database is frequently updated with up-to-the-minute information to aid in resolving technical problems. As a problem is resolved for one customer, it is entered into the database, making it instantly accessible to support personnel for other customers with similar problems. The Company believes that a key to the success of its support organization is a high level of expertise by support staff with regard to its systems, peripherals and software. Customer satisfaction frequently 45 47 requires helping customers resolve problems with a broad variety of products regardless of whether the Company actually sold the products to the customer. All support personnel must complete an extensive training course. The Company currently plans to begin outsourcing certain of its service and support functions to third-party service providers, other than service and support for the Company's new and high end products. The Company believes that this strategy will reduce the Company's operating costs, allow the Company to better utilize its resources and ensure continued quality of service to the Company's expanding customer base. If the Company fails to effectively execute or implement its plans to outsource certain service and support functions, the quality and timeliness of service and support to the Company's customers could decline. Since the Company's service and support performance and reputation are important in attracting both new and repeat customers for the Company's products, any such decline in the quality or timeliness of the Company's service and support could result in a material adverse effect on demand for the Company's products. See "Risk Factors -- Changes to Service and Support Functions" and "-- Management of Growth." MANUFACTURING The Company's manufacturing and assembly processes are designed to produce high quality custom-configuration products while minimizing output times and product costs. The major production processes include component assembly, software loading and quality control tests. All systems are manufactured and tested on a custom-configuration basis with each system being built from an extensive menu of hardware and software configuration options. Upon its introduction of Wintel computer systems, the Company expects that it will be able to utilize a substantial number of existing components in the manufacture of both Macintosh and Wintel computer systems. The Company uses its own assembly and test facilities to manufacture its products and has designed and installed modular manufacturing lines that provide flexibility and the ability to quickly respond to the changing demands of orders received from customers using the Company's direct marketing strategy. The Company's modular manufacturing lines are self contained production units that can easily be expanded or reconfigured for various products and easily duplicated to quickly add capacity. The Company strives to maintain flexibility in the manufacturing process by using a lot size of one unit and building all product configurations simultaneously on common assembly lines. Modular manufacturing lines increase efficiency of operations by minimizing set up and changeover times, thereby allowing the Company to reduce its production lot size without incurring significant down time or labor costs when the production line is changed from producing one product, such as a PowerTower Pro, to another, such as a PowerCenter Pro. The Company believes its modular, computerized approach can scale quickly as demand increases and will simplify conversion to Wintel lines and installation in Europe and other markets when demand merits offshore manufacturing. While substantially similar, the Company will use separate modular manufacturing lines for its Macintosh-compatible and Wintel computer systems. The production process is designed to facilitate the manufacture of standard subassemblies and systems and custom-configuration systems, and to provide for testing and software loading on finished systems. The electronic subassemblies used in the Company's products are comprised of board, commodity components, ASICs, processors, memories and logic parts. Most logic assemblies receive both in-circuit testing and functional testing prior to shipment to assure 100% functionality. The final assembly process involves combining electronics assemblies (e.g., PC boards, CPU modules, memory) with enclosures, peripherals and software at the Company's manufacturing facility. Each system must pass an array of quality assurance tests throughout the production process, including a "burn-in" to assure compliance with specifications. Software is loaded to order prior to shipment. To achieve its goals of short output times and low production costs, the Company strives to ensure that all of its peripherals and other "high dollar" components are procured under a "just-in-time" inventory model. The benefits of a just-in-time system include a shorter cash conversion cycle, reduced production cycles, reduced amounts of capital tied up in inventory, reduced exposure to inventory damage, pilferage or obsolescence and a reduced need for warehouse space in which to store inventory. See "-- Supplier Relations" and "Risk Factors -- Sole or Limited Sources of Supply." The Company continually seeks to minimize the time between customer order and product delivery. Once assembled, systems are shipped from the Company's 46 48 manufacturing facilities with certain application software already installed. The Company often ships standard configurations within 48 hours of receipt of an order. The Company believes this manufacturing approach, coupled with a versatile and well trained manufacturing staff, is key to the success of its direct marketing strategy. While the Company currently leases a 70,000 square foot manufacturing facility in Round Rock, Texas, the Company's growth has forced it to expand its manufacturing and other facilities. See "-- Facilities" and "Risk Factors -- Expansion of Manufacturing Facilities." In February 1997, the Company entered into a lease agreement for 154 acres of industrial zoned land in Georgetown, Texas, and the Company plans to use the land as the site of a new corporate campus. The plan involves building a 320,000 square foot facility consisting of 141,300, 81,000 and 94,500 square feet for manufacturing, warehouse and office facilities, respectively. The Company expects such facilities to be ready for occupation in the second half of fiscal 1998. See "-- Facilities." SUPPLIER RELATIONS The Company's manufacturing processes for both Macintosh-compatible and Wintel computer systems require high volumes of quality components that are procured from third-party suppliers. Although the Company contracts for the manufacture of components according to the Company's specifications, the Company itself does not manufacture any components used in its products. Except for components the Company must obtain from suppliers licensed by Apple, the Company purchases all of its components on a turn-key basis directly from independent suppliers. Each of the Company's suppliers is chosen after an evaluation of the quality of its components. Once a supplier is chosen, the Company provides quality specifications for products ordered from that supplier. When the components are delivered to the Company's facility, Company personnel inspect representative samples of the components to ensure compliance with quality specifications. In addition, the Company works closely with many of its suppliers to perform quality control inspections at the supplier's facilities before components are shipped to the Company. The Company obtains some component parts from a sole supplier or a limited group of suppliers. Although the Company generally attempts to use standard parts and components that are available from multiple suppliers, the Company considers single-source supplier relationships to be advantageous in some circumstances. Moreover, the Company's license agreements with Apple require that certain components obtained for use in Macintosh-compatible computer systems be procured from designated suppliers that are approved or licensed by Apple, in which case the Company purchases such components according to forecasts. For components that must be procured from Apple-licensed suppliers, the Company purchases subcomponents according to forecast and then delivers them to contract assembly houses for assembly and functional testing. See "Risk Factors -- Dependence on Licenses from Apple." Examples of critical components that are available from only one or a limited number of sources, or that require a license from Apple, include ASICs, CPUs and ROMs. With respect to Wintel computer systems in particular, Microsoft is the sole supplier of Windows, and a limited number of suppliers manufacture Wintel-compatible microprocessors. See "Risk Factors -- Sole or Limited Sources of Supply." From time to time the Company has experienced, and in the future may experience, disruptions to its normal production schedules as a result of single-source suppliers not meeting component delivery schedules. In particular, certain components that can only be manufactured by third parties holding licenses from Apple such as ASICs have recently been reported to be in short supply. In addition, alternative sources of supply are not available for some of the Company's single sourced components. Where alternative sources are available, qualification of the alternative suppliers by Apple, when necessary, and the establishment of reliable supplies of components from such sources may result in delays and could have a material adverse effect on the Company. Any delays or inability of the Company in acquiring these or any other critical component parts on commercially reasonable terms would have a material adverse effect on the Company. Because the manufacture of certain components and subassemblies involves extremely complex processes involving long lead times, there can be no assurance that delays or shortages in manufacturing or acquiring 47 49 such items will not occur and such delays or shortages could have a material adverse effect on the Company. For example, ASICs that are used in the Company's Macintosh-compatible products have long lead times. The Company has occasionally received defective components from suppliers, which can delay the production cycle of the Company's products, decrease profit margins by increasing inspection, handling and reworking costs, and more importantly, affect the reliability and reputation of the Company's products. The Company seeks to minimize such disruptions by regularly evaluating its supply sources and seeking alternative or additional suppliers as necessary. There can be no assurance that the receipt of defective components would not have a material adverse effect on the Company. See "Risk Factors -- Dependence on Licenses from Apple." and "Management's Discussion and Analysis of Financial Condition and Results of Operations." While the Company has supply agreements with certain suppliers, such agreements typically only specify general terms and conditions, subject to release of purchase orders by the Company and acceptance thereof by the component supplier. If, in the future, the Company enters into long-term procurement contracts to reduce the risk of shortages or secure stable prices, the Company will risk paying for more components than it ultimately needs or purchasing components at prices in excess of prevailing market conditions. The Company strives to ensure that all of its peripherals and certain other components are procured under a "just-in-time" inventory model. The benefits of a just-in-time system include a shorter cash conversion cycle, reduced production cycles, reduced amounts of capital tied up in inventory, reduced exposure to inventory damage, pilferage or obsolescence and a reduced need for warehouse space in which to store inventory. The success of just-in-time manufacturing, however, is dependent upon the Company's relationships with its suppliers and each supplier's ability and willingness to provide more numerous but smaller shipments of components according to very specific delivery schedules. Consequently, the Company is dependent upon its suppliers to provide accurate and timely deliveries of component parts, and there is a minimal margin of error. Because the just-in-time model requires maintaining minimal levels of inventory, a delay in the delivery of one type of component could delay the production of an entire end product, in which case the Company would be materially adversely affected. See "-- Manufacturing" and "Risk Factors -- Sole or Limited Sources of Supply." MANAGEMENT INFORMATION SYSTEMS The Company's growth has required it to reevaluate its current management information systems and to commence implementation of new systems. The Company's current systems combine a centralized database with similar localized work group database systems integrated throughout the Company in an extensive multi-site computer network. For a variety of reasons, such systems are not well suited to the Company's direct marketing strategy and custom-configuration program, are unable to work with multiple currencies and lack the ability to scale quickly. The Company is in the process of implementing i2, the initial phase of its new information system strategy. i2, which the Company expects will be operational by the second quarter of fiscal 1998, is a management information system focused on forecasting and factory planning. The Company's current plan is to then begin converting its entire management information system to SAP, which integrates all of the Company's management information systems, including phone systems, order entry, credit approval status, website ordering, order processing, manufacturing, finance and service, into one system designed to efficiently handle transactions on a worldwide basis. In addition to the benefits of total systems integration, the Company's SAP system will be capable of working with multiple currencies and should enable the Company to expand its markets more quickly and efficiently. Moreover, version 4.0 of SAP, which is expected to be released in the fourth quarter of calender year 1997, will be compatible with the i2 system that is currently being implemented by the Company. The Company believes its current implementation of i2, and the compatibility between i2 and SAP, will allow the Company to take advantage of the benefits of i2 in the immediate future while allowing for smoother transition to the full SAP system over the next two fiscal years. Since the Company does not currently expect to fully implement SAP in fiscal 1998, it has extended its agreement for its current management information system. 48 50 The Company's decision to transition to SAP was based on its desire to adopt a system that could quickly scale to the Company's growth and adapt to the increasingly global nature of the Company's business. To meet these objectives the Company has recently hired several management employees experienced in implementing SAP. The Company believes its move to SAP will also provides it the capability to utilize a distributed Intranet based system for internal information flow and secure, reliable Internet access for customers. Although customers can currently order systems directly from the Company's Internet online store using its online configurator, they must still call the Company to check order status. When the Company's Internet/Intranet backbone is in place, customers will be able to track their own orders throughout the process, including checking lead-times for specific custom-configurations and credit approval, manufacturing, shipping, customer service and repair status. Customers will have instant access to this information, regardless of physical location within the Company or the time of day. The Company believes that information systems are integral to its ability to provide superior customer service and support and that such systems provide the Company significant competitive advantages as part of its direct marketing strategy. However, the Company's implementation of i2, conversion to SAP, and the identification and implementation of other management information system components has been and will continue to be extremely complex as well as time and resource consuming. Any failure by the Company to complete such implementation or conversion efficiently and on schedule could have a material adverse effect on the Company. In addition, the Company's current management information system is not equipped to handle the year 2000 problem, and, if left in place, will treat January 1, 2000 as though it is January 1, 1900. This would lead to substantial errors in all of the Company's information systems, which would have a material adverse effect on the Company. In addition, even if the Company is successful in implementing its present information strategy, there can be no assurance such strategy will be effective. Failure of i2, SAP, or any components of either, to efficiently meet the growing needs of the Company could require investment and transition by the Company to a new system, which could have a material adverse effect on the Company. See "Risk Factors -- Dependence on Information Systems." The Company relies on continuous operations of its computer systems, particularly its manufacturing system, which currently operates 22 hours a day. The failure of the operation of the Company's manufacturing information system, or any of the its computer systems in full or in part, including, but not limited to, internal or external network problems, manufacturing control systems failures or phone system problems, could have a material adverse impact on the Company. RESEARCH AND DEVELOPMENT The Company's research and development efforts are now focused on the rapid development and introduction of innovative Macintosh and Wintel technologies and the design of PCs that incorporate lower cost Wintel components that reduce the manufacturing cost of its systems. The Company's direct marketing strategy combined with its research and development efforts provides it the ability to more rapidly introduce innovative products and allows the Company to tailor specific components (e.g., processor speed grades) to customers who can use these functions quickly and efficiently. To maintain its competitive position in the Macintosh-compatible market, the Company must continue to develop and introduce Macintosh-compatible computer systems with features, performance and pricing competitive with systems offered by Apple and other Macintosh-compatible licensees. To obtain a competitive position in the Wintel market, the Company must develop and introduce Wintel computer systems with features, performance and pricing that are competitive with systems offered by sellers of Wintel computer systems. The Company's research and development group, based in Cupertino, California, principally focuses on system design, system architecture, ASIC design, software design and test development. In the past, the Company has also worked with Apple and several key suppliers on certain joint development efforts. See "-- Supplier Relations" and "-- Manufacturing." The Company continually strives to develop a broad range of Macintosh-compatible products with some features and functions different than those offered by Apple, while still maintaining Macintosh compatibility. For example, the Company used its ASIC design technology in order to be the only manufacturer to offer 49 51 Macintosh-compatible computer systems that were compatible with both PCI and NuBus architectures, thereby enabling customers to continue to enjoy the benefits of the investments they made in NuBus peripherals. The Company was also the first Apple licensee to offer PCI compatible systems using the Power Macintosh architecture. In addition, the Company focuses its research and development efforts on being "first to the market" in offering leading edge peripherals as part of its systems. For example, the Company offered the first standard 4x, 6x, 8x and 16x CD-ROM drives in Macintosh-compatible computer systems and was the first Macintosh supplier to offer internal Iomega storage drives as custom-configuration options. The Company is developing Wintel computer systems with some features and functions the Company believes are not currently available from other manufacturers of Wintel computer systems. Since there are a greater number of competitors in the Wintel market than in the Macintosh market and since many Wintel computer systems have become commodity items, the Company expects that research and development will be critical to its success in the Wintel market. See "-- Overview," "-- Strategy" and "-- Competition." The Company has recruited a multi-disciplined research and development team, including management and engineering talent, with substantial experience in the development of Macintosh and Wintel systems. The Company believes that expertise in both Macintosh and Wintel platforms enables development of differentiated features and benefits derived from the best components of both platforms. In addition, the Company believes such experience positions the Company to better address emerging technical issues that may result from CHRP and the development of systems capable of running multiple operating systems. To assist in developing a line of Macintosh-compatible and Wintel portables, the Company recently hired engineers formerly employed by Texas Instruments Incorporated with experience in developing portables. The Company expects that these engineers will contribute to the Company's development of portables as well as in other areas of the Company's research and development efforts. Because of the Company's early success in the Macintosh-compatible marketplace, several key vendors have begun to consider the Company a strategic partner as opposed to simply a customer. For example, IBM, Motorola and the Company have worked closely to bring the latest and fastest versions of the 604 and 604e PowerPC microprocessors to market. This close relationship, along with the specific high speed system design know-how in engineering, has allowed the Company to consistently be first to the market with high performance Macintosh-compatible products. As such, the Company believes it now plays an industry role as a process driver for PowerPC chips and other key component chips used in Macintosh-compatible computer systems. The Company intends to develop similar relationships in the Wintel market. COMPETITION The PC industry in general, and the market for the Company's current and planned future products in particular, are highly competitive and characterized by the frequent introduction of new products, short product life cycles, a large number of competitors, continual improvement in product performance, features and price and price sensitivity on the part of customers. The combination of an environment of rapid technological changes, short product life cycles and competitive pressures results in gross margins on specific products decreasing rapidly. Accordingly, any delay in introduction of more advanced or more cost-effective products can result in significantly lower sales and gross margins. These factors have in the past and will likely continue in the future to create pricing pressures on the Company's products and downward pressures on the Company's gross margins, and the Company expects that its current gross margins will decline in future quarters as a result of such pressures. Other competitive factors include availability of new technology, marketing and sales ability, brand recognition, breadth of product line, ease of use and quality of customer support. The Company also believes that a segment of the PC industry competes for customers primarily on the basis of price, and that certain of the Company's competitors may offer lower prices than the Company. While the Company believes it is competitive with such vendors, the Company attempts to compete on the basis of value rather than solely on the basis of price. Failure of the Company to compete successfully with Apple, other Apple licensees or manufacturers of Wintel computer systems, or on the basis of any or all of the factors 50 52 listed above, could have a material adverse effect on the Company. See "Risk Factors -- Highly Competitive Industry." In the Macintosh-compatible market, the Company currently competes directly with Apple and other manufacturers that license Macintosh technology. Although Apple has announced several Macintosh licenses to date, Power Computing was the only company selling a broad line of Macintosh-compatible computer systems until in 1996 when UMAX and Motorola began selling Macintosh-compatible computer systems under the SuperMac and StarMax names, respectively. IBM and Motorola have also been granted rights by Apple to sublicense the Macintosh technology to other computer manufacturers. Although IBM possesses the right to manufacture and market Macintosh products under its own name, IBM has stated that it will focus on manufacturing and marketing its own Wintel computer systems and seek to sublicense its rights to Apple technology. The Company has recently obtained a sublicense for the Mac OS from IBM. Apple has also granted Motorola the right to resell Macintosh-based OEM board products, including passing through a Mac OS license to companies wishing to enter the Macintosh-compatible market without heavy engineering or manufacturing investment. See "-- Agreements with Apple" and "Risk Factors -- Highly Competitive Industry." An increased number of Macintosh licensees may result in an increase in the number of Macintosh-compatible computer systems available to the public, which could have a material adverse effect on demand for the Company's products. Upon the Company's planned introduction of Wintel computer systems, the Company's Wintel products will compete directly against products manufactured by Wintel competitors, including Gateway, Micron, Compaq, Dell and others, some of whom offer their products through a direct marketing strategy similar to that employed by the Company. The Company's Macintosh-compatible products already compete to some extent against the manufacturers of Wintel computer systems and such competition is likely to increase. The introduction of Windows 95 and Windows NT, the planned release of Windows 98, recent announcements regarding the operating results of Apple and the future of the Mac OS, the potential emergence of CHRP and other factors may have the effect of creating increased direct competition between manufacturers of Macintosh and Wintel computer systems. As a result of this increased competition, the Company's planned Wintel products may compete directly with the Company's Macintosh-compatible products. Increased competition by the Company with Apple, Macintosh-compatible and Wintel manufacturers may result in increased price competition and product confusion that could materially adversely affect the Company. See "Risk Factors -- Highly Competitive Industry." The Company competes with many Macintosh-compatible and Wintel manufacturers that market their products through distribution channels in which the Company does not currently participate. In particular, many such manufacturers traditionally sell their products through national and regional distributors, dealers and value-added resellers, as well as through their own direct sales forces. Failure to compete with these manufacturers could have a material adverse effect on the Company. The Company and other manufacturers of Macintosh-compatible and Wintel computer systems generally have access to and make use of many of the same components, often from the same group of suppliers. Since there are generally more suppliers of Wintel components, such components have become commodities in the computer market, making it difficult for suppliers to differentiate their products. Consequently, the Company (especially upon its planned entry into the Wintel market) and other manufacturers of Wintel products will generally purchase components from the same group of suppliers on substantially equal terms. See "-- Supplier Relations." The prices of many Macintosh-compatible and Wintel components decline periodically, often at an accelerated pace, and the general practice of the Company and its competitors is to reduce the prices of their products to attempt to gain a competitive advantage based on these component price declines. This market factor makes it imperative that the Company acquire component parts at the best possible price. Any failure by the Company to obtain good prices for its component parts or manage its inventory of component parts could place it at a competitive disadvantage and have a material adverse effect on the Company. The Company may, at any time, find it necessary to take pricing actions in an attempt to maintain a competitive mix of price, performance and customer support services. In this regard, the Company and its 51 53 competitors often introduce new products with enhanced performance and additional features without corresponding price increases. The Company attempts to mitigate the effects of price reductions by improving product mix, further reducing component costs and lowering operating costs. There can be no assurance, however, that any pricing actions taken by the Company will be effective in stimulating higher levels of sales or that any concurrent cost reduction efforts will offset the effects of pricing actions on the Company's gross margins. Recently, many of the Company's competitors, including Apple, have lowered prices substantially, and the Company expects these pricing pressures to continue. These pricing pressures have resulted in significant reductions in the gross margins achieved by the Company, Apple and other competitors of the Company. If the Company is unable to respond to pricing pressures by reductions in manufacturing costs, increases in productivity or changes in product mix, the Company's gross margins and profitability would be adversely affected. Many of the Company's competitors in both the Macintosh-compatible and Wintel markets, including but not limited to Apple, Gateway, Micron, Compaq and Dell, have greater financial, marketing, manufacturing, technical and management resources, broader product lines, greater brand name recognition and larger installed customer bases than those of the Company. As a result, they may be able to respond more quickly than the Company to new or emerging technologies and changes in customer requirements, or to devote greater resources than the Company to the development, promotion and sale of products. There can be no assurance that the Company will be able to compete successfully against its current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company. See "Risk Factors -- Highly Competitive Industry." INTELLECTUAL PROPERTY The Company relies on a combination of copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect its proprietary technology. Although the Company's only patent pending relates to the software used in its on-line configurator, continuing new developments in research and development may create a necessity or desire by the Company to patent additional technology. From time to time, other companies and individuals assert exclusive patent, copyright, trademark and other intellectual property rights to technologies or marks that are important to the PC industry or to the Company's business. See "Risk Factors -- Intellectual Property Rights." There can be no assurance that such infringement claims will not be asserted by third parties in the future and the Company's involvement in any patent or other intellectual property dispute or action could have a material adverse effect on the Company. In particular, adverse determinations in any litigation may subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and prevent the Company from manufacturing and selling its systems. Moreover, if the Company seeks licenses from third parties, there can be no assurance that the Company will be able to obtain such licenses on commercially reasonable terms, if at all. In addition, the Company could be at a disadvantage if its competitors obtain licenses for protected technologies, including Apple technology, on more favorable terms than the Company. If the Company or its suppliers are unable to license protected technology used in the Company's products, the Company could be required to eliminate certain features from such products, or could even be prohibited from marketing such products entirely. The Company could also incur substantial costs to redesign its products or to defend any legal action taken against the Company and, if the Company's products should be found to infringe protected technology, the Company could be enjoined from further infringement and required to pay damages to the infringed party. Any of the foregoing could have a material adverse effect on the Company. See "-- Agreements with Apple" and "Risk Factors -- Intellectual Property Rights." The Company owns or uses a number of trademarks, some of which are registered, on or in connection with its products, including PowerBase, PowerCenter, PowerTower and the Power Computing logo. The Company also makes extensive use of certain trademarks, some of which are registered, of Apple pursuant to its license agreements including Apple, Macintosh, Mac and the Mac OS logo. See "-- Agreements with Apple" and "Risk Factors -- Dependence on Licenses from Apple." 52 54 EMPLOYEES As of May 23, 1997, the Company had approximately 530 full time and 160 part time employees, most of whom are involved in manufacturing operations, research and development, sales and marketing, customer support and general administrative and finance positions. In order to support its growth plans, the Company intends to hire additional personnel during the next twelve months in all of these areas. The Company has recently hired a significant number of employees, including senior management personnel, and will continue to do so to meet the growth demands of the Company. There can be no assurance that the management personnel in place will function effectively as a management team. In addition, the Company's future performance depends in significant part upon attracting and retaining key technical, sales, senior management and financial personnel, as well as highly skilled design and process engineers involved in the manufacture of existing systems and the development of new systems and processes. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its key technical, sales, senior management and financial personnel or to attract, assimilate or retain other such personnel in the future. Failure to do so could have a material adverse effect on the Company. See "Risk Factors -- Management of Growth" and "Management." None of the Company's employees is represented by a labor union and the Company has never experienced a work stoppage, slowdown or strike. The Company generally considers its relationships with its employees to be good. See "Risk Factors -- Management of Growth." FACILITIES The Company's growth has forced it to expand its manufacturing and other facilities. In February 1997, the Company entered into a lease agreement for 154 acres of industrial zoned land whereby it would lease until December 2009 certain land and facilities in Georgetown, Texas, and the Company plans to use the land as the site of a new corporate campus (the "Georgetown Facilities"). See "-- Manufacturing" and "Risk Factors -- Expansion of Manufacturing Facilities." The plan involves building a 320,000 square foot facility consisting of 141,300, 81,000 and 94,500 square feet for manufacturing, warehouse and office facilities, respectively. At any time during the lease term, the Company has the option of purchasing the premises for a nominal amount. Monthly lease payments are set to be equal to the monthly costs of the lessor related to the leased premises. These costs will fluctuate as land is purchased and construction costs of the facilities are incurred. Total anticipated costs of the land purchase and facilities construction is approximately $25 million. At March 31, 1997, approximately $4.7 million had been paid or accrued under this agreement for the purchase of land and initial construction costs. The Company expects the Georgetown Facilities to be ready for occupation in January 1998. The Company's agreements for the Georgetown Facilities grant it certain tax abatements and other benefits from the City of Georgetown (the "City"). These agreements also anticipate that the City will receive state grants and other funds to help subsidize the costs of preparing the infrastructure for the Georgetown Facilities. The Company must reimburse the City up to $8 million if the City can not recover their costs through grants, tax receipts, or other allowed means. The Company currently maintains its headquarters in Round Rock, Texas in four leased facilities. The Company's corporate offices and sales department reside in separate 16,300 square foot and 91,300 square foot office complexes while the manufacturing and service organizations reside in a 70,000 square foot combined manufacturing and office facility. The finance, information systems and customer service organizations reside in a 15,000 square foot office complex adjacent to the manufacturing facility. The corporate office leases are for monthly rents of $19,662 and $45,662 and expire in December 1997 and February 2000, respectively, while the manufacturing space lease is for a monthly rent of $27,790 and expires in December 1997. The office space adjacent to the manufacturing space leases for a monthly rent of $8,185 and expires in December 1997. The Company also leases 20,000 square feet of administrative and engineering space, mostly used for research and development, in Cupertino, California for a monthly rent of $21,560 pursuant to a lease that expires in September 1998. The Company is currently in negotiations to ensure that its Texas leases are long enough in duration and provide for sufficient space until such time as the Company moves to the Georgetown Facilities. See "-- Manufacturing" and "Risk Factors -- Expansion of Manufacturing Facilities." 53 55 MANAGEMENT The following table sets forth certain information as of June 27, 1997 with respect to the executive officers and directors of the Company: EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION ---- --- -------- Stephen S. Kahng...................... 47 Chairman of the Board, Chief Executive Officer and Director Joel J. Kocher........................ 41 President, Chief Operating Officer and Director James A. Wallace...................... 51 Chief Financial Officer and Vice President, Finance John W. Teets......................... 42 Corporate Secretary Song S. Kim........................... 42 Treasurer Enzo N. Torresi....................... 52 Vice Chairman of the Board, Director Sada Chidambaram...................... 52 Director David Heller.......................... 52 Director Elserino M. Piol...................... 64 Director Giuliano C. Raviola................... 65 Director
STEPHEN S. KAHNG has served as Chief Executive Officer and a director of the Company since January 1994. He is also a co-founder of the Company. Mr. Kahng has also served as Chairman of the Board since November 1996. From January 1994 until September 1995, he served as Chief Financial Officer and Secretary, and from January 1994 until November 1996, he served as President. From 1991 to December 1993, Mr. Kahng served as President of Up To Date Technology, Inc., a technology design and consulting company owned by him and based in San Jose, California ("Up To Date"). From 1986 to 1991, Mr. Kahng served as Senior Vice President and General Manager of Chips and Technologies, Inc., a leading manufacturer of ASICs to the PC industry. JOEL J. KOCHER has served as a director of the Company since June 1997, and he has served as President and Chief Operating Officer of the Company since December 1996. From October 1995 until he joined the Company, Mr. Kocher served as a member of the Board of Directors and as President and Chief Operating Officer of Artisoft Corporation, a computer networking and telephony company ("Artisoft"). From November 1994 to October 1995, he served as Chief Operating Officer of Artisoft. From December 1987 to October 1994, Mr. Kocher served in various capacities with Dell, most recently as President, Worldwide Sales, Marketing and Services from May 1993 to September 1994. From December 1992 to May 1993 he served as President of Dell USA, L.P., and from March 1990 to December 1992, he served as Senior Vice President and General Manager of Dell USA. From November 1988 to March 1990, served as Vice President and General Manager of Dell USA. From December 1987 to November 1988, he served as Vice President of Dell Field Sales Corporation, a subsidiary of Dell. JAMES A. WALLACE has served as Chief Financial Officer and Vice President, Finance of the Company since December 1996. From 1980 until September 1996, Mr. Wallace served in various capacities with Digital Equipment Corporation ("Digital"), most recently as Vice President of Finance for its Computer Systems Division from May 1993 to September 1996. From September 1991 to May 1993, he served as Vice President Finance (US Area); and from September 1989 to September 1991, he served as Finance Manager, Digital Services. JOHN W. TEETS has served as Corporate Secretary of the Company since March 1996. From March 1995 to March 1996 he was a partner with Hurst & Hake L.L.P., an Austin, Texas law firm. From June 1993 to February 1995 he served as a Corporate Director with international responsibilities for Motorola. From 1986 to May 1993 he served as senior counsel with Motorola. 54 56 SONG S. KIM has served as Treasurer of the Company since April 1997. From July 1996 to March 1997 he served as Controller of the Company. From June 1995 to June 1996, he served as Assistant to the Chairman and as Vice President, Controller and Secretary of CM Lee & Company, a management and investment company. From December 1991 to May 1995, he served as Controller of Diamond Multimedia Systems, a designer and manufacturer of graphic accelerators and multimedia products for PCs. ENZO N. TORRESI is a co-founder of the Company and has served as Vice Chairman of the Board since November 1996. Mr. Torresi has been a director of the Company since January 1994, and from January 1994 until November 1996, he served as Chairman of the Board. From January 1989 to October 1994, he served as President and Chief Executive Officer of NetFRAME Systems Incorporated, a computer manufacturer that he co-founded in 1987. Since December 1996, Mr. Torresi has been Chairman and Chief Executive Officer of ICAST Corporation, an Internet software company. Mr. Torresi is also a director of PictureTel Inc., a leading video conferencing company, and of The Santa Cruz Operation, Inc., the leading provider of UNIX operating systems on Intel platforms. SADA CHIDAMBARAM has served as a director of the Company since December 1996. Mr. Chidambaram also has served as a director of ASCII Corporation ("ASCII"), a publisher of software and computer magazines and a manufacturer and distributor of specialized semiconductors, since April 1996, and he has served as the President and a director of ASCII of America, Inc., a subsidiary of ASCII, since February 1989. He also serves on the board of directors of several privately held companies. DAVID HELLER has served as a director of the Company since January 1994. Mr. Heller has served as the President of Pacific Technology Capital Corporation, a financial advisory and investment banking firm of which he is a founder, since 1982. He has also served as a director of Borland International, Inc., a computer software company, since 1982. From January 1988 to December 1993, Mr. Heller served as a director and President of Tie Rack West, Inc., a clothing accessory company. Since March 1995, Mr. Heller has served as a director of America West Golf Manufacturing Company, Inc., a golf equipment manufacturer and distributor. ELSERINO M. PIOL has served as a director of the Company since January 1994. Since March 1995, Mr. Piol has been a partner of 4C Ventures, L.P. ("4C Ventures"), a venture capital limited partnership and affiliate of the Company, and since January 1995, he has served as a Chairman of Veron S.p.A., a manufacturer of smart card equipment. Since January 1996, Mr. Piol has also served as a director of Docunet, Inc., a terminals products company, and since September 1993, he has been a director of Advanced Telecommunications Modules Ltd., a communications products company. From January 1992 until April 1997, he served as Chairman of Olivetti Canon Industriale S.p.A., a computer peripherals products company. From 1991 to September 1992, he served as Chief Operating Officer of Olivetti Group Core Business, an information systems company. From 1985 to July 1996, he served as a director of Acorn Computer Group, Inc., a computer products company. From 1987 and 1988, respectively, to July 1996, he served as a director and as Vice Chairman of Olivetti S.p.A., an information systems company. From February 1994 to July 1996, he served as a director of Olivetti Research Ltd., the research arm of Olivetti S.p.A. From September 1994 to July 1996, he served as Chairman of Olivetti Telemedia, a communications products and services company. In 1994, Mr. Piol was elected President of Associazione Italiana di Informatica ed il Calcolo Automatico, a professional society of computer professionals, based in Italy. GIULIANO C. RAVIOLA has served as a director of the Company since January 1994. Mr. Raviola has served as a Managing Director of 4C Associates, Inc., the general partner of 4C Associates, L.P., which is the general partner of 4C Ventures, since March 1995. From January 1991 to December 1992, he served as President of Olivetti Advanced Technology Center, a developer of computer and information systems. From September 1990 to December 1992, Mr. Raviola served as President of International Technology Ventures, Inc., the investment manager of Olivetti Partners C.V., a Venture Capital partnership. Mr. Raviola serves as a director of Solopoint, Inc., a telecommunications equipment manufacturer, Four11 Corp., an online Internet directory service provider and Apogee Software, Inc., a software development company. 55 57 Currently all directors are elected annually and serve until the next annual meeting of stockholders or until the election and qualification of their successors. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the directors or officers of the Company. VOTING AGREEMENTS Under a Voting Agreement dated June 26, 1995 (the "Voting Agreement"), Olivetti, 4C Ventures, ASCII, Providence Investment Company Limited ("Providence") and Messrs. Kahng, Torresi and Piol have agreed to affirmatively vote their shares with respect to certain nominees of Olivetti, 4C Ventures, ASCII and Mr. Kahng for the Company's Board of Directors. Pursuant to the Voting Agreement, Messrs. Kahng, Torresi, Piol, Raviola, Heller and Chidambaram were nominated and elected to the Board of Directors. The Voting Agreement terminates upon the completion of the Offering except as amended by the Letter Agreement described below. In addition, pursuant to a letter agreement dated December 14, 1996 (the "Letter Agreement"), Mr. Kahng, Olivetti and 4C Ventures agreed to elect Mr. Kocher to the Board of Directors. The Letter Agreement also provides that the parties will take appropriate action in the future to remove Mr. Kocher from the Board should Mr. Kocher resign, or be terminated from his position as President of the Company and to reduce the size of the Board accordingly. In addition, the Letter Agreement provides that the Voting Agreement will continue in force with respect to the shares held by Mr. Kahng, Olivetti and 4C Ventures for one year following the closing of the Offering. The Letter Agreement terminates one year following the closing of this Offering. OTHER SIGNIFICANT EMPLOYEES DOYLE T. BAKER, 50, has served as Chief Information Officer and Vice President of the Company since December 1996. From October 1994 to April 1996, Mr. Baker served as Vice President of Information Systems and Chief Information Officer of Mentor Graphics Corporation, a CAD/CAM software manufacturer. From 1985 to September 1994, he served as Director of Information Systems at Convex Computer Corporation, a scientific computer manufacturer. JUDITH A. BITTERLI, 43, has served as Vice President, Sales and Support of the Company since February 1997. From May 1993 until she joined the Company, Ms. Bitterli served as Executive Vice President of Sales, Client Services and Call Center Operations of Softbank Services Group, Inc., a provider of outsourced sales and support services to the computer industry. From January 1993 to May 1993, she was Vice President, Sales at Austin Computers, a provider of computer products. From March 1989 to January 1993, she was Director of Sales at CompuAdd Computer Corporation. GEOFFREY S. BURR, 48, has served as Vice President, Business Development of the Company since February 1997. From November 1996 to February 1997, he served as Senior Vice President, Sales and Marketing, and from July 1995 to November 1996, he served as Vice President, Sales and Marketing of the Company. From April 1995 to July 1995, he served as Vice President, Sales of the Company. From August 1993 to April 1995, he served as President and Chief Operating Officer of Tadpole Technology, Inc., a portable workstation provider. From March 1992 to August 1993, Mr. Burr was a principal with Robert W. Duggen and Associates, a business consulting firm. JOHN F. ELLETT, 40, has served as Vice President, Worldwide Marketing of the Company since May 1997. From September 1994 to May 1997, he served as President of the Ellett Group, a technology marketing firm, and from 1993 to September 1994, he served as Group Director and Acting Vice President of Marketing of Dell North America, a division of Dell. From 1992 to 1993, he served as Group Brand Manager for Dell. SAVINO R. ("SID") FERRALES, 46, has served as Vice President, Human Resources of the Company since February 1997. From June 1995 to February 1997, Mr. Ferrales served as Vice President of Worldwide Human Resources for Digital, and from June 1994 to June 1995, he served as President of OMC Group, a management consulting firm which he founded. From January 1989 to June 1994, he was Vice President, Human Resources for Dell. 56 58 JONATHAN M. FITCH, 42, has served as Vice President, Engineering of the Company since December 1995. From April 1995 to December 1995, Mr. Fitch served as Senior Director of Engineering of the Company. From December 1980 to April 1995, he served in various capacities with Apple. From April 1994 to April 1995, he served as Distinguished Engineer (Director); from April 1990 to March 1994, he served as Principal Engineer; and from October 1987 to March 1990, he served as Staff Engineer. Mr. Fitch holds eleven patents for computer architecture, circuit design and instruction set emulation technology. ROBERT J. GROPPO, 44, has served as Vice President, Portables of the Company since March 1997. From July 1996 to March 1997, he served as Director of Strategic Marketing of the Company. From June 1993 to June 1996, Mr. Groppo served as Director of Mobile Products of MicroCenter Corporation, a computer service and support company. From 1992 to 1993, Mr. Groppo served as Director of Marketing for Up To Date. JAMES R. HINDMARCH, 54, has served as Vice President, Worldwide Manufacturing of the Company since January 1997. From 1994 until he joined the Company, Mr. Hindmarch served as Vice President of Operations at Plantronics, Inc., a telecommunications equipment manufacturer. From April 1993 to 1994, he served as Senior Vice President of Operations at SuperMac Technologies, an Apple peripherals manufacturer. From November 1989 to April 1993, he served as Vice President of Manufacturing at Dell. COMMITTEES OF THE BOARD OF DIRECTORS The Stock Option Committee of the Board of Directors was formed in February 1995 and is responsible for administering the Company's 1994 Stock Option Plan. The members of the Stock Option Committee are Messrs. Kahng, Torresi and Raviola. The Finance and Audit Committee of the Board of Directors was established in October 1996 and is responsible for recommending independent auditors, reviewing the audit plan, the adequacy of internal controls, the audit report and management letter and undertaking such other incidental functions as the Board of Directors may authorize. The members of the Finance and Audit Committee are Messrs. Heller and Raviola. The Compensation Committee was established in January 1997 and is responsible for setting executive compensation policies and administering the Company's compensation plans. The members of the Compensation Committee are Messrs. Chidambaram and Raviola. COMPENSATION OF DIRECTORS Beginning in the first quarter of calendar year 1997, the Company's non-employee directors are paid a quarterly fee of $5,000 for service on the Board of Directors or any committee thereof and are reimbursed for reasonable expenses incurred in connection with attendance at Board and committee meetings. The Company's directors are not otherwise paid cash compensation for service on the Board. On May 15, 1997 the Company granted 30,000 options to purchase shares of Common Stock for $7.50 to each of Messrs. Chidambaram, Heller, Piol, Raviola and Torresi. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The Company's Compensation Committee was established in January 1997. Accordingly, decisions in fiscal 1996 concerning the compensation of the Company's executive officers were made by the Board of Directors. Although Mr. Kahng was an executive officer and member of the Board of Directors in fiscal 1996, he did not participate in any decisions regarding his own compensation as an executive officer of the Company. 57 59 EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth certain information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer. During fiscal 1996 there were no other executive officers whose pay exceeded $100,000. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ----------------------- FISCAL SALARY OTHER ANNUAL NAME AND PRINCIPAL POSITION YEAR ($) COMPENSATION --------------------------- ------ ------- ------------ Stephen S. Kahng(1)......................................... 1996 170,000 -- Chairman of the Board, Chief 1995 170,000 5,762(2) Executive Officer and Director 1994 85,000 --
- --------------- (1) Mr. Kahng was appointed an executive officer of the Company in January 1994. See "-- Directors and Executive Officers." (2) Represents reimbursement by the Company to Mr. Kahng for relocation expenses. OPTION GRANTS, EXERCISES AND HOLDINGS Option Grants. No options were granted by the Company to Mr. Kahng during fiscal 1996. No stock appreciation rights have been granted by the Company under any incentive plan. Stock Option Exercises and Holdings. Mr. Kahng exercised no options during fiscal 1996 and he held no options as of June 30, 1996. No stock appreciation rights have been granted by the Company under any incentive plan. INCENTIVE STOCK PLAN 1994 Stock Option Plan. The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the Board of Directors and approved by the Company's stockholders in January 1994 and ratified by the Company's stockholders in April 1995. The 1994 Plan was amended by the Board of Directors in August 1994, April, June and July 1995, December 1996 and February 1997 and such amendments relating to increases in shares reserved under the 1994 Plan were approved by the Company's stockholders in September 1994, April and August 1995, November 1996 and May 1997. A total of 6,210,000 shares of Common Stock are reserved for issuance under the 1994 Plan. As of June 18, 1997, 364,147 shares had been issued upon the exercise of stock options granted under the 1994 Plan and 5,148,159 shares were subject to outstanding options. Options granted under the 1994 Plan generally vest over a four or five year period of time, with 1/4 or 1/5 of the shares subject to the option vesting one year after the vesting commencement date and 1/16 or 1/20 of the shares subject to the option vesting at the end of each calendar quarter thereafter. As of June 18, 1997, 700,944 shares remain available for future grant. The 1994 Plan is presently administered by the Stock Option Committee of the Board of Directors. Under the 1994 Plan, options may be granted to consultants and employees, including directors who are employees or consultants. Only employees may receive "incentive stock options," which are intended to qualify for certain favorable tax treatment. The exercise price of incentive stock options under the 1994 Plan must at least equal the fair market value of the Common Stock on the date of grant. The exercise price for non-statutory stock options under the 1994 Plan must at least equal 85% of the fair market value on the date of grant. The exercise price of incentive stock options granted to a ten-percent stockholder must be at least 110% of the fair market value on the date of grant. Options granted under the 1994 Plan must be exercised within ten years of the date of grant (five years in the case of an incentive stock option granted to a ten-percent stockholder). The Board of Directors or the Stock Option Committee may amend or modify the 1994 Plan at any time, provided that no such amendment or modification may affect the rights and obligations of the participants 58 60 with respect to their outstanding options in a material adverse way. In addition, no amendment of the 1994 Plan may, without the approval of the Company's stockholders, (i) materially modify the class of individuals eligible for participation, (ii) increase the number of shares available for issuance, except in the event of certain changes to the Company's capital structure, (iii) materially increase the benefits accruing to optionees under the 1994 Plan or (iv) extend the term of the 1994 Plan. The 1994 Plan will terminate on January 15, 2014, unless sooner terminated by the Board of Directors. LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS As permitted by the Delaware General Corporation Law, the Company has included in its Certificate of Incorporation a provision to eliminate the personal liability of its directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to certain exceptions. In addition, the Bylaws of the Company provide that the Company is required to indemnify its officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature and (i) claims based upon such party's personal profit or advantage, (ii) short swing profits and (iii) acts of "certain and deliberate dishonesty" with actual dishonest intent and purpose), to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance if available on reasonable terms. At present, the Company is not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of the Company in which indemnification would be required or permitted. The Company believes that its charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. 59 61 CERTAIN TRANSACTIONS Since its inception, the Company has maintained business relationships and engaged in certain transactions with affiliated companies and parties as described below. It is the policy of the Company to engage in transactions with related parties on terms, in the opinion of the Company, no less favorable to the Company than could be obtained from unrelated parties. On January 18, 1994, the Company, in connection with its organization, issued 5,175,000 shares of Common Stock, 3,000,000 shares of Series A Preferred Stock and warrants to purchase 225,000 shares of Common Stock. Messrs. Kahng, Torresi, Piol and Carlton Amdahl and Olivetti Holding N.V. ("Olivetti") purchased shares pursuant to such issuances as further described below. On the date of purchase, Messrs. Piol and Raviola were affiliates of Olivetti. In connection with the Company's organization, on January 18, 1994, Mr. Kahng purchased 3,400,000 shares of Common Stock in exchange for certain assets valued at $300,000 and $40,000 in cash. Mr. Kahng also purchased an additional 600,000 shares of Common Stock, subject to a right of repurchase by the Company (the "Kahng Restricted Shares"), in exchange for a promissory note in the stated principal amount of $60,000 at an annual interest rate of 3.98%. The promissory note was paid in full on May 29, 1997. As of May 31, 1997, the Company's right of repurchase has lapsed as to 500,000 of the Kahng Restricted Shares. If Mr. Kahng's employment is terminated by the Company for cause or by Mr. Kahng, the Company may, within 90 days following such termination, repurchase any shares still subject to the right of repurchase for the original purchase price per share paid by Mr. Kahng. The Company's right of repurchase automatically lapses as to all Kahng Restricted Shares upon Mr. Kahng's termination without cause or upon his death. In connection with the Company's organization, on January 18, 1994, Mr. Torresi purchased 250,000 shares of Common Stock for $25,000. Mr. Torresi also purchased 225,000 shares, subject to a right of repurchase by the Company (the "Torresi Restricted Shares"), in exchange for a promissory note in the principal amount of $22,500 at an annual interest rate of 3.98%. The promissory note has been paid in full. Pursuant to a resolution of the Board of Directors, all of the Torresi Restricted Shares were accelerated as of February 27, 1995, and such shares are no longer subject to a right of repurchase by the Company. Although Mr. Torresi is a director of the Company, he abstained from participating in the decision relating to the acceleration of the Torresi Restricted Shares. In connection with the Company's organization, on January 18, 1994, Mr. Piol purchased 250,000 shares of Common Stock for $25,000. On the same date, Mr. Piol purchased for $2,250, two warrants to purchase a total of 225,000 shares of Common Stock at an exercise price of $0.10 per share. See "Description of Capital Stock -- Warrants." On April 24, 1995, Mr. Piol exercised one warrant with respect to 112,500 shares of Common Stock. In connection with the Company's organization, on January 18, 1994, Olivetti, then an affiliate of Messrs. Piol and Raviola, purchased 250,000 shares of Common Stock for $25,000 and 3,000,000 shares of Series A Preferred Stock for $2,750,000 in cash and an assignment of its rights under a Letter Agreement dated September 10, 1993 between Olivetti and Up To Date, valued at $250,000. Up To Date is owned by Mr. Kahng. On the same date, Olivetti agreed to purchase an additional 2,000,000 shares of Series A Preferred Stock if neither the Company nor Olivetti could find additional suitable investors to purchase such shares by May 31, 1994. On February 18, 1995, Olivetti purchased the additional 2,000,000 shares of Series A Preferred Stock for $2,000,000. On February 27, 1995, the Board of Directors approved a grant of non-statutory stock options to purchase 50,000 shares of the Company's Common Stock at an exercise price of $0.35 per share to Mr. Raviola, vesting immediately, and the Board removed the vesting requirement imposed on options to purchase 50,000 shares of Common Stock for $0.10 per share, which were previously granted to Mr. Heller. Although Messrs. Raviola and Heller are directors of the Company, each abstained from voting on the transactions that affected them individually. On June 26, 1995, the Company issued 2,735,000 shares of Series B Preferred Stock. In connection therewith, Messrs. Kahng, Torresi and Charles H. Kahng, Mr. Kahng's father, purchased 50,000, 25,000 and 60 62 25,000 shares of the Company's Series B Preferred Stock for $100,000, $50,000 and $50,000, respectively, and ASCII purchased 500,000 shares for $1,000,000. Mr. Chidambaram is a director of ASCII and has voting control over shares held by ASCII. On August 28, 1995, the Company issued 615,000 shares of Series B Preferred Stock, and in connection therewith, Messrs. Kahng and Torresi purchased 37,500 and 40,000 shares for $75,000 and $80,000, respectively. On December 31, 1996, Olivetti sold all of its shares of Common Stock and Preferred Stock (the "4C Shares") to 4C Ventures. In connection with such transfer, the Board of Directors resolved on December 3, 1996, that it was not in the best interests of the Company to exercise its right of first refusal under the Shareholder Agreement with respect to the 4C Shares. Mr. Raviola and Mr. Piol, both directors of the Company at the time, formed 4C Ventures as a venture capital fund with the backing of a major financial institution. Along with Alexandra Giurgiu Piol, Mr. Piol and Mr. Raviola exercise control over 4C Ventures. Mr. Piol and Mr. Raviola did not participate in any discussions of the Board of Directors concerning the transfer of the 4C Shares. All of the above holders are parties to, and their respective shares of Common Stock and Preferred Stock are subject to, that certain Investor Rights Agreement dated June 26, 1995 (the "Investor Rights Agreement"), providing for certain preemptive rights and certain registration rights with respect to all shares of Common Stock and Preferred Stock of such holders. See "Description of Capital Stock -- Registration Rights." Such preemptive rights will terminate upon the completion of the Offering and do not apply to the shares of Common Stock offered hereby. In addition, all of the above holders are parties to, and their respective shares are subject to, that certain Amended and Restated Shareholder Agreement dated June 26, 1995 (the "Shareholder Agreement"), providing for certain rights of first refusal and placing certain selling restrictions on all of the shares of Common Stock and Preferred Stock held by such holders. The Shareholder Agreement terminates upon the completion of this Offering. Under the Voting Agreement, 1995, Olivetti, 4C Ventures, ASCII, Providence and Messrs. Kahng, Torresi and Piol agreed to affirmatively vote their shares with respect to certain nominees of Olivetti, 4C Ventures, ASCII and Mr. Kahng for the Company's Board of Directors. The Voting Agreement terminates upon the completion of the offering with respect to ASCII, Providence and Messrs. Torresi and Piol. See "Management -- Voting Agreements." Under a Shareholder Voting Agreement dated April 27, 1995, Olivetti, Providence and Messrs. Kahng, Torresi and Piol, and Carlton Amdahl, a former consultant to the Company, agreed to vote their shares in the manner determined by the vote of 70% of the voting power of the shares subject to the agreement with respect to certain proposals that are required to be submitted to the stockholders of the Company by applicable law, the Company's charter documents or applicable agreements to be submitted for approval. In calendar year 1994, the Company's employees performed certain research and development services for Up To Date, which is owned by Mr. Kahng, and Up To Date paid approximately $156,000 for such services. The Company no longer provides services to Up To Date. In October 1996, the Company entered into a consulting agreement with Mr. Piol for direction and management services in the development of the Company's European business. Pursuant to such consulting agreement, Mr. Piol received compensation for services rendered in the amount of $10,000 per month plus pre-approved expenses. As of June 18, 1997, the Company had paid Mr. Piol $50,000 pursuant to such consulting agreement. Beginning in February 1997 the Company began paying Mr. Piol on a purchase order basis. In April 1996, the Company entered into a Service Agreement with ASCII for consulting services related to the development of the Company's business in Japan. ASCII, and certain employees of ASCII including Mr. Chidambaram, are stockholders of the Company and Mr. Chidambaram is ASCII's nominee to the Board of Directors pursuant to the Voting Agreement. See "Management -- Voting Agreements." ASCII is compensated at a rate of 1,900,000 Japanese yen per month plus reasonable expenses under the terms of the Service Agreement. 61 63 In January 1997, the Company entered into a consulting agreement with AAK Sales Consultants for direction and management services in the field of sales. AnnMarie Kocher, the wife of Mr. Kocher, is a principal with AAK Sales Consultants. Pursuant to the consulting agreement, AAK Sales Consultants receives compensation for services rendered in the amount of $10,000 per month plus pre-approved expenses. Ms. Kocher has more than twelve years of senior sales management experience. Prior to entering into such consulting agreement with the Company, Ms. Kocher served as Director of Indirect Sales at Tivoli Systems from 1994 to 1995; Vice President of Government, Education and Medical Sales for Dell from 1992 to 1994; and Vice President of Sales for GTSI, the largest Government GSA reseller, from 1985 to 1992. On March 10, 1997 the Board of Directors granted 750,000 options to purchase shares of Common Stock for $8.25 to Mr. Kahng. Mr. Kahng did not participate in the Board's decision to grant such options. On May 15, 1997 the Board of Directors granted 30,000 options to purchase shares of Common Stock for $7.50 to each of Messrs. Chidambaram, Heller, Piol, Raviola and Torresi. The Company has entered into indemnification agreements with each of its directors and officers. 62 64 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of June 18, 1997 by: (i) each person known by the Company to own beneficially five percent or more of the outstanding Common Stock; (ii) each of the Company's directors; (iii) each of the Named Executive Officers; and (iv) all directors and executive officers of the Company as a group.
PERCENTAGE OF OUTSTANDING SHARES -------------------- BENEFICIALLY PRIOR TO AFTER OWNED(1) OFFERING OFFERING ------------ -------- -------- 4C Ventures, L.P.(2)........................................ 4,837,866 32.8% 27.2% Stephen S. Kahng(3)......................................... 3,772,500 25.6 21.2 Joel J. Kocher(4)........................................... 140,000 * * Enzo N. Torresi(5).......................................... 689,700 4.6 3.9 Elserino M. Piol(6)......................................... 5,115,366 34.6 28.8 David Heller(7)............................................. 56,822 * * Giuliano C. Raviola(8)...................................... 4,887,866 33.1 27.5 Sada Chidambaram(9)......................................... 505,000 3.4 2.8 All directors and executive officers as a group (10 persons)(10).............................................. 10,338,388 69.5 57.8
- --------------- * Represents less than 1.0% of the outstanding Common Stock. (1) Beneficial ownership is determined in accordance with the rules of the Commission. In computing the number of shares of Common Stock beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days of June 18, 1997 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Percentage ownership is based (i) before the Offering, on 14,766,647 shares of Common Stock outstanding as of June 18, 1997 (assuming the conversion of 5,000,000 and 4,100,000 shares of Series A Preferred Stock and Series B Preferred, respectively, upon completion of the Offering; and (ii) after the Offering, on 17,766,647 shares of Common Stock. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to the shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. (2) Includes 4,337,866 and 250,000 shares of Common Stock to be issued upon conversion of the Series A Preferred Stock and Series B Preferred Stock, respectively, which will occur upon completion of the Offering. The address of 4C Ventures, L.P. is Queensgate Bank & Trust Ltd., Ugland House, South Church Street, P.O. Box 30464 SMB, Georgetown, Grand Cayman, Cayman Islands, B.W.I. (3) Includes 100,000 shares of Common Stock subject to a right of repurchase by the Company upon the termination, under certain circumstances, of Mr. Kahng's employment with the Company. See "Certain Transactions." Excludes 25,000 shares held by Charles Kahng, Mr. Kahng's father, and 315,000 shares held by Peter Kahng, Mr. Kahng's adult son, as to all of which shares Mr. Kahng disclaims beneficial ownership. Mr. Kahng's address is 2400 South IH35, Round Rock, Texas 78681. (4) Includes 140,000 shares of Common Stock to be issued upon conversion of the Series B Preferred Stock upon completion of the Offering. (5) Includes 110,840 shares of Common Stock subject to options exercisable within 60 days of June 18, 1997 and 60,700 shares of Common Stock to be issued upon conversion of the Series B Preferred Stock upon completion of the Offering. Includes 1,000 shares held by each of Beatrice Torresi, Francesca Pappalardo Torresi, Gabriella Carciotto Torresi and Antonio Torresi. Excludes 20,000 shares held by each of Mr. Torresi's sons Marco Torresi and Cristiano Torresi. (6) Includes 4,837,866 shares held by 4C Ventures, 10,000 shares held by Alexandra Giurgiu Piol as Custodian for Serena Piol under the Uniform Gift to Minors Act ("UGMA") and 10,000 shares held 63 65 by Alexandra Giurgiu Piol as Custodian for Marco Piol under the UGMA. Ms. Piol is the Managing Director of 4C Ventures. (7) Includes 50,000 shares held by David and Etta Heller as Trustees of the Davett Trust and 6,822 shares of Common Stock to be issued upon conversion of the Series B Preferred Stock held by Pacific Technology Capital Corporation Profit Sharing Plan, of which Mr. Heller is a signatory. (8) Consists of 4,837,866 shares held by 4C Ventures and 50,000 shares held jointly by Giuliano and Anna Raviola. (9) Consists of 500,000 shares of Common Stock to be issued upon conversion of the Series B Preferred Stock upon completion of the Offering held by ASCII, of which Mr. Chidambaram is a signatory, and 5,000 shares of Common Stock to be issued upon conversion of the Series B Preferred Stock upon completion of the Offering, held by Mr. Chidambaram. (10) Includes 118,340 shares of Common Stock subject to options exercisable within 60 days of June 18, 1997. Includes 205,700 shares of Common Stock to be issued upon conversion of the Series B Preferred Stock which will occur upon completion of the Offering. 64 66 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 5,000,000 shares of Series A Convertible Preferred Stock, par value $.01 per share ("Series A Preferred Stock"), 4,200,000 shares of Series B Convertible Preferred Stock, par value $.01 per share ("Series B Preferred Stock"), (collectively, "Preferred Stock"), and 30,800,000 shares of Common Stock, par value $.01 per share. COMMON STOCK As of June 18, 1997, there were 5,666,647 shares of Common Stock outstanding which were held of record by 40 stockholders. Holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors from funds legally available therefor. See "Dividend Policy." Each share of Common Stock entitles the holder thereof to one vote, and cumulative voting for the election of directors is not permitted. The Company's Certificate of Incorporation and Bylaws upon completion of the Offering will provide for a board of directors divided into three classes with only one class of directors standing for election each year. Directors can only be removed for cause. Except as otherwise required by law, a majority vote is sufficient for any act of the stockholders. Upon completion of the Offering, the holders of Common Stock will not have any preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of any shares of Preferred Stock that the Company may designate and issue in the future. Upon liquidation of the Company, subject to the rights of holders of any Preferred Stock outstanding, the holders of Common Stock are entitled to receive the Company's assets remaining after payment of liabilities proportionate to their pro rata ownership of the outstanding shares of Common Stock. All shares of Common Stock now outstanding are, and the shares of Common Stock to be outstanding upon the completion of the Offering will be, fully paid and non-assessable. PREFERRED STOCK General. Upon completion of the Offering, the Board of Directors will be authorized, without further action of the stockholders of the Company, to issue from time to time shares of Preferred Stock in one or more series and with such relative rights, powers, preferences, limitations and restrictions as the Board of Directors may determine at the time of issuance. Such shares may be convertible into Common Stock and may be superior to the Common Stock in the payment of dividends, liquidation, voting and other rights, preferences and privileges. The issuance of shares of Preferred Stock could adversely affect the holders of Common Stock. By way of example, the issuance of Preferred Stock could be used in certain circumstances to render more difficult or discourage a merger, tender offer or proxy contest or removal of incumbent management. Preferred Stock may be issued with voting and conversion rights that could adversely affect the voting power and other rights of the holders of Common Stock. The Company has no present plans to issue any additional shares of Preferred Stock. Series A Preferred Stock and Series B Preferred Stock. The Company currently has 5,000,000 shares of Series A Preferred Stock and 4,100,000 shares of Series B Preferred Stock outstanding, held of record by 11 and 58 stockholders, respectively. Each outstanding share of Series A Preferred Stock has a liquidation value of $1.00 and a dividend preference of $0.06 per annum. Each outstanding share of Series B Preferred Stock has a liquidation value of $2.00 and a dividend preference of $0.12 per annum. Each outstanding share of Series A Preferred Stock and Series B Preferred Stock may be converted into one share of Common Stock at the option of the holder, and has the voting rights equivalent to one share of Common Stock (subject to adjustment for dilution). Upon completion of the Offering each share of Series A Preferred Stock and Series B Preferred Stock shall automatically be converted into one share of Common Stock. WARRANTS The Company currently has issued and outstanding a warrant to purchase 112,500 shares of Common Stock (the "Common Stock Warrant") and a warrant to purchase 100,000 shares of Series B Preferred Stock (the "Series B Warrant"). The Common Stock Warrant is exercisable at $0.10 per share and expires in 65 67 January 2001. The Series B Warrant is exercisable at $5.00 per share and expires in November 2000. The exercise price of the warrants and the number of shares issuable pursuant thereto may be adjusted pursuant to certain anti-dilution provisions. The warrants do not confer upon the holder any voting or any other rights of a stockholder of the Company. The warrants are entitled to certain registration rights. See "-- Registration Rights." REGISTRATION RIGHTS The holders ("Holders") of an aggregate of approximately 14,679,160 shares of Common Stock (assuming the conversion of 9,100,000 shares of Preferred Stock upon completion of the Offering and including 212,500 shares issuable upon exercise of outstanding warrants) (the "Registrable Securities") are entitled to certain registration rights with respect to such shares pursuant to the Investor Rights Agreement. The Investor Rights Agreement provides, in part, that the Holders may request that the Company file a registration statement under the Securities Act with respect to at least 25% of the Registrable Securities or a lesser percentage if the aggregate offering price to the public would be at least $5,000,000. Upon receipt of such a request, the Company is required to notify all other Holders and to use its best efforts to effect such registration, subject to certain conditions. The Company is not required to effect more than two registration statements pursuant to such requests. The Holders may also request, without limit but subject to certain frequency restrictions, that the Company file a registration statement on Form S-3 under the Securities Act, provided that the anticipated aggregate offering price of Registrable Securities so requested to be registered exceeds $1,000,000 and the Company is a registrant entitled to use Form S-3 for such an offering. Further, whenever the Company proposes to register any of its securities under the Securities Act for its own account or for the account of other security holders, the Company is required to notify each Holder of the proposed registration and include all Registrable Securities that such Holder may request to be included in such registration, subject to certain limitations. Generally, the Company is required to bear all expenses (except underwriting discounts, selling commissions and stock transfer taxes) of all registrations. The Company expects to obtain a waiver of these registration rights to the extent they would apply to this Offering. No Holders have given the Company notice that they intend to exercise registration rights following the Offering. DELAWARE LAW AND CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS Upon completion of the Offering, certain provisions of the Company's Certificate of Incorporation and Bylaws and certain provisions of Delaware law could make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of the Company. Such provisions could limit the price that investors might be willing to pay in the future for the Company's Common Stock. These provisions permit the issuance of "blank check" preferred stock by the Board of Directors without stockholder approval, require super-majority approval to amend certain provisions in the Certificate of Incorporation and Bylaws, require that all stockholder actions be taken at duly called annual or special meetings and not by written consent, divide the Board of Directors into three classes with only one class standing for election each year and impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. Furthermore, the Company will be subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law ("Section 203") which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. Such application of Section 203 could also have the effect of delaying or preventing a change of control of the Company. See "Description of Capital Stock." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is Harris Trust and Savings Bank. 66 68 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering and assuming no exercise of options or warrants after June 18, 1997, the Company will have outstanding 17,766,647 shares of Common Stock (18,216,647 shares if the Underwriters' over-allotment option is exercised in full). Of these shares, the 3,000,000 shares offered hereby (3,450,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 described below. The remaining 14,766,667 shares of Common Stock outstanding upon completion of the Offering are "restricted securities" as that term is defined in Rule 144. Of the 14,766,667 restricted shares, 14,679,160 shares are subject to lock-up agreements (described below). On the date of the Offering, 15,000 shares will become eligible for immediate sale without restriction pursuant to Rule 144 and, beginning 90 days after commencement of the Offering, 184,987 shares will become eligible for sale without restriction pursuant to Rule 144 or Rule 701 (described below) and approximately 100,000 shares will be eligible for sale subject to the timing, volume and manner of sale restrictions of Rule 144. Beginning 180 days after commencement of the Offering, 2,916,356 shares will become eligible for sale without restriction pursuant to Rule 144(k) or Rule 701 and approximately 6,286,660 additional shares will be eligible for sale subject to the timing, volume, and manner of sale restrictions of Rule 144. In addition, beginning 90 and 180 days after commencement of the Offering, 1,174,046 and 410,436 shares, respectively, subject to outstanding Warrants and stock options vested as of such dates could also be sold pursuant to Rule 701, subject in some cases to compliance with certain volume limitations as described below. In general, under Rule 144, as recently amended, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year (including the holding period of any prior owner except an affiliate from whom such shares were purchased) is entitled to sell in "brokers' transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (then approximately 177,666 shares immediately after the completion of the Offering (182,166 shares if the Underwriters' over-allotment option is exercised in full)) or (ii) generally, the average weekly trading volume in the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner other than an affiliate from whom such shares were purchased), is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701, persons who purchase shares upon exercise of options granted prior to the effective date of the Offering are entitled to sell such shares 90 days after the effective date of the Offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. Certain stockholders owning upon completion of the Offering, in the aggregate, 14,466,660 shares of Common Stock, have contractually agreed to execute lock-up agreements pursuant to which each will agree that they will not, for a period of 180 days from the date of this Prospectus, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, contract to sale, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale offer of sale, contract of sale, pledge, grant of option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock of the Company or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock, or other capital stock of the Company without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters. Further, holders of outstanding warrants and vested stock options for, in the aggregate, an additional 212,500 shares of Common Stock are subject to 180 day lock-up agreements with the Company. The Company has agreed to use its best efforts to seek such lock-up agreements from all of the Company's officers, directors, stockholders and option holders. In addition, the Company has agreed that it will not, for a period of 180 days from the date of this Prospectus, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, 67 69 grant any option to purchase or otherwise sell or dispose (or announce any offer, sale offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock of the Company or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock, or other capital stock of the Company without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, except that such agreement does not prevent the Company from granting additional options under the 1994 Plan. Prudential Securities Incorporated may in its sole discretion, at any time and without notice, release all or any portion of the securities subject to lock-up agreements. Approximately 180 days after the date of this Prospectus, the Company intends to file a Registration Statement on Form S-8 covering an aggregate of approximately 5,849,103 shares of Common Stock (including the 5,148,159 shares subject to currently outstanding options that have been reserved for issuance under the 1994 Plan, thus permitting the resale of such shares in the public market without restriction under the Securities Act. The holders of an aggregate of 14,679,160 shares of Common Stock (assuming the conversion of 9,100,000 shares of Preferred Stock and including 212,500 shares issuable upon exercise of outstanding warrants) or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock -- Registration Rights." Prior to the Offering, there has not been any public market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market prices for the Common Stock and impair the Company's ability to raise capital through the sale of equity securities. UNDERWRITING The Underwriters named below (the "Underwriters"), for whom Prudential Securities Incorporated and Salomon Brothers Inc are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names:
NUMBER UNDERWRITER OF SHARES ----------- --------- Prudential Securities Incorporated.......................... Salomon Brothers Inc........................................ --------- Total............................................. 3,000,000 =========
The Company is obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock offered hereby if any are purchased. The Underwriters, through their Representatives, have advised the Company that they propose to offer the Common Stock initially at the initial public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per share; and that such dealers 68 70 may reallow a concession of $ per share to certain other dealers. After the initial public offering, the offering price and the concessions may be changed by the Representatives. The Company has granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 450,000 additional shares of Common Stock at the initial public offering price, less underwriting discounts and commissions, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering over-allotments incurred in the sale of the shares of Common Stock offered hereby. To the extent such option to purchase is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to . The Company has agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company, its officers and directors and certain other beneficial owners of the Company's Common Stock and holders of warrants or options to purchase Common Stock have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for any shares of Common Stock or other capital stock of the Company, for a period of 180 days after the date of this Prospectus without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters. Prudential Securities Incorporated may in its sole discretion, at any time and without notice, release all or any portion of the securities subject to lock-up agreements. Prior to the Offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in making such determination will be the prevailing market conditions, the Company's financial and operating history and condition, its prospects and the prospects for its industry in general, the management of the Company and the market prices of securities for companies in businesses similar to that of the Company. In connection with the Offering, certain Underwriters and selling group members (if any) and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company, and in such case may purchase Common Stock in the open market following the closing of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 450,000 shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, Prudential Securities Incorporated, on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. 69 71 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Baker & McKenzie, Dallas, Texas. Frank S. Bayley III, a partner of Baker & McKenzie, owns 15,000 shares of Common Stock and options to purchase 25,000 shares of Common Stock at an exercise price of $7.00 per share, and another attorney with Baker & McKenzie will own 500 shares of Common Stock upon conversion of the Preferred Stock. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California ("WSGR"). WS Investment Company 95B, an investment fund established for the benefit of the members and other attorneys of WSGR, and WSGR Retirement Plan, a fund that provides retirement benefits to members of WSGR and for which members of WSGR serve as trustees, will own 15,750 and 9,250 shares, respectively, of Common Stock upon conversion of the Preferred Stock. EXPERTS The consolidated financial statements and schedule of the Company for the period from inception through June 30, 1994, the fiscal years 1996 and 1995 and the nine months ended March 31, 1997, appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act, of which this Prospectus is a part, with respect to the shares of Common Stock offered hereby. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement for further information with respect to the Company and the Common Stock offered hereby. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents and when any such document is an exhibit to the Registration Statement, each such statement is qualified in its entirety by reference to the copy of such document filed with the Commission. Copies of the Registration Statement may be obtained upon payment of the prescribed fees or examined without charge at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of this Registration Statement may also be obtained from the Commission's website (http://www.sec.gov). 70 72 INDEX TO FINANCIAL STATEMENTS POWER COMPUTING CORPORATION Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity............. F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 73 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Power Computing Corporation We have audited the accompanying consolidated balance sheets of Power Computing Corporation and Subsidiaries as of June 30, 1995 and 1996 and March 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the period from inception (November 19, 1993) to June 30, 1994, each of the two years in the period ended June 30, 1996 and the nine months ended March 31, 1997. Our audits also include Schedule II which is included in this Registration Statement. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Power Computing Corporation and Subsidiaries as of June 30, 1995 and 1996 and March 31, 1997 and the consolidated results of their operations and their cash flows for the period from inception (November 19, 1993) to June 30, 1994, each of the two years in the period ended June 30, 1996 and the nine months ended March 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Austin, Texas June 26, 1997 F-2 74 POWER COMPUTING CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
JUNE 30 ----------------- MARCH 31 1995 1996 1997 ------- ------- -------- Current assets: Cash and cash equivalents................................. $ 6,205 $ 2,161 $ 3,438 Accounts receivable, less allowances of $196, $1,587 and $4,243 respectively.................................... 817 18,842 26,117 Inventories............................................... 2,943 23,226 28,206 Prepaid expenses and other current assets................. 1,073 239 1,452 Deferred income taxes..................................... - 2,340 3,826 ------- ------- ------- Total current assets.............................. 11,038 46,808 63,039 Property and equipment, net................................. 389 2,251 10,845 ------- ------- ------- Total assets...................................... $11,427 $49,059 $73,884 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,465 $20,390 $20,248 Accrued liabilities and other............................. 331 1,796 6,181 Accrued royalties payable................................. 146 3,024 3,245 Income taxes payable...................................... - 986 2,152 Borrowings from bank...................................... - 8,000 18,683 ------- ------- ------- Total current liabilities......................... 2,942 34,196 50,509 Other liabilities........................................... - 302 724 Stockholders' equity: Series A convertible preferred stock, $.01 par value: Authorized 5,000,000 shares; shares issued and outstanding 5,000,000 in 1995, 1996, and 1997......... 50 50 50 Series B convertible preferred stock, $.01 par value: Authorized 4,200,000 shares; shares issued and outstanding 3,485,000 in 1995, 4,100,000 in 1996 and 1997.................................................. 35 41 41 Common stock, $.01 par value: Authorized 18,800,000 shares; shares issued and outstanding 5,352,500 in 1995, 5,407,125 in 1996 and 5,619,113 in 1997..................................... 54 54 56 Additional paid-in capital................................ 12,369 13,533 13,884 Notes receivable from stockholders........................ (70) (70) (70) Retained earnings (deficit)............................... (3,953) 953 8,690 ------- ------- ------- Total stockholders' equity........................ 8,485 14,561 22,651 ------- ------- ------- Total liabilities and stockholders' equity........ $11,427 $49,059 $73,884 ======= ======= =======
See accompanying notes. F-3 75 POWER COMPUTING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCEPTION NINE (NOVEMBER 19 MONTHS 1993) THROUGH YEAR ENDED JUNE 30 ENDED JUNE 30 -------------------- MARCH 31 1994 1995 1996 1997 ------------- ------- --------- -------- Net sales............................... $ -- $ 3,046 $ 131,075 $247,207 Cost of goods sold...................... -- 2,059 104,408 194,495 ------- ------- --------- -------- Gross profit.......................... -- 987 26,667 52,712 Operating expenses: Sales, general and administrative..... 413 1,602 17,458 35,544 Research and development.............. 624 2,366 3,425 3,962 ------- ------- --------- -------- 1,037 3,968 20,883 39,506 ------- ------- --------- -------- Income (loss) from operations........... (1,037) (2,981) 5,784 13,206 Other income............................ 25 40 46 33 Interest expense........................ -- -- 462 886 ------- ------- --------- -------- Income (loss) before income taxes....... (1,012) (2,941) 5,368 12,353 Provision for income taxes.............. -- -- 462 4,616 ------- ------- --------- -------- Net income (loss)....................... $(1,012) $(2,941) $ 4,906 $ 7,737 ======= ======= ========= ======== Net income (loss) per share............. $ (0.22) $ (0.49) $ 0.35 $ 0.46 ======= ======= ========= ======== Weighted average common and common equivalent shares..................... 4,574 5,991 14,024 17,000 ======= ======= ========= ========
See accompanying notes. F-4 76 POWER COMPUTING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A CONVERTIBLE SERIES B CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLES -------------------- -------------------- ------------------ PAID-IN FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS ---------- ------- ---------- ------- --------- ------ ---------- ------------ Balances at inception.............. -- $ -- -- $ -- -- $ -- $ -- $ -- Series A preferred stock issued for cash and assignment of certain rights................. 3,000,000 30 -- -- -- -- 2,970 -- Common stock issued for cash, notes receivable and fixed assets......................... -- -- -- -- 5,175,000 52 466 (93) Common stock warrants issued..... -- -- -- -- -- -- 2 -- Net loss......................... -- -- -- -- -- -- -- -- --------- ---- --------- ---- --------- ---- ------- ---- Balances as of June 30, 1994....... 3,000,000 30 -- -- 5,175,000 52 3,438 (93) Series A preferred stock issued......................... 2,000,000 20 -- -- -- -- 1,980 -- Sale of common stock............. -- -- -- -- 15,000 -- 1 -- Exercise of stock purchase warrants....................... -- -- -- -- 112,500 1 10 -- Sale of Series B preferred stock.......................... -- -- 3,485,000 35 -- -- 6,935 -- Exercise of stock options........ -- -- -- -- 50,000 1 5 -- Collections on receivables....... -- -- -- -- -- -- -- 23 Net loss......................... -- -- -- -- -- -- -- -- --------- ---- --------- ---- --------- ---- ------- ---- Balances as of June 30, 1995....... 5,000,000 50 3,485,000 35 5,352,500 54 12,369 (70) Exercise of stock options........ -- -- -- -- 54,625 -- 11 -- Sale of Series B preferred stock.......................... -- -- 615,000 6 -- -- 1,153 -- Net income....................... -- -- -- -- -- -- -- -- --------- ---- --------- ---- --------- ---- ------- ---- Balances as of June 30, 1996....... 5,000,000 50 4,100,000 41 5,407,125 54 13,533 (70) Exercise of stock options........ -- -- -- -- 211,988 2 126 -- Income tax benefit from stock option exercises............... -- -- -- -- -- -- 225 -- Net income....................... -- -- -- -- -- -- -- -- --------- ---- --------- ---- --------- ---- ------- ---- Balances as of March 31, 1997...... 5,000,000 $ 50 4,100,000 $ 41 5,619,113 $ 56 $13,884 $(70) ========= ==== ========= ==== ========= ==== ======= ==== RETAINED EARNINGS TOTAL -------- ------- Balances at inception.............. $ -- $ -- Series A preferred stock issued for cash and assignment of certain rights................. -- 3,000 Common stock issued for cash, notes receivable and fixed assets......................... -- 425 Common stock warrants issued..... -- 2 Net loss......................... (1,012) (1,012) ------- ------- Balances as of June 30, 1994....... (1,012) 2,415 Series A preferred stock issued......................... -- 2,000 Sale of common stock............. -- 1 Exercise of stock purchase warrants....................... -- 11 Sale of Series B preferred stock.......................... -- 6,970 Exercise of stock options........ -- 6 Collections on receivables....... -- 23 Net loss......................... (2,941) (2,941) ------- ------- Balances as of June 30, 1995....... (3,953) 8,485 Exercise of stock options........ -- 11 Sale of Series B preferred stock.......................... -- 1,159 Net income....................... 4,906 4,906 ------- ------- Balances as of June 30, 1996....... 953 14,561 Exercise of stock options........ -- 128 Income tax benefit from stock option exercises............... -- 225 Net income....................... 7,737 7,737 ------- ------- Balances as of March 31, 1997...... $ 8,690 $22,651 ======= =======
See accompanying notes. F-5 77 POWER COMPUTING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
INCEPTION NINE (NOVEMBER 19, YEAR ENDED JUNE 30 MONTHS ENDED 1993) THROUGH ------------------ MARCH 31, JUNE 30, 1994 1995 1996 1997 ------------- ------- -------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)................................. $(1,012) $(2,941) $ 4,906 $ 7,737 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization................... 42 176 581 968 Write-off of acquired technology................ 250 -- -- -- Loss on write-down and disposal of property and equipment.................................... 190 -- -- 403 Income tax benefit from stock option exercises.................................... -- -- -- 225 Change in assets and liabilities: Accounts receivable, net..................... -- (817) (18,025) (7,275) Inventories.................................. -- (2,943) (20,283) (4,980) Receivable from related party................ (59) 59 -- -- Deferred income taxes........................ -- -- (2,340) (1,486) Prepaid expenses and other current assets.... (53) (1,020) 834 (1,213) Accounts payable............................. 78 2,387 17,925 (142) Accrued liabilities and other................ 15 316 1,767 4,807 Accrued royalties payable.................... -- 146 2,878 221 Income taxes payable......................... -- -- 986 1,166 ------- ------- -------- -------- Net cash provided by (used in) operating activities...................................... (549) (4,637) (10,771) 431 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment............. (244) (239) (2,443) (9,965) ------- ------- -------- -------- Net cash used in investing activities............. (244) (239) (2,443) (9,965) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of stock and warrants...... 2,877 8,988 1,170 128 Collections on notes receivables from stockholders.................................... -- 23 -- -- Payments of capital lease obligation.............. (1) (13) -- -- Draws on line of credit........................... -- -- 8,000 20,900 Payments on line of credit........................ -- -- -- (10,217) ------- ------- -------- -------- Net cash provided by financing activities......... 2,876 8,998 9,170 10,811 Net increase (decrease) in cash and cash equivalents..................................... $ 2,083 $ 4,122 $ (4,044) $ 1,277 Cash and cash equivalents at beginning of period.......................................... -- 2,083 6,205 2,161 ------- ------- -------- -------- Cash and cash equivalents at end of period........ $ 2,083 $ 6,205 $ 2,161 $ 3,438 ======= ======= ======== ======== Cash paid during the periods for: Interest........................................ $ -- $ -- $ 425 $ 910 Income taxes.................................... $ -- $ -- $ 1,816 $ 4,711 Supplemental disclosures: Series A preferred stock issued for acquired technology................................... $ 250 $ -- $ -- $ -- Common stock issued for notes receivable........ $ 93 $ -- $ -- $ -- Common stock issued for fixed assets............ $ 300 $ -- $ -- $ --
See accompanying notes. F-6 78 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Power Computing Corporation (the Company) was incorporated in Delaware in November 1993. The Company develops, manufactures, markets and supports high performance computer systems. The Company markets its computer products and services under the Power Computing brand name primarily through direct sales. Its customers include major corporate, government and education accounts, as well as small to medium-size businesses and individuals. The Company supplements its direct marketing strategy by marketing through value-added resellers and catalogers. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year In 1994, 1995 and 1996, the Company reported on a fiscal year ending on the last day in June. Effective in 1997, the Company changed its fiscal year to a 52 or 53 week period ending on the last Sunday in June. In addition, the quarter ends were changed to the last Sunday of the respective quarter. For presentation purposes, the Company refers to its reporting period ended March 30, 1997 as ending on March 31, 1997. Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Inventories Inventories, principally component parts, are stated at the lower of cost, determined on a first-in, first-out basis, or market. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the related assets (three to five years). Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining lease term, whichever is less. Revenue Recognition The Company recognizes revenue, net of customer returns and customer allowances, as of the date product is shipped to customers. Revenues from separately priced maintenance and extended warranty agreements are recognized ratably over the terms of the agreements. Warranty Costs The Company provides currently for estimated costs which may be incurred under its initial warranty program. Costs related to separately priced maintenance and extended warranty costs are recognized as incurred. F-7 79 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Advertising Costs The Company expenses advertising costs when incurred. Advertising costs for the years ended June 30, 1995 and 1996 and the nine months ended March 31, 1997 were approximately $204,000, $2,645,000 and $3,534,000, respectively. There were no advertising costs incurred in the year ended June 30, 1994. There were no direct-response advertising costs reported as assets at June 30, 1995 and 1996 or March 31, 1997. Concentration of Credit Risk The Company's customers include large corporations, government and education entities, small to medium-sized businesses and individuals. Its receivables from such parties are diversified. The Company's accounts receivable potentially expose the Company to concentrations of credit risk, as defined by Statement of Financial Accounting Standard No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk. However, in management's opinion, no significant concentration of credit risk exists for the Company. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses are provided for in the financial statements and consistently have been within management's expectations. No customer accounted for more than 10% of sales for any period presented. Export sales to foreign customers were $27,659,000 during the nine months ended March 31, 1997. For the years ended June 30, 1994, 1995 and 1996, sales to foreign customers were less than 10% of consolidated revenues. Fair Value of Financial Instruments Cash, accounts receivable, accounts payable and accrued and other liabilities are stated at cost which approximates fair value due to the short-term maturity of these instruments. The fair value of the Company's outstanding debt, due to its variable interest rate, approximates its carrying value. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard (FAS) No. 109, Accounting for Income Taxes. This statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-Based Compensation The Company adopted the disclosure option of Statement of Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based Compensation, for the period ended March 31, 1997. The Company continues to apply Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plan. As a result, no compensation expense has been recognized for options granted with an exercise price equal to market value at the date of grant. For stock options issued at discounted prices, the Company accrues compensation expense over the vesting period for the difference between the exercise price and the fair market value on the measurement date. F-8 80 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net Income (Loss) Per Share Net income (loss) per share is computed using the weighted average number of shares of common stock and dilutive common equivalent shares from convertible preferred stock (using the if-converted method) and from stock options and warrants (using the treasury stock method). Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common stock and common equivalent shares issued by the Company during the twelve-month period prior to the proposed offering have been included in the calculation as if they were outstanding for all periods presented regardless of whether they are dilutive (using the treasury stock method at an assumed public offering price). Primary earnings per share approximates fully diluted earnings per share for all periods presented. Supplemental pro forma net income per common and common equivalent share reflecting the issuance of a sufficient number of shares of Common Stock at an assumed offering price per share necessary to repay the debt outstanding at the end of the period and eliminate interest expense, net of income taxes, related to these borrowings is as follows (in thousands, except per share data):
YEAR ENDED NINE MONTHS ENDED JUNE 30, 1996 MARCH 31, 1997 ------------- ----------------- Pro forma net income per common and equivalent share............................................... $ 0.36 $ 0.43 Pro forma weighted average number of common and equivalent shares outstanding....................... 14,913 19,076
Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share (FAS 128), which is required to be adopted for financial statements issued for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, the presentation of primary earnings per share is replaced with a presentation of basic earnings per share, the calculation of which excludes the dilutive effect of common stock equivalents. The adoption of FAS 128 is expected to result in a basic earnings per share of $(0.22), $(0.49), $0.80, $1.23 for the years ended June 30, 1994, 1995 and 1996 and the nine months ended March 31, 1997, respectively. Compared to primary earnings per share as currently presented, the adoption of FAS 128 results in no change for 1994 and 1995 and an increase of $0.45 and $0.77 for 1996 and 1997, respectively. There is no impact on the fully diluted earnings per share calculation for the periods presented. Reclassifications Certain reclassifications have been made to prior periods' financial statements to conform to 1997 presentation. F-9 81 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
JUNE 30 --------------- MARCH 31 1995 1996 1997 ----- ------ -------- (IN THOUSANDS) Computers and equipment................. $ 396 $1,878 $ 3,661 Furniture and fixtures.................. 63 271 557 Computer software....................... 138 575 897 Leasehold improvements.................. 10 191 798 Construction in process................. -- -- 6,168 ----- ------ ------- 607 2,915 12,081 Less accumulated depreciation and amortization.......................... (218) (664) (1,236) ----- ------ ------- $ 389 $2,251 $10,845 ===== ====== =======
3. BORROWINGS FROM BANK In November 1995, the Company entered into a $5 million revolving line of credit available for working capital, bearing interest at the lender's prime rate plus 2.25% (11.0% at June 30, 1996), due monthly. The line was increased to $10 million in March 1996, and increased again to $15 million in October 1996. Borrowings under the line were collateralized by substantially all of the Company's assets. In December 1996, the Company obtained a $20 million bridge line of credit ("Phase I") from a financial institution. Proceeds from the Phase I facility were used to retire the line of credit previously in place. Borrowings under the Phase I facility, bore interest due monthly at the financial institution's Base Rate. The Phase I facility required the Company to meet certain financial and reporting requirements, and was collateralized by substantially all of the Company's assets. In March 1997, the Company entered into a $50 million loan agreement ("the Loan Agreement") to replace the Phase I facility. Under the terms of the Loan Agreement, the Company may borrow up to $50 million under a revolving credit facility ("Phase II") which matures in March 1998. Borrowings under this facility are subject to a borrowing base limitation (based upon a combination of certain eligible accounts receivable and inventory), are collateralized by substantially all of the Company's assets, and bear interest, payable monthly, at the financial institution's Base Rate plus 0.5% (9.0% at March 31, 1997). The Company may convert the interest rate on all or a portion of the outstanding borrowings from the financial institution's Base Rate plus 0.5% to LIBOR. In addition, the financial institution will issue merchandise or standby letters of credit, subject to certain restrictions, in amounts not to exceed in the aggregate $5 million. There were no letters of credit outstanding as of March 31, 1997. If the Company meets certain conditions, including completion of an initial public offering prior to December 31, 1997 generating at least $35 million in net proceeds to the Company, the Phase II agreement converts to a $30 million revolving line of credit, ("Phase III") maturing in March 1999 and, certain of the reporting requirements and financial covenants are reduced or replaced. Borrowings under the Phase III facility bear interest at the financial institution's Base Rate. The Loan Agreement requires that the Company maintain a lock box at the financial institution for collection of its accounts receivable. Collections via the lock box are restricted for payment of the interest and principal balance under the Phase II facility. The Loan Agreement limits the Company's annual capital expenditures and requires the Company to maintain a minimum net worth and meet certain financial ratios, including fixed charge coverage, as well as comply with periodic reporting requirements. F-10 82 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At March 31, 1997, the Company was in violation of certain covenants of the Loan Agreement, including failure to meet the minimum Fixed Charge Coverage ratio for the three-month period ended March 31, 1997; failure to meet the required ratio of current assets to current liabilities as of March 31, 1997; failure to provide a compliance certificate within 45 days after the Fiscal Quarter ended March 31, 1997; and failure to obtain the bank's written permission for commencement of the campus real estate project in Georgetown, Texas. The Company obtained waivers of these covenant violations from the bank. In June 1997, the Loan Agreement was amended to reduce the revolving credit facility to $30 million, to modify the formula used to compute the borrowing base, to reduce the minimum quarterly Fixed Charge Coverage ratio requirement through June 30, 1998, and to notify the Company of the bank's formal consent to the commencement of the campus real estate project in Georgetown, Texas, subject to maximum project cost and maximum borrowing thresholds. Outstanding borrowings from the bank were $8,000,000 and $18,683,000 at June 30, 1996 and March 31, 1997, respectively; and, giving effect to the June 1997 amendment to the Loan Agreement, the Company had a borrowing base of approximately $25,000,000 at March 31, 1997. 4. LEASES The Company leases certain equipment and operating facilities under noncancelable operating leases with terms expiring through 2001. Rent expense for the years ended June 30, 1994, 1995 and 1996 and the nine months ended March 31, 1997 under such arrangements totaled approximately $27,000, $103,000, $856,000, and $959,000, respectively. Future minimum lease payments at March 31, 1997 under the operating leases are as follows (in thousands): Remainder of fiscal 1997................ $ 301 1998.................................... 1,674 1999.................................... 1,065 2000.................................... 756 2001.................................... 295 ------ Total minimum lease payments............ $4,091 ======
5. COMMITMENTS, CONTINGENCIES AND CERTAIN CONCENTRATIONS Georgetown Facilities In February 1997, the Company entered into a lease agreement whereby it would lease until December 2009 certain land and facilities to be constructed and located in Georgetown, Texas. At any time during the lease term, the Company has the option of purchasing the premises for a nominal amount. Monthly lease payments are equal to the monthly costs (including interest) of the lessor related to the leased premises. These costs will fluctuate as land is purchased and construction costs of the facilities are incurred. Total anticipated costs of the land purchase and facilities construction is approximately $25 million. At March 31, 1997, approximately $4.7 million had been paid or accrued under this agreement for the purchase of land and initial construction costs. The Company's agreements for leasing these facilities grant it certain tax abatements and other benefits from the City of Georgetown (the "City"). These agreements also anticipate that the City will receive state grants and other funds to help subsidize the costs of preparing the infrastructure for the facilities. The Company must reimburse the City up to $8 million if the City can not recover their costs through grants, tax receipts, or other allowed means. The Company and the lessor are currently in the process of obtaining financing for the majority of the construction effort. It is anticipated that the Company will be a guarantor on all debt related to the property. F-11 83 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company is capitalizing its lease obligations when incurred as construction in process. Once the facilities are completed and placed in service, the Company will begin depreciating the building and related assets. Legal Matters The Company is involved in certain claims arising in the normal course of business. An estimate of the possible loss resulting from these matters cannot be made, however, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. Certain Concentrations The Company purchases a number of components from single sources. In some cases, alternative sources of supply are not available. In other cases, if the Company believes it is advantageous to do so due to performance, quality, support, delivery, capacity or price considerations, the Company may establish a working relationship with a single source, even when multiple suppliers are available. If the supply of a critical single-source material or component were delayed or curtailed, the Company's ability to ship the related product in desired quantities and in a timely manner could be adversely affected. Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could affect operating results adversely. 6. LICENSES Since inception, the Company has developed, manufactured, marketed and sold only Macintosh-compatible computer systems. The Company's Macintosh-compatible business is dependent on several license agreements with Apple that permit the Company to manufacture or sell Macintosh-compatible computer systems and distribute the Mac OS. All of the Company's current products and many of its planned products are dependent on these license agreements. The Company's licenses to manufacture Macintosh-compatible computer systems and distribute the current Mac OS expire in May 2000 and December 2001, respectively. Alternatively, these agreements will expire the twelfth month following the next major release of the Mac OS, if earlier. These licenses, among other things, allow the Company to reproduce and distribute the current version of the Mac OS for a specified royalty, require Apple to offer the Company a follow-on license for Apple's next major release of the Mac OS, require that the Company's Macintosh-compatible computer systems conform to certain technical specifications set forth by Apple and that those systems be certified prior to shipment, and require that the Company receive authorization from Apple before obtaining certain component parts in which Apple holds intellectual property rights. The Company has agreed to the principal business terms to license the next major operating system. There can be no assurance that the Company will reach final agreement with Apple on these licensing and other issues. Failure of the Company to reach agreement on certain of these issues could have a material adverse effect on the Company. The Company is also subject to ongoing software royalty agreements for periods exceeding twelve months which require cash payments. Royalty costs are accrued at the time product is shipped and are included in cost of goods sold. 7. STOCKHOLDERS' EQUITY The Company, the Series A preferred stockholders, the Series B preferred stockholders and certain common stockholders (collectively, the "selected stockholders") have the right of first refusal on a pro-rata basis, should any of the selected stockholders decide to sell shares. In addition, certain stockholders have the F-12 84 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) right to sell their shares should certain key Series A preferred, Series B preferred and common stockholders sell 50% or more of their holdings. Common Stock In January 1994, the Company issued 925,000 shares of its common stock subject to a purchase agreement containing both vesting provisions and repurchase rights. The shares generally vest over a four year period and require the continuous employment of the stockholder. If the stockholder ceases employment prior to full vesting, the Company may have the right of repurchase for any unvested shares at a price equal to that originally paid by the stockholder. There were 145,833 shares unvested at March 31, 1997. Preferred Stock The rights, preferences and privileges of the preferred stockholders are as follows: Dividends The holders of Series A and Series B convertible preferred stock are entitled to receive noncumulative dividends at an annual rate of $0.06 and $0.12 per share, respectively, when, and if, declared by the Board of Directors. After payment of the dividend, additional dividends declared are to be paid pro rata to both the holders of the common stock and preferred stock (on an "as converted basis"). No dividends have been declared for the fiscal years ended June 30, 1994, 1995, 1996 or the nine months ended March 31, 1997. Liquidation Series A and Series B convertible preferred stock are not subject to redemption. Holders of the Series A and Series B convertible preferred stock are entitled to a preference, upon liquidation of the Company, of $1.00 and $2.00 per share, respectively, plus declared but unpaid dividends. After the full amounts have been paid on the Series A and Series B preferred stock, any remaining assets will be distributed to the common stockholders. Conversion and Registration The Series A and Series B preferred stock is convertible, at the option of the holder, into common stock on a one-for-one basis (subject to certain adjustments for antidilution). Conversion of the Series A and Series B preferred stock is automatic upon the closing of an underwritten public offering of the Company's Common Stock at an aggregate offering price of not less than $5,000,000 and $10,000,000, respectively, and at a price of not less than $3.00 and $5.00 per share, respectively. In addition, preferred stockholders have certain registration rights and the right to participate in future issuances of the Company's stock. This right to participate in future issuances of the Company's stock terminates upon the closing of an underwritten public offering of the Company's securities in an aggregate principal amount of $10,000,000 or more. Voting Each share of preferred stock is entitled to vote on an "as converted" basis along with common stockholders. Warrants In January 1994, the Company issued warrants, at $0.01 per share, to various individuals to purchase 225,000 shares of common stock at $0.10 per share, the then estimated fair value of the Company's stock. At F-13 85 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) March 31, 1997, a warrant to purchase 112,500 shares of common stock was outstanding which expires January 15, 2001. In November 1995, the Company issued a warrant to a financial institution in connection with a financing arrangement to purchase 100,000 shares of Series B Preferred Stock at $5.00 per share. The fair value of the warrant at the date of grant was not material. At March 31, 1997, this warrant was outstanding and expires November 20, 2000. Notes Receivable From Stockholders The Company has accepted long-term promissory notes for the issuance of common stock. These notes incur interest at 3.98% per annum with principal and interest due on demand, and are reflected as a reduction in stockholders' equity in the Company's consolidated balance sheet. Stock Option Plan In January 1994, the Company adopted the 1994 Stock Option Plan (the Plan) which provides for the granting of stock options to employees, directors and consultants of the Company. The plan terminates in 2014. Under the plan, incentive options to purchase the Company's common stock may be granted to employees at prices not lower than fair market value, as determined by the Board of Directors at the date of grant. Nonstatutory options (options which do not qualify as incentive options) may be granted at prices not lower than 85% of fair market value, as determined by the Board of Directors, at the date of grant. The options generally expire 10 years from date of grant. Options granted generally vest over four years, at the rate of 25% one year from the date of grant and 1/16 each calendar quarter thereafter. Unexercised options expire 30 days after termination of employment with the Company. Stock issued under the Plan is subject to the Company's repurchase right, at the higher of the exercise price or the fair market value, within 90 days of termination of employment. In addition, shares issued under the Plan are subject to the Company's right of first refusal. F-14 86 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables summarize stock option activity under the plan for each of the three fiscal years ended June 30, 1996 and the nine months ended March 31, 1997:
WEIGHTED- AVERAGE NUMBER OF EXERCISE SHARES SHARES PRICE EXERCISABLE --------- --------- ----------- Outstanding at inception.................................... -- $ -- Granted................................................... 210,000 0.10 Canceled.................................................. -- -- Exercised................................................. -- -- --------- Outstanding at June 30, 1994................................ 210,000 0.10 210,000 ======= Granted................................................... 2,020,000 0.31 Canceled.................................................. (710,000) 0.22 Exercised................................................. (50,000) 0.10 --------- Outstanding at June 30, 1995................................ 1,470,000 0.33 250,000 ======= Granted................................................... 1,479,500 3.73 Canceled.................................................. (299,375) 1.92 Exercised................................................. (45,875) 0.25 --------- Outstanding at June 30, 1996................................ 2,604,250 2.08 564,570 ======= Granted................................................... 3,032,400 6.70 Canceled.................................................. (860,627) 4.42 Exercised................................................. (220,738) 0.60 --------- Outstanding at March 31, 1997............................... 4,555,285 4.79 652,413 ========= =======
The following is additional information relating to options outstanding as of March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------- ----------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE CONTRACTUAL EXERCISE PRICE RANGE SHARES PRICE LIFE (YEARS) SHARES PRICE LIFE (YEARS) - -------------------- --------- -------- ------------ --------- -------- ------------ $0.25-0.50 1,190,635 $0.35 8.1 522,976 $0.34 8.0 $3.50-5.00 1,391,150 4.58 9.2 129,437 3.70 8.5 $7.00-8.25 1,973,500 7.61 9.9 -- -- -- --------- ------- 4,555,285 652,413 ========= =======
Pro forma information regarding net income and earnings per share is required by FAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to June 30, 1995, under the fair value method prescribed by FAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the periods ended June 30, 1996 and March 31, 1997, respectively:
JUNE 30 MARCH 31 1996 1997 --------- --------- Risk-free interest rate..................................... 5.8% 6.4% Dividend yield.............................................. 0% 0% Volatility factor of the expected market price of the Company's common stock.................................... .55 .55 Weighted-average expected life of the options............... 4.0 years 4.7 years
F-15 87 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, this option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows (in thousands, except for earnings per share information):
JUNE 30 MARCH 31 1996 1997 ------- -------- Pro forma stock-based compensation expense.................. $ 105 $ 169 Pro forma net income........................................ $4,801 $7,568 Pro forma earnings per share: Primary and fully diluted................................. $ 0.34 $ 0.45
Because FAS 123 is applicable only to options granted subsequent to June 30, 1995, its pro forma effect will not be fully reflected until June 30, 1998. The effects of applying FAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net income for future years. The exercise price of some options differed from the market price of the stock on the grant date. The following is a summary of options granted:
YEAR ENDED JUNE 30 NINE MONTHS ENDED 1996 MARCH 31, 1997 ---------------------- ---------------------- EXERCISE EXERCISE FAIR VALUE PRICE FAIR VALUE PRICE ---------- -------- ---------- -------- (WEIGHTED-AVERAGE) Stock price equal to exercise price........ $0.82 $3.74 $1.72 $5.25 Stock price less than exercise price....... -- -- 1.39 8.25
Shares Reserved Common stock reserved at March 31, 1997, consists of the following (see Note 11): For conversion of preferred stock........................... 9,100,000 For exercise of outstanding warrants........................ 212,500 For exercisable stock options............................... 652,413 ---------- 9,964,913 ==========
F-16 88 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. INCOME TAXES Significant components of the Company's deferred taxes at June 30, 1995 and 1996 and March 31, 1997 are as follows:
JUNE 30 ------------------ MARCH 31 1995 1996 1997 ------- ------- -------- (IN THOUSANDS) Deferred tax assets: Tax carryforwards......................................... $ 1,258 $ -- $ -- Deferred revenue.......................................... -- 115 486 Reserves for doubtful accounts and returns................ 73 546 1,626 Inventory and warranty reserves........................... 112 1,524 1,511 Accrued liabilities....................................... -- 109 141 Other (net)............................................... 59 46 62 ------- ------- ------ Net deferred tax assets..................................... 1,502 2,340 3,826 Valuation allowance......................................... (1,502) -- -- ------- ------- ------ Net deferred taxes.......................................... $ -- $ 2,340 $3,826 ======= ======= ======
In 1995, the Company recorded a valuation allowance equal to the net deferred tax assets due to uncertainties regarding the realization of deferred tax assets based on the Company's lack of earnings history. The valuation allowance decreased by $1,502,000 during 1996 as the Company generated positive operating results. Significant components of the provision for income taxes attributable to continuing operations are as follows:
NINE MONTHS YEAR ENDED JUNE 30 ENDED --------------------------- MARCH 31 1994 1995 1996 1997 ------ ------ ------- -------- (IN THOUSANDS) Current: Federal..................................... $ -- $ -- $ 2,507 $ 5,641 State....................................... -- -- 295 461 ------ ------ ------- ------- Total current....................... -- -- 2,802 6,102 Deferred: Federal..................................... -- -- (2,094) (1,403) State....................................... -- -- (246) (83) ------ ------ ------- ------- Total deferred...................... -- -- (2,340) (1,486) ------ ------ ------- ------- $ -- $ -- $ 462 $ 4,616 ====== ====== ======= =======
F-17 89 POWER COMPUTING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's provision for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 34% to income before income taxes as a result of the following:
NINE YEAR ENDED JUNE 30 MONTHS ENDED ----------------------- MARCH 31 1994 1995 1996 1997 ----- ----- ----- ------------ (IN THOUSANDS) Federal statutory rate......................... (34.0)% (34.0)% 34.0% 35.0% State taxes, net of federal benefit............ (3.0) (1.6) 1.8 2.7 Tax credits.................................... (2.5) (2.3) -- (0.5) Changes in valuation allowance................. 38.6 37.8 (27.9) -- Permanent items and other...................... 0.9 0.1 0.7 0.2 ----- ----- ----- ---- --% --% 8.6% 37.4% ===== ===== ===== ====
The exercise of certain of the stock options which have been granted under the Company's stock option plan give rise to compensation which is includable in the taxable income of the applicable option holder and deductible by the Company for federal and state income tax purposes. Such compensation results from increases in the fair market value of the Company's common stock subsequent to the date of grant of the applicable exercised stock options and, in accordance with APB 25, such compensation is not recognized as an expense for financial accounting purposes however, the related tax benefits are recorded as an addition to Additional Paid-in Capital. The compensation deductions arising from the exercise of stock options were not material in 1994, 1995 and 1996. 9. EMPLOYEE BENEFIT PLAN The Company maintains a 401(k) Profit Sharing Plan and Trust (the "401(k) Plan") that covers substantially all full-time employees who are twenty-one years of age or older. Company contributions to the 401(k) Plan are determined at the discretion of the Board of Directors and vest ratably over six years of service starting after the first two years. The 401(k) Plan was established in May 1995. No contributions have been made to the 401(k) Plan by the Company for the years ended June 30, 1995 and 1996 or the nine months ended March 31, 1997. 10. RELATED PARTY TRANSACTIONS As of March 31, 1997, the Company has in place consulting agreements with certain Directors and stockholders of the Company. In fiscal 1994 and 1995, the Company performed certain research and development services for a company owned by a stockholder. Fees paid and received related to these agreements were not significant in any periods presented. During the nine month period ended March 31, 1997, the Company paid $4,396,000 to purchase inventory from a company which is a stockholder. The Company had no significant transactions with this stockholder in previous periods. 11. SUBSEQUENT EVENTS On June 26, 1997, the Board of Directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. The Company has filed an amendment to the Certificate of Incorporation to increase the authorized common stock from 18,800,000 to 30,800,000. F-18 90 ============================================================ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................... Risk Factors................................ The Company................................. Use of Proceeds............................. Dividend Policy............................. Capitalization.............................. Dilution.................................... Selected Financial Data..................... Management's Discussion and Analysis of Financial Condition and Results of Operations................................ Business.................................... Management.................................. Certain Transactions........................ Principal Stockholders...................... Description of Capital Stock................ Shares Eligible for Future Sale............. Underwriting................................ Legal Matters............................... Experts..................................... Additional Information...................... Index to Financial Statements...............
============================================================ ============================================================ 3,000,000 Shares [LOGO] Common Stock ------------------------ PROSPECTUS ------------------------ PRUDENTIAL SECURITIES INCORPORATED SALOMON BROTHERS INC , 1997 ============================================================ 91 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses and costs (other than underwriting discounts and commissions) expected to be incurred in connection with the issuance and distribution of the securities registered hereby: Securities and Exchange Commission registration fee......... $10,455 NASD filing fee............................................. Nasdaq listing fee.......................................... Printing and engraving costs................................ 75,000 Legal fees and expenses..................................... * Accounting fees and expenses................................ * Blue Sky fees and expenses.................................. * Miscellaneous............................................... * ------- Total............................................. $ * =======
- --------------- * To be provided by Amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATION OF LIABILITY FOR MONETARY DAMAGES (a) Section 145 of the General Corporation Law of the State of Delaware empowers a Delaware corporation to indemnify any person who is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was an officer or director of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or other enterprise. However, no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which he actually and reasonably incurred in connection therewith. (b) The Company's Restated Certificate of Incorporation also provides that no director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. The Company's Restated Certificate of Incorporation also provides that the Company shall indemnify to the full extent authorized by the law any person who was or is a party or is threatened to be made a party to any action or proceeding, whether criminal, civil, administrative or investigative by reason of the fact that he is or was a director or officer of the Company or any predecessor of the Company, or serves or served as a director or officer of any other enterprise at the request of the Company or any predecessor of the Company. II-1 92 The Bylaws of the Company provide that any employee benefit plans of the Company will be deemed to be "other enterprises" for the purposes of the indemnification provisions. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized in the Restated Certificate of Incorporation or the Bylaws. The Bylaws of the Company provide that the Company shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, indemnify any director, officer or trustee against any expenses, liabilities or other matters. The indemnification provided for in the Company's Bylaws (i) shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, (ii) shall continue as to a person who has ceased to be a director or officer and (iii) shall inure to the benefit of the estate, heirs, executors and administrators of such person. The Corporation's obligation to provide indemnification under the Bylaws shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the Company or any other person. (c) The Registrant has also purchased and currently has in force directors' and officers' liability insurance policies which cover certain liabilities of directors and officers based on certain acts or omissions by them in their capacity as directors or officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following sets forth information as of June 18, 1997 regarding all sales of unregistered securities of the Company since the Company's inception. All such securities were deemed exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") by reason of Section 4(2) or 3(b) of the Securities Act or Rule 701 in the case of options. In connection with each of the sales of shares of Common Stock and Preferred Stock, the shares were sold to a limited number of persons, such persons were provided access to all relevant information regarding the Company and/or represented to the Company that they were "sophisticated" investors, and such persons represented to the Company that the shares were purchased for investment purposes only and not with a view toward distribution. (a) On January 18, 1994, the Company issued 3,000,000 shares of Series A Preferred Stock to an accredited investor for $2,750,000 in cash and assignment of such investor's rights subject to a Letter Agreement valued at $250,000. (b) On January 18, 1994, the Company issued an aggregate of 5,175,000 shares of Common Stock as follows: (i) 250,000 shares to an accredited investor for $25,000 in cash; (ii) 4,000,000 shares to Stephen S. Kahng, Chairman of the Board and Chief Executive Officer of the Company, for certain assets valued at $300,000, $40,000 in cash and a promissory note in the principal amount of $60,000 at an annual interest rate of 3.98%; (iii) 475,000 shares to Enzo Torresi, Vice Chairman of the Board, for $25,000 in cash and a promissory note in the principal amount of $22,500 at an annual interest rate of 3.98%; (iv) 200,000 shares to Carlton Amdahl, a consultant to the Company, for $10,000 in cash and a promissory note in the principal amount of $10,000 at an annual interest rate of 3.98%; and (v) 250,000 shares to Elserino Piol, a director of the Company, for $25,000 in cash. (c) On January 18, 1994, the Company issued two warrants to purchase 112,500 shares of Common Stock each at an exercise price of $0.10 per share to Mr. Piol for $2,250 in cash. (d) On February 18, 1995, the Company issued 2,000,000 shares of Series A Preferred Stock to an accredited investor for $2,000,000 in cash. (e) On April 5, 1995, the Company issued 15,000 shares of Common Stock to Frank S. Bayley, a partner with Baker & McKenzie, legal counsel to the Company, for $1,500 in cash. II-2 93 (f) On April 24, 1995, the Company issued 112,500 shares of Common Stock to Mr. Piol for $11,250 in cash pursuant to the exercise of a warrant for Common Stock. (g) Between April 27, 1995 and October 10, 1995, the Company issued an aggregate of 4,100,000 shares of Series B Preferred Stock as follows: (i) on April 27, 1995, 750,000 shares to three accredited investors for $1,500,000 in cash; (ii) on June 26, 1995, 2,735,000 shares to twenty-seven accredited investors for $5,470,000 in cash; (iii) on August 28, 1995, 37,500 shares to Mr. Kahng for $75,000 in cash, 40,000 shares to Mr. Torresi for $80,000 in cash, and 12,500 shares to an accredited investor for $25,000 in cash; (iv) on September 1, 1995, 9,250 and 15,750 shares to the Trustee of the WSGR Retirement Plan, a retirement plan for the benefit of the members of WSGR, legal counsel to the Underwriters and WS Investment Company 95B, an investment fund for the benefit of attorneys with members of WSGR for $18,500 and $31,500 in cash, respectively; and (v) on October 10, 1995, 500,000 shares to an accredited investor for 1,000,000 in cash. (h) Between June 30, 1995 and June 18, 1997, the Company issued an aggregate of 364,147 shares of Common Stock to holders of options to purchase Common Stock issued pursuant to the 1994 Plan as follows: (i) 60,000 shares for an aggregate purchase price of $6,000; (ii) 54,686 shares for an aggregate purchase price of $13,672; (iii) 192,314 shares for an aggregate purchase price of $67,310; (iv) 20,924 shares for an aggregate purchase price of $10,462; (v) 13,535 shares for an aggregate purchase price of $47,373; and (vi) 14,688 shares for an aggregate purchase price of $73,440. (i) On November 20, 1995, the Company issued a warrant to purchase 100,000 shares of Series B Preferred Stock at an exercise price of $5.00 per share to GBC Bancorp ("GBC") for $1.00 in cash and as additional consideration to GBC for entering into a lending agreement in which GBC agreed to extending credit to the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 1 -- Form of Underwriting Agreement* 3.1 -- Amended and Restated Certificate of Incorporation of the Registrant* 3.2 -- Amended and Restated Bylaws of the Registrant* 4.1 -- Form of Certificate for Common Stock of the Registrant* 5 -- Form of Opinion of Baker & McKenzie with respect to the legality of the securities being registered 10.1 -- Investor Rights Agreement (amended and restated) dated June 26, 1995 by and among the Company, and certain holders and purchasers of the Company's Common Stock, warrants to purchase Common Stock, Series A Preferred Stock and Series B Preferred Stock* 10.2 -- Amended and Restated Shareholder Agreement dated June 26, 1995 by and among the Company and certain purchasers or holders of Common Stock, warrants to purchase Common Stock, Series A Preferred Stock and Series B Preferred Stock* 10.3 -- Amended Mac OS License Agreement dated December 27, 1996 between the Company and Apple+ 10.4 -- Certified Computer Manufacturing Agreement dated December 16, 1994 between the Company and Apple+ 10.5 -- Certified Computer Manufacturing Agreement dated July 17, 1996 between the Company and Apple+ 10.6 -- Amendment dated January 1, 1997 to Certified Computer Manufacturing Agreement dated May 1, 1996 between the Company and Apple+ 10.7 -- Board-Design License Agreement dated December 16, 1994 between the Company and Apple+ 10.8 -- Amendment dated June 3, 1996 to the Board-Design License Agreement dated December 16, 1994 between the Company and Apple+
II-3 94 10.9 -- Second Amendment dated December 19, 1996 to the Board-Design License Agreement dated December 16, 1994 between the Company and Apple+ 10.10 -- Letter Agreement regarding ROM royalty dated April 24, 1995 between the Company and Apple+ 10.11 -- Economic Development Program Agreement dated October 15, 1996 between the Company, the City of Georgetown, Texas and Georgetown 4B, Inc. 10.12 -- Lease Agreement dated February 27, 1997 between the Company and Georgetown 4B, Inc.* 10.13 -- Standard Form of Agreement between Owner and Designer/Builder dated March 1, 1997 between the Company, Georgetown, 4B, Inc. and Hensel Phelps Construction Co.* 10.14 -- Manufacturing Services Agreement dated March 19, 1997 between the Company and Solectron Texas, L.P. 10.15 -- Mac OS License Agreement dated March 1, 1997 between the Company and IBM+ 10.16 -- Loan and Security Agreement by and between Bank One, Texas and the Company dated * 10.17 -- Loan and Security Agreement by and between Bank One, Texas and the Company dated March 28, 1997* 10.18 -- 10.19 -- SAP R/3 Software End User Value License Agreement dated June 28, 1996 between the Company and SAP America, Inc.* 10.20 -- Letter Agreement dated June 19, 1997 between Apple and the Company+ 11 -- Statement re computation of per share earnings 23.1 -- Consent of Ernst & Young LLP 23.3 -- Consent of Baker & McKenzie (included in Exhibit 5) 24 -- Power of Attorney (contained on Page II-6) 27 -- Financial Data Schedule
- --------------- * To be filed by amendment. + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Commission. II-4 95 (b) Financial Statement Schedules SCHEDULE II POWER COMPUTING CORPORATION VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT FISCAL BEGINNING BAD DEBT CHARGED TO END OF YEAR DESCRIPTION OF PERIOD EXPENSE ALLOWANCE PERIOD - ------ ----------- ---------- ---------- ---------- ---------- (IN THOUSANDS) 1995 Allowance for doubtful accounts............... $ -- $ 16 $ -- $ 16 1996 Allowance for doubtful accounts............... 16 2,091 1,007 1,100 1997 Allowance for doubtful accounts............... 1,100 2,798 2,067 1,831 1995 Allowance for sales returns................... -- 180 -- 180 1996 Allowance for sales returns................... 180 10,863 10,557 486 1997 Allowance for sales returns................... 486 28,018 26,092 2,412
The Company was in development stage during fiscal 1994 with no sales or related allowances. Fiscal year 1997 refers to the nine month period ended March 31, 1997. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 96 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Round Rock, State of Texas, on the 27th day of June, 1997. POWER COMPUTING CORPORATION By: /s/ STEPHEN S. KAHNG ---------------------------------- Stephen S. Kahng, Chairman of the Board, Chief Executive Officer and Director Each individual whose signature appears below hereby designates and appoints Stephen S. Kahng, Joel S. Kocher and James A. Wallace, and each of them, any one of whom may act without the joinder of the others, as such person's true and lawful attorneys-in-fact and agents (the "Attorneys-in-Fact") with full power of substitution and resubstitution, for such person and in such person's name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, which amendments may make such changes in this Registration Statement as either Attorney-in-Fact deems appropriate, and any registration statement relating to the same offering filed pursuant to Rule 462(b) under the Securities Act of 1933 and requests to accelerate the effectiveness of such registration statements, and to file each such amendment with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto such Attorneys-in-Fact and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that such Attorneys-in-Fact or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ STEPHEN S. KAHNG Chairman of the Board, Chief June 27, 1997 - ----------------------------------------------------- Executive Officer and Director Stephen S. Kahng (Principal Executive Officer) /s/ JOEL J. KOCHER President, Chief Operating Officer June 27, 1997 - ----------------------------------------------------- and Director Joel J. Kocher /s/ JAMES A. WALLACE Chief Financial Officer and Vice June 27, 1997 - ----------------------------------------------------- President, Finance (Principal James A. Wallace Financial and Accounting Officer) /s/ ENZO TORRESI Director and Vice-Chairman of the June 27, 1997 - ----------------------------------------------------- Board Enzo Torresi /s/ SADA CHIDAMBARAM Director June 27, 1997 - ----------------------------------------------------- Sada Chidambaram /s/ DAVID HELLER Director June 27, 1997 - ----------------------------------------------------- David Heller /s/ ELSERINO PIOL Director June 27, 1997 - ----------------------------------------------------- Elserino Piol /s/ GIULIANO RAVIOLA Director June 27, 1997 - ----------------------------------------------------- Giuliano Raviola
II-6 97 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 1 -- Form of Underwriting Agreement* 3.1 -- Amended and Restated Certificate of Incorporation of the Registrant* 3.2 -- Amended and Restated Bylaws of the Registrant* 4.1 -- Form of Certificate for Common Stock of the Registrant* 5 -- Form of Opinion of Baker & McKenzie with respect to the legality of the securities being registered 10.1 -- Investor Rights Agreement (amended and restated) dated June 26, 1995 by and among the Company, and certain holders and purchasers of the Company's Common Stock, warrants to purchase Common Stock, Series A Preferred Stock and Series B Preferred Stock* 10.2 -- Amended and Restated Shareholder Agreement dated June 26, 1995 by and among the Company and certain purchasers or holders of Common Stock, warrants to purchase Common Stock, Series A Preferred Stock and Series B Preferred Stock* 10.3 -- Amended Mac OS License Agreement dated December 27, 1996 between the Company and Apple+ 10.4 -- Certified Computer Manufacturing Agreement dated December 16, 1994 between the Company and Apple+ 10.5 -- Certified Computer Manufacturing Agreement dated July 17, 1996 between the Company and Apple+ 10.6 -- Amendment dated January 1, 1997 to Certified Computer Manufacturing Agreement dated May 1, 1996 between the Company and Apple+ 10.7 -- Board-Design License Agreement dated December 16, 1994 between the Company and Apple+ 10.8 -- Amendment dated June 3, 1996 to the Board-Design License Agreement dated December 16, 1994 between the Company and Apple+ 10.9 -- Second Amendment dated December 19, 1996 to the Board-Design License Agreement dated December 16, 1994 between the Company and Apple+ 10.10 -- Letter Agreement regarding ROM Royalty dated April 24, 1995 between the Company and Apple+ 10.11 -- Economic Development Program Agreement dated October 15, 1996 between the Company, the City of Georgetown, Texas and Georgetown 4B, Inc. 10.12 -- Lease Agreement dated February 27, 1997 between the Company and Georgetown 4B, Inc.* 10.13 -- Standard Form of Agreement between Owner and Designer/Builder dated March 1, 1997 between the Company, Georgetown, 4B, Inc. and Hensel Phelps Construction Co.* 10.14 -- Manufacturing Services Agreement dated March 19, 1997 between the Company and Solectron Texas, L.P. 10.15 -- Mac OS License Agreement dated March 1, 1997 between the Company and IBM+ 10.16 -- Loan and Security Agreement by and between Bank One, Texas and the Company dated * 10.17 -- Loan and Security Agreement by and between Bank One, Texas and the Company dated March 28, 1997* 10.18 -- 10.19 -- SAP R/3 Software End User Value License Agreement dated June 28, 1996 between the Company and SAP America, Inc.*
98
EXHIBIT NO. DESCRIPTION ------- ----------- 10.20 -- Letter Agreement dated June 19, 1997 between Apple and the Company+ 11 -- Statement re computation of per share earnings 23.1 -- Consent of Ernst & Young LLP 23.3 -- Consent of Baker & McKenzie (included in Exhibit 5) 24 -- Power of Attorney (contained on Page II-6) 27 -- Financial Data Schedule
- --------------- * To be filed by amendment. + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Commission. The ease-of-use of the Macintosh, Macintosh software applications and the Mac OS have created a large and loyal installed base worldwide which provides the Company an opportunity to offer these users new, faster Macintosh-compatible models as they replace their old systems or purchase additional Macintosh computer systems. EX-5 2 OPINION OF BAKER & MCKENZIE 1 EXHIBIT 5 _____________, 1997 Power Computing Corporation 2400 South IH-35 Round Rock, Texas 78681 Gentlemen: This firm has acted as counsel for Power Computing Corporation, a Delaware corporation (the "Company"), in connection with the preparation of the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on or about June 27, 1997 (together with any amendments thereto, the "Registration Statement"), as it relates to the proposed offering of an aggregate of 3,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), of the Company (the "Shares"). Up to 450,000 additional shares of Common Stock (the "Option Shares") are subject to an over-allotment option to be granted by the Company. In reaching the opinion set forth below, this firm has reviewed the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, minutes of meetings of the Company's Board of Directors, the Underwriting Agreement incorporated by reference into the Registration Statement (the "Underwriting Agreement"), certificates of public officials, and matters of law that this firm deemed relevant. Based on and subject to the foregoing and subject further to the assumptions, exceptions, and qualifications stated below, this firm expresses the opinion that each of the Shares and Option Shares registered pursuant to the Registration Statement, when and if delivered in accordance with the terms of the Underwriting Agreement, will be legally issued, fully paid, and non-assessable. The opinion expressed above is subject to the following assumptions, exceptions, and qualifications: This firm has assumed that (a) all information contained in all documents reviewed by this firm is true and correct, (b) all signatures on all documents reviewed by this firm are genuine, (c) all documents submitted to this firm as originals are true and complete, (d) all documents submitted as copies are true and complete copies of the originals thereof, (e) each natural person signing any document reviewed by this firm had the legal capacity to do so, (f) each person signing in a representative capacity any document reviewed by this firm had authority to sign in such capacity, and (g) the laws of any jurisdiction other than the State of Texas and the Delaware General Corporation Law that govern any of the documents reviewed by this firm do not modify the terms that appear in any such document. The opinion expressed above is limited to the laws of the State of Texas, the Delaware General Corporation Law and the federal laws of the United States of America. This opinion letter may be filed as an exhibit to the Registration Statement. Consent is also given to the reference to this firm under the caption "Legal Matters" in the prospectus contained in the Registration Statement. In giving this consent, this firm does not thereby admit that it comes within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, BAKER & McKENZIE EX-10.3 3 AMENDED MAC OS LICENSE AGREEMENT 1 EXHIBIT 10.3 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] Apple-PCC Mac OS Lic. Agmt. II Final AMENDED MAC OS LICENSE AGREEMENT #C24-96-00116 This Mac OS License Agreement ("Agreement") is effective as of December 27, 1996 (the "Effective Date"), by and between APPLE COMPUTER, INC., a California corporation having its principal place of business at One Infinite Loop, Cupertino, California 95014, U.S.A. ("Apple") and POWER COMPUTING CORPORATION, a Delaware corporation having its principal place of business at 2555 North Interstate 35, Suite 200, Round Rock, Texas 78664 and its Subsidiaries ("PCC"). This Agreement supersedes the Mac OS License Agreement between Apple and PCC dated December 16, 1994 (the "Old Agreement"). The Old Agreement is terminated as of the Effective Date of this Agreement and the provisions of Section 10.2 of the Old Agreement apply; provided, however, that PCC does not have the right under the Old Agreement to sell inventory for six months after termination and provided further that Apple is released from any obligation under Section 3.2 of the Old Agreement that may have accrued prior to termination. All sales of Certified Computers after the Effective Date of this Agreement will be governed by this Agreement. RECITALS o Apple and PCC desire Apple to license to PCC certain Apple computer system technology for incorporation into hardware products to be sold by PCC on the terms and conditions set forth below. AGREEMENT 1. DEFINITIONS 1.1 "Certification Requirements" means requirements documented by Apple for Certified Computers to successfully run the Mac OS and Mac OS applications, and otherwise qualify for use of the Mac OS trademark. The current Certification Requirements are attached as Exhibit A. These requirements may be modified by Apple from time to time and when modified will be provided to PCC. CONFIDENTIAL Page 1 2 Apple-PCC Mac OS Lic. Agmt. II Final 1.2 "Certified Computers" means hardware products manufactured by PCC or bearing a PCC trademark and/or tradename, in the form they will be used by End Users, which satisfy the Certification Requirements. 1.3 "Confidential Information" means (i) for Apple, the Licensed Software, the Enabling Technology, the terms and conditions of this Agreement including without limitation the license fees and royalty rates charged to PCC, and trade secrets or proprietary information related to any of the foregoing; (ii) for each party, any information relating to that party's product plans, designs, costs, names, finances, marketing plans, business opportunities, personnel, research, development or know-how designated as confidential in writing or, if disclosed orally, identified in writing and designated as confidential within thirty (30) days of disclosure; provided, however that "Confidential Information" shall not include information that: (a) is or becomes generally known or available by publication, commercial use or otherwise through no fault of the receiving party; (b) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (c) is independently developed by the receiving party without use of the disclosing party's Confidential Information; (d) is lawfully obtained without restriction from a third party who has the right to make such disclosure; or (e) is released for publication by the disclosing party in writing. 1.4 "Enabling Technology" means the materials described under the heading "Enabling Technology" in Exhibit B. The materials which constitute Enabling Technology may be modified by Apple from time to time upon written notice to PCC. 1.5 "End User Documentation" means the End User documentation related to the Licensed Software provided to PCC by Apple under this Agreement. 1.6 "End User" means a third party using a Certified Computer for its ordinary and customary business or personal purposes, and not for redistribution. 1.7 "Licensed Software" means the software specified in Exhibit B. 1.8 "Marks" mean the trademark and logo listed in Exhibit C; and such other additional or substitute marks that the parties agree in writing are subject to the terms of this Agreement. 1.9 "MAS" means a Mac OS Authorized Supplier designated by Apple. 1.10 "Maintenance Releases" are releases of the Mac OS designated by a change in the second digit to the right of the first decimal point (Mac OS 7.5X or Mac OS 7.5.X) that Apple makes generally available for licensing to comparably situated licensees. CONFIDENTIAL Page 2 3 Apple-PCC Mac OS Lic. Agmt. II Final 1.11 "Major Releases" are releases of the Mac OS designated by a change in the digit to the left of the first decimal point (e.g., Mac OS 8.X). 1.12 "Minor Releases" are releases of the Mac OS designated by a change in the first digit to the right of the first decimal point (Mac OS 7.X) that Apple makes generally available for licensing to comparably situated licensees. 1.13 "OEM" means a third party that will resell a Certified Computer under the tradename and/or trademark of that third party. 1.14 "PPP" means the Power PC Platform. 1.15 "Royalty Payments" means the payments PCC is required to make to Apple pursuant to Section 3.2 and as described in Exhibit B. 1.16 "Subsidiary" means a corporation more than 50% of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are owned or controlled, directly or indirectly, by PCC, and which agrees in writing to be bound by the terms of this Agreement. A corporation which ceases to be a Subsidiary will lose its rights under this Agreement, but will continue to be bound by the obligations that survive termination specified in Section 10.2. 1.17 "System Updates" means software which, when installed on a Certified Computer which already has the Licensed Software installed on it, updates the Licensed Software to fix bugs, increase performance, and make other maintenance changes. 1.18 "Technical Support Plan" means the plan by which technical support will be provided by the Mac OS Licensing Technical Support Group to help PCC develop Certified Computers. The current Technical Support Plan is attached as Exhibit E. The Technical Support Plan may be modified by Apple from time to time and when modified will be provided to PCC. 2. LICENSE AND RELATED RIGHTS AND RESTRICTIONS 2.1 License. (a) Subject to the provisions of this Agreement, Apple hereby grants to PCC a non-exclusive, non-transferable, royalty-bearing, worldwide license to reproduce or have reproduced the Licensed Software in binary executable form, and to distribute: CONFIDENTIAL Page 3 4 Apple-PCC Mac OS Lic. Agmt. II Final (i) directly and through its distributors, one copy of the same version of the Licensed Software for which the computer was certified, or the most recent full release thereof, installed on or distributed with Certified Computers. If the Licensed Software is installed on the hard disk of a Certified Computer before shipment to an End User, one (1) additional copy of such pre-installed Licensed Software may be included in diskette and/or CD-ROM form with such Certified Computer without payment of an additional royalty; and (ii) Maintenance Releases and System Updates of the Licensed Software, royalty-free, to PCC's registered customers who have purchased a Certified Computer with the Licensed Software; provided, however that Maintenance Releases and System Updates will be royalty-free only if they are not installed on or distributed with Certified Computers. (b) Subject to the provisions of this Agreement, Apple hereby grants to PCC a non-exclusive, non-transferable, worldwide license to use, modify, reproduce and have reproduced the End User Documentation and to distribute one (1) copy of the End User Documentation together with any Certified Computer distributed with the applicable Licensed Software. (c) Subject to the provisions of this Agreement, Apple hereby grants to PCC a non-exclusive, nontransferable, worldwide license to reproduce and use internally, the Enabling Technology in connection with the installation of Licensed Software on Certified Computers and the design, development, manufacture and testing of such computers. 2.2 Registration Cards; Restrictions; No Implied Rights; No Reverse Engineering. (a) PCC will include with each copy of the Licensed Software, a registration card addressed to Apple, in the form provided by Apple, allowing Apple to provide information to End Users regarding updates to the Licensed Software, and other software and peripheral products; provided, however, that Apple will not use the list of End Users compiled from such registration cards to provide End Users information or advertising material regarding Apple personal computers. (b) PCC will distribute the Licensed Software only to End Users, directly or through its distributors, and will include a Software License Agreement in the form attached as Exhibit D, as may be updated from time to time by Apple. PCC will localize the Software License Agreement for each jurisdiction in which the Licensed Software is distributed for compliance with the local law and language. CONFIDENTIAL Page 4 5 Apple-PCC Mac OS Lic. Agmt. II Final (c) PCC will retain on all copies of the Licensed Software and End User Documentation reproduced by or for PCC, or distributed by PCC, copyright notices and other proprietary rights notices contained in copies of the Licensed Software or End User Documentation provided by Apple or a MAS. (d) PCC is granted no rights that are not expressly granted in this Agreement, including but not limited to any rights to any Apple product industrial designs, and PCC specifically agrees that nothing in this Agreement will limit Apple's rights to develop or license competing products. (e) PCC will not modify, decompile, disassemble, or reverse engineer any Licensed Software (to the extent such restriction is permitted under applicable law), and will not make, have made, distribute, license, reproduce, sell or otherwise use the Licensed Software, except as expressly permitted by this Agreement or other written agreements between Apple and PCC. (f) PCC may sell Certified Computers to OEMs. Prior to the initial delivery of Certified Computers to each OEM, PCC will supply the name, address and telephone number of such OEM to Apple. PCC acknowledges that Apple is free to contact such OEM and to offer to such OEM a Mac OS License Agreement. 2.3 Trademark License. (a) Grant by Apple. Subject to the provisions of this Agreement, Apple hereby grants to PCC a non-exclusive, non-transferable, paid-up, worldwide license to use the Marks, solely on Licensed Software and Certified Computers and on packaging, labels, start-up screens, advertisements, promotional materials and product manuals for the Licensed Software and Certified Computers to the extent that the Licensed Software and Certified Computers are licensed in Section 2.1. (b) Required Use of the Mark. PCC agrees to and will use the Marks on or in connection with the Licensed Software and Certified Computers and that such usage shall strictly comply with the trademark specifications and guidelines attached as Exhibit C. Apple may issue updates and revisions to Exhibit C and PCC will comply with such updates and revisions. PCC will include the following statement in conjunction with the use of the Marks: "Mac OS and the Mac OS logo are trademarks of Apple Computer, Inc. and are used under license. The Mac OS Logo is registered in the United States and other countries." CONFIDENTIAL Page 5 6 Apple-PCC Mac OS Lic. Agmt. II Final or any other similar statement as Apple may, from time to time, request PCC to use. (c) Limitations on PCC. PCC acknowledges and agrees that the Marks and the goodwill associated therewith are the sole property of Apple, and that goodwill from the use of the Marks exclusively inures to the benefit of and belongs to Apple. PCC acknowledges and agrees that this license does not extend to or include the right to use the Marks, or any other trademark, service mark or logo of Apple (and PCC agrees that it will not use the same) as or in the title or brand name of Certified Computers. PCC agrees that this license does not extend to or include the right to use the Marks on promotional merchandise (such as, by way of example but not limitation, shirts, key chains, mugs, mouse pads, etc.). PCC agrees that it has no rights of any kind whatsoever with respect to the Marks except to the extent of the license granted herein. PCC agrees to refrain from using or filing any application to register, in any class and in any country, any trademark or service mark which is the same as, similar to, or which incorporates, in whole or in part, any or all the Marks, in the name or on behalf of PCC or its related companies, or in the name of or on behalf of any of its or their officers, directors, employees, agents, servants, or other juristic entity within the control of, or which controls, any of them. PCC agrees not to use the Marks in any manner that Apple, in its sole judgment, deems to (a) be in poor taste, (b) be unlawful, (c) have the purpose, object or intent to encourage unlawful activity by others, or (d) suggest that PCC is affiliated with Apple or that the relationship between Apple and PCC is anything other than that of licensor/licensee. (d) Use and Approvals. (i) PCC agrees that it is of fundamental importance to Apple that the Licensed Software and Certified Computers shall be of the highest quality and integrity. PCC agrees that Certified Computers will, at all times during the term of the Agreement, meet the Certification Requirements. (ii) Prior to the first commercial shipment of each model of Certified Computer, PCC shall submit to Apple, or its designated agent, ten (10) units of such model of Certified Computer for testing in accordance with the Certification Requirements. In addition, and prior to first commercial shipment of each model of Certified Computer, PCC will certify in writing to Apple that: such model of Certified Computer meets the Certification Requirements; and PCC's use of the Marks in connection with such model of Certified Computer, including packaging, advertising, promotional materials and product manuals comply with Apple's trademark specifications and CONFIDENTIAL Page 6 7 Apple-PCC Mac OS Lic. Agmt. II Final guidelines attached as Exhibit C. PCC, when requested by Apple, shall supply to Apple, a copy of the packaging, advertising, promotional materials and product manuals for such model of Certified Computer. (e) Infringement. In the event PCC learns of any actual or threatened infringement of or challenge to a Mark or passing off of Certified Computers or that any third party alleges or claims that a Mark is liable to cause deception or confusion to the public, or is liable to dilute or infringe any right, PCC shall immediately notify Apple in writing of the particulars. Apple may, but shall not be required to, take whatever action it, in its sole discretion, deems necessary or desirable to protect the validity and strength of the Marks at Apple's sole expense. Should Apple choose to take any action with respect to the Marks, PCC shall comply with Apple's reasonable requests for assistance in connection therewith. (f) Exterior Design. Nothing contained in this Agreement shall be construed as conferring on PCC any license or other right to copy the exterior design or distinctive features of the exterior design of the products of Apple and PCC agrees not to do so. 2.4 Certification Requirements. PCC will ensure that each computer distributed with the Licensed Software satisfies the Certification Requirements. Apple will provide PCC with updates to the Certification Requirements as they become available. Each model submitted by PCC will comply either with: (i) the most current version of the Certification Requirements, or, (ii) if the most current Certification Requirements were received by PCC less than ninety (90) days prior to PCC's submission of the model to Apple for testing, then the immediately preceding version of the Certification Requirements. PCC shall pay Apple $ ** /hour for Apple's certification testing not to exceed $ ** , each time a model of a computer is submitted for testing. For certification purposes, a computer may be considered a new model if it has a new or different (1) logic board layout, (2) processor speed, or (3) processor. PCC will notify Apple if it intends to make a change in one of these areas, and Apple will notify PCC if such change requires re-certification. 2.5 Next Major Release. Provided PCC has not breached this Agreement or other agreements between Apple and PCC, Apple will offer to PCC a non-exclusive, non-transferable, royalty-bearing license to Apple's next Major Release of the Mac OS (8.0) on Apple's then standard terms and conditions for that version of the Mac OS. Apple will offer such license to PCC at substantially the same time it is offered to other licensees. The term of the agreement for Mac OS 8.0 will be similar to Section 9 of this Agreement and, provided Apple continues to use a volume pricing schedule, the royalty rates for similar volumes for Mac OS 8.0 will not exceed two times the rates set forth in the royalty table in Exhibit B of this Agreement. If Apple stops using a volume pricing schedule, the royalty rates will not CONFIDENTIAL Page 7 8 Apple-PCC Mac OS Lic. Agmt. II Final exceed two times the rate for the lowest volume in the royalty table in Exhibit B of this Agreement. Apple will not charge PCC an initial license fee for Mac OS 8.0, separate from any royalty prepayments that might be required. 3. PAYMENTS 3.1 License Fee. ** . PCC hereby releases Apple from any obligation under the Old Agreement to maintain or provide any Market Development Funds. 3.2 Royalty Payments and Statements. (a) PCC will pay to Apple Royalty Payments associated with the distribution of copies of the Licensed Software by PCC as follows: For each unit of a Certified Computer distributed with Licensed Software pursuant to this Agreement which is delivered by PCC to a third party, including but not limited to, distributors, retailers, OEMs and End User customers, or used by PCC internally (except for units used by PCC to test or certify such Certified Computers), PCC will pay to Apple a royalty in the amount and according to the terms specified in Exhibit B. PCC will receive a credit for all units of Certified Computers which were returned because they were defective if such units were included in the count of units for which a royalty was paid. PCC must make a Royalty Payment on any unit of a Certified Computer distributed with the Licensed Software pursuant to this Agreement which is resold after PCC has received a credit for that unit. (b) PCC shall keep and maintain all appropriate books and records necessary for verification that the applicable license and purchase fees and royalties have been paid. During the term of this Agreement and for three years thereafter, Apple shall be entitled, not more than once annually and on thirty (30) days notice, to retain independent auditors to review PCC's books and records for the purpose of verifying the accuracy of the statements provided and amounts paid pursuant to this Section 3. Any underpayment or overpayment determined as a result of the review will be reflected in the following quarter's statement and Royalty Payments. If such review verifies an underpayment error of greater than five percent (5%) of the aggregate royalties paid for the period being reviewed, PCC shall pay the cost of such review. PCC shall pay all amounts when due, and any amounts not paid when due shall accrue interest at the annual rate of twelve percent (12%) or the highest rate allowed by law, if lower, from the date when the payment should have been paid and ending when paid. CONFIDENTIAL Page 8 9 Apple-PCC Mac OS Lic. Agmt. II Final 3.3 Taxes. PCC is responsible for payment of any taxes on payments made under this Agreement except taxes based on Apple's income for which Apple shall be responsible. 3.4 Form of Payment. All royalty statements and payments will be made in U.S. dollars and sent to: Apple Computer, Inc. Royalty Accounting 2420 Ridgepoint Drive, MS 198-GL Austin, TX 78754 4. INDEMNIFICATION 4.1 Indemnity by Apple. (a) Apple will indemnify, hold harmless, and at PCC's request, defend PCC and PCC's directors, officers, employees, agents and independent contractors from and against any loss, cost, liability or expense (including court costs and reasonable fees of attorneys and other professionals) arising out of or resulting from any third party claim that the Licensed Software infringes any copyright or trade secret right, existing as of the Effective Date. In the event of any such claim, PCC agrees: (i) promptly to give Apple notice in writing of any such claim or action and permits Apple, through counsel of its choice, to answer the charge of infringement and defend such claim or action; (ii) to provide Apple information, assistance and authority, at Apple's expense, to enable Apple to defend such claim or action; and (iii) that Apple will not be responsible for any settlement made by PCC without Apple's written permission. If Apple receives notice of an alleged copyright or trade secret infringement or if PCC's use of the Licensed Software shall be prevented by permanent injunction for reasons of copyright or trade secret infringement, Apple may, at its sole option and expense, procure for PCC the right to continued use of the Licensed Software as provided hereunder, or modify the Licensed Software such that it is no longer infringing, or replace the Licensed Software with computer software of equal or superior functional capability. (b) Apple shall have no liability under this Section 4.1 for any claim or suit to the extent that any alleged infringement is based upon: (i) Apple's incorporation of PCC-supplied designs, particular requirements, specifications or instructions into the Mac OS; (ii) the combination, operation, or use of the Mac OS with devices, parts, or software not supplied hy Apple, (iii) modifications made to the Mac OS other than those made by Apple or in accordance with Apple's written instructions, or (iv) use CONFIDENTIAL Page 9 10 Apple-PCC Mac OS Lic. Agmt. II Final of the Mac OS other than as permitted under this Agreement or in a manner for which it was not intended. 4.2 Indemnity by PCC. PCC will indemnify, hold harmless, and at Apple's request, defend Apple and Apple's directors, officers, employees, agents and independent contractors from and against any loss, cost, liability or expense (including court costs and reasonable fees of attorneys and other professionals) arising out of or resulting from any third party claim arising from PCC's distribution of Licensed Software with Certified Computers, use of the Licensed Software or Certified Computers by PCC's customers, or PCC's use of the Marks, except claims and remedies for which Apple is expressly made responsible by the terms of this Agreement. In the event of any such claim, Apple agrees: (i) promptly to give PCC notice in writing of any such claim or action and permits PCC, through counsel of its choice, to answer and defend such claim or action; (ii) to provide PCC information, assistance and authority, at PCC's expense, to enable PCC to defend such claim or action; and (iii) that PCC will not be responsible for any settlement made by Apple without PCC's written permission. 4.3 THE FOREGOING STATES THE PARTIES' TOTAL LIABILITY AND OBLIGATION WITH RESPECT TO ANY THIRD PARTY CLAIM CONNECTED TO OR ARISING OUT OF THIS AGREEMENT AND SETS FORTH EACH PARTY'S SOLE AND EXCLUSIVE REMEDY FOR INFRINGEMENT OF THIRD PARTY RIGHTS. 5. CONFIDENTIALITY Each party will protect the other party's Confidential Information from unauthorized dissemination and use with the same degree of care that the first party uses to protect its own like information but in no event less than due care; provided, however, that each party may disclose the terms and conditions of this Agreement to their attorneys, accountants, and potential investors, provided such parties are under a duty not to further disclose such information. Further, each party may provide Confidential Information in response to a valid order or subpoena from, or as part of a filing, registration or submission to, a court or governmental agency, provided the party receiving such order or subpoena or making such filing, registration or submission makes reasonable efforts to obtain, whenever possible, confidential treatment for such information. Each party agrees not to use the other party's Confidential Information for purposes other than as expressly authorized by this Agreement, except to the extent reasonably necessary to have Certified Computers made for PCC by another party and, in that instance, only subject to a non-disclosure agreement at least as restrictive and protective of Apple's rights as this Section 5. PCC specifically agrees not to use or disclose the Licensed Software or Apple's Confidential Information to develop or assist any other party to develop another operating system. 6. DELIVERY CONFIDENTIAL Page 10 11 Apple-PCC Mac OS Lic. Agmt. II Final 6.1 Apple will deliver the Licensed Software in accordance with the delivery terms in Exhibit B. 6.2 Each language version of any Minor Release or Maintenance Release for the Licensed Software will be delivered to PCC at substantially the same time as for all other licensees of such language versions of the Licensed Software. Such delivery will be within thirty (30) days of when that particular Minor Release or Maintenance Release is available in the particular language as an Apple retail product. 7. END USER SUPPORT PCC will be responsible for providing support to PCC's End Users, OEMs and distributors. PCC will not direct PCC's End Users to Apple for support in connection with PCC products. Apple will provide four (4) training and support sessions to PCC's support personnel at Apple's Cupertino facilities to assist them in supporting end users. Apple will provide technical support to PCC pursuant to the Technical Support Plan. 8. LIMITED WARRANTY 8.1 Apple warrants that any Licensed Software made available to PCC will perform in substantially the manner described in the End User Documentation provided by Apple for such Licensed Software. This warranty will expire on the earlier of: (a) PCC's delivery to any third party of the Licensed Software or of any product incorporating the Licensed Software, or (b) thirty (30) days from the date the Licensed Software was received by PCC. PCC's sole and exclusive remedy in the event of any breach of this warranty is to return the Licensed Software to Apple, and Apple will, at Apple's option, either provide a new version of the Licensed Software to PCC or permit PCC to terminate its rights in such rejected Licensed Software. 8.2 Upon expiration of the warranty period described above the Licensed Software will be deemed accepted and PCC will have no further rights or claims against Apple with respect to the Licensed Software, except as specified in Section 4. PCC acknowledges that this allocation of risks is a part of the bargain of this Agreement and is reflected in the fees and royalties charged for the Licensed Software and that PCC's rights are limited to the foregoing notwithstanding the failure of essential purpose of the remedy provided herein. 8.3 APPLE MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY LICENSED SOFTWARE, ENABLING TECHNOLOGY, OR ANY OTHER ITEMS (INCLUDING CONFIDENTIAL Page 11 12 Apple-PCC Mac OS Lic. Agmt. II Final BUT NOT LIMITED TO DOCUMENTATION, TOOLS AND MATERIALS) PROVIDED UNDER THIS AGREEMENT, WHETHER LICENSED AND/OR MADE AVAILABLE TO PCC FROM APPLE OR A MAS. 9. TERM This Agreement will commence on the Effective Date and will continue until the earliest of the following occur: (i) the Agreement is terminated according to Section 10, (ii) twelve (12) months from Apple's commercial release of the next Major Release of the Mac OS; or (iii) five (5) years from the Effective Date. 10. TERMINATION 10.1 Termination for Cause By Either Party. Either party will have the right to terminate this Agreement immediately upon written notice at any time if: (a) The other party is in material breach of any warranty, term, condition or covenant of this Agreement other than those contained in Section 5 and fails to cure that breach within thirty (30) days after receiving written notice of that breach and of the first party's intention to terminate; (b) The other party is in material breach of any warranty, term, condition or covenant of Section 5; or (c) The other party: (i) becomes insolvent; (ii) admits in writing its insolvency or inability to pay its debts or perform its obligations as they mature; or (iii) makes an assignment for the benefit of creditors. 10.2 Effect of Termination. Upon any termination of this Agreement, all licenses and other rights granted under this Agreement will automatically terminate and each party will be released from all obligations and liabilities to the other occurring or arising after the date of such termination, except that the provisions of Sections 1, 2.2(a) - (e), 2.3(c), 3, 4, 5, 8, 10.2, 11 and 12, and any liability arising from any breach of this Agreement will survive termination of this Agreement. Termination of this Agreement will not affect the rights of PCC's End User customers to continue to use the Licensed Software or the Certified Computers. For termination other than for PCC's breach of this Agreement, PCC may sell reasonable quantities of Certified Computers together with copies of the Licensed Software, which are in inventory at the time of termination, for up to six (6) months after termination. Any obligation to pay incurred prior to termination will survive termination. Neither party will be liable to the other for damages of any sort solely as a result of terminating this Agreement CONFIDENTIAL Page 12 13 Apple-PCC Mac OS Lic. Agmt. II Final in accordance with its terms. Termination of this Agreement will be without prejudice to any other right or remedy of either party. 11. CONSEQUENTIAL DAMAGES; LIMITATION OF LIABILITY 11.1 CONSEQUENTIAL DAMAGES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, IN NO EVENT SHALL APPLE BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS OR DAMAGES TO PCC'S BUSINESS REPUTATION HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER IN AN ACTION FOR CONTRACT, STRICT LIABILITY OR TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT APPLE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY REMEDY. 11.2 LIMITATION OF LIABILITY. IN NO EVENT SHALL APPLE'S LIABILITY TO PCC, IN THE AGGREGATE, UNDER THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO APPLE'S LIABILITY UNDER SECTION 4, EXCEED THE AMOUNTS ACTUALLY PAID BY PCC TO APPLE UNDER THIS AGREEMENT AS ROYALTIES FOR THE LICENSED SOFTWARE. 12. GENERAL 12.1 Force Majeure. Neither party will be liable for any failure or delay in its performance under this Agreement due to causes, including, but not limited to, an act of God, act of civil or military authority, fire, epidemic, flood, earthquake, riot, war, sabotage, labor shortage or dispute, and governmental action, which are beyond its reasonable control; provided that the delayed party: (i) gives the other party written notice of such cause promptly, and in any event within fifteen (15) days of discovery thereof; and (ii) uses its reasonable efforts to correct such failure or delay in its performance. The delayed party's time for performance or cure under this Section 12.1 will be extended for a period equal to the duration of the cause or sixty (60) days, whichever is less. 12.2 Assignment. The rights and liabilities of the parties hereto will bind and inure to the benefit of their respective successors, executors and administrators, as the case may be; provided that PCC may not assign or delegate its rights or obligations under this Agreement either in whole or in part, (by operation of law or merger or otherwise), without the prior written consent of Apple. If PCC includes in its written request for consent to assignment a conspicuous statement that Apple must respond within twenty (20) business days and Apple fails to respond within such period, Apple will be deemed to have given its consent to such CONFIDENTIAL Page 13 14 Apple-PCC Mac OS Lic. Agmt. II Final assignment. Any attempted assignment in violation of the provisions of this Section 12.2 will be void. 12.3 Equitable Relief. PCC acknowledges that Apple has valuable intellectual property rights in the Licensed Software and in the Marks. Because PCC will be permitted to use the Marks and will have access to and become acquainted with confidential and proprietary information and materials of Apple, including but not limited to the Licensed Software, the unauthorized use or disclosure of which would cause irreparable harm and significant injury which would be difficult to ascertain and which would not be compensable by damages alone, PCC agrees that Apple will have the right to enforce the confidentiality and license provisions of this Agreement by injunction, specific performance or other equitable relief without prejudice to any other rights and remedies that Apple may have for PCC's breach of this Agreement. 12.4 Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California as applied to agreements entered into and to be performed entirely within California between California residents. Both parties will comply with applicable export laws and regulations and will cooperate in executing necessary documentation to comply with such laws and regulations. The parties specifically exclude applicability of the Convention Relating to Uniform Law on the International Sale of Goods. 12.5 Jurisdiction and Venue. The parties hereby submit to the jurisdiction of, and waive any venue objections against, the United States District Court for the Northern District of California, the Superior Court of the State of California for the County of Santa Clara, the Santa Clara Municipal Court, and any mutually agreed to alternative dispute resolution proceeding taking place in Santa Clara County, California, in any litigation arising out of the Agreement. 12.6 Severability. If for any reason a court of competent jurisdiction finds any provision of this Agreement, or portion thereof, to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. 12.7 Notices. All notices required or permitted under this Agreement will be in writing, will reference this Agreement and will be deemed given when: (i) delivered personally; (ii) when sent by confirmed telex or facsimile; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) day after deposit with a commercial overnight carrier specifying next day delivery, with written verification of receipt. All communications will be sent to the addresses set forth below to or such other address as may be designated by a party by giving written notice to the other party pursuant to this Section 12.7: CONFIDENTIAL Page 14 15 Apple-PCC Mac OS Lic. Agmt. II Final Apple: PCC: Mac OS Licensing Steve Kahng MS: 38-LG Power Computing Corp. Apple Computer, Inc. 2555 N. Interstate 35, Suite 200 1 Infinite Loop Round Rock, Texas 78664 Cupertino, California, U.S.A. 95014 With a copy to Apple's Law Dept. at the same address, Mac OS Licensing, MS: 38-I 12.8 No Waiver. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. 12.9 No Rights in Third Parties. This Agreement is made for the benefit of PCC and Apple and their respective subsidiaries and affiliates, if any, and not for the benefit of any third parties. 12.10 Subsidiaries. PCC guarantees the performance of its Subsidiaries and will be jointly and severally liable for the obligations of its Subsidiaries under this Agreement. 12.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but which collectively will constitute one and the same instrument. 12.12 Headings and References. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 12.13 Construction. This Agreement has been negotiated by the parties and their respective counsel. This Agreement will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either party. 12.14 Trademark Usage. Except as set forth in Section 2.3, PCC will not, without Apple's prior written consent, use any Apple trademarks, service marks, trade names, logos or other commercial or product designations, for any purpose, including, but not limited to, use in connection with any PCC products, promotions, advertisements or exhibitions. 12.15 Relationship of Parties. PCC and Apple are independent contractors. Neither party nor its employees, consultants, contractors or agents are agents, employees or joint venturers of the other party, nor do they have any authority to bind the other party by contract or otherwise CONFIDENTIAL Page 15 16 Apple-PCC Mac OS Lic. Agmt. II Final to any obligation. They will not represent to the contrary, either expressly, implicitly, by appearance or otherwise. 12.16 Complete Agreement. This Agreement, including all exhibits, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. No amendment to or modification of this Agreement will be binding unless in writing and signed by a duly authorized representative of both parties. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. APPLE: PCC: APPLE COMPUTER, INC. POWER COMPUTING CORP. BY: /s/ BY: /s/ ---------------------------------------- -------------------------- PRINT NAME: Lamar Potts PRINT NAME: Stephen Kahng -------------------------------- ------------------ TITLE: Vice President, Licensing TITLE: Chairman and CEO ------------------------------------- ----------------------- CONFIDENTIAL Page 16 17 Apple-PCC Mac OS Lic. Agmt. II Final EXHIBIT A CERTIFICATION REQUIREMENTS The current Certification Requirements are attached hereto and are hereby incorporated herein by reference. The Certification Requirements will subsequently be updated for computers using the PPP version of the Mac OS. CONFIDENTIAL Page 17 18 [Logo] Mac(TM) OS Certification Requirements for Mac(TM) OS Compatible Products v1.8 December 10, 1996 - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 1 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 19 CERTIFICATION REQUIREMENTS FOR MAC(TM) OS COMPATIBLE PRODUCTS TABLE OF CONTENTS 1.0 Introduction 3 2.0 Certification Overview 3 3.0 Pre-Certification with MCE 6 4.0 Certification Strategy & Definitions 8 5.0 Scheduling, Documentation and Equipment Requirements 11 6.0 Questions and Other Issues 13
Appendix A: Tasks Not Covered by Certification 14 Appendix B: Sample Certification Approval Letter 15 Appendix C: Applications used by MCE 16 Appendix D: Certification Request Form 17 Appendix E: Sample Certification Disclaimer Form 18
(C)1995 - 1996 Apple Computer, Inc. All rights reserved. Mac and the Mac OS logo are trademarks of Apple Computer, Inc. - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 2 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 20 CERTIFICATION REQUIREMENTS DOCUMENT (CRD) 1.0 INTRODUCTION 1.1 PURPOSE The purpose of this document is to specify Apple's Certification Requirements referenced in the Mac OS Licensing Agreement. Apple has defined specific requirements which must be met before a Licensee product can be certified Mac OS compatible. This document describes the process used to test compatibility and from this point on will be referenced as the CRD (certification requirements document). 1.2 CONFLICTS In cases where the requirements of this document conflict with those of other documents specified on the face of the Mac OS License Agreement or other related written agreements between Apple and the Licensee (License Agreements), the order of precedence shall be as follows: o License Agreements o Apple Engineering drawing or specification provided by Apple o This document 1.3 CHANGES Apple reserves the right to change these requirements at any time. 2.0 CERTIFICATION OVERVIEW 2.1 GOALS OF CERTIFICATION The purpose of certification is to ensure that the Licensee's product demonstrates sufficient compatibility to satisfy the requirements of the Mac OS License Agreement and to bear the Mac OS logo and preserves the Macintosh user experience. This is achieved by rigorously testing that applications and peripherals that function on Apple Macintosh products also function on Mac OS compatible products. 2.2 CERTIFICATION TIERS As referenced above, every design that a Licensee ships must be certified for Mac OS compatibility prior to shipping. Since there are varying degrees of changes from one licensee design to another, the certification process is divided into four different "tiers": o Comprehensive: For all new logic board designs. Any product which uses a logic board that has never previously undergone certification. o Update: For any product using a previously certified logic board where the processor's clock speed and/or number of processors has been changed. o International: For products shipping with Non-Roman versions of the OS. o Integrator: For any products using a previously certified logic board with no modifications. All certifications will examine the contents and structure of the system software for correct configuration. 2.2.1 COMPREHENSIVE CERTIFICATION (approximately 2 week turnaround, 4 computers required for testing) This is a comprehensive evaluation of logic board functionality including all I/O and PCI slots. It tests the logic board 's compatibility with the US version of the Mac OS. This level of certification is applied to all board designs that are either new or substantially different from those previously certified (i.e. have different processors or deviate from an Apple licensed design). - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 3 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 21 2.2.2 UPDATE CERTIFICATION (approximately 2 week turnaround, 4 computers required for testing) This is a focused evaluation of timing critical functionality designed to cover incremental changes to the logic board. These changes include processor speed and additional processors (multi-processing) which introduce variables that may affect timing sensitive components such as: - Ethernet and LocalTalk - Floppy - PCI, Comm. Slot - Sound In and Out - Serial ports - SCSI - Video - ADB - PC keyboard and mouse - PC Parallel Port - PC Serial Ports Increases in hard drive capacity, CD-ROM speed, the amount of standard memory, the size of the Level 2 cache and the amount of video RAM don't affect the compatibility of a given design and does not require recertification. Note that although this certification requires less actual testing time, it is performed much more frequently than the comprehensive certification and thus requires more scheduling flexibility. 2.2.3 INTERNATIONAL (NON-ROMAN LANGUAGE) CERTIFICATION (approximately 1 week turnaround, 2 computers required for testing) This is an evaluation focusing on non-Roman language compatibility of already certified logic boards. A Comprehensive or Update certification must precede this certification or be performed concurrently. These systems will normally ship with a version of the Mac OS which has been modified, or "localized" for the native language of the targeted market. For Roman character based languages such as French, German, Italian and British English these differences amount to no more than replacement of all the system strings, therefore no additional certification will be required. Non-Roman systems are enabled by Apple's WorldScript I & WorldScript II system software. Languages that require WorldScript II are Japanese, Chinese (Simplified & Traditional), and Korean. Languages that require WorldScript I include Thai, Hebrew, Arabic and others (Note: WorldScript I languages are not currently licensed). A separate certification is required for each language on each logic board design. This additional certification suite will focus on the particular areas of non-Roman languages that differ from Roman languages such as: - WorldScript extension - text input (including input methods) - fonts - localized apps. - printing - hardware keys (dongles) - system software installation - certain localized applications 2.2.4 INTEGRATOR CERTIFICATION (approximately 1 week turnaround, 2 computers required for testing) This suite designed for machines that have been sub-licensed from another vendor and focuses only on those aspects of the product that are likely to change when reconfigured by a systems integrator. These - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 4 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 22 are usually cosmetic changes to the enclosure or a new enclosure, a different splash screen for the licensing extension and a different install CD with appropriate changes to the ReadMe files. Any machine which uses an unmodified, previously certified logic board (including processor daughter card, if equipped) is eligible for an Integrator Certification. Key areas evaluated: - software bundles - install CDS - preconfigured software on hard drive - Licensee specific system extensions 2.2.5 DESIGN CHANGE MATRIX Table 1 outlines a reference matrix for which certification is required for a particular design change. This should be used as a guide to determine which certification applies to any product. Changes of hard drives, CD-ROMs, floppy drives, power supplies and enclosures do not warrant a new certification.
- -------------------------------------------------------------------------------------------------- Component Certification Comments Required - -------------------------------------------------------------------------------------------------- Logic Board Comprehensive Any changes to logic board may require re-certification - -------------------------------------------------------------------------------------------------- Processor Type Comprehensive - -------------------------------------------------------------------------------------------------- Processor Speed Update If higher than highest speed previously certified - -------------------------------------------------------------------------------------------------- Number of Processors Update - -------------------------------------------------------------------------------------------------- Number of PCI Update Includes changes in riser cards Slots - -------------------------------------------------------------------------------------------------- Language Version International Each non-Roman language requires a of Mac OS separate certification - -------------------------------------------------------------------------------------------------- Licensing Integrator Extension - -------------------------------------------------------------------------------------------------- L2 Cache, RAM, Floppy, None Required CD-ROM, Hard Drive, Power Supply, Video Board, Enclosure - --------------------------------------------------------------------------------------------------
TABLE 1 2.3 QUALITY AND RELIABILITY Certification does not guarantee that the Licensee has met customer needs of overall quality, reliability, or compatibility. The Licensee is expected to perform all qualification and reliability testing of their own designs. A partial listing of tasks not performed during certification can be found in Appendix A. - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 5 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 23 2.4 APPLE LICENSED DESIGN MODIFICATIONS If the product is based on an Apple designed logic board, any changes or modifications must be pre-approved by Mac OS Licensing Technical Support BEFORE the product is provided to Apple for certification. The main concern behind making changes to a particular design is the effect the change(s) might have on future releases of the Mac OS. See the Technical Evaluations document (TED) for a description of the process used to request and receive approval for changes to an Apple licensed design. 2.5 STATUS UPDATES Apple will update the Licensee during certification via e-mail. If any problems are encountered which make it impossible to continue with certification testing, the Licensee will be notified immediately of the problem with a phone call. If the problem is one that the Licensee can fix quickly via a simple software update or by rapid delivery of a replacement component, certification testing will simply be suspended until the fix is delivered. If, however, the problem is more serious, the units will be returned and the Licensee must resubmit the product for certification. 2.6 CERTIFICATION LETTER Certification is successfully completed when all bugs and product issues encountered during testing have been resolved. At this point, the Mac OS Certification team will issue the Certification Approval Letter (see Appendix B for a sample) to the Licensee's Account Manager for delivery to the Licensee. After the Licensee receives their Certification Approval Letter they can begin shipping their Mac OS Compatible product. 3.0 PRE-CERTIFICATION WITH MAC OS CERTIFICATION ENVIRONMENT (MCE) 3.1 INTRODUCTION Self-certification is an integral and mandatory part of the certification process. Licensees perform it by running an integrated software tool, the Mac OS Certification Environment (MCE), which covers a significant portion of compatibility tests. Thus, they can perform both early diagnostics of potential incompatibilities and automated self-certification in-house. With MCE's official inclusion in the certification process (November 1, 1996), Apple distributes CD-ROMs with MCE 1.0 to all Licensees. Eventually, Licensees will be able to download the latest releases from the Mac OS Certification Web site. 3.2 OVERVIEW MCE is an exportable, integrated tool suite designed by the Mac OS Certification team to increase efficiency of the testing process. It is based on tools that Apple itself uses internally to qualify new Macintosh models and new releases of the Mac OS. MCE provides a simple, intuitive user interface to quickly and easily test key portions of the Mac OS running on a Macintosh OS-Compatible product. It gives an on-screen pass/fail/abort/crash summary of test results, and a more comprehensive record is also stored in a results file viewable within MCE. Currently (version 1.0), MCE tests compatibility for significant portions of the System Toolbox, Sound Manager, QuickTime, AppleTalk protocol (both EtherTalk and LocalTalk), and five major applications (see Appendix C for listing of applications). 3.3 HOW MCE FITS INTO THE CERTIFICATION PROCESS MCE's primary objective is to maximize the amount of certification testing that Licensees can do themselves. It is made available to all Licensees early on in the development cycle to help them rigorously exercise their machines. Versatility and other features built into MCE allow the Licensee to uncover and diagnose potential compatibility problems. Apple will accept no machine for certification unless it is accompanied by a passed MCE results file. - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 6 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 24 3.4 INSTALLING AND USING MCE MCE is designed for simple and intuitive installation and operation. Hardware requirements include the machine to be certified (host), and another (support) machine networked with the host. All software components are automatically set up by an installer program, and quality on-line help and printable user manual documentation are provided. The exceptions to this automatic installation are the third-party application programs required for passing a certain class of MCE compatibility tests. For now, it is not possible to bundle these with MCE; acquiring them is the responsibility of the licensee. The exact list of these programs is given in Appendix C. Any potential changes to this list in the future will be communicated promptly. Once installed, MCE is conceptually operated in three phases: test selection, test suite execution, and result analysis. Figure 1 shows the main MCE window where the tests for the current suite are selected. Buttons on the right hand side control execution and provide access to the results. 3.5 LICENSEE DELIVERABLES FOR MCE Upon successful completion of the pre-certification process, Licensees are required to submit the passing results file back to Apple (Mac OS Certification team). A results file is considered passed only if all automated tests pass. Manual tests are not formally required but are certainly recommended. The file should be sent via e-mail to: macoscert@apple.com, and also included on a floppy disk along with the units submitted for certification. 3.6 MCE TECHNICAL SUPPORT If any problems are found with MCE, the MCE team should be contacted by sending a email to: (macoscert@apple.com). Using this email address ensures the matter is included in an issues tracking data base. An MCE engineer will usually respond one business day. If the issue cannot be immediately resolved, the MCE team will: - Send out frequent updates on status of problem along with expected resolution date - Suggest possible approaches to solution - Request additional information This support does not extend to diagnosing hardware functionality or compatibility issues. Enhancement requests and other forms of non-critical feedback are welcome and should also be sent to the above address. 3.7 NEW RELEASES AND PERIODIC UPDATES As new releases of MCE become available, they will be distributed to Licensees. It is the responsibility of the Licensees to distribute each release of MCE to their sub-licensees. Internet based distribution is currently also under development. The scope of changes will typically encompass improved compatibility coverage, additional application scripts, and might also include usability improvements. FIGURE 1 - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 7 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 25 4.0 CERTIFICATION STRATEGY AND DEFINITIONS 4.1 STRATEGY AND DEFINITIONS The basic theory of certification testing is to exercise all aspects of the machine in combination with each other. Testing the hardware exclusively is not considered sufficient to insure Mac OS compatibility since it is the combination or integration of these various components that frequently highlights weakness in the design or problems with timing. For instance, the SCSI controller and the Ethernet port may function perfectly well independently, but may fail when interacting simultaneously with the Mac OS, so a narrow test of each component may not be enough. By probing the machine at three different levels (see Figure 2 below) with a through collection of API and application tests in addition to the hardware test, we are more likely to turn up these integration issues. APPLICATIONS FIGURE 2 4.2 THREE GENERAL CATEGORIES Our current certification suite is divided into three general categories: - hardware - software (high level) - application programing interface (API) (low level) Referring to Figure 2, we test at the hardware layer directly with specialized tools designed to look at each component on the motherboard at a very low level. We then move up to operating system level and run a suite of test tools which exercise the various API components of the system software, which indirectly test a variety of combinations of the hardware underneath. Finally, we test a large suite of applications since this is ultimately how the machines are used and this is the best way to test various combinations of APIs to give us the most rigorous integration testing. 4.2.1 HARDWARE COMPATIBILITY A Licensee Mac OS compatible computer must work reliably with a variety of peripherals. Testing will involve integration of software applications and hardware peripherals which are designed to run together on the Mac OS. Peripheral testing focuses in the following areas: - Network {Ethernet, LocalTalk} - SCSI - Mac serial ports {printing, modem, GeoPort, MIDI} - Mac keyboard/mouse port {ADB} - PC serial ports and parallel ports - PC keyboard and mouse ports {PS/2} - Sound In and Out {external speakers, microphone} - Video {multiple monitor resolutions} - PCI card compatibility(1) Note: While a Licensee Mac OS Compatible product will be tested with many different peripherals for the purposes of examining the various connection ports, the only peripherals that Apple uses in certification testing are those deemed critical to maintain the Macintosh user experience. These include: CD-ROM, hard drive, video out board (if equipped), keyboard, mouse and floppy. If a Licensee includes - ---------------------- (1) For a list of PCI cards compatible with PCI based Macintosh computers, please refer to Apple's product information Web page: http://product.info.apple.com/productinfo/factsheets/pciproduct dir.html - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 8 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 26 a video digitizing card in its product, for instance, this card will not be certified or tested by Apple. Also, if the Licensee does not use an Apple qualified CD-ROM, hard drive or floppy drive, only the out-of-box functionality will be tested. Apple is not responsible for the reliability or comprehensive compatibility testing of these components. 4.2.2 APPLICATION PROGRAMMING INTERFACE (API) The API evaluation tests the various Mac OS Toolbox routines as specified in Inside Macintosh. These include (but are not limited to): Core - Resources, Procedures and Events I/O - Bus, Video, ASIC, and Hardware Control File/Device - File Manager, Device Manager, Hard Disk, and CD Toolbox - Window, Dialog, Menu, Font Visual - Display, QuickDraw, QuickDraw GX, QuickDraw 3D, QuickTime VR and Color 4.2.3 SOFTWARE COMPATIBILITY Testing of software on a Mac OS Compatible product is designed to mimic user interaction with a Mac OS Compatible product as it would occur in the home, school, or business while exposing the machine to as much software as possible. Both manual and automated tests are performed. MCE covers the automated tests through and extensive library of scripts tailored for a large variety of applications. Automated testing provides us the opportunity to run a much larger number of applications than we could possibly run manually during certification. Extensive ad hoc manual testing covers the human element which so often uncovers bugs not found with automated tests. Following is a list of the types of applications tested, along with some examples. Actual applications tested may vary. o Productivity Word Processing {MS Word, Nisus Writer, Claris Works, SimpleText} Database {FileMaker Pro, HyperCard Player} Spreadsheet {MS Excel, ClarisWorks} Draw/Paint {Illustrator, Freehand} Authoring {MacroMind Director} Organizers {Now Contact/Up-to-Date, Claris Organizer, Meeting Maker} Programming {Think C++, Apple Script, MPW} o Graphics and Multimedia Graphic Manipulation {Photoshop} Desktop Publishing {Quark, PageMaker} Movie Viewing & Editing {Movie Player, Adobe After Effects, QuickTime VR} 3D modeling & rendering {InfiniD, Strata Studio Pro} Sound recording and editing {SoundEdit} MIDI {Opcode Musicshop} o Connectivity applications Terminal/Modem {Zterm, ClarisWorks, VersaTerm} Online Services {AOL, CompuServe, Prodigy} AppleTalk {Personal file sharing, Meeting Maker, Marathon} Internet (TCP/IP) {Netscape, Fetch, NCSA Telnet, Newswatcher, Cyberdog} Internet server applications {Apple Internet Mailserver, NetPresence, WebStar} o User level features and utilities Control Panels {Sound, Network, Desktop Patterns, Sharing, Views } Apple Menu {Apple Audio CD Player, Jigsaw Puzzle, Scrapbook} - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 9 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 27 SCSI/IDE {Licensee formatting utility, Disk First Aid, Hard Disk Toolkit, Norton Utilities} General utilities {RAM Doubler, SpeedCopy, Now Utilities} System Software Installation using Licensee documentation 5.0 SCHEDULING, DOCUMENTATION AND EQUIPMENT REQUIREMENTS 5.1 SCHEDULE Certification scheduling is requested by submitting the certification request form to Mac OS Certification at: (macoscert@apple.com). Appendix D contains a copy of the Certification Request Form. Mac OS Certification has two scheduled dates: the preliminary date and start date. Licensees should notify the Mac OS Certification team with any changes to their scheduled certification start date. All scheduling requests and changes must be sent to: (macoscert@apple.com). 5.1.2 PRELIMINARY DATE The preliminary date is intended to help in the planning of the certification schedule. It is recommended that Licensee inform Apple at least three months in advance of when a model will be ready for certification. 5.1.3 START DATE The certification start date is the specific day certification will start. This date needs to be set a minimum of 4 weeks before certification will commence. To ensure that certification will start on the scheduled start date the following conditions must be met: o All contract/business issues must be resolved o All issues resolved with Mac OS Licensing Technical Support o All issues resolved with Mac OS Certification o All required documentation is received (ERS, software and hardware configuration lists) o Signed Certification Disclaimer from the Licensee (see Appendix E for sample) o Licensee's product in the required quantities must arrive for certification o Passing MCE results file must be submitted by email and enclosed with product on floppy disk Apple has the sole and absolute discretion to determine whether these conditions have been met and whether certification may proceed on the start date. 5.1.4 MISSED CERTIFICATION DATE If the product is not received or issues are still outstanding on the certification start date the Mac OS Certification team will decide if certification can proceed. If rescheduling of certification is required the Mac OS Certification team will try to accommodate the Licensee's schedule after all issues are resolved. 5.2 PRODUCT LOGISTICS 5.2.1 PRODUCT LABELING All products received for certification must be labeled with the following information: o Unit number o CPU type o CPU speed o RAM configuration o VRAM configuration o Cache configuration o Hard drive size o Video card type o CD-ROM speed o Any other information needed to differentiate computers from one another. (One example would be a 3 PCI slot computer vs. a 2 PCI slot computer.)
- -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 10 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 28 5.2.1 PRODUCT ARRIVAL To help track products shipped to Apple for certification please notify the Mac OS Certification team by email when computers are shipped. Include the following information: o shipping date o expected arrival date at Apple o carrier o waybill number o number of packages o return shipping information o licensee contact phone number and email address
Address product to: Apple Computer, Inc. Mac OS Certification 1 Infinite Loop, MS: 38-ARQ Cupertino, CA 95014 U.S.A. 5.2.2 PRODUCT RETURN All return shipping costs will be paid by the Licensee. Licensee needs to include account number for billing of return shipment and any required customs documents and contact phone numbers. Licensee will be notified by email when product is shipped from Apple. 5.3 EQUIPMENT REQUIREMENTS FOR CERTIFICATION The Licensee must provide completely functioning computers. Each should have a bootable hard disk configured as the licensee intends to ship it to the end user, a CD-ROM drive, video capability (either a built in monitor or a video out port) and a power supply, all installed in an enclosure. Each certification requires: o Comprehensive certification - 4 computers - 2 installation CDS or sets of floppy disks o Update certification - 4 computers - 2 installation CDS or sets of floppy disks o International certification - 2 computers - 2 installation CDS or sets of floppy disks (in the appropriate language) o Integrator certification - 2 computers - 2 installation CDS or sets of floppy disks (in the appropriate language) If this computer is going to be sold with different clock speeds, the configurations sent in for certification must contain one of the fastest and one of the slowest clock speeds. The CD-ROMs must contain the system software as it will be delivered to the end user. One off CD-ROMs of the system software will be accepted for certification. 5.4 DOCUMENT REQUIREMENTS 5.4.1 MCE RESULTS FILE The MCE results file must be sent in via email to the Mac OS Certification team prior to certification starting. Additionally, the MCE results file needs to be shipped with the product on a floppy disk. 5.4.2 SYSTEM CONFIGURATION - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 11 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 29 A soft copy of the contents of the Licensee changes to the System Software is required to ensure the Licensee is shipping the correct versions of the Mac OS. This information is submitted with the Licensee product on floppy disk. 5.4.3 PRODUCT CONFIGURATION LIST This matrix outlines the Licensee configurations to be shipped to the marketplace. A subset of these configurations will be required for certification. Below is a sample matrix which reflects the information needed: System # Enclosure Processor Slot Cfg RAM VRAM Hard Drive L2 Cache CD-ROM -------- --------- --------- -------- --- ---- ---------- -------- ------ 1 Desktop 604e/275MHz 3 PCI 32MB 1MB 2GB 256KB 8X 2 MiniTower 604e/250MHz 2 PCI 16MB 1MB 1GB 256KB 4X 3 Tower 604e/300MHz 4 PCI 24MB 4MB 1GB 512KB None 4 Tower 603e/120MHz 6 PCI 32MB 1MB 850MB 512KB 8X
6.0 QUESTIONS OR ISSUES? This document was created by the Mac OS Certification team. As the certification procedure is improved and changed to better meet the needs and requirements of the Licensee and Apple, this document will be updated. If you have any questions or issues regarding the procedures within this document, please direct them to: (macoscert@apple.com). - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 12 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 30 APPENDIX A: TASKS NOT COVERED BY CERTIFICATION BUG (DEFECT) ISOLATION Apple will attempt to isolate bugs, but not to evaluate them during the certification process. This isolation methodology includes, and will not exceed: o Identifying the bug o Regress the bug against its underlying Macintosh product o Verify the bug is NOT present or evident on its underlying Macintosh product KNOWN APPLE BUGS Apple does not guarantee that any existing Mac OS system bugs which also occur on Apple's own Macintosh products will be fixed. REGRESSION TESTING Apple will regress bugs identified on a Mac OS compatible product against the most closely related Apple qualified design. STRESS TESTING Apple will NOT include, as part of its Certification Process, stress testing of any Mac OS compatible product. However, we will perform limited networking stress testing by saturating Ethernet and LocalTalk ports with AppleTalk packets. PERFORMANCE BENCHMARKS Apple will NOT include, as part of the Certification Process, any performance related benchmark tests. Apple will NOT benchmark the performance and speed of a Mac OS compatible product against its comparable Macintosh product. - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 13 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 31 APPENDIX B: SAMPLE CERTIFICATION LETTER November 18, 1996 Mr. Licensee Super Computer Corp. 1 Infinite Loop Any Town, CA 95014 Re: Certification of Super Computer Corp., Super Fast X-1 series of computers Dear: Mr. Licensee This is to inform you that the following series of computers have successfully passed Mac(TM) OS Certification and are now approved to ship as certified computers: Super Fast X-1/160, Super Fast X-1/180, Super Fast X-1/200 Super Fast X-1 series, using 603e PowerPC(TM) processors running at: 160, 180, 200 MHz The above certified products are based on Apple Logic Board Design XYZ 100. The above referenced series of computers were certified using the components listed below:
Description Manufacturer Model Size - ----------- ------------ ----- ---- 5x CD-ROM Acme CD-555-B n/a Floppy Drive Quality 355F 1.44 MB Int. Hard Drive Best Drive fast 2100 2.2lGig Super Drive fast 1200 1.2Gig Power Supply RS Ind. A-01 200 Watts Video On Board n/a n/a 1MB DRAM Cache MBI 4MP6 256K RAM On Board 16MB
In addition to shipping with US System Software, you are certified to ship with the following onebyte Roman languages and two byte languages as specified in your Mac OS Licensing agreement: British, Italian, German, French, Spanish, Yours sincerely, - ---------------------------------------- Eric Du Bois Engineering Project Manager Mac(TM) OS Certification - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 14 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 32 APPENDIX C: APPLICATIONS FOR MCE List of applications that need to be installed on the host machine: - - Adobe Dimensions 2.0 - - Adobe Photoshop 3.0.4 - - ClarisWorks 4.0 - - Microsoft Excel 4.0 - - Microsoft Word 6.0.1 - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 15 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 33 APPENDIX D: CERTIFICATION REQUEST FORM Company Name: Address: Country: Contact Name: Phone Number: FAX Number: e-mail: Product Name: Requested Certification Date: On which Apple Design or CHRP reference design is product based? Differentiation between the Apple design or CHRP reference design provided within your product (such as additional I/O ports, different on board video controller, etc.): Basic system features: Processor type, clock speeds and number of processors Complete list of I/O ports available (SCSI, serial, ADB etc.) How many internal PCI slots? (if applicable) How video is handled? (on board or a card) Additional PCI cards added to the product System software additions Special cables or adapters required to use product Please send your completed form to: (macoscert@apple.com) Thank you for the information, your request will be acknowledged within 2 business days. - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 16 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 34 APPENDIX E: SAMPLE CERTIFICATION DISCLAIMER FORM November 5, 1996 Mr. Licensee Super Computer Corp. 1 Infinite Loop Any Town, CA 95014 Dear Mac(TM) OS Licensee: This letter will set forth the terms of Apple's testing process to determine whether your computer qualifies as a "Certified Computer" under your Mac OS License Agreement. Apple will perform the tests described in the accompanying Mac OS Certification Requirements document. At the completion of this evaluation, Apple will either provide you a written notice that your computer has satisfactorily passed this evaluation and therefore qualifies as a "Certified Computer" or will describe the areas in which your computer has failed to pass the evaluation. If your computer fails to pass the evaluation, it will be necessary for you to correct the deficiencies, resubmit the computer for testing, and satisfactorily pass the tests before you can distribute your computer. Reevaluation Testing charges will be $100/hour up to a maximum of $25,000 per testing session or as otherwise provided in agreements between Apple and Licensee. You agree that Apple's taking of this evaluation and the results of this evaluation constitute Apple "Confidential Information" under your Mac OS License Agreement with Apple, and that you will not disclose the fact that Apple took these tests and any statements by Apple regarding the results of these tests, to any third party. The results of these tests will not be deemed a guarantee or warranty by Apple of any kind regarding the compatibility, quality or performance of your computer to you or your customers, distributors, OEMs, Licensees or any other party. You and your employees and agents will not make any statement to the contrary to any third party. This paragraph does not diminish your rights to use the "Mac OS" logo under the Mac OS License Agreement or to refer to that logo as an indicator of compatibility with the Mac OS. Please indicate your agreement with the foregoing, by signing below and returning a copy of this letter to Mac OS Certification team at Apple. Sincerely, PRODUCT SUBMITTED FOR CERTIFICATION X-1 604e @ 180 MHz X-2 Multi-Processor 604e @ 200 MHz Eric Du Bois Mac OS Certification TYPE OF CERTIFICATION Comprehensive Processor UNDERSTOOD AND AGREED: Super Computer Corp. By ------------------------------ - -------------------------------------------------------------------------------- NOTICE OF PROPRIETARY PROPERTY THE INFORMATION CONTAINED HEREIN IS THE PROPRIETARY PROPERTY OF APPLE COMPUTER, INC. THE POSSESSOR AGREES TO THE FOLLOWING: (i) TO MAINTAIN THIS DOCUMENT IN CONFIDENCE (ii) NOT TO REPRODUCE OR COPY IT (iii) NOT TO REVEAL OR PUBLISH IT IN WHOLE OR PART - -------------------------------------------------------------------------------- APPLE COMPUTER, INC. SHEET 17 TITLE: CERTIFICATION REQUIREMENTS DOCUMENT (CRD) Rev: 1.8 12/10/96 35 Apple-PCC Mac OS Lic. Agmt. II Final EXHIBIT B LICENSED SOFTWARE, ENABLING TECHNOLOGY, ROYALTIES AND AVAILABILITY This exhibit sets forth the royalty rate and other terms relating to the Licensed Software and Enabling Technology: LICENSED SOFTWARE: The Licensed Software consists of the non-PPP version and PPP version of the Mac OS 7.5.x generally provided to Mac OS licensees and Maintenance Releases and Minor Releases thereto for Certified Computers (excluding any software contained in the Mac OS for which Apple does not have the right to grant the rights specified in Section 2.1) in the following languages: US English, UK English, Italian, German, French, Spanish, Portuguese, Swedish, Norwegian, Danish, Finnish, Dutch, Traditional Chinese, Simplified Chinese, Japanese. (A license to some fonts used in the Japanese version is available from the FDPC consortium.) These are all the language versions currently available for licensing. PCC will be offered additional languages as they become available for licensing. ROYALTY RATE AND PAYMENT TERMS Subject to the provisions of this Agreement, royalties will be due and payable upon all distributions of the Licensed Software according to the following terms and payment schedule: Royalty Payments will be based on quarterly unit volume. Quarterly unit volume will be calculated based on the following four calendar quarters: January-March, April-June, July-September, and October-December. The amount of royalty for each Certified Computer shipped will be based on the number of units shipped each quarter in accordance with the following table: Quarterly Unit Volumes(1) U.S. Other ---------------------- ---- ----- English Languages ------- --------- [S] [C] [C] ** $ ** $ ** - --------------------- (1) If Company distributes both U.S. English and other language versions of the Mac OS, the royalty rate for a particular quarter will be calculated based on the combined number of units. Similarly, the combined number of PPP and non- PPP units will be aggregated to determine the quarterly unit volume. CONFIDENTIAL Page 18 36 Apple-PCC Mac OS Lic. Agmt. II Final Notwithstanding the foregoing but subject to the OEM Royalties set forth below, the maximum PCC will be required to pay for the term of this Agreement pursuant to the above table will be $ ** for Certified Computers containing U.S. English versions of the Licensed Software and $ ** for Certified Computers containing other language versions of the Licensed Software. PCC will pay an additional OEM Royalty for each unit copy of the Licensed Software that is distributed by PCC to an OEM pursuant to 2.2(f), except Maintenance Releases and System Upgrades distributed to an OEM pursuant to Section 2.1(a)(ii). The OEM Royalties will be as follows: Quarterly Unit Volumes(1) OEM Royalty Rate ** $ ** PCC shall prepay royalties each quarter based on the greater of: (i) PCC's best estimate of the royalties it will pay for sales of Certified Computers in the quarter, or (ii) the actual royalty payment for sales of Certified Computers in the preceding quarter. The amount of the prepayment shall equal the following percentage of the greater of the above two numbers:
Quarter Pre-Payment Due Date Percentage ------- -------------------- ---------- Jan - Mar 1997 Jan. 30, 1997 ** Apr - June 1997 April 30, 1997 ** All Other Quarters **
PCC will make such prepayment of Royalty Payments within thirty (30) days after commencement of the quarter and should accompany such prepayment with a statement indicating the number and type (U.S. English vs. other languages) of units PCC is estimating it will distribute during the quarter for which royalties are being prepaid, the amount of royalty being prepaid, and the basis for the calculation of the prepayment. The prepayment is non-refundable. Within thirty (30) days after the end of each calendar quarter for which PCC prepays Royalty Payments, PCC shall determine the actual quarterly unit volume for which it owes Royalty Payments. If the amount PCC actually owes for the last quarter is greater than the amount it prepaid, PCC shall then (also within the thirty (30) day time period) make additional Royalty Payments for the difference. If the amount PCC actually owes for the last quarter is less than the amount it prepaid, PCC may reduce its prepayment for the current quarter by the difference. Each Royalty Payment will be accompanied by a statement certified correct by an officer of PCC, indicating the number of units distributed by PCC during the quarter for which royalties are being paid broken down by the number of units of each language version distributed and the number of units distributed in each country, the amount of any prepaid royalties, and the amount of royalties owed for the quarter. PCC shall pay all amounts when due, and any amounts not paid when due shall accrue interest at the higher of (i) four (4) points over the Citicorp prime rate as listed in the Wall Street Journal during the relevant period, or (ii) the highest rate allowed by California law. Such interest will accrue from the date when the payment should have been paid and ending when paid. - ---------------------------------- (1) If Company distributes both U.S. English and other language versions of the Mac OS, the royalty rate for a particular quarter will be calculated based on the combined number of units. Similarly, the combined number of PPP and non-PPP units will be aggregated to determine the quarterly unit volume. CONFIDENTIAL Page 19 37 Apple-PCC Mac OS Lic. Agmt. II Final AVAILABILITY OF LICENSED SOFTWARE Each language version of each release of the Licensed Software will be made available within thirty (30) days of the latter of: (1) the Effective Date, or (2) after such language version of each release of the Licensed Software is golden master. ENABLING TECHNOLOGY: Manufacturing Final Test Tool. This tool is used by Apple during the final test phase in the manufacture of a Macintosh computer. This test is very extensive. This tool is extensible to allow a licensee to create additional tests beyond the tests created and provided by Apple. This tools includes: complete documentation, header files, and libraries to enable a licensee to create new tests to meet their additional requirements. Apple Personal Diagnostics. This tool provides comprehensive diagnostic tests on logic board, hard disk, floppy disk drive, system software and display. It also provides information about the system configuration. The Automatic Diagnostics feature allows testing of the system automatically when the system is not otherwise in use. These tools alert users to problems and suggest corrections. Mac OS Certification Environment. Apple is developing a new certification procedure under which licensees of the Licensed Software will be able to perform certification testing on their own with limited validation being conducted by Apple. To enable such self-certification, Apple is developing a tool, currently known as the Mac OS Certification Environment, which Apple intends to provide to licensees of the Licensed Software and which will enable licensees to determine, to a large extent, whether their computers meet the Certification Requirements. Apple intends to provide pre-release copies of this tool to licensees on an evaluation basis and a final version of this tool when it is available. Pre-Release Seed copies. Enabling Technology includes pre-release copies of the Licensed Software and Mac OS ROM code which may be provided to PCC. Availability and Modifications. The current versions of the Manufacturing Final Test Tool and Apple Personal Diagnostics will be made available to PCC within thirty (30) days of the Effective Date. Apple may expand PCC's license rights to certain specific Enabling Technology (as defined in Section 2.1(c) of this Agreement) by posting a notice listing such additional rights when Apple makes available the specific Enabling Technology. CONFIDENTIAL Page 20 38 Apple-PCC Mac OS Lic. Agmt. II Final EXHIBIT C MARKS "MAC OS" MAC OS STYLIZED LOGO APPLE TRADEMARK GUIDELINES The Apple Trademark Guidelines and the Usage Guidelines for the Mac OS Logo are attached hereto and are hereby incorporated herein by reference. Required Use of Mark The Marks must be displayed on and in connection with the Licensed Software and Certified Computers in at least the following instances: (i) on at least two sides of the outside of the box or other package in which a Certified Computer is shipped and on the packaging in which the Licensed Software is shipped; (ii) on the copyright/title page of End User Documentation for Licensed Software and product manuals for Certified Computers; (iii) by prominently displaying the Marks on promotional material, including, without limitation, advertising, point of sale and data sheets for the Licensed Software and Certified Computers; and (iv) the Mark must be retained on the screen display of the Licensed Software at boot up. CONFIDENTIAL Page 21 39 Apple-PCC Mac OS Lic. Agmt. II Final EXHIBIT D END USER SOFTWARE LICENSE APPLE COMPUTER, INC. LICENSE FOR MAC(TM)OS PLEASE READ THIS LICENSE CAREFULLY BEFORE USING THE SOFTWARE. BY USING THE SOFTWARE, YOU ARE AGREEING TO BE BOUND BY THE TERMS OF THIS LICENSE. 1. LICENSE. The application, demonstration, system and other software accompanying this License, whether on disk, in read only memory, or on any other media (the "Apple Software"), the related documentation and fonts are licensed to you by Apple Computer, Inc. or its local subsidiary, if any ("Apple"). You own the disk on which the Apple Software and fonts are recorded but Apple and/or Apple's Licensor(s) retain title to the Apple Software, related documentation and fonts. This License allows you to use the Apple Software and fonts on a single Apple computer and make one copy of the Apple Software and fonts in machine-readable form for backup purposes only. You must reproduce on such copy the Apple copyright notice and any other proprietary legends that were on the original copy of the Apple Software and fonts. You may use the Apple Software in a networked environment so long as each computer in such environment is the subject of a license for the Apple Software; however, you may not electronically transmit the Apple Software from one computer to another over a network. You may also transfer all your license rights in the Apple Software and fonts, the backup copy of the Apple Software and fonts, the related documentation and a copy of this License to another party, provided the other party reads and agrees to accept the terms and conditions of this License. 2. RESTRICTIONS. The Apple Software contains copyrighted material, trade secrets and other proprietary material and in order to protect them, and except as permitted by applicable legislation, you may not decompile, reverse engineer, disassemble or otherwise reduce the Apple Software to a human-perceivable form. You may not modify, network, rent, lease, loan, distribute or create derivative works based upon the Apple Software in whole or in part, except for the limited networking described above in Section 1. THIS APPLE SOFTWARE MAY NOT BE IMPORTED TO, USED IN, OR RE-EXPORTED FROM FRANCE OR ANY OF ITS DEPARTMENTS OR TERRITORIES. [This last sentence is not required in connection with the sale of computers containing the French version of the Mac OS]. 3. TERMINATION. This License is effective until terminated. You may terminate this License at any time by destroying the Apple Software, related documentation and fonts and all copies thereof. This License will terminate immediately without notice from Apple if you fail to comply with any provision of this License. Upon termination you must destroy the Apple Software, related documentation and fonts and all copies thereof. 4. EXPORT LAW ASSURANCES. You agree and certify that neither the Apple Software nor any other technical data received from Apple, nor the direct product thereof, will be exported outside the United States except as authorized and as permitted by the laws and regulations of the United States. If the Apple Software has been rightfully obtained by you outside of the United States, you agree that you will not re-export the Apple Software nor any other technical data received from Apple, nor the direct product thereof, except as permitted by the laws and regulations of the United States and the laws and regulations of the jurisdiction in which you obtained the Apple Software. 5. GOVERNMENT END USERS. If the Apple Software is supplied to the United States Government, the Apple Software is classified as "restricted computer software" as defined in clause CONFIDENTIAL Page 22 40 Apple-PCC Mac OS Lic. Agmt. II Final 52.227-19 of the FAR. The United States Government's rights to the Apple Software are as provided in clause 52.227-19 of the FAR. 6. DISCLAIMER OF WARRANTY ON APPLE SOFTWARE. You expressly acknowledge and agree that use of the Apple Software and fonts is at your sole risk. The Apple Software, related documentation and fonts are provided "AS IS" and without warranty of any kind and Apple and Apple's Licensor(s) (for the purposes of provisions 7 and 8, Apple and Apple's Licensor(s) shall be collectively referred to as "Apple") EXPRESSLY DISCLAIM ALL WARRANTIES AND/OR CONDITIONS, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES AND/OR CONDITIONS OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. APPLE DOES NOT WARRANT THAT THE FUNCTIONS CONTAINED IN THE APPLE SOFTWARE WILL MEET YOUR REQUIREMENTS, OR THAT THE OPERATION OF THE APPLE SOFTWARE WILL BE UNINTERRUPTED OR ERROR FREE, OR THAT DEFECTS IN THE APPLE SOFTWARE AND THE FONTS WILL BE CORRECTED. FURTHERMORE, APPLE DOES NOT WARRANT OR MAKE ANY REPRESENTATIONS REGARDING THE USE OR THE RESULTS OF THE USE OF THE APPLE SOFTWARE AND FONTS OR RELATED DOCUMENTATION IN TERMS OF THEIR CORRECTNESS, ACCURACY, RELIABILITY, OR OTHERWISE. WITHOUT PREJUDICE TO THE GENERALITY OF THE FOREGOING, APPLE DOES NOT WARRANT OR MAKE ANY REPRESENTATION OR GUARANTEE REGARDING THE AUTHENTICITY OR SECURITY OF ANY DIGITAL SIGNATURE GENERATED USING THE APPLE SOFTWARE, OR ANY WARRANTY OR REPRESENTATION THAT THE PERSON OR ENTITY THAT IS USING SUCH A DIGITAL SIGNATURE HAS THE AUTHORITY TO DO SO. NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY APPLE OR AN APPLE AUTHORIZED REPRESENTATIVE SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF THIS WARRANTY. SHOULD THE APPLE SOFTWARE PROVE DEFECTIVE, YOU (AND NOT APPLE OR AN APPLE AUTHORIZED REPRESENTATIVE) ASSUME THE ENTIRE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU. THE TERMS OF THIS DISCLAIMER AND THE LIMITED WARRANTY IN PARAGRAPH 3 DO NOT AFFECT OR PREJUDICE THE STATUTORY RIGHTS OF A CONSUMER ACQUIRING APPLE PRODUCTS OTHERWISE THAN IN THE COURSE OF A BUSINESS, NEITHER DO THEY LIMIT OR EXCLUDE ANY LIABILITY FOR DEATH OR PERSONAL INJURY CAUSED BY APPLE'S NEGLIGENCE. 7. LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES INCLUDING NEGLIGENCE, SHALL APPLE BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES THAT RESULT FROM THE USE, INCLUDING BUT NOT LIMITED TO THE IMPROPER, WRONGFUL, OR FRAUDULENT USE OF THE DIGITAL SIGNATURES GENERATED USING THE APPLE SOFTWARE, OR INABILITY TO USE THE APPLE SOFTWARE OR RELATED DOCUMENTATION, EVEN IF APPLE OR AN APPLE AUTHORIZED REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME JURISDICTIONS DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU. In no event shall Apple's total liability to you for all damages, losses, and causes of action (whether in contract, tort (including negligence) or otherwise) exceed the amount paid by you for the Apple Software and fonts. 8. CONTROLLING LAW AND SEVERABILITY. If there is a local subsidiary of Apple in the country in which the Apple Software License was purchased, then the local law in which the subsidiary sits shall govern this License. Otherwise, this License shall be governed by and construed in accordance with the laws of the United States and the State of California, as applied to agreements entered into CONFIDENTIAL Page 23 41 Apple-PCC Mac OS Lic. Agmt. II Final and to be performed entirely within California between California residents. If for any reason a court of competent jurisdiction finds any provision of this License, or portion thereof, to be unenforceable, that provision of the License shall be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this License shall continue in full force and effect. 9. COMPLETE AGREEMENT. This License constitutes the entire agreement between the parties with respect to the use of the Apple Software, related documentation and fonts, and supersedes all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. No amendment to or modification of this License will be binding unless in writing and signed by a duly authorized representative of Apple. CONFIDENTIAL Page 24 42 MAC(TM) OS LICENSING TECHNICAL SUPPORT PLAN V1.O SUMMARY This plan describes the technical support that will be provided by the Mac OS Licensing Technical Support Group to help the Mac OS Licensee develop Mac OS-compatible computer systems in a manner that will successfully run the Mac OS whether based on a Apple License Design ("ALD") or the Common Hardware Reference Platform ("CHRP") specification. This group will answer technical questions related to integrating the Mac OS onto Mac OS Licensee's Mac compatible products. This plan covers the following areas: o Technical Support Provided o Developer Partner Program o Escalating Mac OS Issues o Technical Support Not Provided o E-mail Address o Mac OS Technical Seminars TECHNICAL SUPPORT PROVIDED Apple will provide support in connection with Mac OS Licensee's development of Certified Computers and escalation support for technical issues that Mac OS Licensee cannot answer and which are not addressed in the training and documentation provided by Apple to Mac OS Licensee. Mac OS Licensee is responsible to provide any necessary support to Mac OS Licensee's customers. The Apple support engineer working with the Mac OS Licensee will consult with others in the Mac OS Licensing Technical Support Group or elsewhere within Apple engineering on an as needed basis to provide to Mac OS Licensee the information described in this document to assist Mac OS Licensee in the development of Mac OS compatible computers. Apple will make reasonable efforts to answer questions within one business day or, if Apple is unable to answer the question within one business day, it will within that time frame provide a target date for a response to the question. Apple will make problem tracking information available regarding Mac OS Licensing Technical Support issues raised by the Mac OS Licensee, including results of problem resolution. At Apple's request, the Mac OS Licensee will provide regular reports from Mac OS Licensee problem tracking databases. Apple will provide the Mac OS Licensee information about Mac OS bugs, features, integration issues, guidelines and advice that Apple provides generally to Mac OS licensees. Apple will provide the following technical support to Mac OS Licensee: ENGINEERING SUPPORT - Apple will provide consultation in connection with proposed modifications to a Apple Licensed Design (ALD), including potential impact on certification. Apple will provide suggestions for modifications and corrections to proposed hardware designs to assist Mac OS Licensee in developing systems that successfully run the Mac OS and otherwise pass certification. Apple will not certify a computer model which requires the Mac OS system or ROM to be changed. For computer models based on the CHRP specification, Apple will analyze the model for conformance with the CHRP specification and ability to run the then-current release of Mac OS for CHRP. MAC OS SEEDING SUPPORT - Before a new version of the Mac OS is released to end users, pre-release versions of the Mac OS and, where necessary, Mac OS ROMs, will be made available to Mac OS Licensee. Seeding of pre-release versions usually begins during the late alpha timeframe. The pre-release versions will be made available via a secured Apple Web site. Technical support will be provided to answer questions that arise from testing the pre-release versions on Mac OS Licensee's ALD or CHRP product. Feedback regarding bugs or proposed changes to the Mac OS from Mac OS Licensee will be forwarded to the Mac OS development team as appropriate. The Mac OS Licensee may be required to execute a Letter of Authorization to get access to the pre-release software. NOTE: Apple reserves the right to change or update this plan at any time with respect to support that has not yet been paid for. Final (PLA) v1.0 APPLE CONFIDENTIAL Page 1 43 HARDWARE SEEDING SUPPORT - If Mac OS Licensee has licensed an ALD and systems based on the design are not commercially available, prototypes of the design may be made available for purchase by Mac OS Licensee. Seeding usually begins during the EVT2 timeframe. Technical support will be provided to answer questions related to the ALD. Mac OS Licensee technical support centers will have the ability to reproduce and distribute this technical information and documentation to its sublicensees. ADDITIONAL TECHNICAL INFORMATION AND DOCUMENTATION SUPPORT - Apple will also create additional technical information and documentation to assist Mac OS Licensee. This information will be in the form of technical notes and other documentation. These notes will be released via the secure Mac OS Licensing R&D web site. Mac OS Licensee technical support centers will have the ability to reproduce and distribute this technical information and documentation to its sublicensees. CERTIFICATION SUPPORT - During certification of a Mac OS Licensee Mac OS-compatible, the Mac OS Licensing Technical Support group will provide the interface between the Mac OS Certification Team and Mac OS Licensee. The group will communicate issues which are discovered during certification. The group will also provide information to and answer questions for Mac OS Licensee to assist Mac OS Licensee in getting their products to successfully pass certification. Apple will make the Mac OS Certification Environment (MCE) available to Mac OS Licensee and Mac OS Licensee will make the Mac OS Certification Environment available to Mac OS Licensee sublicensees to assist them in preparing for certification of Mac OS compatible systems. TRAINING SUPPORT - Mac OS Licensee will be eligible to enroll in and receive all of the Developer University (DU) courses and material at the appropriate fees for this information and training. DEVELOPER PARTNER PROGRAM Mac OS Licensee may be interested in creating applications or other hardware peripherals (such as PCI cards) for their Mac compatible products. Once a Mac OS license is signed, the Mac OS Licensee will be automatically enrolled into the Developer Partner program. This program includes the following benefits: 1. Access to the Developer Technical Support (DTS) Group. They provide technical support for creating 3rd party software or hardware for the Mac which is not related to developing a Mac OS Compatible computer system. 2. Mailings of technical information: - Apple Directions: marketing info - Developer CD Series: 3 CDS rotate each quarter ( = 1.8 GB of goodies! ) containing: development tools, sample code, system software - develop magazine (quarterly) - Apple's Technical Journal for creating software and hardware for the Mac and providing information on Apple's latest technology. The Developer CD Series contains the PCI Driver Development Kit (DDK). The DDK contains documentation, sample code, headers & libraries, tools and references enabling the development of PCI card drivers and Open Firmware for Macintosh. A general description of these major parts follows: Documentation: o Designing PCI Cards and Drivers for Power Macintosh Computers book. This document is written for professional hardware and software engineers. It's divided into three parts and contains 13 chapters. The three parts are: - PCI Bus Overview - System Startup by Open Firmware-describes startup process in PCI-based Power Mac CPUs o Native PowerPC Drivers-tells how to design and write PCI card drivers o Tech Notes and develop articles o PCI Binding 1.5 Document NOTE: Apple reserves the right to change or update this plan at any time with respect to support that has not yet been paid for. Final (PLA) v1.0 APPLE CONFIDENTIAL Page 2 44 o Display Device Driver Guide and Open Firmware extensions for display devices o ATM device driver guidelines and DLPI specification documents Sample Code: o Driver samples: Networking (Open Transport DLPI), SCSI (NCR card), Video (our video driver essentially) o Networking samples: ATM o Open Firmware samples: Display, SCSI, and minimal samples Tools: Forth Tokenizer, Display Name Registry, PCI Peek, Load Driver and Log Library driver helpers, NCR card ROM flasher. Headers & Libraries: Headers and libraries required for PCI driver development. This corresponds to the Golden Master (GM) set released with the 7200/8500/9500 Power Macintosh computers. These interfaces and libraries are in addition to and designed to work with the interfaces and libraries in the Macintosh Programmer's Workshop (MPW) Latest folder on MPW Pro #19. References pointed to by the DDK: o The Developer CD (3 CD set) contains other Macintosh technical information, samples, tools. Examples pertinent to PCI developers are CPU developer notes for the Power Macintosh 7200, 7500, 8500, and 9500 CPUs, and Display Manager documentation o ANSI specifications for PCI and Forth o FirmWorks Corporation-Writing FCode Programs for PCI book 3. Technical resources: o sample code: to solve particular software problem. This sample code comes in the form of small code fragments to complete applications. o technical notes: this information describes how to solve a particular software or hardware issue. These notes are usually 2 - 15 pages in length. o developer notes: this information provides developers with detailed hardware and software information unique to each Macintosh model and to Apple's LaserWriter printers, scanners, and video display products. Developer Notes are distributed whenever new Macintosh models or imaging products are introduced. o tools: various tools for software and hardware development. 4. Seeding of future Mac technologies (i.e. QuickTime VR, QuickDraw 3D, etc...). ESCALATING MAC OS ISSUES When an issue is uncovered with the Mac OS system from Mac OS Licensee, the issue will be sent to the Mac OS Licensing Technical Support Team. Once the issue is received and understood, the issue will be researched to determine if the issue is already known. If it is, the status of the issue will be sent back to Mac OS Licensee. If the issue is not known, the assigned Mac OS Licensing Technical Support engineer will try to isolate and research the problem to determine the case. This work will usually require assistance with others from the Mac OS Licensing Technical Support team and discussions with the Apple software development team. Once the issue is isolated and understood, the status and resolution of the bug will be sent back to Mac OS Licensee. NOTE: Apple reserves the right to change or update this plan at any time with respect to support that has not yet been paid for. Final (PLA) v1.0 APPLE CONFIDENTIAL Page 3 45 E-MAIL ADDRESS Mac OS Licensee can directly contact the Mac OS Technical Support Team by sending the issue via e-mail, to the following addresses: Internet: OEMSUPPORT@apple.com TECHNICAL SUPPORT NOT PROVIDED As stated above, Mac OS Licensee is responsible to provide any necessary support to Mac OS Licensee's customers and sublicensees. Apple's Technical Support is provided to assist Mac OS Licensee with troubleshooting to identify and isolate technical problems. This does not include custom software engineering or programming. Depending on the nature of the problem, Apple's Technical Support staff may provide information, answer questions, help outline a course of action, and/or identify a third party capable of resolving problems. For CHRP, Apple will NOT be providing technical support to create: POST/hardware init, Open Firmware, or RTAS, which are contained with CHRP's boot ROM provided by the Licensee. Apple will also NOT be supporting the development of CHRP hardware designs. Apple intends to provide a list of 3rd party providers who provide engineering services for the pieces within the licensee boot ROM and support for CHRP hardware development during late 1996. Also, Mac OS Licensee is responsible for making the following pieces of the Mac OS Licensee's boot ROM complete, functional and stable: o Hardware Init (P.O.S.T.) o Open Firmware o Run Time Abstraction Services (RTAS) MAC OS TECHNICAL SEMINARS Mac OS Technical seminars will be provided by the Mac OS Licensing Technical Support Group, Developer University (DU) or third party instructors. Technical training is available for any interested Apple developer or Licensee, and include courses that are self-paced with CDs or traditional classroom instruction. These courses generally cover information related to creating 3rd party applications and peripherals. For a complete list of the available DU courses, please refer to the following web site: http://www.info.apple.com/dev/du.html Mac OS Licensing Technical Support Group will provide additional seminars directly related to creating a Mac compatible computer system. These seminars will be available on a periodic basis to help our licensees better understand the Mac OS system issues and development of systems based on the CHRP specification. As these seminars are available, Apple will inform Mac OS Licensee about their content and location. NOTE: Apple reserves the right to change or update this plan at any time with respect to support that has not yet been paid for. Final (PLA) v1.0 APPLE CONFIDENTIAL Page 4 46 Apple-PCC Mac OS Lic. Agmt. II Final EXHIBIT E The Technical Support Plan is further described in the following pages. CONFIDENTIAL Page 22 EX-10.4 4 CERTIFIED COMPUTER MANUFACTURING AGREEMENT 1 EXHIBIT 10.4 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] PCC Manufacturing License Final CERTIFIED COMPUTER MANUFACTURING AGREEMENT This Certified Computer Manufacturing Agreement (this "Agreement") is effective as of December 16, 1994 (the "Effective Date"), by and between APPLE COMPUTER, INC., a California corporation having its principal place of business at One Infinite Loop, Cupertino, California 95014, U.S.A. ("Apple") and POWER COMPUTING CORPORATION, a Delaware corporation having its principal place of business at 1225 Barber Lane, Milpitas, California 95035 ("PCC"). RECITALS o Apple and PCC have entered into the Mac OS Agreement permitting PCC to incorporate the Mac OS into Certified Computers. Apple has certain intellectual property rights that PCC requires in order to legally manufacture Approved Boards and Certified Computers. PCC also requires the right to purchase certain Proprietary Components from MASs. The parties desire Apple to license those rights to PCC under the terms of this Agreement. AGREEMENT 1. DEFINITIONS 1.1 Except as expressly modified in this Agreement, the definitions in the Mac OS Agreement will have the same meaning in this Agreement. 1.2 "Apple Intellectual Property" means any patent applications or patents (including utility models, but excluding design patents and registrations) which are essential to comply with the Certification Requirements, and which Apple now has or hereafter obtains the right to grant licenses to PCC without being obligated to pay royalties or other consideration to third parties. 1.3 "Approved Boards" means primary printed circuit boards (i.e., "motherboards") manufactured by PCC for Certified Computers for which the design has been approved in writing by Apple. 1.4 "Certified Computers" means hardware products manufactured by PCC, in the form they will be used by End Users, which satisfy the Certification Requirements. CONFIDENTIAL Page 1 2 PCC Manufacturing License Final 1.5 "Mac OS Agreement" means the Mac OS License Agreement entered into between PCC and Apple, effective December 16, 1994. 1.6 "Mac OS Licensee" means a party that has signed a Mac OS License Agreement with Apple. 1.7 "Proprietary Components" means components in which Apple has some proprietary rights to be used for incorporation in Certified Computers 2. LICENSE 2.1 Apple hereby grants to PCC, under Apple's Intellectual Property, a non-exclusive, non-transferable, royalty-bearing, worldwide license to design, develop, make, have made (for resale by PCC), use, and import Certified Computers and Approved Boards and to lease, sell and otherwise transfer Approved Boards to Mac OS Licensees and to lease, sell or otherwise transfer Certified Computers to third parties. 2.2 Apple reserves all intellectual property rights, including but not limited to patent rights, not expressly licensed to PCC under this Agreement. PCC has no right to sublicense the rights granted under this Agreement. 3. MASS 3.1 Apple will authorize MASs to sell certain Proprietary Components to PCC. The terms and conditions of the purchase and sale of the Proprietary Components shall be determined by agreement between the MASs and PCC. Apple is not a party to the purchase and sale transactions for the Proprietary Components between the MASs and PCC and Apple has no responsibility for such transactions, including but not limited to, the quality, condition or delivery of the components or any payment obligation of PCC. Apple may charge MASs reasonable royalties in connection with the sale of Proprietary Components to PCC. 3.2 PCC will use the Proprietary Components solely for incorporation into or servicing of Certified Computers or Approved Boards and not for other purposes, including resale to others. 4. ROYALTIES 4.1 Royalty Payments and Statements. (a) PCC will pay to Apple royalty payments for each unit of a Certified Computer or Approved Board manufactured by or for PCC in accordance with the royalty rates set forth on Exhibit A. CONFIDENTIAL Page 2 3 PCC Manufacturing License Final (b) Within thirty (30) days of the end of each quarter, PCC will pay the royalty payments due for that quarter to Apple accompanied by a statement certified correct by an officer of PCC, indicating the number of Approved Boards and Certified Computers sold by PCC during the quarter and the amount of royalty due. (c) PCC shall keep and maintain all appropriate books and records necessary for verification that the applicable license and purchase fees and royalties have been paid. During the term of this Agreement and for three years thereafter, Apple shall be entitled, not more than once annually and on thirty (30) days notice, to retain independent certified public accountants to review PCC's books and records for the purpose of verifying the accuracy of the statements provided and amounts paid pursuant to this Section 3. Any underpayment or overpayment determined as a result of the review will be reflected in the following quarter's statement and Royalty Payments. If such review verifies an underpayment error of greater than 3%, PCC shall pay the cost of such review. PCC shall pay all amounts when due, and any amounts not paid when due shall accrue interest at the annual rate of twelve percent (12%) or the highest rate allowed by law, if lower, from the date when the payment should have been paid and ending when paid. 4.2 Taxes. PCC is responsible for payment of any taxes on payments made under this Agreement except taxes based on Apple's income for which Apple shall be responsible. 4.3 Form of Payment. All payments will be made in U.S. dollars via electronic transfer to Apple Computer, Inc., c/o ** , or as otherwise directed in writing by the AppleSoft Director of Finance. 5. DISCLAIMER OF WARRANTY APPLE MAKES NO WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO CERTIFIED COMPUTERS OR PROPRIETARY COMPONENTS DELIVERED TO COMPANY. 6. TERM AND TERMINATION 6.1 Term. This Agreement will continue in effect until five (5) years from the Effective Date, unless (i) the Agreement is terminated earlier pursuant to Section 6.2, or (ii) the Mac OS Agreement is terminated by Apple because of breach by PCC, in which case this Agreement will terminate at the same time as the Mac OS Agreement. 6.2 Termination for Cause By Either Party. Either party will have the right to terminate this Agreement immediately upon written notice at any time if: CONFIDENTIAL Page 3 4 PCC Manufacturing License Final (a) The other party is in material breach of any warranty, term, condition or covenant of this Agreement other than those contained in Section 5.1 of the Mac OS Agreement and fails to cure that breach within thirty (30) days after receiving written notice of that breach and of the first party's intention to terminate; (b) The other party is in material breach of any warranty, term, condition or covenant of Section 5.1 of the Mac OS Agreement; or (c) The other party: (i) becomes insolvent; (ii) admits in writing its insolvency or inability to pay its debts or perform its obligations as they mature; or (iii) makes an assignment for the benefit of creditors. 6.3 Effect of Termination. Upon any termination of this Agreement, the license granted under Section 2 will automatically terminate and each party will be released from all obligations and liabilities to the other occurring or arising after the date of such termination, except that the provisions of Sections 1, 2.2, 3.2, 4, 5, 6.3, and 7 and any liability arising from any breach of this Agreement will survive termination of this Agreement. Termination of this Agreement will not affect the rights of PCC's End User customers to continue to use Certified Computers. For termination other than for PCC's breach of this Agreement, PCC may sell reasonable quantities of Certified Computers, which are in inventory at the time of termination, for up to six (6) months after termination. Any obligation to pay incurred prior to termination will survive termination. Neither party will be liable to the other for damages of any sort solely as a result of terminating this Agreement in accordance with its terms. Termination of this Agreement will be without prejudice to any other right or remedy of either party. 7. INCORPORATION OF MAC OS AGREEMENT PROVISIONS The following provisions of the Mac OS Agreement are hereby incorporated into this Agreement: Sections 1, 5, 11, and 12. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. APPLE: PCC: BY: /s/ BY: /s/ ------------------------------ ---------------------------------- PRINT NAME: Don Strickland PRINT NAME: Stephen S. Kahng ----------------------- ---------------------------- TITLE: Vice President, Licensing TITLE: President & CEO --------------------------- -------------------------------- CONFIDENTIAL Page 4 5 PCC Manufacturing License Final ROYALTIES AND CONTRIBUTIONS BOARD DESIGN ROYALTY* ** ** $ ** * PCC will pay Apple a royalty in this amount for each unit of a Certified Computer or Approved Board manufactured by or for PCC. ** Catalyst and Tsunami are the current Apple code names for Power Macintosh computers that have not yet been released. CONFIDENTIAL Page 5 6 ADDENDUM TO MANUFACTURING AGREEMENT The following is an addendum to the December 16, 1994 Certified Manufacturing Agreement by and between Apple Computer, Inc., a California corporation having its principal place of business at One Infinite Loop, Cupertino, California 95014, USA ("Apple") and Power Computing Corporation, a Delaware corporation having a principal place of business at 1225 Barber Lane, Milpitas, California 95035 ("PCC"). BOARD DESIGN ROYALTY ** $ ** EX-10.5 5 CERTIFIED COMPUTER MANUFACTURING AGREEMENT 1 EXHIBIT 10.5 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] Apple/PCC Manu. Lic. Agt. II Final, #C24-96-00127 CERTIFIED COMPUTER MANUFACTURING AGREEMENT #C24-96-00127 This Certified Computer Manufacturing Agreement (this "Agreement") is effective as of July 17, 1996 (the "Effective Date"), by and between APPLE COMPUTER INC., a California corporation having its principal place of business at 1 Infinite Loop, Cupertino, California 95014, U.S.A. ("Apple") and POWER COMPUTING CORPORATION, a Delaware corporation having its principal place of business at 2555 North Interstate 35, Suite 200, Round Rock, Texas 78664 and its Subsidiaries ("PCC"). RECITALS o Apple and PCC have entered into the Mac OS License Agreement permitting PCC to incorporate the Mac OS into Certified Computers. Apple has certain intellectual property rights that PCC requires in order to legally manufacture Approved Boards and Certified Computers. PCC also requires the right :o purchase certain Proprietary Components from MASs. The parties desire Apple to license those rights to PCC under the terms of this Agreement. AGREEMENT 1. DEFINITIONS 1.1 "Apple lntellectual Property" means all patent applications, patents, and know how throughout the world (including utility models, but excluding design patents and registrations, software and/or any semiconductor design information): (i) infringement of which cannot be avoided in complying with the Certification Requirements, and (ii) in connection with which Apple now has or hereafter obtains during the term of this Agreement the right to grant licenses to PCC without being obligated to pay royalties or other consideration to third parties. 1.2 "Approved Boards" means primary printed circuit boards (i.e., "motherboards") manufactured by or for PCC for Certified Computers for which the design has been approved in writing by Apple. 1.3 "Certification Requirements" means requirements documented by Apple for Certified Computers to successfully run the Mac OS and Mac OS applications, and otherwise qualify for use of the Mac OS trademark. These requirements may be modified by Apple from time to time. 1.4 "Certified Computers" means hardware products manufactured by or for PCC, in the form they will be used by End Users, which satisfy the Certification Requirements. CONFIDENTIAL 022696 Page 1 2 Apple/PCC Manu. Lic. Agt. II Final, #C24-96-00127 1.5 Confidential Information" means (i) for Apple, the terms and conditions of this Agreement including without limitation the license fees and royalty rates charged to PCC, and trade secrets or proprietary information related to any of the foregoing; (ii) for each party, any information relating to that party's product plans, designs, costs, names, finances, marketing plans, business opportunities, personnel, research, development or know-how designated as confidential in writing or, if disclosed orally, identified in writing and designated as confidential within thirty (30) days of disclosure; provided, however that "Confidential Information" shall not include information that: (a) is or becomes generally known or available by publication, commercial use or otherwise through no fault of the receiving party; (b) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (c) is independently developed by the receiving party without use of the disclosing party's Confidential Information; (d) is lawfully obtained without restriction from a third party who has the right to make such disclosure; or (e) is released for publication by the disclosing party in writing. 1.6 "End User" means a third party using a Certified Computer for its ordinary and customary business or personal purposes, and not for redistribution. 1.7 "Mac OS License Agreement" means the Mac OS License Agreement entered into between PCC and Apple, effective ___________. 1.8 "Mac OS Licensee" means a party that has signed a Mac OS License Agreement with Apple. 1.9 "MAS" means a Mac OS Authorized Supplier designated by Apple. 1.10 "Proprietary Components" means components in which Apple has some proprietary rights to be used for incorporation in Certified Computers. 1.11 "Royalty Payments" means the payments PCC is required to make to Apple pursuant to Section 4.1 and as described in Exhibit A. 1.12 "Subsidiary" means a corporation more than 50% of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are owned or controlled, directly or indirectly, by PCC, and which agrees in writing to be bound by the terms of this Agreement. A corporation which ceases to be a Subsidiary will lose its rights under this Agreement, but will continue to be bound by the obligations that survive termination specified in Section 5.2 2. LICENSE 2.1 Apple hereby grants to PCC, under Apple's Intellectual Property, a non-exclusive, non-transferable, royalty-bearing, worldwide license to design, develop, make, have made CONFIDENTIAL 022696 Page 2 3 Apple/PCC Manu. Lic. Agt. II Final, #C24-96-00127 (for resale by PCC), use, and import Certified Computers and Approved Boards and to lease, sell and otherwise transfer Approved Boards to Mac OS Licensees and to lease, sell or otherwise transfer Certified Computers to third parties. 2.2 Apple reserves all its intellectual property rights, including but not limited to patent rights, trademarks, copyrights, industrial designs, or rights in the Mac OS software or any Proprietary Components, not expressly licensed to PCC under this Agreement. PCC has no right to sublicense the rights granted under this Agreement. 3. MASs 3.1 Apple will authorize MASs to sell certain Proprietary Components to PCC. The terms and conditions of the purchase and sale of the Proprietary Components shall be determined by agreement between the MASs and PCC. Apple is not a party to the purchase and sale transactions for the Proprietary Components between the MASs and PCC and Apple has no responsibility for such transactions, including but not limited to, the quality, condition or delivery of the components or any payment obligation of PCC. Apple is making no representation to PCC that MASs are willing to sell Proprietary Components to PCC, that MASs have sufficient capacity to supply PCC's needs or that MASs will have Proprietary Components available in the time frame required for PCC's current manufacturing schedule. 3.2 PCC will use the Proprietary Components solely for incorporation into or servicing of Certified Computers or Approved Boards and not for other purposes, including resale to others. 3.3 APPLE MAKES NO WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO CERTIFIED COMPUTERS OR PROPRIETARY COMPONENTS DELIVERED TO PCC. 4. ROYALTIES 4.1 Royalty Payments and Statements. (a) PCC will pay to Apple Royalty Payments for each unit of a Certified Computer or Approved Board distributed by PCC in accordance with the royalty rates set forth on Exhibit A; provided however, that only one such Royalty Payment shall be payable to Apple for each unit of a Certified Computer containing only one Approved Board, and PCC shall have no obligation to pay to Apple such Royalty Payment for any such Certified Computer for which PCC or a third party has previously paid Apple a royalty under a Certified Computer Manufacturing Agreement with Apple. CONFIDENTIAL 022696 Page 3 4 Apple/PCC Manu. Lic. Agt. II Final, #C24-96-00127 (b) Within thirty (30) days of the end of each quarter, PCC will pay the Royalty Payments due for that quarter to Apple accompanied by a statement certified correct by an officer of PCC, indicating the number and type of Approved Boards and Certified Computers sold hy PCC during the quarter and the amount of royalty due. (c) PCC shall keep and maintain all appropriate books and records necessary for verification that the applicable license and purchase fees and royalties have been paid. During the term of this Agreement and for three years thereafter, Apple shall be entitled, not more than once annually and on thirty (30) days notice, to retain independent certified public accountants to review PCC's books and records for the purpose of verifying the accuracy of the statements provided and amounts paid pursuant to this Section 4. Any underpayment or overpayment determined as a result of the review will be reflected in the following quarter's statement and Royalty Payments. If such review verifies an underpayment error of greater than five percent (5%), PCC shall pay the cost of such review. PCC shall pay all amounts when due, and any amounts not paid when due shall accrue interest at the annual rate of twelve percent (12%) or the highest rate allowed by law, if lower, from the date when the payment should have been paid and ending when paid. 4.2 Taxes. PCC is responsible for payment of any taxes on payments made under this Agreement except taxes based on Apple's income for which Apple shall be responsible. 4.3 Form of Payment. All royalty statements and payments will be made in U.S. dollars and sent to: Apple Computer, Inc. Royalty Accounting 2420 Ridgepoint Drive, MS 198-GL Austin, TX 78754 5. TERM AND TERMINATION 5.1 Term. This Agreement will continue in effect until four (4) years from the Effective Date, unless (i) the Agreement is terminated earlier pursuant to Section 5.2 or (ii) the Mac OS License Agreement is terminated, in which case this Agreement will terminate at the same time as the Mac OS License Agreement. 5.2 Termination for Cause By Either Party. Either party will have the right to terminate this Agreement immediately upon written notice at any time if: (a) The other party is in material breach of any warranty, term, condition or covenant of this Agreement other than those contained in Section 5 of the Mac OS License CONFIDENTIAL 022696 Page 4 5 Apple/PCC Manu. Lic. Agt. II Final, #C24-96-00127 Agreement and fails to cure that breach within thirty (30) days after receiving written notice of that breach and of the first party's intention to terminate; (b) The other party is in material breach of any warranty, term, condition or covenant of Section 5 of the Mac OS License Agreement; or (c) The other party: (i) becomes insolvent; (ii) admits in writing its insolvency or inability to pay its debts or perform its obligations as they mature; or (iii) makes an assignment for the benefit of creditors. 5.3 Effect of Termination. Upon any termination of this Agreement, the license granted under Section 2 will automatically terminate and each party will be released from all obligations and liabilities to the other occurring or arising after the date of such termination, except that the provisions of Sections 1, 2.2, 3.2, 3.3, 4, 5.3, and 6 and any liability arising from any breach of this Agreement will survive termination of this Agreement. Termination of this Agreement will not affect the rights of PCC's End User customers to continue to use Certified Computers. Subject to the payment of royalties and in accordance with the terms and conditions of this Agreement, in the event of termination other than for PCC's breach of this Agreement, PCC may sell reasonable quantities of Certified Computers and Approved Boards, which are in inventory at the time of termination, for up to six (6) months after termination. Any obligation to pay incurred prior to termination will survive termination. Neither party will be liable to the other for damages of any sort solely as a result of terminating this Agreement in accordance with its terms. Termination of this Agreement will be without prejudice to any other right or remedy of either party. 6. INCORPORATION OF MAC OS LICENSE AGREEMENT PROVISIONS The following provisions of the Mac OS License Agreement are hereby incorporated into this Agreement: Sections 1 (to the extent that the terms defined in such section are not already defined in Section 1 of this Agreement), 5, 11, and 12. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. APPLE: PCC: APPLE COMPUTER, INC. POWER COMPUTING CORPORATING BY: /s/ LAMAR POTTS BY: /s/ STEVE KAHNG ------------------------------ ---------------------------------- PRINT NAME: LAMAR POTTS PRINT NAME: STEVE KAHNG ----------------------- ---------------------------- TITLE: VP, Licensing TITLE: President & CEO --------------------------- -------------------------------- CONFIDENTIAL 022696 Page 5 6 Apple/PCC Manu. Lic. Agt. II Final, #C24-96-00127 EXHIBIT A ROYALTIES BOARD DESIGN ROYALTY* ** $ ** - ------------- * PCC will pay Apple a royalty in this amount for each unit of a Certified Computer or Approved Board distributed by PCC, provided that no such royalty will be payable to Apple for any Certified Computer containing only one Approved Board for which PCC or a third party has previously paid Apple a royalty under a Certified Computer Manufacturing Agreement with Apple. CONFIDENTIAL 022696 Page 6 EX-10.6 6 AMENDMENT TO CERTIFIED COMPUTER MANUFACTURING AGMT 1 EXHIBIT 10.6 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] AMENDMENT TO CERTIFIED COMPUTER MANUFACTURING AGREEMENT The Certified Computer Manufacturing Agreement (this "Agreement") between APPLE COMPUTER, INC., a California corporation having its principal place of business at 1 Infinite Loop, Cupertino, California 95014, U.S.A. ("Apple") and POWER COMPUTING CORPORATION, a Delaware corporation having its principal place of business at 2555 North Interstate 35, Suite 200, Round Rock, Texas 78664 and its Subsidiaries ("PCC"), dated May 1, 1996 is hereby amended, as of January 1, 1997, as follows: Notwithstanding Section 3.2, PCC may resell Proprietary Components to other Mac OS Licensees provided it has obtained the prior written approval of Apple in each instance. Exhibit A is amended to read as follows: EXHIBIT A ROYALTIES BOARD DESIGN ROYALTY* ** ** $ ** * PCC will pay Apple a royalty in this amount for each unit of a Certified Computer or Approved Board distributed by PCC, provided that no such royalty will be payable to Apple for any Certified Computer containing only one Approved Board for which PCC or a third party has previously paid Apple a royalty under a Certified Computer Manufacturing Agreement with Apple. ** PCC must demonstrate to Apple's reasonable satisfaction that ** systems containing processors with clock speeds in excess of ** will meet the Certification Requirements. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. APPLE: PCC: APPLE COMPUTER, INC. POWER COMPUTING CORP. BY: /s/ BY: /s/ ------------------------------ ---------------------------------- PRINT NAME: Lamar Potts PRINT NAME: Stephen S. Kahng ----------------------- ---------------------------- TITLE: Vice President, Licensing TITLE: President & CEO --------------------------- -------------------------------- CONFIDENTIAL Page 4 EX-10.7 7 BOARD DESIGN LICENSE AGREEMENT 1 EXHIBIT 10.7 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] PCC Board Design License Final BOARD-DESIGN LICENSE AGREEMENT This Agreement is effective as of December 16, 1994 (the "Effective Date"), by and between APPLE COMPUTER, INC., a California corporation having its principal place of business at 20525 Mariani Avenue, Cupertino, California 95014 ("Apple") and POWER COMPUTING CORPORATION, a Delaware corporation having its principal place of business at 1225 Barber Lane, Milpitas, California 95035 ("PCC"). RECITALS Apple has designed logic boards for its Macintosh computers. Apple and PCC desire PCC to modify these board designs and to license such modified designs to Manufacturing Licensees. AGREEMENT 1. DEFINITIONS 1.1 "Apple Board Designs" means logic board designs for Apple's PowerMacintosh and Macintosh computers identified in Exhibit A, in the form delivered to PCC. 1.2 "Apple Deliverables" means the Apple deliverables identified in Exhibit A. 1.3 "Confidential Information" shall mean: (i) for Apple, the Apple Board Designs, the Apple Deliverables, and any pre-release versions of the Mac OS delivered by Apple to PCC pursuant to this Agreement; (ii) for either party, any information relating to that party's product plans, designs, costs, prices and names, finances, marketing plans, business opportunities, personnel, research, development or know-how which is designated by the disclosing party as confidential in writing or, if disclosed orally, reduced to writing and designated as confidential within thirty (30) days; and (iii) the terms and conditions of this Agreement; provided, however that "Confidential Information" shall not include information that: (a) is or becomes generally known or available by publication, commercial use or otherwise through no fault of the receiving party; (b) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (c) is independently developed or learned by the CONFIDENTIAL Page 1 2 PCC Board Design License Final receiving party; (d) is lawfully obtained from a third party who has the right to make such disclosure; or (e) is released for publication by the disclosing party in writing. 1.4 "Mac OS" means versions of Apple's Mac OS in object code form, that are generally available during the term of this Agreement and pre-release versions of the Mac OS that Apple delivers to PCC pursuant to this Agreement. 1.5 "Manufacturing Licensees" shall mean parties to which Apple has granted the right to manufacture computers capable of running the Mac OS pursuant to a Certified Computer Manufacturing Agreement. 1.6 "PCC Board Designs" means logic board designs to be developed by PCC pursuant to this Agreement, which have been approved by Apple pursuant to Section 2.5. 2. OWNERSHIP AND LICENSES 2.1 Apple Ownership. Apple retains all right, title and interest in and to the Apple Board Designs, the Apple Deliverables, and the Mac OS. 2.2 PCC Ownership. Subject to Apple's underlying rights in the Apple Board Designs, PCC will retain ownership of the PCC Board Designs. 2.3 (a) License to Apple Board Designs and Apple Deliverables. Apple hereby grants to PCC a non-exclusive, non-transferable, royalty-bearing license to use the Apple Board Designs and Apple Deliverables to develop the PCC Board Designs, and to license Manufacturing Licensees the right to use such PCC Board Designs in the manufacture of logic boards. PCC has no right under this Agreement to manufacture or sell boards or to sell computers incorporating boards based on PCC Board Designs. (b) License to Mac OS. Apple further grants to PCC a non-exclusive, non-transferable license to make copies of the Mac OS as reasonably necessary for the development, testing and marketing of the PCC Board Designs, provided, however, that PCC has no right under this Agreement to distribute copies of the Mac OS to other persons, except as expressly authorized by this Agreement. (c) Restrictions. PCC agrees that it will not use, manufacture or distribute the PCC Board Designs, except as expressly authorized CONFIDENTIAL Page 2 3 PCC Board Design License Final in this Agreement or other written agreements with Apple. This license is limited to Apple's rights in the layout of the Apple Board Designs (i.e., the manner in which the various semiconductor devices and other components are connected to each other) and does not include a license to any such semiconductor devices or other components contained on the Apple Board Designs. 2.4 Proprietary Components. Apple will authorize others to sell to PCC components that are required by the Apple Board Designs and are not otherwise available to PCC, for use in developing, testing, and marketing of the PCC Board Designs. PCC will not resell such components and will not use such components for any other purpose. 2.5 Apple Approval. The PCC Board Design designs will be subject to approval by Apple. Such approval must be obtained prior to PCC delivering the associated PCC Board Designs to any other party. Such approval will not be unreasonably withheld. 2.6 Other Licensees. Apple will make available for licensing to PCC the same board designs that Apple makes generally available for licensing to other Apple Board Design licensees and will make available manufacturing test tools and/or diagnostics that Apple makes generally available to such other licensees. 3. SUPPORT AND FEES 3.1 Apple will provide to PCC reasonable support for the first twelve (12) months of this Agreement up to 160 hours total for each Apple Board Design licensed under this Agreement. Such support will include answering questions PCC may have regarding the Apple Board Designs and the Mac OS. In addition, PCC will be entitled, at no additional charge, to receive support from Apple's Developer Technical Support line during the term of this Agreement. 3.2 For each Apple Board Design that is licensed to PCC pursuant to this Agreement, PCC will pay to Apple a one time fee in the amount of ** within thirty (30) days after Apple delivers the Apple Deliverables associated with such Apple Board Design to PCC. INDEMNITY PCC shall, at PCC's expense, indemnify, hold harmless and, at Apple's request, defend Apple, and Apple's subsidiaries, affiliates, directors, officers, CONFIDENTIAL Page 3 4 PCC Board Design License Final employees, agents and independent contractors, from and against any and all loss, cost, liability or expense (including costs and reasonable fees of attorneys and other professionals) arising out of or in connection with PCC's license of PCC Board Designs to Manufacturing Licensees. The foregoing states the parties' total obligation with respect to indemnity in connection with or arising out of this Agreement. 5. CONFIDENTIALITY Each party will protect the other's Confidential Information from unauthorized dissemination and use with the same degree of care that each such party uses to protect its own like information. Neither party will use the other's Confidential Information for purposes other than those necessary to directly further the purposes of this Agreement. Neither party will disclose to third parties the other's Confidential Information without the prior written consent of the other party. 6. TERM OF AGREEMENT This Agreement will come into force on the Effective Date and will remain in effect for a period of five (5) years unless earlier terminated by either party pursuant to Section 7. 7. TERMINATION 7.1 Termination For Default. Either party may suspend its performance and/or terminate this Agreement immediately upon written notice at any time if: (a) The other party is in material breach of any warranty, term, condition or covenant of this Agreement other than those contained in Section 5 and fails to cure that breach within thirty (30) days after written notice of that breach and of the first party's intention to suspend its performance or terminate; (b) The other party is in material breach of any warranty, term, condition or covenant of Section 5; or (c) The other party: (i) becomes insolvent; (ii) fails to pay its debts or perform its obligations in the ordinary course of business as they mature; (iii) admits in writing its insolvency or inability to pay its debts or perform its obligations as they mature; or (iv) makes an assignment for the benefit of creditors. 7.2 Effect of Termination. CONFIDENTIAL Page 4 5 PCC Board Design License Final (a) Immediately upon termination of this Agreement due to PCC's breach, PCC shall return all Apple Board Designs and Apple Deliverables to Apple and certify in writing that it has done so and will no longer have any right to develop or license PCC Board Designs to any other party. (b) Notwithstanding any termination of this Agreement, the obligations of the parties under Sections 1, 2.1, 2.2, 3.2, 4, 5, 7.2, 8 and 9 shall remain in effect. 8. LIMITATION OF LIABILITY 8.1 CONSEQUENTIAL DAMAGES. IN NO EVENT SHALL APPLE BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS OR DAMAGES TO PCC'S BUSINESS REPUTATION HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER IN AN ACTION FOR CONTRACT, STRICT LIABILITY OR TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT APPLE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY REMEDY. 8.2 LIMITATION OF LIABILITY. IN NO EVENT SHALL APPLE'S LIABILITY TO PCC, IN THE AGGREGATE, UNDER THIS AGREEMENT EXCEED THE AMOUNTS ACTUALLY PAID BY PCC TO APPLE UNDER THIS AGREEMENT. 9. GENERAL 9.1 Relationship of Parties. PCC, Apple and the Manufacturing Licensees are all independent parties. No party is an agent, partner, representative or joint venturer for or with Apple, nor does any party have any authority to bind any other party by contract or otherwise to any obligation. They will not represent to the contrary, explicity or implicitly. 9.2 Assignment. The rights and liabilities of the parties hereto will bind and inure to the benefit of their respective successors, executors and administrators, as the case may be; provided that, as Apple has licensed these rights only to PCC may not assign or delegate its obligations under this Agreement either in whole or in part, without the prior written consent of Apple. Any attempted assignment in violation of the provisions of this Section 9.2 will be void. CONFIDENTIAL Page 5 6 PCC Board Design License Final 9.3 Equitable Relief. Because PCC will have access to and become acquainted with Confidential Information of Apple, the unauthorized use or disclosure of which would cause irreparable harm and significant injury which would be difficult to ascertain and which would not be compensable by damages alone, both parties agree that, in addition to any other remedy available to Apple at law or in equity, the confidentiality provisions of this Agreement shall be enforceable under the provisions of the California Uniform Trade Secrets Act, California Civil Code Section 3426, as amended. 9.4 Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California as applied to agreements entered into and to be performed entirely within California between California residents. Both parties will comply with applicable export laws and regulations and will cooperate in executing necessary documentation to comply with such laws and regulations. The parties specifically exclude applicability of the Convention Relating to Uniform Law on the International Sale of Goods. 9.5 Jurisdiction and Venue. The parties hereby submit to the jurisdiction of, and waive any venue objections against, the United States District Court for the Northern District of California, the Superior Court of the State of California for the County of Santa Clara, the Santa Clara Municipal Court, and any mutually agreed to alternative dispute resolution proceeding taking place in Santa Clara County, California, in any litigation arising out of the Agreement. 9.6 Trademark Usage. PCC shall not, without Apple's prior written consent, use any Apple trademarks, service marks, trade names, logos or other commercial or product designations, for any purpose, including, but not limited to, use in connection with any PCC products, promotions, advertisements or exhibitions. CONFIDENTIAL Page 6 7 PCC Board Design License Final 9.7 Complete Agreement. This Agreement, including all Exhibits, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. No amendment to or modification of this Agreement shall be binding unless in writing and signed by a duly authorized representative of both parties. IN WITNESS WHEREOF, the parties have caused this Macintosh Board-Design License Agreement to be executed by their duly authorized representatives in Cupertino, California, on the final date set forth below. APPLE: PCC: APPLE COMPUTER, INC. BY: /s/ BY: /s/ ---------------------------- ------------------------------ NAME: Don Strickland NAME: Stephen S. Kahng ---------------------------- ------------------------------ TITLE: Vice President, Licensing TITLE: President & CEO ---------------------------- ------------------------------ CONFIDENTIAL Page 7 8 PCC Board Design License Final EXHIBIT A APPLE BOARD DESIGNS ** APPLE DELIVERABLES ** CONFIDENTIAL Page 8 EX-10.8 8 AMENDMENT TO BOARD DESIGN LICENSE AGREEMENT 1 EXHIBIT 10.8 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] AMd. to Bd. Design Lic./PCC Rev. 1-6/3/96 AMENDMENT TO BOARD-DESIGN LICENSE AGREEMENT BETWEEN APPLE COMPUTER, INC. AND POWER COMPUTING CORP. # C24-94-00428 THIS IS AN AMENDMENT, dated June 3, 1996 (this "Amendment"), to the Board- Design License Agreement entered into on December 16, 1994 (the Agreement") by Apple Computer, Inc, ("Apple"), a California corporation with its principal place of business at 1 Infinite Loop, Cupertino, CA 95014 and Power Computing Corp., a Delaware corporation with its principal place of business at 1225 Barber Lane, Milpitas, CA 95035 ("PCC"). All capitalized terms used herein, unless otherwise defined, shall have the respective meanings set forth in the Agreement. RECITAL The parties wish to amend the Agreement on the terms set forth herein. AGREEMENT 1. INSERT NEW LINE TO EXHIBIT A UNDER THE HEADING, "APPLE BOARD DESIGNS": Power Macintosh code named " ** " 2. INSERT THE FOLLOWING TO EXHIBIT A UNDER THE HEADING, "APPLE DELIVERABLES": For the Apple logic board code name " ** ," Apple will deliver the following to PCC: 1. Evaluation package documentation: o Bill of Materials o PCB Quote Sheet o Design Drawing Guide o Specifications for all industry standard components o Letters of Authorization for relevant Apple proprietary components, allowing PCC to receive quotations Apple will deliver the evaluation package documentation within two weeks of PCC's request. All information in the evaluation package documentation is preliminary in nature and may be changed by Apple at its sole and absolute discretion until the design is in production at Apple and all components have been approved by Apple. 2. Design package documentation: o Schematic database (electronic) o Board CAD design database (electronic) o Gerber files (electronic) o Licensing specifications for Apple proprietary components CONFIDENTIAL Page 1 2 AMD. TO BD. DESIGN LIC./PCC REV. 1 - 6/3/96 o Notification that PCC has been added to the Macintosh Authorized Supplier (MAS) Agreements for the relevant Apple proprietary components, allowing PCC to purchase such components Apple will deliver the design package documentation by the later of three weeks after: (a) the date this amendment is last signed, or (b) the start of production ramp and full release of the logic board design, as defined by Apple. 3. EXCEPT AS AMENDED HEREBY, THE AGREEMENT IS HEREBY CONFIRMED AND RATIFIED IN ALL RESPECTS. IN WITNESS WHEREOF, the parties have caused this Amendment to the Agreement to be executed by their duly authorized representatives. APPLE: PCC: APPLE COMPUTER, INC. POWER COMPUTING CORP. BY: BY: /s/ ------------------------------- ------------------------------ NAME: NAME: Stephen Kahng ----------------------------- ------------------------------ TITLE: TITLE: President & CEO ----------------------------- ------------------------------ DATE: DATE: June 5, 1996 ----------------------------- ------------------------------ CONFIDENTIAL Page 2 EX-10.9 9 2ND AMENDMENT TO BOARD DESIGN LICENSE AGREEMENT 1 EXHIBIT 10.9 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] Apple/PCC Bd Design Agt Amd 2 Final, 12/19/96, #C24-094-00428b SECOND AMENDMENT TO THE BOARD-DESIGN LICENSE AGREEMENT CONTRACT #C24-94-00428B This second amendment to the board-design license agreement ("Second Amendment"), is entered into and is effective as of December 19, 1996 (the "Effective Date") by and between APPLE COMPUTER, INC., a California corporation having its principal place of business at 1 Infinite Loop, Cupertino, California 95014 and POWER COMPUTING CORPORATION, a Delaware corporation having its principal place of business at 2555 North Interstate 35, Suite 200, Round Rock, Texas 78664 ("PCC" or "Company"). This Second Amendment amends the board-design license agreement, contract number C24-94-00428, entered into by the parties effective December 16, 1994 (the "Agreement"). Unless otherwise defined in this Second Amendment, all capitalized terms used in this Second Amendment have the meanings assigned to them in the Agreement. To the extent there are any inconsistencies between this Second Amendment and the Agreement, this Second Amendment shall control. In accordance with Section 9.7 of the Agreement, the parties hereto agree to amend the Agreement as follows: 1. Exhibit A: The following board design is added to Exhibit A under the Section entitled "APPLE BOARD DESIGNS" Apple logic board code name " ** " with a processor speed ** .* Apple may modify the processor speed for the ** logic board by providing written notice to Company. 2. Exhibit A: The following is hereby added to Exhibit A under the Section entitled "APPLE DELIVERABLES": For the "Apple logic board code name ' ** ' with a processor speed ** *1,'' Apple will deliver the following to Company: Evaluation package documentation: o Bill of Materials o PCB Quote Sheet o Design Guide Drawing o Specifications for all industry standard components o Letters of Authorization for relevant Apple proprietary components, allowing Company to receive quotations components, Apple will deliver the evaluation package documentation within two weeks of Company's request. All information in the evaluation package documentation is preliminary in nature and may be changed by Apple at - ------------------------ *PCC must demonstrate to Apple s reasonable satisfaction that ** systems containing processors with clock speeds ** will meet the Certification Requirements. Confidential Page 1 2 Apple/PCC Bd Design Agt Amd 2 Final, 12/19/96, #C24-094-00428b its sole and absolute discretion until the design is in production at Apple and all components have been approved by Apple. Design package documentation: o Schematic database (electronic) o Board CAD design database (electronic) o Gerber files (electronic) o Sanitized specifications for Apple proprietary components o Notification that Company has been added to the Macintosh Authorized Supplier (MAS) Agreements for the relevant Apple proprietary components, allowing Company to purchase such components Apple will deliver the design package documentation by the later of: (a) two weeks after the Effective Date, or (b) the start of production ramp for the logic board design, as defined by Apple. IN WITNESS WHEREOF, the parties have caused this Second Amendment to be executed by their duly authorized representatives. APPLE COMPANY APPLE COMPUTER, INC. POWER COMPUTING CORPORATION By: /s/ By: /s/ ------------------------------ ----------------------------------------- signature signature Name: Lamar Potts Name: Stephen Kahng ---------------------------- --------------------------------------- print name print name Title: Vice President, Licensing Title: President & CEO --------------------------- --------------------------------------- Confidential Page 2 EX-10.10 10 ROM ROYALTY AGREEMENT LETTER 1 EXHIBIT 10.10 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] Dear Power Computing: Apple intends to authorize Samsung to sell ROMs containing Mac OS software under the conditions described in this letter. These ROMs are considered Proprietary Components under the terms of your Certified Computer Manufacturing Agreement with Apple. You must pay to Apple a royalty of $ ** for each ROM you purchase from Samsung. Payments should be made within 45 days after the end of each quarter for all ROMs purchased within such quarter and should be accompanied by a statement indicating the number of ROMs purchased from Samsung during the quarter. Apple is entitled to audit your records to ensure proper payment in accordance with the provisions of your Certified Computer Manufacturing Agreement. We intend our authorization to Samsung to extend only to orders placed by June 15, 1995 and for shipments scheduled only through August 1, 1995. Apple will inform you when Samsung's authorization goes into effect, if Samsung's authorization is extended beyond this date, or if the royalty payment requirement is discontinued. This royalty payment requirement does not apply to other Proprietary Components (e.g., ASICs) purchased from Samsung or to ROMs purchased from Sharp Electronics Corporation. If you agree to purchase ROMs from Samsung under these conditions, please indicate your agreement by signing and returning a copy of this letter to Apple. Upon agreement between Apple and Samsung and receipt of this letter signed by you, we will authorize Samsung to sell ROMs to you. If you have any questions, please call Steve Winters at 408-974-6209. Sincerely, Apple Computer, Inc. By /s/ Date 4/24/95 ---------------------------- UNDERSTOOD AND AGREED: Power Computing Corporation By /s/ Date 4/24/95 ---------------------------- EX-10.11 11 ECONOMIC DEVELOPMENT AGREEMENT 1 EXHIBIT 10.11 STATE OF TEXAS Section CITY OF GEORGETOWN, TEXAS Section ECONOMIC DEVELOPMENT Section PROGRAM AGREEMENT AND COUNTY OF WlLLIAMSON Section PURCHASE OF REAL PROPERTY Section FOR DEVELOPMENT OF THE POWER Section COMPUTING CORP. PROJECT CITY OF GEORGETOWN Section AND RELATED SITE DEVELOPMENT THIS IS AN AGREEMENT BY AND BETWEEN the CITY OF GEORGETOWN, TEXAS, a Texas Home Rule Municipal Corporation (the "City"), GEORGETOWN 4B, INC., a Texas Development Corporation ("Georgetown 4B"), and POWER COMPUTING CORPORATION, a Delaware Corporation authorized to do business in Texas ("Power"), to further economic growth in the City by development of the Power Center Project. WHEREAS, Power desires to relocate its corporate facilities to the City and create the Power Center Project, which will include computer manufacturing and warehouse facilities, a retail telemarketing center, administrative offices and related support facilities (the "Project"); and WHEREAS, the City, jointly with Williamson County, Georgetown Independent School District, Georgetown Chamber of Commerce, Georgetown Industrial Foundation, Georgetown Industrial Development Corporation and Southwestern University, has adopted Resolution No. 890223A for cooperation and participation in efforts for economic development for the greater Georgetown area; and WHEREAS, the City Council determined in Resolution No. 961015-I (attached as Exhibit "A") that this Agreement constitutes an Economic Development Program within the meaning of Local Government Code Section 380.001, (the "Program") and that the development of the Project by Power as supported by the Program will stimulate economic growth in the Georgetown area and in the State of Texas, and further that the Project is in the best interest of the City; and WHEREAS, the City Council hereby determines that the development of the Project will promote local economic development and stimulate business and commercial activity in the City by creating an estimated 1,500 permanent new jobs and significantly increasing the tax base of the Georgetown area over a period of approximately fifteen (15) years required for the build-out of the Project; and WHEREAS, Power desires to participate in the Program by entering into this Agreement; and Power Computing Economic Development Agreement Page 1 of 25 2 WHEREAS, the City has incorporated Georgetown 4B under the authority of Section 4B of Article 5190.6 of the Texas Revised Civil Statutes in order to facilitate the implementation of the Program and this Agreement; WHEREAS, the City has purchased the property described in Exhibit "B" (the "Property"), and intends to transfer the portion of the Property described in Exhibit "C" (the "Power Campus") to Georgetown 4B; WHEREAS, if certain conditions contained herein are met, Power intends to ground lease the Power Campus from Georgetown 4B for development of the Project; and WHEREAS, Power desires that the Power Campus be developed for use by Power, and, in order to proceed with the Project, Power desires to receive adequate assurance from the City of future land use approvals, commitments for reliable utility services for the development of the Project, and receipt of certain tax and other economic benefit incentives; and WHEREAS, the parties have agreed that any development of the Property will be in accordance with this Agreement and the Development Regulations of the City, which are specifically defined to include the City's Century Plan, Subdivision Regulations, Zoning Ordinance, Sign Ordinance, Building and Construction Codes, and Construction Standards and Specifications for Roads, Streets, Structures and Utilities ("Development Regulations") and that such development is in their mutual best interests; and WHEREAS, the City and Power have determined that the development of the Property will best be accomplished through this Agreement; and WHEREAS, the City and Power agree that the Development Regulations of the City and this Development Agreement substantially advance a legitimate interest of the City; NOW, THEREFORE, for and in consideration of the promises and the mutual agreements set forth herein, the City and Power hereby agree as follows: I. DEFINITIONS. CITY means City of Georgetown. CITY ACREAGE means that portion of the Property which will be developed by the Power Computing Economic Development Agreement Page 2 of 25 3 City and which consists of approximately 42 acres more particularly described on Exhibit "D" and depicted on Exhibit "E". CITY PROPERTY TAX REVENUES means the amount of property tax collected by the City from Power Affiliates with respect to real and personal property, excluding inventory, owned or leased by Power Affiliates. CITY SALES TAX COLLECTIONS means the City's share of all sales and use taxes collected by Power Affiliates resulting from the imposition of a 1% municipal sales tax, such as that presently in effect pursuant to Texas Tax Code Sections 321.101(a) and 321.103 by the City. Amounts must be actually received by the City to constitute City Sales Tax Collections. COUNTY means Williamson County. CDD means Williamson County Development District No. 1, as more specifically described in Article V. INITIAL POWER FACILITIES means a warehouse, a manufacturing facility and an administrative office building which includes Power's retail telemarketing function. POWER means Power Computing Corporation. POWER AFFILIATES means Power and all companies under common control with, controlled by, or controlling Power Computing Corporation. For purposes of this definition, "CONTROL" means 50% or more of the ownership determined by either value or vote. POWER CAMPUS means that portion of the property which will be utilized by Power Affiliates, and which consists of approximately 154 acres more particularly described in Exhibit "C" and depicted on Exhibit "E". PROJECT means the development of the Property to promote new and expanded business enterprise within Georgetown, and specifically includes developing the Power Campus for use by Power for computer manufacturing, warehousing, retail telemarketing, administrative offices, and related support facilities. PROGRAM means the Economic Development Program established by the City pursuant to Local Government Code Section 380.001 and under Resolution No. 96101 5-I. PROGRAM GRANT means the amount paid by the City pursuant to the Program Power Computing Economic Development Agreement Page 3 of 25 4 each month, and includes the Basic Program Grant defined in Article VI Paragraph D, the Contingent Program Grant defined in Article VI Paragraph H, the Additional Program Grant defined in Article VI Paragraph I, and the Supplemental Program Grant defined in Article VI Paragraph J. PROPERTY means the tract of approximately 196 acres described in Exhibit "A" and depicted on Exhibit "E". SCHOOL DISTRICT means Georgetown Independent School District. TOTAL CITY TAX REVENUES means the sum of City Property Tax Revenues and City Sales Tax Collections. II. BASIS OF AGREEMENT A. CENTURY PLAN COMPLIANCE. The facts and recitations contained in the preamble of this Agreement are hereby found and declared to be true and correct, and are incorporated by reference herein and expressly made a part hereof, as if copied verbatim. The City Council hereby finds that this Agreement implements the following policies of the Century Plan - Policy Plan Element, which state: Economic Development Policy 1: "The City will encourage diversified growth and promote business opportunities to create jobs, broaden the tax base and minimize the impact of economic fluctuations." Growth and Physical Development Policy 1: "The City will ensure that future land use patterns provide economic, cultural, and social activities to all residents, businesses and organizations." Growth and Physical Development Policy 4: "The City will encourage new development and infill redevelopment in the community." The City Council further finds that the execution of this Agreement is not inconsistent or in conflict with any other Century Plan Policies, as required by Section 2.03 of the Administrative Chapter of the Policy Plan. B. PROJECT. Power, the City, and Georgetown 4B are jointly undertaking the Program pursuant to this Agreement to facilitate the Project. Power agrees to undertake the Project so that the Power Campus will be developed to include facilities for manufacturing and warehousing personal computers, retail telemarketing, administration, and support. Development will be consistent with the "Rivery Concept Plan," as such may be modified to meet the reasonable business needs of Power. Power Computing Economic Development Agreement Page 4 of 25 5 C. AUTHORIZATION. This Agreement is authorized by Section 380.001 of the Texas Local Government Code and by Resolution No. 961015-I of the City of Georgetown, Texas as an Economic Development Program of the City. III. REAL ESTATE A. THE PROPERTY. As part of the Program, the City has purchased the Property. B. CITY ACREAGE. Approximately 7 acres of the City Acreage will be utilized by the City for the development of what was previously designated as "Rivery Boulevard", and which will now be known as "Power Computing Boulevard". The remaining City Acreage may be developed and/or sold by the City for retail and commercial purposes. Proceeds from the sale will be utilized to recover all costs incurred by the City in undertaking the Program, and any excess proceeds may be used by the City to fund the Improvements identified in Section VIII of this Agreement, or for such other purposes as the City determines to be consistent with the Program. C. POWER CAMPUS. 1. Power Commitment. Power agrees to utilize the Power Campus, for the development of the Project as described in this Agreement. Power understands that the City would not have purchased the Property but for Power's agreement to develop the Project on the Power Campus. Power agrees that its sales tax generating activity will be conducted so as to source local sales tax revenues in Georgetown by December 31, 1997. 2. Acquisition by Georgetown 4B. Georgetown 4B will purchase the Power Campus from the City by taking subject to all existing debt. 3. Lease. Power will lease the Power Campus from Georgetown 4B. The lease agreement (the "Lease") will contain the following general terms: (a) Term: 12 years. (b) Rent: Sufficient to pay all of Georgetown 4B's expenses in the following priority: (i) reasonable expenditures for maintenance and operation of Georgetown 4B; (ii) Equivalency Payments as defined in Article III; (iii) taxes owed; and (iv) debt service on the Power Campus, as such may be expanded by Power. Power Computing Economic Development Agreement Page 5 of 25 6 (c) Incentive Rent Reduction: Incentive payments received by Georgetown 4B from the City and the CDD, as specified in Article V and VI, will offset, dollar for dollar, rental obligations of Power to Georgetown 4B. (d) Option: Power can purchase the Power Campus at any time for the outstanding debt plus $100.00, with closing costs to be borne by Power. (e) Supplemental Rent Defaults: On or about October 1 of each year, 4B shall determine if sufficient funds are on hand to remit (1) to the City, County, and School District the Equivalency Payments defined in Article IV; and (2) any taxes assessed against Georgetown 4B. If there are not sufficient funds on hand to pay these items, Georgetown 4B shall invoice Power for Supplemental Rent in an amount sufficient to pay these items. If Power fails to pay Supplemental Rent by the later of November 1 or 30 days following Power's receipt of a Supplemental Rent invoice, then Power will have committed a Supplemental Rent Default. Following notice of a Supplemental Rent Default and a 10 day cure period, Georgetown 4B may, as its remedy, (a) convey the Power Campus to Power terminating the Lease and returning the Power Campus to the tax roll, and (b) collect delinquent Supplemental Rents and collection costs. (f) Assignment: Georgetown 4B and Power will not assign their respective interests in the Lease without the consent of the other. Power's consent to an assignment by Georgetown 4B will not be required if Power fails to cure a default under the Lease. 4. Expansion. At the request of Power during the term of the Lease, Georgetown 4B will make improvements to the Power Campus using non-recourse financing supplied by Power. Any such improvements will be leased to Power as part of the Lease, and the debt service for the financing will be used in determining Power's rent. Power may choose to use a third party developer to accomplish expansion of the Power Campus, provided that Power remains the occupant of the Power Campus. At Power's request, Georgetown 4B will release a portion of the Power Campus from the Lease and simultaneously lease such property to a developer under terms and conditions equivalent to the Lease to accommodate Power's utilization of the developer. In order to accommodate financing of improvements on the Power Campus, Georgetown 4B agrees that the term of the lease of some or all of the Power Campus may be extended at Power's request, provided that for 2009 and all years thereafter the Power Campus is subject to ad valorem tax, or alternatively that the extended lease calls for Supplemental Rent based on Equivalency Payments of 50% to the City and 100% to the County and the School District for 2009 and all years thereafter. Power Computing Economic Development Agreement Page 6 of 25 7 5. Refinancing. At the request of Power during the term of the Lease, Georgetown 4B will refinance outstanding indebtedness secured by the Power Campus and any improvements on the Power Campus under such terms and conditions as arranged by Power. Any change in debt service requirements and any costs of financing will be reflected in Power's rent as specified in Section 3(b) above. All financing and refinancing shall be nonrecourse as to Georgetown 4B. Georgetown 4B will not incur any liens or encumbrances on the Power Campus unless approved in advance by Power. D. PARK LAND. Approximately 62.46 acres, more or less, of floodplain acreage have been dedicated for the benefit of the City, to be utilized by the City as a match for grant funds for a future extension of the City's Hike and Bike Trail along the San Gabriel Rivers in Georgetown and related park land development ("Park Acreage"). The City agrees to apply for a matching grant from the Texas Parks and Wildlife Department, and upon receipt of such grant, to develop the Park Acreage to connect to the Property, so that the Park Acreage can be accessed from the Property. IV. EQUIVALENCY AND SUPPLEMENTAL RENT PAYMENTS A. EQUIVALENCY PAYMENTS. During calendar years 2000 through 2008, Equivalency Payments will be made by Georgetown 4B according to the schedule set forth in Section IV.D. to the City, County and School District to mitigate the reduction in tax revenues which results from Georgetown 4B's ownership of the Power Campus. B. CORRESPONDING POWER OBLIGATION. Power is obligated to pay Supplemental Rent on the Power Campus in an amount equal to the Equivalency Payments which become due from Georgetown 4B to the City, County and School District. Georgetown 4B will use the Supplemental Rent to make the Equivalency Payments. C. TIMING OF PAYMENTS. The City, County and School District will supply calculations of the Equivalency Payments due each year from Georgetown 4B. Georgetown 4B will invoice Power for Supplemental Rent on or about October 1 of each year. Power's Supplemental Rent Payment will be due on the later of November 1 or 30 days after receipt of the invoice. Georgetown 4B will make Equivalency Payments within 10 days of receipt of Supplemental Rent from Power. Power Computing Economic Development Agreement Page 7 of 25 8 D. AMOUNT. The Equivalency Payment due a jurisdiction under Paragraph A above equals the product of (a) the value of any portion of the Power Campus and any personal property located on the Power Campus which are owned by Georgetown 4B and exempt from ad valorem taxation as of January 1 of that year, times (b) the jurisdiction's ad valorem tax rate for that year, times (c) the percentage from the following schedule for that entity for that year. Entity 2000-2005 2006 2007 2008 ------ --------- ---- ---- ---- City 0% 25% 50% 50% County 0% 25% 50% 75% School 50% 50% 50% 75% E. VALUATION AND ACCOUNTS. All valuations of property necessary to determine the amount of Equivalency Payments will be made by the Williamson Central Appraisal District or by an appraiser selected by the City, at the City's option. V. COUNTY DEVELOPMENT DISTRICT A. FORMATION. The parties agree to work with the County to establish the Williamson County Development District No. 1 ("CDD"), which will include the Power Campus. B. SALES TAX. The CDD will put before the voters residing in the district a resolution to adopt a 1/2 cent sales tax applicable to sales occurring in the district. C. USE OF TAX PROCEEDS. The CDD will use a portion of the sales tax proceeds in furtherance of the Program. The amount expended by the CDD in furtherance of the Program will be equal to one-half of the CDD sales tax collected by Power at the Power Campus. During the term of the Lease, the CDD will make payments of this amount directly to Georgetown 4B, and such payments will correspondingly offset Power's rental under the Lease for the month following the month of receipt. Any amount received by Georgetown 4B in excess of Power's current rental obligation will be paid to Power. After the Lease is terminated the CDD will make such payments to Power. Payments received by Power will be used by Power in the maintenance, operation, and further development of the Project. D. OBLIGATION. The CDD will incur an obligation commensurate with the term of this Agreement so that its right to receive one-half cent tax revenues from sales within the CDD retains priority over the rights of other taxing jurisdictions. E. EXPOSITION CENTER. It is anticipated that the CDD will also expend sales tax revenues on a project to develop an exposition center for Williamson County. The parties agree to seek approval from the CDD and/or Williamson County for Power to use the exposition center for three weeks annually at no charge. Power Computing Economic Development Agreement Page 8 of 25 9 VI. ECONOMIC DEVELOPMENT PROGRAM GRANT A. TERM OF PROGRAM GRANT. Program Grants from the City to Power shall begin for October 2006 and continue through December 2056, unless initiated earlier as provided in Paragraphs H, I, or J, or unless terminated earlier as provided in this Agreement. B. SUBMISSION OF DATA. Within thirty (30) days of the end of each month, Power shall submit to the City a schedule detailing its calculation of the Program Grant for the past month. As backup for the schedule, Power shall submit a copy of all sales tax reports, including amended reports, filed by Power for that month showing City Sales Tax Collections, and such other data as the parties determine appropriate to support the calculation of the Program Grant. C. PROGRAM GRANT. Within thirty (30) days of receipt of City Sales Tax Collections from the State of Texas for the month detailed in Power's report, the City shall pay the Program Grant. During the term of the Lease, the Program Grant shall be paid to Georgetown 4B up to the amount of rent due for the month following the month in which payment is made, and shall constitute a credit against any rent owed by Power under the Lease for the month following the month of receipt. Any excess amount, and any payments made after the expiration of the Lease, shall be made to Power or as directed in writing by Power. D. COMPUTATION OF BASIC PROGRAM GRANT. The Basic Program Grant for a month is equal to the sum of (a) City Sales Tax Collections multiplied by the following percentage: October 2006 - September 2007 15 % October 2007 - September 2008 20 % October 2008 - September 2009 25 % October 2009 - September 2010 30 % October 2010 - and thereafter 39 % plus, for taxes assessed in calendar years 2009 and thereafter, (b) the amount of City Property Tax Revenues collected during the prior month, multiplied by 50%. E. CONDITION TO PROGRAM GRANT. Power agrees to use its best efforts to maximize local sales and use tax revenues to the City. Power's continuing right to receive Program Grant Payments beginning in 2019 and each year thereafter is conditioned upon the difference between Power Computing Economic Development Agreement Page 9 of 25 10 (1) Total City Tax Revenues for the immediately preceding three years, and (2) the total Program Grant for the immediately preceding three years, exceeding $1.5 million. If Power fails to meet this condition for any year, all future Program Grants are canceled, and this Agreement shall terminate. Power may, however, choose to meet this condition by making a cash payment to the City on or before January 30 of the year for which the condition has not been met in an amount, which, when added to the Total City Tax Revenues amount specified above, will cause the difference referenced above to equal $1.5 million. F. ACCESS TO INFORMATION. Power agrees to provide the City access to information related to the computation of the Program Grant during regular business hours upon reasonable notice. G. INTENT. It is the intent of the parties that the Program Grant represent a sharing of tax benefits which inure to the City as a result of Power's location in the City. The percentages set forth in Paragraph D, above, have been selected based on the present tax situation in the City. The percentages are to be applied to monies actually collected by the City, and are net of any fees or charges imposed by the State for handling such monies. If during the term of this Agreement state law applicable to municipal taxation changes and as a result the Program Grant amount differs materially from the amount which would have been calculated if state law remained the same as in effect on the date of this Agreement, then the parties shall endeavor to adjust the Program Grant computation so as to achieve the same proportionate economic benefits to both parties as would have resulted if the law had not changed. H. CONTINGENT PROGRAM GRANT. It is the expectation of the parties that while owned by Georgetown 4B the Power Campus, as improved, will be exempt from ad valorem tax. If the Power Campus is subject to ad valorem tax while owned by Georgetown 4B, resulting in Power paying either ad valorem tax on the Power Campus, or Supplemental Rent related to payment of ad valorem taxes by Georgetown 4B, then the City will pay a Contingent Program Grant to Power each month during the term of this Agreement. The amount in any month will be the sum of (a) the amount, which when added to the Basic Program Grant specified in Paragraph D above, equals 40% of the City Sales Tax Collections for the month of calculation, plus (b) the amount of City Property Tax Revenues collected during the prior month, multiplied by 100% for collections in 1997 through 2005, 75% for collections in 2006, and 50% thereafter. It is specifically provided, however, that the aggregate amount of Contingent Program Grant payments made under this provision will not exceed the amount of the additional ad valorem tax and Supplemental Rent paid by Power resulting from the ownership of the Power Campus by Georgetown 4B failing to provide ad valorem tax exemption for the Power Campus. Power Computing Economic Development Agreement Page 10 of 25 11 I. ADDITIONAL PROGRAM GRANT. If the CDD sales tax described in Article V Paragraph B is not approved by the voters in the CDD prior to the time that Power begins making sales from the Power Campus, then until such time as the voters do approve the CDD sales tax, the City will make an Additional Program Grant each month equal to 25% of City Sales Tax Collections. The City may choose to satisfy this obligation by creating any type of special district or adopting any type of additional tax authorized by law, and providing that the Program Grant be made by such special district or from such additional tax revenues. J. SUPPLEMENTAL PROGRAM GRANT. If authorized by the Texas Legislature, the City and Power may jointly seek to apply a site-specific sales tax to sales made at the Power Campus. If such sales taxes are collected by the City, and provided that Additional Program Grants pursuant to Paragraph I above are not being made, then the City shall pay to Power a Supplemental Program Grant equal to 95% of the site specific sales tax revenues collected by the City. If Additional Program Grants under Paragraph I above are being made, then the Supplemental Program Grant under this Paragraph J shall equal 95% of the site specific sales taxes collected which are attributable to a site specific sales tax rate in excess of .5%; site specific sales taxes collected which are attributable to the first .5% of any site specific sales tax rate shall not be included in the calculation of the Supplemental Program Grant. VII. OTHER PROGRAM COMPONENTS A. ELECTRIC UTILITY RATE. The City owns and operates a municipal electrical distribution system and obtains wholesale power from the Lower Colorado River Authority ("LCRA"). In providing electric utility service to the Power Campus, the City agrees to charge Power the direct wholesale cost of power as charged to the City by LCRA plus a customer service charge equal to $2,000.00 per month. Power agrees to work with the City in order to maximize Power's electric load factor, thereby reducing the cost of providing electric service to Power and the cost of wholesale power being used by Power. B. FOREIGN TRADE ZONE DESIGNATION. The City agrees to support an application by Foreign Trade Zone of Central Texas, Inc., to obtain Foreign Trade Zone status for the Power Campus. C. WORKFORCE TRAINING PROGRAMS. The City agrees to work with local agencies in order to develop and train additional workers within the Georgetown area. Specifically, the City will work in conjunction with Austin Community College, Texas State Technical College, and other technical colleges within the State of Texas, to ensure that Power receives workforce development funds through Smart Jobs, Skills Development Fund, and other workforce programs of the State of Texas. Power Computing Economic Development Agreement Page 11 of 25 12 D. TEXAS CAPITAL FUND. The City will apply for Texas Capital Fund ("TCF") grants to finance a portion of the infrastructure improvements required for development of the Property. The City will file its first application for TCF funding as soon as practicable. Power agrees to supply the City with all business and development information required for this TCF application and any future TCF applications. E. DESIGN AND CONSTRUCTION OF POWER FACILITIES. Georgetown 4B agrees to contract with a developer, architects, engineers, land planners, general contractors, project managers, and/or other design and construction professionals ("Development Professionals") to provide for the design and construction of the Power Facilities. Georgetown 4B agrees to employ only those Development Professionals which are acceptable to Power. Power agrees to assist the Development Professionals by providing needed information related to the Project in order to assure timely development. Georgetown 4B agrees to require the Development Professionals to work with the City staff to ensure that all Project plans are in compliance with the Development Regulations. The City will work with the Development Professionals hired by Georgetown 4B to assist in rapid processing of the Water Pollution Abatement Plan through the Texas Natural Resources and Conservation Commission. F. DEVELOPMENT APPROVALS AND FEES. Power recognizes that the City has Development Regulations currently in effect which will govern the development of the Project. Power agrees to comply with the terms of the Development Regulations in effect on the date of Power's application for approval for that particular development permit. The City and Power understand and agree that Power desires to amend or supplement this Development Agreement in the future to further define the actual development proposed by Power for the Project and to submit for approval a Concept Plan and proposed development standards to be utilized during the term of development of the Project. Power shall obtain all approvals as required by the City's Development Regulations and this Agreement prior to its development of any of the Power Campus. The City and Power will work together to recommend appropriate zoning classifications for the Project. If rezoning is recommended for any portion of the Power Campus, such as the potential C-2B zoning for the corporate offices to be higher than three stories, Power agrees that these applications will be processed in the same manner as all other development applications, in compliance with this Paragraph and the terms of this Agreement. Power agrees and acknowledges that each application filed under the Development Regulations must be processed through the public review process required in the Development Regulations before any action may be taken concerning the application. The City agrees to support all applications for development approvals or permits by Power, so long as such Power Computing Economic Development Agreement Page 12 of 25 13 applications comply with the Development Regulations and the development of Power Center as contemplated by this Agreement. The City agrees to waive all planning review fees and impact fees related to the development on the Power Campus, except for direct costs charged to the City by other organizations. G. BUILDING PERMITS AND FEES. Power agrees to secure or cause to be secured City building permits for all construction to be done on the Power Campus and construction shall be in compliance with the City's Development Regulations. The City agrees to waive all building permit fees for development of the Project. The City agrees to contract with the Southern Building Codes Conference, Inc. ("SBCCI") for review of Power's building plans for the Project. Power agrees to pay the SBCCI fees incurred by the City for the review of Power's building plans. The City will devote the necessary personnel to the Project to ensure that the development applications for the Project are processed in the least amount of time possible. H. INSPECTIONS DURING CONSTRUCTION. In order to expedite the construction of the Project in the time period desired by Power, the City's Building Inspection Department will not inspect the construction. Power agrees to contract with, or cause its Project developer to contract with, additional architects and engineers, with the approval of the City, to inspect the construction and to certify that all aspects of the Project are constructed in accordance with all applicable building, construction, plumbing and other development requirements. VIII. SITE DEVELOPMENT A. CENTURY PLAN. Power shall seek approval of Century Plan amendments reasonably required to ensure that planned development of the Project is consistent with the Century Plan. The City agrees to support each application by Power for an amendment to the Century Plan so long as such application is consistent with the development of the Project contemplated by this Agreement. B. DEVELOPMENT IMPROVEMENTS. Power agrees and acknowledges that its proposed development of the Project will require substantial utility, transportation and certain other improvements to be made in order for the infrastructure to be available for the development of the Project on the Property as contemplated by this Agreement. 1. City-Installed Improvements. The following improvements will be constructed by the City in order for the Project to be developed ("City Improvements"). The City and Power understand and agree that the City plans to utilize funding from the Texas Capital Fund ("TCF"), to the extent that funding is available, for the construction of these improvements. Power Computing Economic Development Agreement Page 13 of 25 14 (a) Off-site Improvements. (1) water transmission loop from site to Central Drive water storage tank for fire flow purposes; and (2) electric feeds from two separate electric substations, if needed. (b) Subdivision Improvements. (1) water distribution lines; (2) wastewater collection lines; (3) stormwater collection lines; (4) underground electrical distribution lines; (5) relocation of electric transmission line to the San Gabriel River floodplain or along the centerline or Power Computing Boulevard if relocation to the floodplain is infeasible; (6) appropriate street lighting; (7) sidewalks; (8) bridge connecting Power Computing Boulevard to Country Club Drive; (9) entrance feature, utilizing the architectural style of Power's facilities; (10) landscaping along Power Computing Boulevard; (11) landscaping at the entrance feature and along the exterior front property, if permitted by the Texas Department of Transportation; and (12) streets, specifically Hillview, Vista, and Power Computing Boulevard. Power Computing Economic Development Agreement Page 14 of 25 15 2. Power-Installed Improvements. Power shall be fully responsible for all costs related to the construction of any improvements required for the development of the Project which are not specified as City-Installed Improvements. Power is also specifically required to construct drainage facilities for the removal of stormwater related to the development of the Project ("Stormwater Improvements"). Power may construct the Stormwater Improvements by paying for the incremental cost of oversizing the City's stormwater collection system which connects to the Power Campus. 3. Payment of Construction Costs. The City agrees to construct the City-Installed Improvements for the benefit of the Property, subject to the terms of this Agreement. This commitment is based upon Power's proposed development of the Project. The City agrees to pay for the cost of construction of the City-Installed Improvements, subject to the following limitations: (a) Power agrees to phase development of the Project in order for the City to maximize the utilization of TCF funding for the construction of the City Improvements within the Project subject to reasonable business considerations concerning Power's facility expansion needs; (b) utilization of the existing Rivery engineering and construction plans prepared by the Urban Design Group provided that Power shall pay the increased engineering cost related to changes in such plans; and (c) reimbursement by Power for the installation of City-Installed Improvements, if required by the terms of this Paragraph. On February 1, 2012, Power shall reimburse the City for the cost of the construction of City-Installed Improvements to the extent that $8,000,000.00 exceeds the sum of the following items ("Improvement Cost Credits"): (i) any and all revenues received by the City during the period beginning on the date of this Agreement and continuing through January 1, 2012 ("Improvement Cost Recoupment Period") from sales and use taxes, ad valorem taxes or other taxes directly attributable to Power's activity on the Power Campus net of any Program Grant Payments made to Power pursuant to Article VI hereof, plus (ii) any and all grants, subsidies, or other funds received by the City during the Improvement Cost Recoupment Period from federal, state or other local governmental sources used in the construction of the City-Installed Improvements, plus (iii) the revenues received by the City Power Computing Economic Development Agreement Page 15 of 25 16 during the Improvements Cost Recoupment Period from the development and sale of the City Acreage, net of cost of acquisition and any expenditures related to ownership and development of the Property; provided that if the average square foot sales price of the City Acreage is less than $4.00 then the gross revenues received by the City from the sales of the City Acreage shall be calculated as if all City Acreage was sold at a price of $4.00 per square foot. In the event that the sum of the Improvement Cost Credits equals or exceeds $8,000,000.00, Power shall have no obligation to reimburse the City for the City-Installed Improvements. (d) Improvements Construction Schedule. Power and the City recognize that the timetable for Improvements necessary for services to the Project is based on the proposed construction schedule for development of the Project. The City will construct Improvements and provide utility services based on actual development of the Project. Power recognizes that in order for the City to be responsive to the planning and site development reviews that will be needed for the development of the Project, the City and Power must meet at least semi-annually to review the growth projections affecting additional construction needs within the Project. At each meeting, Power shall submit to the City a building phasing plan, in order to permit the City to timely seek any additional funding needed for construction of City Improvements from TCF. C. MAINTENANCE OF CERTAIN IMPROVEMENTS. The City and Georgetown 4B agree to require the purchasers of the City Acreage to pay the costs for the maintenance of landscaping along Power Computing Boulevard, at the entrance to the Property adjacent to the I-35 frontage road, and such landscaping as the Texas Department of Transportation allows to be installed within the state right of way adjacent to the Property. D. UTILITY SERVICE. In accordance with Power's commitment to locate the Project within the City, the City agrees to provide such utilities to the Project as the City is legally authorized to provide, subject to the terms of this Agreement. 1. Water. The City agrees to provide domestic water service required to deliver potable water to the Project at a point located at the Power Campus near where the Initial Power Facilities are to be constructed on or before June 1, 1997. In addition, the City agrees to provide fire flow to the Project at the minimum levels established by the Power Computing Economic Development Agreement Page 16 of 25 17 State Board of Insurance. Water service shall be provided in accordance with the same policies and ordinances in effect for all City water customers within the City limits, and the potable water shall comply with all federal, state and local requirement for potable water. Water service rates shall be the same as those rates applicable to other similarly classified City water customers within the City limits. The City shall maintain the ability to amend such policies, ordinances and rates as the City may deem necessary, so long as such amendments are applicable citywide. 2. Wastewater. The City agrees to provide domestic wastewater service to the Project at a point located at the Power Campus near where the Initial Power Facilities are to be constructed on or before July 1, 1997. Wastewater service shall be provided in accordance with the same policies and ordinances in effect for all City wastewater customers within the City limits. Wastewater service rates shall be the same as those rates applicable to other similarly classified City wastewater customers within the City limits. The City shall maintain the ability to amend such policies, ordinances and rates as the City may deem necessary, so long as such amendments are applicable citywide. 3. Electric. The City shall provide electric utility services to the Project. The City shall waive all applicable connect fees for connection to the electric distribution system. Electric service from the City shall be provided in accordance with the same policies and ordinances in effect for all City electric customers within the City limits. Electric service rates for Power shall be the same as those rates applicable to other similarly classified City electric customers within the City limits. The City shall maintain the ability to amend such policies, ordinances and rates as the City may deem necessary, so long as such amendments are applied city-wide. 4. Solid Waste. The City agrees to provide solid waste disposal services to the Project. Solid waste disposal service shall be provided in accordance with the same policies and ordinances in effect for all City sanitation customers within the City limits. Solid waste disposal service rates shall be the same as those rates applicable to other similarly classified City sanitation customers within the City limits. The City shall maintain the ability to amend such policies, ordinances and rates as the City may deem necessary, so long as such amendments are applied city-wide. 5. Drainage. Power acknowledges that the City has created a drainage utility in accordance with the requirements of State law. Drainage utility fees will be applicable Power Computing Economic Development Agreement Page 17 of 25 18 to residents within the Project in the same manner and according to the same terms as apply to other similarly classified customers of the City. The City shall maintain the ability to amend such policies, ordinances and rates as the City may deem necessary, so long as such amendments are applied city-wide. IX. MISCELLANEOUS PROVISIONS A. TERM OF AGREEMENT. This Agreement shall remain in full force and effect until December 31, 2056; unless sooner terminated as otherwise provided in this Agreement. If Power has not provided notice to the City that it has secured adequate financing on or before March 31, 1997, then the City may terminate this Agreement. B. CONDITION SUBSEQUENT. Power may terminate this Agreement at any time on or before March 31, 1997 by delivering notice to the City that Power has been unable to obtain acceptable financing for the Initial Power Facilities. If the Agreement is terminated pursuant to this provision, none of the parties shall have any further obligation to the others. C. DEFAULT. If any party should default (the "Defaulting Party") with respect to any of its obligations hereunder and should fail, within thirty (30) days after delivery of written notice of such default from another party (the "Complaining Party") to cure such default, the Complaining Party, may elect to terminate this Agreement or specifically enforce this Agreement. A default under the Lease is a default under this Agreement. None of the parties shall under any circumstances have liability for any consequential damages which may be caused by default under this Agreement. Notwithstanding anything to the contrary contained herein, any Program Grant which is not timely paid by the City shall incur interest at the highest rate per annum allowed by applicable law from the date such Program Payment is due until paid. D. MUTUAL ASSISTANCE. The City, the Georgetown 4B and Power shall do all things necessary or appropriate to carry out the terms and provisions of this Agreement and to aid and assist each other in carrying out such terms and provisions. Power hereby consents to and agrees to cooperate in any request by the City to obtain copies of Sales/Use tax returns from the State which contains information pertinent to the calculation of a Program Grant. Power Computing Economic Development Agreement Page 18 of 25 19 E. REPRESENTATIONS AND WARRANTIES. The City and Georgetown 4B each represents and warrants to Power that this Agreement is within the scope of its respective authority and the provisions of its charter and that it is duly authorized and empowered to enter into this Agreement. Power represents and warrants to the City and to Georgetown 4B that it has requisite authority to enter into this Agreement. F. SECTION OR OTHER HEADINGS. Section or other headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. G. ATTORNEYS FEES. In the event any legal action or proceeding is commenced to enforce or interpret provisions of this Agreement, the prevailing party in any such legal action shall be entitled to recover its reasonable attorneys' fees and expenses incurred by reason of such action. H. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the transaction contemplated herein. I. AMENDMENT. This Agreement may only be amended, altered, or revoked by written instrument signed by Power, the Georgetown 4B and the City. Use of term "Agreement" herein includes all amendments or supplements to this Agreement. J. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and inure to the benefit of the parties, their respective successors and assigns. Power may assign all or part of its rights and obligations hereunder only upon prior written approval of the City. Notwithstanding the foregoing provisions of this Section, in the event Power desires to transfer or assign its rights or obligations hereunder to a Power Affiliate, it shall have the right to do so without the consent or approval by the City, so long as Power shall remain responsible and obligated to the City for the performance of its obligations under this Agreement. K. NOTICE. Any notice and/or statement required and permitted to be delivered shall be deemed delivered by depositing same in the United States mail, certified with return receipt requested, postage prepaid, addressed to the appropriate party at the following addresses, or at such other addresses provided by the parties in writing; Power Computing Economic Development Agreement Page 19 of 25 20 POWER: Stephen S Kahng Chairman and Chief Executive Officer 2555 N. IH-35 Round Rock, Texas 78664 With a copy to: John W. Teets Corporate Counsel 2555 N. IH-35 Round Rock, Texas 78664 CITY: City Manager City of Georgetown P. O. Box 409 Georgetown, Texas 78627-0409 With a copy to: City Attorney City of Georgetown P. O. Box 409 Georgetown, Texas 78627-0409 GEORGETOWN 4B Executive Director Georgetown 4B, Inc. P. O. Box 409 Georgetown, Texas 78627-0409 With a copy to: City Attorney City of Georgetown P. O. Box 409 Georgetown, Texas 78627-0409 Power Computing Economic Development Agreement Page 20 of 25 21 L. INTERPRETATION. Regardless of the actual drafter of this Agreement, this Agreement shall, in the event of any dispute over its meaning or application, be interpreted fairly and reasonably, and neither more strongly for or against any party. M. APPLICABLE LAW. This Agreement is made, and shall be construed and interpreted under the laws of the State of Texas and venue shall lie in Williamson County, Texas. N. SEVERABILITY. In the event any provision of this Agreement is illegal, invalid, or unenforceable under present or future laws, then, and in that event, it is the intention of the parties hereto that the remainder of this Agreement shall not be affected thereby, and it is also the intention of the parties of this Agreement that in lieu of each clause or provision that is found to be illegal, invalid, or unenforceable a provision be added to this Agreement which is legal, valid and enforceable and is as similar in terms as possible to the provision found to be illegal, invalid or unenforceable. O. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be considered an original, but all of which shall constitute one instrument. P. GEORGETOWN 4B STATUS. In the event that Georgetown 4B is unable to undertake this project before January 15, 1997, then the City agrees to amend this Agreement in such a manner as to provide economic benefits to the parties that are substantially the same as those set forth herein, but without the involvement of Georgetown 4B. It is anticipated that such amended Agreement will include the economic benefits described in Section VI.H. hereof. Power may, but shall not be obligated to, enter into such amended Agreement. If Power and the City do not enter into such amended Agreement, neither party shall have any further obligation hereunder. EXECUTED this _____ day of __________________ 1996. CITY OF GEORGETOWN, TEXAS Attest: By: /s/ /s/ ---------------------------- -------------------------------------- Leo Wood, Mayor Sandra D. Lee, City Secretary Approved as to form: /s/ -------------------------------------- Marianne Landers Banks City Attorney Power Computing Economic Development Agreement Page 21 of 25 22 GEORGETOWN 4B, INC. Attest: By: /s/ ---------------------------- Name: /s/ --------------------------- ------------------------------------- Title: President Corporate Secretary POWER COMPUTING CORPORATION Attest: By: /s/ /s/ ---------------------------- ------------------------------------- Stephen S. Kahng Corporate Secretary Chairman and Chief Executive Officer Power Computing Economic Development Agreement Page 22 of 25 23 STATE OF TEXAS ) ) ss. CORPORATE ACKNOWLEDGMENT COUNTY OF WILLIAMSON ) BEFORE ME, the undersigned authority, on this day personally appeared Leo Wood, Mayor of the City of Georgetown, a Texas Home Rule Municipal Corporation, on behalf of said municipality, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed, as the act and deed of said municipality, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this 10th day of December, 1996. /s/ --------------------------------------- Notary Public, State of Texas [Seal: Sandra Lee] Power Computing Economic Development Agreement Page 23 of 25 24 STATE OF TEXAS ) ) ss. CORPORATE ACKNOWLEDGMENT COUNTY OF WILLIAMSON ) BEFORE ME, the undersigned authority, on this day personally appeared Jim Haskell, known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that the same was the act of said Georgetown 4B, Inc., a Texas Development Corporation, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this 17th day of December, 1996. /s/ --------------------------------------- [Seal, Judith Hunter] Notary Public, State of Texas Power Computing Economic Development Agreement Page 24 of 25 25 STATE OF TEXAS ) ) ss. CORPORATE ACKNOWLEDGMENT COUNTY OF WILLIAMSON ) BEFORE ME, the undersigned authority, on this day personally appeared Stephen S. Kahng, known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that the same was the act of said Power Computing Corporation, a Delaware corporation authorized to do business in Texas, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this 24th day of December, 1996. /s/ --------------------------------------- Notary Public, State of Texas Power Computing Economic Development Agreement Page 25 of 25 26 EXHIBIT A RESOLUTION NO. 961015 - I A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF GEORGETOWN, TEXAS, ENCOURAGING THE DEVELOPMENT OF POWER CENTER IN GEORGETOWN, TEXAS, AND DETERMINING THAT A DEVELOPMENT AGREEMENT WITH POWER COMPUTING CONSTITUTES AN ECONOMIC DEVELOPMENT PROGRAM FOR THE CITY; AND ESTABLISHING AN EFFECTIVE DATE. WHEREAS, Power Computing ("Power") has indicated its interest in developing its manufacturing center, sales, center and administrative headquarters in Georgetown, Texas, ("Power Center Project"); and WHEREAS, the City Council recognizes the significance of the proposed Power Center Project for the Georgetown Community; and WHEREAS, the City Council has actively investigated the effects the proposed Power Center Project will have for Georgetown through the study performed by Arthur Anderson and Associates ("Economic Impact Analysis"); and WHEREAS, the City Council determines that the development of the Power Center Project would prove to be a community asset for the City of Georgetown; NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF GEORGETOWN, TEXAS, THAT: SECTION 1. The facts and recitations contained in the preamble of this resolution are hereby found and declared to be true and correct, and are incorporated by reference herein and expressly made a part hereof, as if copied verbatim. SECTION 2. The City Council hereby finds that this Resolution implements the following policies of the Century Plan -- Policy Plan: Economic Development Policy I, which states: "The City will encourage diversified growth and promote business opportunities to create jobs, broaden the tax base, and minimize the impact of economic fluctuations;" and Growth and Physical Development Policy I, which states: "The City will ensure that future land use patterns provide economic. cultural, and social activities to all residents, businesses and organizations;" and Power Center Resolution No. 961015-I Page 1 of 2 Pages 27 EXHIBIT A Growth and Physical Development Policy 4, which states: "The City will encourage new development and infill redevelopment in the community." The City Council further finds that the adoption of this resolution is not inconsistent or in conflict with any other Century Plan Policies, as required by Section 2.03 of the Administrative Chapter of the Policy Plan. SECTION 3. The City Council hereby determines that the development of the Power Center Project will stimulate economic development within the Georgetown area and in the State of Texas. The City Council further determines that the development of the Power Center Project is in the best interest of the City. SECTION 4. The City Council hereby determines that the development of an Agreement for the Power Center Project constitutes an Economic Development Program within the meaning of Texas Local Government Code Sec. 380.001. The City Council hereby directs the City staff to draft a development agreement in compliance with established City Council policies and state law, and to bring this agreement to the City Council for review and possible approval on November 12, 1996. SECTION 5. The City Council wants to welcome Power Computing to our community and express our pleasure at being chosen as the site for the manufacturing and corporate headquarters for Power Computing. Power Computing is strongly encouraged to proceed with the development of the Power Center Project in Georgetown, and the City Council pledges its support in cooperating with Power Computing and its representatives to satisfy the needs of both Power Computing and the Georgetown Community to the mutual benefit of both parties. SECTION 6. This resolution shall be effective immediately upon adoption. RESOLVED this 15th day of October, 1996. THE CITY OF GEORGETOWN, TEXAS Attest: /s/ /s/ - -------------------------------- -------------------------------------- By: Ferd Tonn Sandra D. Lee, City Secretary Mayor, Pro-Tem Approved as to form: /s/ - --------------------------------------- Marianne Landers Bank, City Attorney Power Center Resolution No. 961015-I Page 2 of 2 Pages 28 EXHIBIT C 154.166 ACRES PARCEL 1 FIELD NOTES FOR A 154.166 ACRE TRACT OF LAND SITUATED IN THE NICHOLAS PORTER SURVEY, ABSTRACT NO. 497, AND THE J.B. PULSIFER SURVEY, ABSTRACT NO. 498, WILLIAMSON COUNTY, TEXAS; BEING A PART OF THAT CERTAIN CALLED 259.4406 ACRE TRACT OF LAND DESCRIBED IN A DEED TO THE RIVERY JOINT VENTURE, RECORDED IN VOLUME 2471, PAGE 379, OFFICIAL RECORDS OF WILLIAMSON COUNTY, TEXAS; SAID 154.166 ACRE TRACT OF LAND BEING MORE PARTICULARLY DESCRIBED BY METES AND BOUNDS AS FOLLOWS: BEGINNING at an iron rod found in northwest right of way line of Interstate Highway No. 35 for the most southerly corner of said called 259.4406 acre tract and the herein described tract, and the southeast corner of RIVER HILLS SECTION FOUR, according to the map or plat thereof recorded in Cabinet H Slides 231-232, Plat Records of Williamson County, Texas; THENCE with the southerly line of said called 259.4406 acre tract, the east and north lines of said RIVER HILLS SECTION FOUR, and the north line of RIVER HILLS SECTION ONE, according to the map or plat thereof recorded in Cabinet D, Slides 304-306, Plat Records of Williamson County, Texas, the following Five (5) courses and distances: 1. N 17 degrees 58'35" W, a distance of 398.11 feet to an iron rod found; 2. S 79 degrees 52'59" W, a distance of 443.29 feet to a 60d nail found; 3. S 76 degrees 35'10" W, a distance of 357.57 feet to an iron rod found; 4. S 71 degrees 20'21" W, a distance of 444.06 feet to an iron rod found; 5. S 69 degrees 00'19" W, a distance of 945.77 feet to an iron rod found in the east line of that tract of land conveyed to Mrs. Floy Howe by deed recorded in Volume 467, Page 433, Deed Records of Williamson County, Texas, for the northwest corner of said RIVER HILLS SECTION ONE, and the southwest corner of said called 259.4406 acre tract an the herein described tract; THENCE, along the east line of the Howe tract and with the west line of said called 259.4406 acre tract, N 12 degrees 20'37" W, passing an iron rod found at a distance of 1078.53 feet and continuing for a total distance of 1127.53 feet to an iron rod found on the bluff bank of the west fork of the San Gabriel River for an ell corner in the west line of said called 259.4406 acre tract; CAI-138-0020 Page 1 of 4 29 THENCE, along the bluff bank of the west fork of the San Gabriel River and the west line of said called 259.4406 acre tract, the following fifteen (15) courses and distances: 1. N 30 degrees 23'43" E, a distance of 133.45 feet to a 60d nail found; 2. N 42 degrees 40'01" E, a distance of 88.49 feet to a 60 d nail found in a cedar tree; 3. N 15 degrees 04'02" E, a distance of 120.20 feet to a 60 d nail found in a cedar tree; 4. N 05 degrees 53'56" E, a distance of 114.71 feet to a 60 d nail found in a cedar tree; 5. N 14 degrees 50'32" E, a distance of 220.01 feet to a 60 d nail found in a cedar tree; 6. N 06 degrees 48'40" E, a distance of 212.67 feet to a 60 d nail found in a cedar tree; 7. N 04 degrees 07'21" E, a distance of 212.02 feet to a 60 d nail found in a oak tree; 8. N 10 degrees 01'41" E, a distance of 289.03 feet to a 60 d nail found in a cedar tree; 9. N 32 degrees 20'23" E, a distance of 208.19 feet to an iron rod found; 10. N 29 degrees 53'10" E, a distance of 163.40 feet to a 60 d nail found in a cedar tree; 11. N 14 degrees 41'53" E, a distance of 203.99 feet to a 60 d nail found in a oak tree; 12. N 43 degrees 55'10" E, a distance of 162.54 feet to a 60 d nail found in a cedar tree; 13. N 63 degrees 43'49" E, a distance of 36.75 feet to an iron rod found; 14. N 72 degrees 49'33" E, a distance of 46.76 feet to an iron rod found; 15. N 37 degrees 45'32" E, a distance of 110.65 feet to an iron rod found for the northeast corner of the herein described tract; THENCE, over and across said called 259.4406 acre tract with the north and east lines of the herein described tract the following fourteen (14) courses and distances: 1. N 77 degrees 46'01" E, a distance of 635.91 feet to a 1/2 inch iron rod set; 2. N 74 degrees 09'00" E, a distance of 348.06 feet to a 1/2 inch iron rod set; 3. N 80 degrees 05'40" E, a distance of 970.84 feet to a 1/2 inch iron rod set in a curve; CAI-138-0020 Page 2 of 4 30 4. with said curve, to the left having a central angle of 05 degrees 26'18" , a radius of 1414.11 feet, an arc length of 134.22 feet and a chord bearing and distance of S 13 degrees 14'54" W, 134.17 feet to a 1/2 inch iron rod set at the point of tangency; 5. S 10 degrees 31'45" W, a distance of 105.00 feet to a 1/2 inch iron rod set at the point of curvature of a curve to the right; 6. with said curve to the right having a central angle of 18 degrees 35'05", a radius of 970.00 feet, an arc length of 314.63 feet and a chord bearing and distance of S 19 degrees 49'18" W, 313.26 feet to a 1/2 inch iron rod set at the point of tangency; 7. S 29 degrees 06'50" W, a distance of 258.86 feet to a 1/2 inch iron rod set at the point of curvature of a curve to the left; 8. with said curve to the left having a central angle of 37 degrees 18'45", a radius of 498.69 feet, an arc length of 324.76 feet and a chord bearing and distance of S 10 degrees 27'28" W, 319.05 feet to a 1/2 inch iron rod set at the point of tangency; 9. S 08 degrees 11'55" E, a distance of 300.17 feet to a 1/2 inch iron rod set at the point of curvature of a curve to the right; 10. with said curve to the right having a central angle of 20 degrees 00'00", a radius of 625.98 feet, an arc length of 218.51 feet and a chord bearing and distance of S 01 degrees 48'05" W, 217.40 feet to a 1/2 inch iron rod set at the point of tangency; 11. S 11 degrees 48'05" W, a distance of 128.87 feet to a 1/2 inch iron rod set for the point of curvature of a curve to the left; 12. with said curve to the left having a central angle of 60 degrees 02'33", a radius of 984.55 feet, an arc length of 1031.75 feet and a chord bearing and distance of S 18 degrees 13'12" E, 985.18 feet to a 1/2 inch iron rod set for the point of tangency; 13. S 48 degrees 14'28" E, a distance of 181.95 feet to a 1/2 inch iron rod set for the point of curvature of curve to the right; 14. with said curve to the right having a central angle of 88 degrees 59'40", a radius of 25.00 feet, an arc length of 38.83 feet and a chord bearing and distance of S 03 degrees 44'38" E, 35.04 feet to a 1/2 inch iron rod set in a curve in the northwest right of way line of Interstate Highway No. 35 and in the south line of said called 259.4406 acre tract for the southeast corner of the herein describe tract, from which an iron rod found at the point of tangency of said curve, bears a chord bearing and distance of N 42 degrees 17'46" E, 324.67 feet. 15. THENCE, with a curve to the left in the northwest right of way line of Interstate Highway No. 35 and the south line of said called 259.4406 acre tract, having a central CAI-138-0020 Page 3 of 4 31 angle of 06 degrees 10'27", a radius of 6029.58 feet, an arc length of 649.75 feet and a chord bearing and distance of S 37 degrees 39'59" W, 649.43 feet to the POINT OF BEGINNING, POINT OF BEGINNING, containing 154.166 acres of land within these metes and bounds, subject to easements, conditions, or restrictions of record, if any. Bearing Reference: The southeast line of said called 259.4406 acre tract described in Volume 2471, Page 379, Official Records of Williamson County, Texas (S 43 degrees 50'20" W) /s/ - ----------------------------- Stan Coalter, RPLS, LSLS [Seal, Stan Coalter] Registered Professional Land Surveyor No. 1481 Date: 12-3-96 ------------------------ CAI-138-0020 Page 4 of 4 32 EXHIBIT D 42.637 Acres PARCEL 2 FIELD NOTES FOR A 42.637 ACRE TRACT OF LAND SITUATED IN THE NICHOLAS PORTER SURVEY, ABSTRACT NO. 497, AND THE J.B. PULSIFER SURVEY, ABSTRACT NO. 498, WILLIAMSON COUNTY, TEXAS; BEING A PART OF THAT CERTAIN CALLED 259.4406 ACRE TRACT OF LAND DESCRIBED IN A DEED TO THE RIVERY JOINT VENTURE, RECORDED IN VOLUME 2471, PAGE 379, OFFICIAL RECORDS OF WILLIAMSON COUNTY, TEXAS; SAID 42.637 ACRE TRACT OF LAND BEING MORE PARTICULARLY DESCRIBED BY METES AND BOUNDS AS FOLLOWS: BEGINNING at a 1/2 iron rod set in a curve in the northwest right of way line of Interstate Highway No. 35 and the south line of said called 259.4406 acre tract for the beginning of a curve and the southwest corner of the herein described tract, from which an iron rod found for the most southerly corner of said carted 259.4406 acre tract, bears a chord bearing and distance of S 37 degrees 39'59" W, 649.43 feet; THENCE, over and across said called 259.4406 acre tract with the west line of the herein described tract the following eleven (11) courses and distances: 1. with said curve to the left having a central angle of 88 degrees 59'40", a radius of 25.00 feet, an arc length of 38.83 feet and a chord bearing and distance of N 03 degrees 44'38" W, 35.04 feet to a 1/2 inch iron rod set for the point of tangency; 2. N 48 degrees 14'28" W, a distance of 181.95 feet to a 1/2 inch iron rod set for the point of curvature of a curve to the right; 3. with said curve to the right having a central angle of 60 degrees 02'33", a radius of 984.55 feet, an arc length of 1031.75 feet and a chord bearing and distance of N 18 degrees 13'12" W, -985.18 feet to a 1/2 inch iron rod set for the point of tangency; 4. N 11 degrees 48'05" E, a distance of 128.87 feet to a 1/2 inch iron rod set for the point of curvature of a curve to the left; 5. with said curve to the left having a central angle of 20 degrees 00'00", a radius of 625.98 feet, an arc length of 218.51 feet and a chord bearing and distance of N 01 degrees 48'05" E, 217.40 feet to a 1/2 inch iron rod set at the point of tangency; 6. N 08 degrees 11'55" W, a distance of 300.17 feet to a 1/2 inch iron rod set at the point of curvature of a curve to the right; CAI-138-0220 Page 1 of 4 33 7. with said curve to the right having a central angle of 37 degrees 18'45", a radius of 498.69 feet, an arc length of 324.76 feet and a chord bearing and distance of N 10 degrees 27'28" E, 319.05 feet to a 1/2 inch iron rod set at the point of tangency; 8. N 29 degrees 06'50" E, a distance of 258.86 feet to a 1/2 inch iron rod set at the point of curvature of a curve to the left; 9. with said curve to the left having a central angle of 18 degrees 35'05", a radius of 970.00 feet, an arc length of 314.63 feet and a chord bearing and distance of N 19 degrees 49'18" E, 313.67 feet to a 1/2 inch iron rod set at the point of tangency; 10. N 10 degrees 31'45" E, a distance of 105.00 feet to a 1/2 inch iron rod set at the point of curvature of a curve to the right; 11. with said curve, to the left having a central angle of 41 degrees 58'47", a radius of 1414.11 feet, an arc length of 1036.10 feet and a chord bearing and distance of N 31 degrees 31'09" W, 1013.08 feet to a 1/2 inch iron rod set at the end of said curve in the north line of said called 259.4406 acre tract and in the southerly right of Country Club Road for the most northerly corner of this tract, from which an iron rod found for an ell corner of said called 259.4406 acre tract bears, S 83 degrees 12'04" W, a distance of 147.49 feet; THENCE, with the northerly line of said called 259.4406 acre tract and the southerly right of Country Club Road, N 83 degrees 12'04" E, a distance of 34.68 feet to an iron rod found for an ell corner of said called 259.4406 acre tract and the herein described tract, THENCE, with the easterly line of said called 259.4406 acre tract the following thirty-two (32) courses and distances: 1. S 08 degrees 34'56" E, a distance of 59.28 feet to an iron rod found; 2. S 23 degrees 56'34" W, a distance of 43.77 feet to an iron rod found at the beginning of a nontangent curve to the left; 3. with said curve to the left, having a radius of 1324.11 feet, a central angle of 37 degrees 03'32", an arc length of 856.44 feet, and a chord bearing and distance of, S 32 degrees 21'59" W, 841.59 feet to an iron rod at the end of said non-tangent curve; 4. N 86 degrees 11'41" E, a distance of 237.46 feet to a 1/2 inch iron rod set on curve; 5. S 61 degrees 24'10" E, a distance of 251.97 feet to a 1/2 inch iron rod set; 6. S 26 degrees 43'00" E, a distance of 320.00 feet to a 1/2 inch iron rod set; 7. S 11 degrees 18'50" W, a distance of 167.55 feet to a 1/2 inch iron rod set; 8. S 38 degrees 45'39" W, a distance of 180.00 feet to a 1/2 inch iron rod set; 9. N 86 degrees 53'00" W, a distance of 194.94 feet to a 1/2 inch iron rod set; CAI-138-0220 Page 2 of 4 34 10. S 02 degrees 37'37" W, a distance of 30.00 feet to a 1/2 inch iron rod set; 11. S 58 degrees 18'30" E, a distance of 178.02 feet to a 1/2 inch iron rod set; 12. S 01 degrees 51'12" E, a distance of 55.70 feet to a 1/2 inch iron rod set; 13. S 08 degrees 30'13" W, a distance of 375.27 feet to a 1/2 inch iron rod set; 14. S 70 degrees 17'30" W, a distance of 244.40 feet to a 1/2 inch iron rod set; 15. S 09 degrees 58'01" W, a distance of 15.00 feet to a 1/2 inch iron rod set; 16. N 80 degrees 01'59" W, a distance of 138.77 feet to a 1/2 inch iron rod set; 17. S 09 degrees 58'01" W, a distance of 15.00 feet to a 1/2 inch iron rod set; 18. S 68 degrees 52'19" E, a distance of 104.12 feet to a 1/2 inch iron rod set; 19. S 67 degrees 39'03" E, a distance of 200.34 feet to a 1/2 inch iron rod set; 20. S 09 degrees 29'43" E, a distance of 143.90 feet to a 1/2 inch iron rod set; 21. S 18 degrees 35'42" W, a distance of 274.84 feet to a 1/2 inch iron rod set; 22. S 61 degrees 46'27" W, a distance of 44.60 feet to a 1/2 inch iron rod set; 23. S 03 degrees 47'46" W, a distance of 15.00 feet to a 1/2 inch iron rod set; 24. N 86 degrees 12'14" W, a distance of 68.67 feet to a 1/2 inch iron rod set; 25. S 03 degrees 47'46" W, a distance of 15.00 feet to a 1/2 inch iron rod set; 26. S 61 degrees 03'56" E, a distance of 31.26 feet to a 1/2 inch iron rod set; 27. S 33 degrees 45'27" E, a distance of 178.78 feet to a 1/2 inch iron rod set; 28. S 39 degrees 39 44" W, a distance of 80.00 feet to a 1/2 inch iron rod set; 29. S 84 degrees 39'44" W, a distance of 130.00 feet to a 1/2 inch iron rod set; 30. S 07 degrees 44'01" E, a distance of 30.03 feet to a 1/2 inch iron rod set; 31. N 84 degrees 39'44" E, a distance of 160.59 feet to a 1/2 inch iron rod set; 32. N 50 degrees 03'08" E, a distance of 190.00 feet to a 1/2 inch iron rod set; 33. S 40 degrees 25'07" E, a distance of 75.00 feet to a 1/2 inch iron rod set; CAI-138-0220 Page 3 of 4 35 34. S 36 degrees 33'42" E, a distance of 190.05 feet to a 1/2 inch iron rod set in the northwest right of way line of Interstate Highway No. 35 and the south line of said called 259.4406 acre tract for the southeast corner of the herein described tract; THENCE, with the northwest right of way line of Interstate Highway No. 35 and the south line of said called 259.4406 acre tract the following two (2) courses and distances: 1. S 43 degrees 50'20" W, a distance of 364.35 feet to a 1/2 inch iron rod found at the point of curvature of a curve to the left; 2. with said curve to the left having a central angle of 03 degrees 05'08", a radius of 6029.58 feet, an arc length of 324.71 feet and a chord bearing and distance of S 42 degrees 17'46" W, 324.67 feet to the POINT OF BEGINNING, containing 42.637 acres of land within these metes and bounds, subject to easements, conditions, or restrictions of record, if any. Bearing Reference: The southeast line of said called 259.4406 acre tract described in Volume 2471, Page 379, Official Records Of Williamson County, Texas. (S 43 degrees 50'20" W) /s/ - ----------------------------- Stan Coalter, RPLS, LSLS [Seal, Stan Coalter] Registered Professional Land Surveyor No. 1481 Date: 12-3-96 ------------------------ CAI-138-0220 Page 4 of 4 EX-10.14 12 MANUFACTURING SERVICES AGREEMENT 1 EXHIBIT 10.14 MANUFACTURING SERVICES AGREEMENT NO. C970305 THIS AGREEMENT is made by and between Solectron Texas, L.P. located at 12455 Research Boulevard, Austin, TX 78759 ("SLRTX") and Power Computing Corporation ("Power") located at 2555 Interstate Highway 35, Second Floor, Round Rock, TX 78664, this 19th day of March, 1997 ("Effective Date"). This Agreement [including individual Statement(s) of Work (defined below) issued hereunder] and its Attachments constitute the final written expression of all the terms of our agreement and is a complete and exclusive statement of those terms. It supersedes all prior agreements, understandings and negotiations concerning the matters specified herein. Any addition to or modification of the terms of this Agreement must be in writing and signed by an authorized representative of the party required to perform under such addition or modification. ATTACHMENTS: A. Consigned Material B. Passive Commodity Substitution Approval IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. AGREED: POWER COMPUTING CORPORATION SOLECTRON TEXAS, L.P. By: /s/ By: /s/ --------------------------- ---------------------------------------- (Signature) (Signature) Name: Jim Hindmarch Name: Ron Shelly ------------------------- -------------------------------------- (Typed) (Typed) Title: V.P. Operations Title: President, Solectron Texas, Inc., ------------------------ ------------------------------------ General Partner Date: 3/20/97 Date: 3/20/97 ------------------------- ------------------------------------- Notices Address: Notices Address: Power Computing Corporation Solectron Texas Attn: Legal Department Attn: Mgr., Legal and Business Services 2555 N. IH 35, Suite 200 P.O. Box 149188, M/S 2273 Round Rock, Texas 78664-2015 Austin, TX 78714-9188 12455 Research, Austin, Texas 78759 2 MANUFACTURING SERVICES AGREEMENT Power desires to have SLRTX manufacture certain products that will be described in Statement(s) of Work issued from time-to-time. SLRTX desires to manufacture such Products for Power. It is Power's and SLRTX' objective that products be manufactured in accordance with the Power's Specifications (defined below). The parties' mutual goals include the availability of quality products when and in the quantities needed and based on SLRTX Workmanship and Quality Standards. Furthermore, Power and SLRTX will jointly strive to achieve value pricing consistent with prudent practices to balance low cost, available services and material availability. Subject to agreement by both parties on individual Statements of Work the following terms will govern transactions indicated therein: 1. DEFINITIONS PRODUCT(S) - the items of finished hardware shipped by SLRTX to Power hereunder. STATEMENT(S) OF WORK - documents agreed to in writing by both parties, which describe the work to be performed, the pricing for such work, the Specifications and any supplemental terms that additionally apply to such work. SLRTX' quotation(s) against which Power's orders are submitted and accepted will be included in the Statement(s) of Work. This Agreement may include multiple Statements of Work. Where Power may consign material, the terms of Attachment A are hereby incorporated. SPECIFICATIONS - That portion of each Statement of Work that provides objective, physical specifications for work to be performed. SLRTX will purchase and assemble material according to such specifications. The Passive Commodity Substitution Approval Form attached hereto and incorporated herein shall be considered part of Power's specifications. 2. TERM This Agreement shall be effective on the Effective Date and shall remain in force for one (1) year. Upon such anniversary this Agreement will automatically continue unless terminated as provided for in this Agreement. 3. PURCHASE ORDERS Power will provide purchase orders (which may be written, verbal or electronic) for Product in accordance with each individual Statement of Work. SLRTX will manufacture Product after acceptance of purchase orders placed by Power and make shipments in accordance with the terms herein. SLRTX' acceptance or refusal of purchase orders will be within a 2 3 reasonable period not to exceed two weeks. No term or condition on any purchase order will add to or modify this Agreement. In addition, Power will provide copies of applicable tax exemption certificates for the applicable Ship-to locations. Each purchase order will include complete "Sold to," "Invoice to" and "Ship to" addresses; quantity, description and price for each item; this Agreement number; and desired ship date, in accordance with the Statement of Work. Verbal orders will be confirmed in writing within three (3) days. 4. PRICING The prices for the Product and non-recurring items (e.g., services for special, development or other activities listed in the Statement of Work, tooling and test fixtures) shall be as set forth in the Statement of Work. Prices are exclusive of all taxes, duties, customs or similar charges and are subject to an increase equal in amount to any charge SLRTX may be required to collect or pay upon shipment of the Product. The parties agree to review pricing, lead time and quality once every quarter. Prices for Products will be monitored regularly and adjustments may be made upon written notice to Power to compensate for fluctuations in material or other direct costs, yield or changes in quantity requirements. A complete BOM review will be made quarterly and adjustments to the unit price to reflect any cost changes will be made. In the interim, only component prices which change by five percent (5%) or more will be reviewed immediately and unit prices adjusted accordingly. Such price changes will not affect purchase orders in SLRTX' then current backlog and scheduled to ship within 30 days of the date notice is given of a price increase. Prices are based on a quantity of Products to be ordered and accepted in accordance with the Statement of Work. Prices do not include amounts for any royalty payments for patents that Products may infringe. The parties agree to diligently pursue cost improvement opportunities for each and every element of price to reduce the cost of the Products, including recommending design or process changes, or new sources which may result in an overall cost reduction of the Products. Any cost reduction realized as a result of SLRTX recommended changes will be shared equally between SLRTX and Power. All Power recommended changes which result in cost reductions will be passed on to Power one hundred percent (100%). 5. RELEASES; SHIPMENTS Within thirty (30) days after the Effective Date of this Agreement, Power will provide purchase order(s) covering Product requirements for a four (4) month period beginning with the date the initial unit is scheduled for shipment. After issuing the initial purchase order(s), 3 4 Power will provide additional purchase order(s) on a once-a-month basis so as to maintain between ninety (90) and one hundred twenty (120) days of Product requirements on order. This shall be the agreed lead time. Additionally, within thirty (30) days after the Effective Date of this Agreement, Power will provide a six (6) month forecast of Product requirements. Power will also use reasonable efforts to provide SLRTX with a forecast covering the balance of a twelve month period not covered by purchase orders. On a monthly basis thereafter, Power will update the six (6) month forecast and will update the twelve month forecast as feasible. Forecast information shall be for planning purposes only and shall not represent Power's commitment to purchase any or all of such Product. However, Power acknowledges that SLRTX will need to purchase (i) material that has a lead time outside of the purchase order backlog, (ii) minimum order quantities (MOQ), and/or (iii) unique or custom material, to support Power's requirements. Some of these purchases may include noncancelable/nonreturnable terms. In connection with procuring such material, SLRTX will advise Power in writing of long lead, MOQ, or unique/custom purchase requirements and Power will confirm in writing its authorization for SLRTX to procure such material. Long lead component detail, including parts and dollar exposure, will be provided to Power at least on a monthly basis. Power will purchase such material from SLRTX at the earlier of (a) the time this Agreement or a Statement of Work terminates or expires, or (b) or in accordance with Section 8, Excess Inventory, below. Power is responsible for the following items, as appropriately invoiced by SLRTX, that accrue in the course of performance of this Agreement: (a) approved inventory purchased or manufactured, (b) charges or costs for which SLRTX may be liable or which SLRTX may have reasonably incurred in connection with ECN's, (c) charges associated with a reschedule, and (d) Cancellation Charges. 6. RESCHEDULING OF SHIPMENTS Subject to the provisions of this Section 6, Power may reschedule individual shipments of Product(s) (increases and decreases) according to the following schedule:
DAYS PRIOR TO SCHEDULED ALLOWABLE ALLOWABLE DELIVERY DATE INCREASE DECREASE 1-30 0% 0% 31-60 25% 25% 61-90 50% 50% Beyond 90 100% 100%
SLRTX will use reasonable efforts to accommodate such requests on a case-by-case basis. In the event that buffer inventory is required to meet these requirements, Power will bear all 4 5 costs associated with carrying such inventory. Upon request by Power, SLRTX will provide an estimate of such costs for Power to review. Such reschedules may be subject to additional charges, such as material and labor premiums, and will be contingent upon availability of material, personnel and capacity resources. SLRTX will provide estimates of all charges associated with a reschedule and such charges shall be reviewed and approved by Power prior to the reschedule being executed. Any rescheduled item may be invoiced at the price in effect at the time of shipment. In the event Power reschedules a shipment to a date more than ninety (90) days beyond the originally acknowledged ship date, such reschedule constitutes a cancellation of that portion of the order and the applicable cancellation charges will apply. Reschedules that result from failure to pay for earlier shipments will be subject to additional charges. 7. CANCELLATION OF SHIPMENTS Power's requests to cancel shipments of Products will be reviewed individually by SLRTX. If charges ("Cancellation Charges") apply to such cancellations, they will be assessed as follows: (a) for Products scheduled to ship within 30 days, Cancellation Charges shall be 100% of the price of the Products being canceled; (b) for Products scheduled to ship within 31-90 days, Cancellation Charges may include SLRTX' costs for material, work-in-process, and finished goods for such canceled shipments, third party supplier restocking or cancellation fees, and mutually agreed SLRTX material handling or other indirect costs. (c) for Products scheduled to ship beyond 90 days, Cancellation Charges will be limited to long lead or custom components, and a maximum of one MOQ lot. Charges will be based on the date written notice of a cancellation is received at SLRTX and SLRTX will use all commercially reasonable efforts to mitigate Power's liability for such charges, including canceling, restocking, reselling, or re-using material in other products. Where cancellation of a previously rescheduled shipment has occurred, the cancellation charge may be computed as if the previously requested reschedule had instead been a request for cancellation. Orders for tooling, test equipment or non-recurring services are firm and not cancelable. 5 6 8. EXCESS INVENTORY If Power cancels or reschedules purchase orders, or changes its forecast, or implements an ECN (such actions shall collectively be referred to as a "Material Event"), which results in excess material inventory (including long lead material, MOQ's, and unique/custom material), then if that excess material inventory is not fully consumed prior to the end of the month following the Material Event, SLRTX may request and Power agrees to pay SLRTX a carrying charge on the inventory of two and one-half percent (2 1/2%) per month. Power agrees to pay such carrying charge on such excess material until it is fully consumed; provided, however, that if the excess material inventory is not consumed by the end of the third month following the month of the Material Event, SLRTX may request and Power shall purchase such inventory from SLRTX and SLRTX will continue, at Power's option, to hold such inventory on Power's behalf subject to agreed carrying charges, or SLRTX will deliver the material to Power's designated location at Power's expense. SLRTX will use all commercially reasonable efforts to minimize the excess material inventory. 9. TERMS AND METHOD OF PAYMENT Terms of payment are net fifteen (15) days from date of invoice, subject to continuing credit approval. On or before the Effective Date of this Agreement, Power agrees to provide SLRTX a copy of its most recent financial statements. Thereafter, Power will provide updated financial statements on a quarterly basis within forty-five (45) days following the end of each fiscal quarter of Power. If Power fails to make timely payments, satisfy credit arrangements, or provide financial information as required in this Section 9, SLRTX may withhold shipment of Products until Power makes other arrangements satisfactory to SLRTX. In the event alternative arrangements are not made, SLRTX may defer or cancel the shipment(s), terminate this Agreement, and/or exercise any and all other legal rights and remedies, and Power agrees to compensate SLRTX in accordance with Sections 5, 6, 7, 8 and 13 of this Agreement. In the event that Power becomes a publicly traded company, then Power's obligation to provide financial information under this Section 9 shall cease. Charges for tooling, test equipment and non-recurring services may be invoiced upon SLRTX' commitment to obtain such items. 10. DELIVERY, TITLE & INSPECTION Prices are FOB SLRTX' point of shipment. Power may specify the carrier by so indicating on the face of its purchase order. Shipments will be shipped freight collect or third party billing, as agreed. SLRTX understands that Power desires that all shipments ordered within agreed lead times (as defined in Section 5) be made on the requested ship date. SLRTX will use all commercially reasonable efforts to ship Products on the requested ship date. SLRTX will advise Power of potential delays, their cause and the actions taken by SLRTX to resolve. Except for consigned material, title will pass to Power upon SLRTX' tender of delivery at SLRTX' dock. Power shall have a reasonable time to inspect the Products. Power will notify SLRTX in writing of particular deficiencies during the inspection period which shall be the 6 7 fifteen (15) day period immediately following receipt. Failure to give notice or particularize the deficiencies will constitute Power's acceptance. 11. TOOLING AND EQUIPMENT SLRTX will acquire or develop certain non-recurring engineering tooling and/or fixtures (the "NRE Tooling") in connection with the manufacture of the Products. Power will issue purchase orders for such NRE Tooling prior to SLRTX acquiring or developing the NRE Tooling. Power will be responsible for consigning certain functional test equipment (hereinafter "Equipment") to SLRTX solely for the purpose of performing functional test and repair on the Products. All other test and equipment responsibilities will be set forth in the Statement of Work or as otherwise agreed by the parties. SLRTX agrees to exercise reasonable care in the use and custody of the Equipment and shall use such Equipment only in performing its obligations under this Agreement. SLRTX further agrees to perform regular preventative maintenance, which excludes replacement of parts for which Power will be billed, at no charge. SLRTX will undertake repair of the Equipment, when necessary, at a reasonable charge to Power. Power will be responsible for replacing Equipment that is non-repairable or requires an upgrade due to ECN's. SLRTX will provide Power with necessary cost and back-up information to verify any non-repairable condition. SLRTX agrees that all NRE tooling and Equipment are the property of Power and SLRTX will not mortgage, pledge, assign or borrow against such property or otherwise create or attempt to create a security interest in the NRE Tooling and Equipment. Upon payment of all undisputed amounts owing to SLRTX under this Agreement, SLRTX agrees to return to Power, or assign per Power's written direction, any or all NRE Tooling and Equipment upon termination or expiration of this Agreement, or upon receipt of written request from 12. QUALITY SLRTX shall manufacture and perform workmanship inspection and agreed test procedures on Products in accordance with the Specification and SLRTX' Workmanship and Quality Standards. Upon request by Power, SLRTX will provide statistical process control data on critical processes, and yield and failure analysis reports in agreed formats and time frames. It is the parties' goal that Products be defect free, and each party will work to develop programs and processes intended to achieve an acceptable level of defect free Products. Products shall be subject to Power's inspection and test, either at Power's premises or, upon request, at SLRTX' premises. Power's remedies for defective Product are set forth in Section 7 8 17. SLRTX shall perform 1% AQL on workmanship inspection. If defects are found during such inspection, additional screening and testing will be performed. Power may perform source inspections at SLRTX' facilities, subject to agreed times, processes and procedures. SLRTX agrees to review and participate in Power's dock-to-stock certification program, as mutually agreed on, including but not limited to statistical process control practices and reporting. 13. TERMINATION In the event either party becomes insolvent or generally is unable to pay its debts as they become due, the other party may immediately cancel individual Statement(s) of Work, or cancel this Agreement in its entirety upon written notice. In the event of any other breach of this Agreement, the aggrieved party shall give the other party written notice to cure the breach within thirty (30) days. The aggrieved party may cancel this Agreement if the breach is not cured within thirty (30) days of receipt of such notice. Either party may terminate this Agreement or any individual Statement of Work without cause by giving 90 days written notice to the other party. In the event of termination without cause, SLRTX will continue shipment of all orders accepted prior to the date of notice and Power will remain obligated to accept and pay for such deliveries at the current pricing. Upon termination of this Agreement or Individual Statement of Work, Power agrees to reimburse SLRTX for all inventory purchased or manufactured and all charges or costs for which SLRTX may be liable or which SLRTX may have reasonably incurred in the course of performance of this Agreement or an individual Statement of Work, Cancellation Charges or charges associated with a reschedule. 14. CHANGES The parties recognize that changes to Products may be suggested from time to time. Changes will be proposed in writing. If by Power, SLRTX will promptly investigate the impact of the change and advise Power. SLRTX-proposed changes will be described in writing and will include the impact to current pricing and schedule. Changes will only be implemented upon receipt by SLRTX of Power's request to proceed with the change. Such request will be Power's acceptance of the indicated adjustment in the price or shipping schedule or both, and any costs to SLRTX for any material (and any cancellation or restocking fees) which is rendered excess due to the change. In the event Power requests that a change be implemented prior to SLRTX' evaluation of pricing and schedule impact, SLRTX will use reasonable 8 9 efforts to perform as directed and Power will be liable for all costs associated with such implementation. 15. WARRANTIES BY SLRTX THE FOLLOWING WARRANTIES FOR EQUIPMENT ARE IN LIEU OF ALL CONDITIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED CONDITIONS OR WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SLRTX warrants that at the time of delivery of Products, SLRTX has clear title to the Products that is manufactured by SLRTX with material supplied by SLRTX.. SLRTX warrants the Products against faulty workmanship and material supplied by SLRTX for a period of fifteen (15) months after the date of shipment. Such warranties are granted for failures that do not result from (a) design flaws or design parameters exceeding or violating component specifications; (b) external or environmental factors; (c) handling, processing, or manufacture of assemblies after shipment from SLRTX; (d) repair, attempted repair, or alteration other than by SLRTX; or (e) electrostatic discharge damage (not caused by SLRTX). Such warranties will not apply to specific components or assemblies (except to the extent that such assemblies exhibit faulty workmanship) for which Power has not provided functional tests to diagnose failures. SLRTX makes NO WARRANTY as to software which is supplied on an "AS IS" basis. Likewise, SLRTX makes NO WARRANTY as to prototypes, pre-production units, or units shipped at Power's request with less than the testing provided for in the work order for production units. SLRTX' warranties, as set forth above, are the only warranties made by SLRTX and shall not be enlarged, diminished or affected by, and no obligation or liability shall arise or grow out of, SLRTX' rendering of technical, programming, or other advice or services in connection with the Products. 16. WARRANTIES BY POWER; LICENSES Power warrants that it is the owner of all proprietary rights in the information provided to SLRTX in order to manufacture the Products, and that it has the unqualified right to make available to SLRTX material and other information, including drawings, designs and specifications. Additionally, Power warrants and represents that it is the owner of software provided to SLRTX hereunder and/or has the right to supply the software. Power hereby grants to SLRTX a license to use and reproduce the software, and any other documentation or information provided to SLRTX for the purposes contemplated by this Agreement. 9 10 17. POWER'S REMEDIES SLRTX' ENTIRE LIABILITY AND POWER'S SOLE AND EXCLUSIVE REMEDY for breach of warranty contained in this Agreement shall be at SLRTX' option to repair, replace (with new or equivalent to new parts) or credit Power's account for any Products found to be defective in workmanship during the warranty period. Power's remedy is contingent on (a) prompt written notification of the defect; (b) the cause not being the result of misuse, accident, neglect, alteration, improper testing, storage, installation or negligence on the part of the Power; and (c) return of the Products to SLRTX' manufacturing location with incoming shipment and in-transit loss or damage at Power's risk and expense. In the event that Products exhibit an unreasonably high DOA or initial inspection defect rate, SLRTX will pay for shipping expense both ways. Returned Products must be marked with SLRTX' Returned Material Authorization (RMA) number. An RMA number will be assigned upon notice to SLRTX' that Products will be returned. Such repair, replacement or credit shall constitute fulfillment of all liability of SLRTX to Power. Power agrees to pay a screening fee and other associated fees for assemblies submitted for warranty work that are not packed appropriately, do not duplicate the alleged failure when tested by SLRTX or are to be tested against a later version test software than was used at the time of manufacture. 18. DISCLAIMER OF DAMAGES NEITHER PARTY SHALL BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, LOSS OF USE OR DATA OR INTERRUPTION OF BUSINESS, WHETHER THE ALLEGED DAMAGES ARE LABELED IN TORT, CONTRACT OR INDEMNITY, EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. Without prejudice to the foregoing, if it should be held by a court of competent jurisdiction, in relation to any claim, that the preceding paragraph is for any reason ineffective, the parties agree that any costs, expenses and/or damages held to be payable for any claim under this Agreement shall in no event exceed the direct cost of remedying the breach, if applicable, or the individual purchase order value for each occurrence, whichever is the lesser. SLRTX is performing work per specifications provided by Power. Therefore, SLRTX shall not be liable for the technical adequacy or design of the product(s); nor shall SLRTX be liable for the safety or regulatory compliance of the Product(s), including but not limited to ensuring that the Products meet applicable government or responsible agency regulations. Power agrees to indemnify and save SLRTX harmless from and against all losses, expenses or damages arising out of any claim resulting from SLRTX' compliance with Power's Specifications. 10 11 Actions, however asserted, shall be commenced within two years from the date the cause of action accrues; provided, however, an action for nonpayment may be commenced at any time within four years from the date the cause of action accrues. 19. PROPRIETARY DATA; INFRINGEMENT Any confidential information exchanged by the parties shall be governed by the terms of that certain Nondisclosure Agreement No. 592412, or any renewal or replacement thereof which is signed by both parties. Power will defend at its expense, any action or claim brought against SLRTX or its subsidiaries alleging that Products provided by SLRTX under this Agreement infringe any patent, copyright, trademark or any other proprietary right, and Power will pay all costs and damages (including attorney's fees) incurred by SLRTX or its subsidiaries in such actions that are attributable to such actions or claims; provided that Power is promptly informed in writing and furnished a copy of each alleged infringement and is given authority, information, and assistance (at Power's expense) necessary to defend or settle such claim. Except for any licenses that are expressly granted by this Agreement, nothing in this Agreement or any course of dealing between the parties will be deemed to create a license from either party to the other of any intellectual property, whether by estoppel, implication or otherwise. 20. INDEPENDENT CONTRACTOR; COMPETITION Each of the parties hereto shall conduct the work to be performed hereunder as an independent contractor and not as an agent or employee of the other party. Subject to the terms and conditions of this Agreement, each party shall choose the means to be employed and the manner of carrying out its obligations hereunder. Nothing in this Agreement shall limit the right of SLRTX to manufacture products or provide services for other customers which may be competitive with those that are the subject of this Agreement Neither party shall be required to disclose planning information to the other. 21. REGULATORY APPROVAL Power is responsible for the Product's compliance with all applicable UL, CSA, FCC, and other approvals, standards and regulations. Power will notify SLRTX in advance of designating SLRTX' manufacturing location as the manufacturing location for the purposes of such approvals. SLRTX will cooperate with public and private regulatory organizations to allow periodic inspections at mutually acceptable times to maintain such approvals. 11 12 Should the Products or changes fail to meet the applicable approvals, standards or regulations, SLRTX may cease production until Power and SLRTX agree to required changes and applicable qualifications are met, without being in breach of this Agreement. Power is responsible for obtaining required approvals relative to any changes and will be responsible for all costs attributable to such requirements. 22. EXPORT; FORCE MAJEURE Each party agrees that it will not knowingly (a) export or re-export, directly or indirectly, any technical data (as defined by the U.S. Export Administration Regulations), including software received from the other under this Agreement, (b) disclose such technical data for use in, or (c) export or re-export, directly or indirectly, any direct product of such technical data, including software, to any destination to which such export or re-export is restricted or prohibited by U.S. Or non-U.S. law without obtaining prior authorization from U.S. Department of Commerce and other competent government authorities to the extent required by those laws. This clause shall survive termination or cancellation of this Agreement. SLRTX is not liable, either wholly or in part for nonperformance or a delay in performance due to force majeure or contingencies or causes beyond the reasonable control of SLRTX including but not limited to shortage of labor, fuel, raw material or machinery or technical; or yield failures where SLRTX has exercised ordinary care in the prevention thereof. Production and deliveries may be allocated by SLRTX in any reasonable manner in the event of product shortage. 23. NOTICE All notices required by this Agreement shall be in writing and delivered postage prepaid to the places indicated under the signatures. 24. PERSONAL INJURY INDEMNIFICATION Each party agrees to indemnify and hold the other harmless against any loss, cost or expense, including reasonable attorneys' fees, finally awarded against the other in connection with a claim by a third party for personal injury or property damage, to the extent that such damage is caused by a negligent act or omission by the indemnifying party or its agents. Each indemnitor's obligations hereunder shall be conditioned upon receiving a prompt notice of each such claim from the indemnitee and the sole authority to defend, and the indemnitee shall cooperate and provide reasonable assistance to the indemnitor in defense of the claim. Each party agrees to carry commercial liability, property damage, and automobile liability coverage, including contractual endorsement and products hazard coverage in reasonable amounts. 12 13 25. WAIVER; SEVERABILITY; APPLICABLE LAW; ASSIGNMENTS Failure of either party to enforce any term or condition of this Agreement will not be deemed to be a waiver of such term or condition. If any provision of this Agreement is held to be invalid, the other provisions will not be affected. This Agreement shall be governed by the laws of the State of Texas for contracts made and to be performed in that State. Neither party shall assign any of its rights or privileges hereunder without the prior written consent of the other party, unless such assignment is incident to the sale or transfer of substantially all assets of the business unit of the assigning party to which this Agreement relates. Any other attempted assignment or transfer of any of the rights, duties, or obligations herein shall be void unless consent is given in which case this Agreement shall be binding upon and inure to the benefit of the assigns. 13 14 ATTACHMENT A AGREEMENT NO. C970305 CONSIGNED MATERIAL Where the Statement of Work provides for Power to furnish consigned material to SLRTX the following terms are additionally incorporated into the Agreement. A. TITLE Title to all consigned material shall remain with Power. Liability for loss or damage to consigned material, in excess of a one percent (1%) allowance for shrinkage, will pass to SLRTX after SLRTX has signed for receipt from the carrier of such consigned material. Liability for loss or damage to consigned material, including finished Products produced from the consigned material, will pass back to Power upon SLRTX' tender of such consigned material or finished Product to a carrier for shipment to Power. B. WARRANTIES BY POWER Power warrants that at the time of delivery of consigned material Power has free and dear title to the consigned material. Power warrants the consigned material against faulty workmanship and materials, that it meets applicable specifications and that any tooling and test equipment that is part of the consigned material performs the functions on which SLRTX will rely to manufacture the Product. C. SLRTX' REMEDIES Power shall have the option to replace or repair defective consigned material. Power shall reimburse SLRTX for labor costs and other increased costs due to production breaks caused by defective consigned material. Power shall also pay appropriate reschedule or cancellation fees or other increased costs if Power's failure to provide consigned material interrupts SLRTX' production schedule. 15 ATTACHMENT B AGREEMENT NO. C970305 PASSIVE COMMODITY SUBSTITUTION APPROVAL FORM POWER COMPUTING CORPORATION This form sets forth the conditions under which Solectron Texas may substitute certain components for those specified on Power's BOM and sourced through Power's approved vendor list (AVL). Power's signature will constitute its express authorization for any substitutions made by Solectron Texas in accordance with the criteria and conditions listed below. RESISTORS: Substitution is approved for these components using the following criteria: o Equal/Better than Tolerance (i.e., 5% when AVL specs 10%) o Equal/Better than Power Rating (i.e., 1/4 watt when AVL specs 1/8 watt) CONDITIONS: 1. Applies to carbon film, metal film, and surface mount resistors only. 2. Wire wound resistors must meet AVL, no exceptions. 3. In all cases, resistance values must meet AVL specifications. 4. The temperature coefficient (PPM/DEG C) will be "equal to" or "better than". 5. Substitution can be done provided form, fit, and function meet original specification. INDUCTORS: Substitution is approved for these components using the following criteria: o Equal/Better than Tolerance (i.e., 10% when AVL specs 20%) CONDITIONS: 1. Surface mount shall be of the same size and pitch as specified. 2. The temperature coefficient (PPM/DEG C) will be "equal to" or "better than". 3. Q Value must be "equal to" unless AVL reads Q=XX or greater. 4. Substitution can be done provided form, fit, and function meet original specification. All substitutions are limited to Solectron Texas Strategic, Preferred+, and Preferred suppliers, and Power approved suppliers. CAPACITORS: Substitution is approved for these components using the following criteria: o Equal/Better than Tolerance (i.e., 10% when AVL specs 20%) o Equal/Better than Voltage (i.e., 20 volt when AVL specs 1 volt) o Equal/Better than Dielectric (i.e., NPO in place of X7R or X5U and X7R in place of Z5U.) 16 CONDITIONS: 1. Tantalum or electrolytic capacitors shall be replaced by the same type. 2. Surface mount shall be of the same size and pitch as specified. 3. Reel and Ammo pack radial/axial lead components with a smaller case size is acceptable. 4. The temperature coefficient (PPM/DEG C) will be "equal to" or "better than". 5. The type of film will remain the same. (i.e. polyester can not be substituted for polycarbonate, and polycarbonate can not be substituted for polysulfone, etc.) 6. The type of construction will remain the same (i.e. WRAP and fill cannot be substituted for hermetically sealed, etc.) 7. Substitution can be done provided form, fit, and function meet original specification. POWER APPROVES THESE SUBSTITUTIONS WITH THE AUTHORIZED SIGNATURE BELOW: POWER COMPUTING CORPORATION By: Signature: /s/ ---------------------------------------------- Name: J.R. Hindmarch Title: V.P. Operations Date: 3/25/97 2 EX-10.15 13 MAC OS LICENSE AGREEMENT 1 EXHIBIT 10.15 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] MAC OS LICENSE AGREEMENT This Mac OS License Agreement ("Agreement") is effective as of March 1, 1997 (the "Effective Date"), by and between International Business Machines Corporation, a New York corporation having an office at 1580 Route 52, Hopewell Junction, New York 12533 ("IBM") and Power Computing Corporation, a corporation formed under the laws of Delaware and having its principal place of business at 2555 North Interstate 35, Round Rock Texas 78664-2015 ("Licensee"). RECITALS IBM and Apple Computer, Inc. ("Apple") have entered into a license agreement under which Apple has granted to IBM the right to grant sublicenses to Apple's Mac(TM)OS operating system and other related materials described herein under certain terms and conditions. IBM and Licensee desire IBM to license to Licensee the Mac OS operating system and other related materials described herein under the terms and conditions set forth below. AGREEMENT 1. DEFINITIONS 1.1 "Certification Requirements" means minimum levels of compatibility imposed by Apple on all licensees of Licensed Software and documented by Apple for Licensee Computers to successfully operate in the following areas: installing and running the Licensed Software and applications which run on the Licensed Software, and enabling interoperability of the Licensed Software and Licensee Computers with printers, peripherals, add-on cards, monitors, and networks which are designed to operate with computers running the Licensed Software. A document describing the current Certification Requirements and testing process is attached hereto as Exhibit A. 1.2 "Change of Control" means an event that will be deemed to have occurred if: (1) there shall be consummated (a) any consolidation or merger of a party in which such party is not the continuing or surviving corporation, or pursuant to which shares of such party's common stock would be converted into cash, securities or other property, other than a merger of such party in which the holders of such party's common stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger or (b) any sale, lease, exchange or other transfer 1 IBM CONFIDENTIAL 2 (in one transaction or a series of related transactions) of all or substantially all the assets of such party. 1.3 "Confidential Information" means for each party, the terms and conditions of this Agreement (concerning licenses, royalties and license fees and payments, indemnification, warranty, termination, consequential damages and limitations on liability), information resulting from any audit pursuant to Section 3.2(b), any information relating to that party's product plans, designs, names, business opportunities, personnel, research, development or know- how designated as confidential as specified in Section 5; provided, however that "Confidential Information" shall not include information that: (a) is or becomes publicly known or available by publication, commercial use or otherwise through no fault of the receiving party; (b) is known by the receiving party at the time of disclosure and is not subject to restriction by another agreement with the disclosing party; (c) is independently developed by the receiving party without use of the disclosing party's Confidential Information; (d) is lawfully obtained without restriction from a third party who has the right to make such disclosure; (e) is released for publication by the disclosing party in writing; (f) is inherently disclosed in the use or distribution of the Licensed Software; or (g) is disclosed pursuant to operation of law provided that the disclosing party gives the owner of such information reasonable prior notice and reasonable cooperation to enable such owner to obtain a protective order. 1.4 "Enabling Technology" means the materials described under the heading "Enabling Technology" in Exhibit B, provided to Licensee pursuant to this Agreement. 1.5 "End User Documentation" means the End User documentation related to the Licensed Software and any updates to such documentation provided to Licensee by IBM under this Agreement, including but not limited to, user manuals in electronic, modifiable form. 1.6 "End User" means an entity or person who owns or leases a Licensee Computer for its own use and not for redistribution. 1.7 "IBM Microprocessor" means a microprocessor that bears the trademark "PowerPC" and is sold as an IBM product. 1.8 "Licensed Software" means the binary executable form of the software specified in Exhibit B under the heading, "Licensed Software." 1.9 "Licensee Computers" means hardware products substantially in the form they will be used by End Users which are manufactured by or for Licensee, each of which contains one or more IBM Microprocessors and satisfies the Certification Requirements. 1.10 "Marks" means the trademark and logo listed in Exhibit C; and such other marks owned by Apple that IBM notifies Licensee in writing are subject to the terms of this Agreement. 2 IBM CONFIDENTIAL 3 1.11 "Maintenance Releases" are releases of the Licensed Software designated by a change in the second digit to the right of the first decimal point (Mac OS 7.5X or Mac OS 7.5.X) that Apple makes generally available for licensing. Maintenance Releases are primarily for correcting errors or defects in prior release, making changes necessary for new models of computers, increasing performance and other incidental improvements. 1.12 "Major Releases'' are releases of the Licensed Software designated by change in the digit to the left of the first decimal point (e.g., Mac OS 8.x) Major Releases generally provide significant new functionality and/or significant architectural changes. 1.13 "Minor Releases'' are releases of the Licensed Software designated by a change in the first digit to the right of the first decimal point (Mac OS 7.X) that Apple makes generally available for licensing. Minor Releases generally provide some increased functionality and performance but are not Major Releases. 1.14 "Proprietary Components" means components in which Apple has some proprietary rights to be used for incorporation in Licensee Computers, including but not limited to the Mac OS ROMs. "Proprietary Components" does not mean any component which a provider has the right to supply without Apple's consent. 1.15 "Replacement Copy" means a copy of the Licensed Software sent to a Registered Customer of a Sublicensee which customer has purchased a Licensee Computer with the same version of the Licensed Software as the Replacement Copy, but which original copy of the Licensed Software has been lost or destroyed. 1.16 "Registered Customer" means an End User who owns or has leased a Licensee Computer with the Licensed Software and who has completed and mailed the registration card provided pursuant to Section 2.2 of this Agreement which registration card has been received by Apple, or whose ownership or lease of an License Computer with the Licensed Software has been verified by similar reliable means (e.g., sales records and electronic registration). 1.17 "Royalty Payments" means the payments Licensee is required to make to IBM pursuant to Section 3.2 of this Agreement and as described in Exhibit B of this Agreement. 1.18 "System Updates" means software which, when installed on a Licensee Computer which already has the Licensed Software installed on it, updates the Licensed Software to fix malfunctions, defects or errors, increase performance, and/or make other maintenance changes. 1.19 "Term" means the period during which this Agreement is in effect pursuant to Section 9 of this Agreement. 3 IBM CONFIDENTIAL 4 2. LICENSE AND RELATED RIGHTS AND RESTRICTIONS 2.1 License. (a) IBM hereby grants to Licensee a non-exclusive, non-transferable, worldwide, royalty-bearing, license: (i) to reproduce and have reproduced the Licensed Software in the form provided by IBM, and to distribute, directly and through its distributors, installed on a Licensee Computer delivered to an End User, one copy, plus one copy for backup purposes, of the same Minor Release or Maintenance Release for which the computer was certified or the most recent Minor Release or Maintenance Release; (ii) to grant End Users the right to use the Licensed Software and to make one copy of the Licensed Software in the form provided by IBM for back up purposes for each Licensee Computer owned or leased by such End User that contains the Licensed Software; and (iii) to distribute, directly and through its distributors, Maintenance Releases, System Updates and Replacement Copies of the Licensed Software, to Registered Customers of Licensee who own or have leased a Licensee Computer that contains the Licensed Software. The number of copies of the Licensed Software which Licensee is authorized to distribute pursuant to Section 2(a)(i) and the number of Maintenance Releases and System Updates which Licensee is authorized to distribute pursuant to Section 2(a)(iii) shall be limited in the aggregate over the term of this Agreement to the number of IBM Microprocessors purchased by Licensee during the term of this Agreement and in no event shall be greater than ** copies per quarter ("Authorized Copies"). In the event Licensee would like IBM to increase the number of Authorized Copies, Licensee shall submit a written request for such increase to IBM pursuant to Section 11.6. Provided that Licensee is in compliance with this Agreement, IBM will not unreasonably deny such request. (b) IBM hereby grants to Licensee a non-exclusive, non-transferable, paid-up, worldwide license to: (i) use, modify, reproduce and have reproduced the End User Documentation and to distribute one (1) copy of the End User Documentation together with each copy of the applicable Licensed Software; (ii) grant each End User who owns or has leased Licensee Computers that contain the Licensed Software the right to reproduce the number of copies of the End User Documentation equal to the number of such computers; and 4 IBM CONFIDENTIAL 5 (iii) reproduce and use internally, the Enabling Technology in connection with the installation of Licensed Software on Licensee Computers and the Enabling Technology and Licensed Software in connection with the design, development, manufacture, and testing of such computers. 2.2 Registration Cards; Restrictions; No Implied Rights; No Reverse Assembly. (a) Licensee will include with each copy of the Licensed Software, a registration card addressed to Apple, in the form provided by IBM for the purpose of allowing Apple to provide information to End Users regarding new releases of the Licensed Software, and other software and peripheral products. The information requested on the registration card will include, but not be limited to, the End User's name, address, and machine configuration. (b) Licensee will include, with each copy of the Licensed Software, an end user license agreement substantially in the form attached as Exhibit D, as may be updated for future licensing transactions from time to time by IBM. (c) Licensee will retain, on all copies of the Licensed Software and End User Documentation reproduced by or for Licensee or distributed by Licensee, copyright notices and other proprietary rights notices contained on copies of the Licensed Software or End User Documentation provided by IBM. (d) No rights are granted by this Agreement except those expressly set forth herein and nothing in this Agreement will limit either party's rights to develop or license competing products. (e) Licensee will not, create derivative works from, decompile, disassemble, or reverse assemble any Licensed Software (to the extent such restriction is permitted under applicable law). 2.3 Trademark License. (a) Grant. Subject to the provisions of this Section 2, IBM hereby grants to Licensee a non-exclusive, non-transferable, worldwide, paid-up, license to use the Marks, solely on or in connection with Licensed Software and Licensee Computers to the extent that the Licensed Software and Licensee Computers are licensed in Section 2.1. (b) Required Use of Mark. Licensee agrees to and will use the Marks on or in connection with the Licensed Software and Licensee Computers and such usage shall comply with the trademark specifications and guidelines attached as Exhibit C. Apple may issue updates and revisions to Exhibit C which will be uniformly applicable to all licensees of Licensed Software and Licensee will comply with such 5 IBM CONFIDENTIAL 6 updates and revisions. Licensee will include the following statement in conjunction with use of the Marks: "Mac OS and the Mac OS logo are trademarks of Apple Computer, Inc. and are used under license. The Mac OS logo is registered in the United States and other countries." or any other similar statement as Apple and/or IBM may from time to time request Licensee to use. (d) Limitations on Licensee. Licensee acknowledges and agrees that the Marks and the goodwill associated therewith are the sole property of Apple and that goodwill from the use of the Marks exclusively inures to the benefit of and belongs to Apple. Licensee acknowledges and agrees that this license does not extend to or include the right to use the Marks, or any other trademark, service mark or logo of Apple or any trademark, service mark or logo of IBM as or in the title or brand name of Licensee. Licensee agrees that this license does not extend to or include the right to use the Marks on promotional merchandise (such as, by way of example but not limitation, shirts, key chains, mugs, mouse pads, etc.). Licensee agrees it has no rights of any kind whatsoever with respect to the Marks except to the extent of the license or right to sublicense granted herein or in other written agreements between Apple and Licensee. Licensee agrees, to refrain from using or filing any application to register, in any class and in any country, any trademark or service mark which is the same as, similar to, or which incorporates, in whole or in part, any or all of the Marks, in the name or on behalf of Licensee or its related companies, or in the name of or on behalf of any of its officers, directors, employees, agents, servants, or other juristic entity within the control of, or which controls, any of them. (e) Use and Approvals. (i) Licensee acknowledges that it is of fundamental importance to IBM that copies of the Licensed Software and Licensee Computers shall be of the highest quality. Licensee agrees that Licensee Computers will, at all times during the Term, meet the Certification Requirements. (ii) When requested by IBM, Licensee shall supply to IBM a copy of the packaging, documentation and advertising for any such requested model of Licensee Computer. (f) Infringement. In the event Licensee learns of any actual or threatened infringement or passing-off of a Mark or that any third party alleges or claims that a Mark is liable to cause deception or confusion to the public, or is liable to dilute or infringe any right, Licensee shall immediately notify IBM of the particulars. Should Apple 6 IBM CONFIDENTIAL 7 choose to take any action with respect to the Marks, Licensee shall comply with Apple's reasonable requests for assistance in connection therewith. 2.4 Certification Requirements. Licensee agrees that each computer distributed by Licensee with the Licensed Software will satisfy the Certification Requirements. IBM will provide Licensee with written modifications to the Certification Requirements as they become available from Apple. Any such modified Certification Requirements will become effective only with respect to new computer models that are submitted for certification more than ninety (90) days after such modified Certification Requirements are received by IBM from Apple. Each time a new model computer is submitted to Apple for testing, Licensee shall pay Apple $ ** /hour for Apple's certification testing not to exceed $ ** . For certification purposes, a computer is considered a new model if it has a different (1) logic board layout, (2) processor speed, or (3) processor. If Licensee believes that a change in the foregoing aspects of a model will not affect the results of Apple's certification testing, it will notify Apple of the change it intends to make, and if Apple in its reasonable judgment believes that such change will affect the certification results, Apple will notify Licensee to submit the changed model for re-certification. Licensee shall submit to Apple, or its designated agent, prior to first commercial shipment of each new model of computer to be distributed with the Licensed Software, the number of units of such model specified in the Certification Requirements. Apple or its designee will conduct the certification testing and provide written notification of results for each submission within fifteen (15) working days of submission of such computer model to Apple; provided, however, that such period will be extended by the time required for Apple to obtain Licensee's consent for consultation with personnel in Apple's computer hardware division. Apple or its designee will return the units submitted for testing promptly upon certification of the new model or upon earlier request by Licensee. Licensee shall not make general commercial shipment of the Licensed Software in association with any new model computer until such new model computer passes Apple's certification testing. 2.5 Next Major Release. Provided Licensee has not materially breached this Agreement and that IBM obtains sufficient rights from Apple, IBM will offer Licensee, in a timely manner, a non-exclusive, royalty-bearing license to Apple's next Major Release of the Mac OS ("8.0") on substantially similar terms to, and at licensee fees and royalty rates no less favorable than, those that IBM grants to other parties shipping similar volumes of Mac OS 8.0 licensed from IBM and purchasing similar volumes of the same PowerPC microprocessors from IBM. 3. PAYMENTS 3.1 License Fee. In consideration of the licenses granted under Section 2, Licensee will pay a non-refundable license fee to IBM in the amount of $ ** within thirty (30) days of the Effective Date. During the first year of the Term, IBM will provide a rebate of this License 7 IBM CONFIDENTIAL 8 Fee to Licensee by issuing a credit to Licensee's account with IBM's Microelectronics Division which Licensee may use only for purchases of IBM Microprocessors during the first year of the Term as follows: (a) ** ; (b) ** ; and (c) ** . Unless used by Licensee as specified above, these credits will expire one year after the Effective Date. 3.2 Royalty Payments and Statements. (a) Licensee will pay to IBM Royalty Payments associated with the distribution of copies of the Licensed Software by Licensee in connection with this Agreement as follows: For each copy of the Licensed Software delivered by Licensee to a third party with a Licensee Computer or used by Licensee internally, Licensee will pay to IBM a royalty in the amount and according to the terms specified in Exhibit B. Notwithstanding the foregoing, Licensee shall not be obligated to pay IBM any royalty for: (i) distribution of Maintenance Releases, System Updates, and Replacement Copies pursuant to Section 2.1(a)(iii) above, provided, however that Maintenance Releases, System Updates and Replacement Copies will be royalty-free only if they are shipped as a replacement for or an update to copy of the Licensed Software for which a royalty has been paid or is not due; (ii) use by Licensee of a reasonable number of copies of each version of the Licensed Software for demonstrating the Licensed Software (provided such use does not include distribution of the Licensed Software to End Users), and for internal use in training, briefing and porting centers; and (iii) copies used by IBM or Sublicensees pursuant to Section 2.1(b)(iii). IBM will provide Licensee with a credit against Royalty Payments for any copies of Licensed Software which are returned to Licensee for which a royalty was paid. (b) Licensee shall keep and maintain appropriate books and records necessary for verification that the applicable license fees and royalties have been paid. During the term of this Agreement and for three (3) years thereafter Apple and IBM shall be entitled, not more than once annually and on thirty (30) days' prior written notice, to retain independent auditors at Apple's or IBM's expense, as applicable, to review Licensees' books and records for the purpose of verifying the accuracy of the statements provided and amounts paid pursuant to this Section 3. Such audit firms will be required by agreement to keep the information learned in the audit confidential. Any underpayment or overpayment by Licensee determined as a result of the audit will be reflected in the following quarter's statement and Royalty Payment. If such audit verifies an underpayment error of greater than five percent (5%) of the aggregate royalties paid for the period being reviewed, Licensee shall pay the cost of such audit. Licensee shall pay all amounts when due, and any amount not paid when due shall accrue interest at the annual rate of two percentage points higher than the prime interest rate quoted by the head office of Citibank, N.A., New York, at the close of banking on such due date or on the first business day thereafter if such 8 IBM CONFIDENTIAL 9 date falls on a non-business day, or the highest rate allowed by law, if lower, from the date when the payment should have been paid and ending when paid. 3.3 Taxes. Licensee is responsible for payment of any taxes on payments made under this Agreement except taxes based on IBM's income for which IBM shall be responsible. 3.4 Form of Payment. The licensee fee and all royalty statements and payments will be made in U.S. dollars and sent to: Manager of Marketing and Sales Operations International Business Machines Corporation 1580 Route 52 - Zip 92E Hopewell Junction, NY 12533 4. CONFIDENTIALITY 4.1 It is understood that either party may refuse to accept information that is identified as Confidential Information. When Confidential Information is disclosed in writing, the writing will contain an appropriate legend, such as "Apple Confidential Information", "Licensee Confidential Information" or "IBM Confidential Information." 4.2 If such disclosure is orally and/or visually made, disclosure will begin with an identification as confidential information and be confirmed by the disclosing party in a written resume delivered within thirty (30) calendar days following such disclosure to the receiving party. The resume will: (a) specifically recite the information deemed to be Confidential Information and identify it as Confidential Information; (b) state that the resume confirms a prior oral and/or visual disclosure; (c) set forth the date of that disclosure; and (d) state that the prior disclosure and the resume have been made pursuant to this Agreement. 4.3 Each party will protect the other party's and Apple's Confidential Information from unauthorized dissemination with the same degree of care that the first party uses to protect its own like information but in no event less than reasonable care. Each party agrees for a period of five (5) years from the receipt thereof not to disclose to third parties the other party's and Apple's Confidential Information without the prior written consent of the other party. Subject to patent rights, copyrights, any express use restrictions on Confidential Information in this Agreement, and provided the use of the disclosing party's documents or software containing Confidential Information does not exceed the scope of any applicable 9 IBM CONFIDENTIAL 10 licenses, there is no use restriction on the receiving party regarding any Confidential Information received pursuant to this Agreement and the receiving party will be free to use any ideas and concepts contained therein. Receipt of Confidential Information under this Agreement will not create any obligation in any way limiting or restricting the assignment and/or reassignment of employees within a party or between a party and any of its subsidiaries. 5. DELIVERY & PROPRIETARY COMPONENTS 5.1 IBM will deliver the Licensed Software, Enabling Technology and End User Documentation in accordance with the delivery terms in Exhibit B. 5.2 Licensee will use the Proprietary Components solely for incorporation into or servicing of Licensee Computers, and not for other purposes, including resale to others. This Agreement does not grant a license, expressly or by implications, to any intellectual property rights that Apple may have in the Proprietary Components. 6. SUPPORT 6.1 Licensee will be primarily responsible for providing support to Licensee's End Users and distributors and will be ultimately responsible for providing the following support: Licensee shall be responsible for handling all issues raised by Licensee's End Users involving a lack of understanding by the End User as to how to use a particular feature of the Licensed Software where such answer is either available in the End User Documentation or can be reasonably deduced therefrom. IBM will not be responsible for providing support directly to Licensee's End Users. Licensee will not direct its End Users to Apple or IBM for support in connection with Licensee Computers. IBM will provide support to Licensee to answer questions that cannot reasonably be answered by Licensee's support personnel. IBM will provide one (1) training session in PowerPC architecture and reference designs for up to two (2) of Licensee's support personnel. IBM will make available to Licensee a copy of an Apple course providing an introduction to RISC and PowerPC. IBM will provide one training and support session to Licensee's support personnel at one of IBM's facilities to assist Licensee in supporting End Users. For Licensee Computers for which Licensee requests that IBM provide support, Licensee shall provide at least one (1) Mac OS compatible system to IBM for each new model computer which requires certification under Section 2.4 to enable IBM to provide technical support specified in this Section 6.1 to Licensee. One (1) system is to be supplied to IBM's technical support center in Austin, Texas. If the licensed system is to be marketed in Europe/Middle East or Asia Pacific regions, one (1) additional system is to be provided to 10 IBM CONFIDENTIAL 11 the IBM technical support center in each region, for a total of up to three (3) systems per licensed product family. These systems will not include monitor, keyboard or mouse. 6.2 Developer Partner Program. Licensee will receive a complimentary membership in Apple's Developer Partner Program. The current program entitles a licensee to: - have access to the Developer Technical Support Group. They provide support via e-mail for creating 3rd party software or peripherals for Mac OS-compatible computers. - various mailings of technical information: Apple Directions: marketing info Developer CD Series: 3 CDS rotate each quarter containing: development tools, sample code, system software develop magazine (quarterly) - Apple's Technical Journal for creating software and hardware for the Mac utilizing various pieces of technology. - technical resources: sample code, technical notes, developer notes, and tools - seeding of future Mac technologies (i.e. QuickTime, VR, QuickDraw 3D, etc...) Apple may change the Developer Partner program and benefits from time to time. 7. NO WARRANTY 7.1 IBM MAKES NO WARRANTY, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO ANY LICENSED SOFTWARE, ENABLING TECHNOLOGY, OR ANY OTHER DELIVERABLES UNDER THIS AGREEMENT, LICENSED AND/OR DELIVERED TO LICENSEE FROM IBM. 8. TERM This Agreement will commence on the Effective Date and will continue until the earliest of the following occur: (i) the later of when Apple discontinues shipping products containing Mac OS 7.x, or twelve (12) months from Apple's general commercial release of the next Major Release; (ii) April 10, 2000; or (iii) termination of this Agreement pursuant to Section 9, below. 11 IBM CONFIDENTIAL 12 9. TERMINATION 9.1 Termination for Cause By Either Party. Either party will have the right to terminate this Agreement for cause immediately upon written notice at any time if: (a) The other party is in material breach of any term, condition or covenant of this Agreement and fails to cure that breach within thirty (30) days after receiving written notice of that breach and of the notifying party's intention to terminate. (b) The other party: (i) becomes insolvent; (ii) admits in writing its insolvency or inability to pay its debts or perform its obligations as they mature; or (iii) makes an assignment for the benefit of creditors; (iv) undergoes a Change of Control. 9.2 Termination for Convenience by IBM. IBM may terminate this Agreement without cause upon six (6) months prior written notice to Licensee. 9.3 Termination by IBM. IBM may terminate this Agreement upon thirty (30) days' prior written notice to Licensee if the Mac OS License Agreement between IBM and Apple dated as of April 10, 1996 is terminated. 9.4 Effect of Termination. Upon any termination of this Agreement, all licenses and other rights granted under this Agreement will automatically terminate and each party will be released from all obligations and liabilities to the other occurring or arising after the date of such termination, except that the provisions of Sections 1, 2.2, 2.3(c), 3.2, 3.3, 3.4, 4, 7, 9.3, 10 and 11, and any liability arising from any breach of this Agreement will survive termination of this Agreement. Termination of this Agreement will not affect the rights of any End User to continue to use the Licensed Software or any Licensee Computer. Upon such termination, Licensee may sell such quantities of Licensee Computers together with copies of the Licensed Software pursuant to the licenses in this Agreement, to the extent necessary to fulfill binding written contractual obligations (e.g., accepted purchase orders for a specified quantity, price and delivery date, and not purchase or distribution agreements without committed quantities) in existence at the time of notice of termination, for up to three (3) months after termination. Any obligation to pay incurred prior to termination will survive termination. Neither party will be liable to the other for damages of any sort solely as a result of terminating this Agreement in accordance with its terms. Termination of this Agreement will be without prejudice to any other right or remedy of either party. 10. CONSEQUENTIAL DAMAGES; LIMITATION OF LIABILITY 10.1 CONSEQUENTIAL DAMAGES. IN NO EVENT SHALL IBM BE LIABLE TO LICENSEE FOR ANY SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND, ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS OR DAMAGES TO 12 IBM CONFIDENTIAL 13 LICENSEE'S BUSINESS REPUTATION HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER IN AN ACTION FOR CONTRACT, STRICT LIABILITY OR TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT IBM HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY REMEDY. 10.2 LIMITATION OF LIABILITY. IN NO EVENT SHALL IBM'S LIABILITY TO LICENSEE IN THE AGGREGATE, UNDER THIS AGREEMENT EXCEED THE AMOUNTS ACTUALLY PAID BY LICENSEE TO IBM UNDER THIS AGREEMENT AS ROYALTIES FOR THE COPIES OF LICENSED SOFTWARE THAT ARE THE SUBJECT OF THE CLAIM, OR ONE HUNDRED THOUSAND DOLLARS ($100,000), WHICHEVER IS GREATER. 11. GENERAL 11.1 Force Majeure. Neither party will be liable for any failure or delay in its performance under this Agreement due to causes, including, but not limited to, an act of God, act of civil or military authority, fire, epidemic, flood, earthquake, riot, war, sabotage, labor shortage or dispute, and governmental action, which are beyond its reasonable control; provided that the delayed party: (i) gives the other party written notice of such cause promptly, and in any event within fifteen (15) days of discovery thereof; and (ii) uses its reasonable efforts to correct such failure or delay in its performance. The delayed party's time for performance or cure under this Section 11.1 will be extended for a period equal to the duration of the cause or sixty (60) days, whichever is less, provided the delayed party is complying with Section 11.1 (ii) above. 11.2 Assignment. The rights and liabilities of the parties hereto will bind and inure to the benefit of their respective successors, executors and administrators, as the case may be, provided that Licensee may not assign or delegate its rights or obligations under this Agreement either in whole or in part, (by operation of law or merger or otherwise), without the prior written consent of IBM. Any attempted assignment in violation of the provisions of this Section 11.2 will be void. 11.3 Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California as applied to agreements entered into and to be performed entirely within California between California residents. Both parties will comply with applicable export laws and regulations and will cooperate in executing necessary documentation to comply with such laws and regulations. The parties specifically exclude applicability of the Convention Relating to Uniform Law on the International Sale of Goods. With respect to any suit, action or other proceeding arising out of this Agreement, or any other transaction contemplated thereby, the parties hereto expressly waive any right they may have to a jury trial and agree that any proceeding hereunder shall be tried by a judge without a jury. 13 IBM CONFIDENTIAL 14 11.4 Jurisdiction and Venue. Licensee agrees to submit to the jurisdiction, and waive any venue objections against, the United States District Court for the Northern District of California, or in the case of an action for which there is not federal jurisdiction, to the California state courts located in Santa Clara County, California, in any litigation arising out of the Agreement. 11.5 Severability. If for any reason a court of competent jurisdiction finds any provision of this Agreement, or portion thereof, to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect to the extent it still gives effect to the intent of the parties. 11.6 Notices. All notices required or permitted under this Agreement will be in writing, will reference this Agreement and will be deemed given when: (i) delivered personally; (ii) when sent by confirmed telex or facsimile; (iii) five (5) days after having been sent by documented registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) day after deposit with a commercial overnight carrier specifying next day delivery, with written confirmation of receipt. All communications will be sent to the addresses set forth below to or such other address as my be designated by a party by giving written notice to the other party pursuant to this Section 11.6. Licensee: IBM: Mr. Stephen Kahng Mr. Jesse Parker Chairman & CEO Director of Marketing Power Computing IBM Marketing & Sales 2555 North Interstate 35 IBM Microelectronics Division Round Rock, Texas 78664-2015 404 Wyman Street Waltham, MA 02254 With a copy to Licensee's Legal With a copy to IBM's Law Dept. Dept. at the following address: at the following address: 2555 North Interstate 35 1580 Route 52 Round Rock, Texas 78664-2015 Hopewell Junction, NY 12533 11.7 No Waiver. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. 11.8 Third Party Beneficiary. Licensee acknowledges and agrees that Apple is a third party beneficiary under this Agreement and has the right to enforce any provision hereunder. 14 IBM CONFIDENTIAL 15 11.9 Counterparts. This Agreement may be executed in or more counterparts, each of which will be deemed an original, but which collectively will constitute one and the same instrument. 11.10 Headings and References. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 11.11 Trademark Usage. Except as set forth in Section 2.3 or other written agreements between the parties, neither party is licensed, without the other party's prior written consent, to use any of the other party's or Apple's trademarks, service marks, trade names, logos or other commercial or product designations for any purpose, including, but not limited to, use in connection with any products, promotions, advertisements or exhibitions. 11.12 Relationship of Parties. IBM and Licensee are independent contractors. Neither party nor its employees, consultants, contractors or agents are agents, employees or joint ventures of the other party, nor do they have any authority, except as provided in this Agreement or other agreement between the parties, to bind the other party by contract or otherwise to any obligation. They will not represent to the contrary, either expressly, implicitly, by appearance or otherwise. 11.13 Complete Agreement. This Agreement, including all exhibits, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. No amendment to or modification of this Agreement will be binding unless in writing and signed by a duly authorized representative of both parties. 11.15 Publicity. Neither party will issue any press release or make any statement of announcement to any third party regarding this Agreement unless and until expressly agreed to by both parties in writing. 15 IBM CONFIDENTIAL 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date last signed below. POWER COMPUTING INTERNATIONAL BUSINESS CORPORATION MACHINES CORPORATION By: /s/ By: /s/ ------------------------ --------------------------------- Name: Stephen Kahng Name: John C. Gleason Title: Chairman & CEO Title: Vice President and General Manager Worldwide Sales and Marketing Date: February 14, 1997 Date: February 23, 1997 ---------------------- ----------------------------- 16 IBM CONFIDENTIAL 17 EXHIBIT A CERTIFICATION REQUIREMENTS The current Certification Requirements are attached hereto and are hereby incorporated herein by reference. The Certification Requirements will subsequently be updated for computers using the CHRP version of the Mac OS operating system. 17 IBM CONFIDENTIAL 18 EXHIBIT B LICENSED SOFTWARE This exhibit sets forth the royalty rate and other terms relating to the Licensed Software: LICENSED SOFTWARE: The Licensed Software consists of the Licensee non-CHRP (PowerPC and Motorola 68xxx) version and Licensee CHRP version of the Mac OS 7.5.x operating system, Maintenance Releases, Minor Releases and System Updates thereto for Licensee Computers in the following languages, as they become available: US English, UK English, Italian, German, French, Spanish, Portuguese, Swedish, Norwegian, Danish, Finnish, Dutch, Traditional Chinese, Simplified Chinese, Japanese. (This license does not include a license to the Japanese fonts from the FDPC consortium.) Also, to the extent that other language versions become available to IBM from Apple at royalty rates no greater than those for the above non-US English language versions, IBM will make them available to Licensee hereunder. ENABLING TECHNOLOGY: Manufacturing Final Test Tool. This tool is used by Apple during the final test phase in the manufacture of a Macintosh computer. This test is very extensive. This tool is extensible to allow a licensee to create additional tests beyond the tests created and provided by Apple. This tool includes: complete documentation, header files, and libraries to enable a licensee to create new tests to meet its additional requirements. Apple Personal Diagnostics. This tool provides comprehensive diagnostic test on logic board, hard disk, floppy disk drives, system software and display. It also provides information about the system configuration. The Automatic Diagnostics feature allows testing of the system automatically when the system is not otherwise in use. These tools alert users to problems and suggest corrections. Mac OS Certification Environment. Apple is developing a new certification procedure under which licensees of the Licensed Software will be able to perform certification testing on their own with limited validation being conducted by Apple. To enable such self-certification, Apple is developing a tool, currently known as the Mac OS Certification Environment, which Apple intends to provide to licensees of the Licensed Software and which will enable licensees to determine, to a large extent, whether their computers meet the Certification Requirements. Apple intends to provide pre-release copies of this tool to licensees on an evaluation basis throughout 1996. Version 1.0 of the tool is currently expected to be released by early 1997. Apple's goal is to have self certification with validation fully in place at that time. 18 IBM CONFIDENTIAL 19 Pre-Release Seed copies of the Licensed Software. Enabling Technology includes prerelease copies of the Licensed Software provided to Licensee. The current versions of the Manufacturing Final Test Tool and Apple Personal Diagnostics will be delivered to Licensee within thirty (30) days of the Effective Date. Additional Enabling Technology and updates to the current Enabling Technology will be made available to Licensee within thirty (30) days of the date it is made available to IBM. ROYALTY RATE AND PAYMENT TERMS: Subject to the provisions of this Agreement, royalties will be due and payable upon all distributions of the Licensed Software by Licensee, except Maintenance Releases, System Upgrades and Replacement Copies distributed pursuant to Section 2.1(a)(iii) according to the following terms and payment schedule: Royalty Payments will be based on quarterly unit volume. Quarterly unit volume will be calculated based on the following four calendar quarters: January-March, April-June, July- September, and October-December. For the period starting on the Effective Date and ending on the last day of the second full quarter after the Effective Date the royalty rate will be $ ** for U.S. English versions of the Licensed Software and $ ** for all other language versions of the Licensed Software regardless of Licensee's actual volume. For all subsequent quarters (except as provided below) the royalty rates are:
Quarterly Unit Volume US Eng. Other ** $ ** $ **
When Licensee sells a model of Licensee Computer that is a desktop system having an average price paid by the End User below $ ** or a notebook computer having an average price paid by the End User below $ ** , the royalty rates are:
Quarterly Unit Volume US Eng. Other ** $ ** $ **
Licensee must provide reliable evidence of the average street price of a model of Licensee Computer (which IBM shall have the right to audit pursuant to Section 3.2(b) above) to be entitled to the above discounted royalty rates. Within fifteen (15) days after the close of each calendar month Licensee shall provide a statement certified correct by an officer of Licensee, indicating the number and type of copies distributed by 19 IBM CONFIDENTIAL 20 Licensee during the calendar month for which royalties are being paid, the amount of royalties owed for the month, and an itemization of the volume of Licensee Computers sold by Licensee in the U.S. versus the volume of Licensee Computers sold by Licensee outside of the U.S. IBM will invoice Licensee for the Royalty Payment amount which Licensee owes for the unit volume for that month no sooner than fifteen (15) days after the close of the calendar month. Payment by Licensee will be due within ** days from the date of invoice. Late payment of invoices will be assessed a charge equal to the lesser of one and one-half percent (1.5%) per month or the statutorily allowed maximum rate of interest in accordance with the laws of the State of New York. The royalty rate for the current quarter will be based on the prior quarter unit volume. An adjustment will be made at the end of the quarter to reflect the royalty rate for the quarterly unit volume actually achieved. Each Royalty Payment shall be accompanied by a statement of the type described in the previous paragraph indicating the number and type of copies distributed by Licensee during the calendar month. In the event that Licensee fails to provide a statement to IBM within fifteen (15) days of the end of the calendar month, IBM will invoice Licensee based on the number of IBM Microprocessors shipped from the Effective Date through the end of the calendar month, less the number of units of Licensed Software on which a royalty has previously been paid. DELIVERY OF LICENSED SOFTWARE: IBM will deliver to Licensee the IBM U.S. English version of Mac OS 7.6 and the corresponding End User Documentation in electronic form within fifteen (15) days of the Effective Date. Each language version of MAC OS 7.6 and any Minor Release or Maintenance Release thereafter for the Licensed Software will be delivered to Licensee within thirty (30) days of the date IBM receives each such language version. 20 IBM CONFIDENTIAL 21 EXHIBIT C MARKS "MAC OS" MAC OS STYLIZED LOGO APPLE TRADEMARK GUIDELINES The Apple Trademark Guidelines and the Usage Guidelines for the Mac OS Logo are attached hereto and are incorporated herein by reference. Required Use of Mark The Marks must be displayed on and in connection with the Licensed Software and Licensee Computers in at least the following instances: (i) on at least two sides of the outside of the box or other package in which a Licensee Computer is shipped and on the packaging in which the Licensed Software is shipped; (ii) on the copyright/title page of End User Documentation for Licensed Software and Licensee Computers; (iii) by prominently displaying the Marks on promotional material, including, without limitation, advertising, point of sale and data sheets for the Licensed Software and Computers; and (iv) the Mark must be retained on the screen display of the Licensed Software at boot up. Licensee may also use the Marks in other ways on or in connection with the Licensed Software and Licensee Computers in accordance with Section 2.3. All such usage will comply with the Apple trademark Guidelines and the Usage Guidelines. Use of the Marks as authorized by this Agreement may be done by Licensee or its authorized agents. Amendment to Trademark Guidelines The paragraph entitled, "the Mac OS Logo trademark" in the attached Apple Trademark Guidelines and the Usage Guidelines is amended in its entirety to read as follows: "Only Apple and authorized licensees and sublicensees can use the Mac OS Logo, and then only as specified in their license agreement." 21 IBM CONFIDENTIAL 22 EXHIBIT D END USER SOFTWARE LICENSE APPLE COMPUTER, INC. LICENSE FOR MAC(TM) OS PLEASE READ THIS LICENSE CAREFULLY BEFORE USING THE SOFTWARE. BY USING THE SOFTWARE, YOU ARE AGREEING TO BE BOUND BY THE TERMS OF THIS LICENSE. 1. License. The application, demonstration, system and other software accompanying this License, whether on disk, in read only memory, or on any other media (the "Apple Software"), the related documentation and fonts are licensed to you by Apple Computer, Inc. or its local subsidiary, if any ("Apple''). You own the disk on which the Apple Software and fonts are recorded but Apple and/or Apple's Licensor(s) retain title to the Apple Software, related documentation and fonts. This License allows you to use the Apple Software and fonts on a single computer and make one copy of the Apple Software and fonts in machine-readable form for backup purposes only. You must reproduce on such copy the Apple copyright notice and any other proprietary legends that were on the original copy of the Apple Software and fonts. You may use the Apple Software in a networked environment so long as each computer in such environment is the subject of a Software license for the Apple Software; however, you may not electronically transmit the Apple Software from one computer to another over a network. You may also transfer all your license rights in the Apple Software and fonts, the backup copy of the Apple Software and fonts, the related documentation and a copy of this License to another party, provided the other party reads and agrees to accept the terms and conditions of this License. 2. Restrictions. The Apple Software contains copyrighted material, trade secrets and other proprietary material and in order to protect them, and except as permitted by applicable legislation, you may not decompile, reverse engineer, disassemble or otherwise reduce the Apple Software to a human-perceivable form. You may not modify, network, rent, lease, loan, distribute or create derivative works based upon the Apple Software in whole or in part, except for the limited networking described above in Section 1. THIS APPLE SOFTWARE MAY NOT BE IMPORTED TO, USED IN, OR RE-EXPORTED FROM FRANCE OR ANY OF ITS DEPARTMENTS OR TERRITORIES. [This last sentence is not required for the French version of Mac OS]. 3. Termination. This License is effective until terminated. You may terminate this License at any time by destroying the Apple Software, related documentation and fonts and all copies thereof. This License will terminate immediately without notice from Apple if you fail to comply with any provision of this License. Upon termination you must destroy the Apple Software, related documentation and fonts and all copies thereof. 22 IBM CONFIDENTIAL 23 4. Export Law Assurance. You may not use or otherwise export or reexport the Apple Software except as authorized by United States law and the laws of the jurisdiction in which the Apple Software was obtained. In particular, but without limitation, the Apple Software may not be exported or reexported (i) into (or to a national or resident of) Cuba, Iran, Iraq, Libya, North Korea, Syria or any other U.S. embargoed country or (ii) to anyone on the U.S. Treasury Department's list of Specially Designated Nationals or the U.S. Department of Commerce's Table of Denial Orders. By using the Apple Software, you represent and warrant that you are not located in, under control of, or a national or resident of any such country or on any such list. 5. Government End Users. If the Apple Software is supplied to the United States Government, the Apple Software is classified as "restricted computer software" as defined in clause 52.227-19 of the FAR. The United States Government's rights to the Apple Software are as provided in clause 52.227-19 of the FAR. 6. Disclaimer of Warranty on Apple Software. You expressly acknowledge and agree that use of the Apple Software and fonts is at your sole risk. The Apple Software, related documentation and fonts are provided "AS IS" and without warranty of any kind and Apple and Apple's Licensor(s) (for the purposes of provisions 7 and 8, Apple and Apple's Licensor(s) shall be collectively referred to as "Apple") EXPRESSLY DISCLAIM ALL WARRANTIES AND/OR CONDITIONS, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES AND/OR CONDITIONS OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. APPLE DOES NOT WARRANT THAT THE FUNCTIONS CONTAINED IN THE APPLE SOFTWARE WILL MEET YOUR REQUIREMENTS, OR THAT THE OPERATION OF THE APPLE SOFTWARE WILL BE UNINTERRUPTED OR ERROR FREE, OR THAT DEFECTS IN THE APPLE SOFTWARE AND THE FONTS WILL BE CORRECTED. FURTHERMORE, APPLE DOES NOT WARRANT OR MAKE ANY REPRESENTATIONS REGARDING THE USE OR THE RESULTS OF THE USE OF THE APPLE SOFTWARE AND FONTS OR RELATED DOCUMENTATION IN TERMS OF THEIR CORRECTNESS, ACCURACY, RELIABILITY, OR OTHERWISE. WITHOUT PREJUDICE TO THE GENERALITY OF THE FOREGOING, APPLE DOES NOT WARRANT OR MAKE ANY REPRESENTATION OR GUARANTEE REGARDING THE AUTHENTICITY OR SECURITY OF ANY DIGITAL SIGNATURE GENERATED USING THE APPLE SOFTWARE, OR ANY WARRANTY OR REPRESENTATION THAT THE PERSON OR ENTITY THAT IS USING SUCH A DIGITAL SIGNATURE HAS THE AUTHORITY TO DO SO. NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY APPLE OR AN APPLE AUTHORIZED REPRESENTATIVE SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF THIS WARRANTY. SHOULD THE APPLE SOFTWARE PROVE DEFECTIVE, YOU (AND NOT APPLE OR AN APPLE AUTHORIZED REPRESENTATIVE) ASSUME THE ENTIRE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU. THE TERMS OF THIS DISCLAIMER AND THE LIMITED WARRANTY IN PARAGRAPH 3 DO NOT AFFECT OR PREJUDICE THE STATUTORY RIGHTS OF A CONSUMER ACQUIRING APPLE PRODUCTS OTHERWISE THAN IN THE 23 IBM CONFIDENTIAL 24 COURSE OF BUSINESS, NEITHER DO THEY LIMIT OR EXCLUDE ANY LIABILITY FOR DEATH OR PERSONAL INJURY CAUSED BY APPLE'S NEGLIGENCE. 7. Limitation of Liability. UNDER NO CIRCUMSTANCES INCLUDING NEGLIGENCE, SHALL APPLE BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES THAT RESULT FROM THE USE, INCLUDING BUT NOT LIMITED TO THE IMPROPER, WRONGFUL, OR FRAUDULENT USE OF THE DIGITAL SIGNATURES GENERATED USING THE APPLE SOFTWARE, OR INABILITY TO USE THE APPLE SOFTWARE OR RELATED DOCUMENTATION, EVEN IF APPLE OR AN APPLE AUTHORIZED REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME JURISDICTIONS DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU. In no event shall Apple's total liability to you for all damages, losses, and causes of action (whether in contract, tort (including negligence) or otherwise) exceed the amount paid by you for the Apple Software and fonts. 8. Controlling Law and Severability. If there is a local subsidiary of Apple in the country in which the Apple Software License was purchased, then the local law in which the subsidiary sits shall govern this License. Otherwise, this License shall be governed by and construed in accordance with the laws of the United States and the State of California, as applied to agreements entered into and to be performed entirely within California between California residents. If for any reason a court of competent jurisdiction finds any provision of this License, or portion thereof, to be unenforceable, that provision of the License shall be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this License shall continue in full force and effect. 9. Complete Agreement. This License constitutes the entire agreement between the parties with respect to the use of the Apple Software, related documentation and fonts, and supersedes all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. No amendment to or modification of this License will be binding unless in writing and signed by a duly authorized representative of Apple. 24 IBM CONFIDENTIAL EX-10.20 14 LETTER AGREEMENT DATED JUNE 19, 1997 1 EXHIBIT 10.20 [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY A DOUBLE ASTERISK (**). THE CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.] June 19, 1997 Geoffrey S. Burr Vice President Business Development Power Computing Corp. 2400 North Interstate Highway 35 Round Rock, Texas 78681-7903 Re: Mac OS Licensing Dear Mr. Burr: The enclosed term sheets reflect the agreement reached by Power Computing and Apple on June 4, 1997 in Cupertino, with a few additional terms for clarification and completeness. By signing below, the parties agree (1) that the enclosed term sheets will serve as a writing to memorialize the agreement reached on June 4, (2) that the parties agree to be bound to these terms, (3) that the parties will negotiate in good faith on additional Mac OS 8 and Mac OS 8/CHRP licensing terms, and (4) that the parties will use their best reasonable efforts to reach agreement on such additional terms by ** . By signing below, the parties further agree that the agreement memorialized by the term sheets, and all licenses granted thereby, will terminate on the earlier of (1) ** , or (2) the execution of a final agreement for licensing of Mac OS 8 and Mac OS 8/CHRP to Power Computing. Finally, by signing below, the parties agree that each party will use its best efforts to keep the terms of this agreement confidential, that Power Computing may reveal the terms to its advisors and underwriters in connection with its initial public offering, subject to an appropriate non-disclosure agreement, and that a party may disclose to the public non-financial terms of this agreement only with the written consent of the other party, such consent not to be unreasonably withheld. 2 Geoffrey S. Burr June 19, 1997 Page 2 Please have a copy of this letter executed by an appropriate representative of Power Computing, and return the signed copy to Apple by overnight delivery. Sincerely yours, /s/ Douglas S. Solomon, Ph.D. Senior Vice President Strategic Planning and Corporate Development cc: Fred Anderson, Apple Garey De Angelis, Apple Encls.: Terms and Conditions for the Power Computing-Apple Mac OS 8 License Agreement, Rev. 061897 Terms and Conditions for the Power Computing-Apple CHRP Kit License Agreement, Rev. 061897 Power Computing Corp. By /s/ --------------------------------------- Printed Name Geoffrey S. Burr ------------------------------ Date June 23, 1997 -------------------------------------- 3 Mac OS 8 Lic. Agmt.-Terms & Conditions Rev. 061897 TERMS AND CONDITIONS FOR THE POWER COMPUTING-APPLE MAC OS 8 LICENSE AGREEMENT INTENT With the introduction of Mac OS 8, Apple will provide licensees with access to this new Major Release for use on Apple Licensed Design systems. Licensees may continue to operate under existing Mac OS System 7.x licenses until their expiration, 12 months after the commercial release of Mac OS 8. PART ONE - EXISTING LICENSES SYSTEM 7 LICENSES Apple will continue to license Mac OS System 7.x to Power Computing under the existing agreements. Power Computing will be able to continue distributing System 7.x with Certified Computers based on Apple Licensed Designs. LICENSED DESIGNS Apple does not intend to offer any additional Apple Licensed Designs, or certify any additional modifications to the current Apple Licensed Designs, except as provided below. NEW APPLE LICENSED DESIGNS Apple will grant a royalty-bearing license to Power Computing to produce systems based on the Apple Licensed Designs ("New ALDs") only with the processors specified, as set forth in the following table:
CPU/BOARD PROCESSOR BOARD ROYALTY DESIGN --------- ------------- --------- ** ** **
APPLE CONFIDENTIAL PAGE 1 4 Mac OS 8 Lic. Agmt.-Terms & Conditions Rev. 061897 ** If a problem is found with any of the New ALD-based systems and customers of Power Computing complain to Apple to fix the problem, Power Computing will announce to such customers that it is a Power Computing issue and not an Apple issue. Power Computing will take responsibility for any customer complaints Apple receives regarding New ALD-based systems. Right to ship systems based on New ALD/Tsunami designs are contingent on each system passing Technical Evaluation and Mac OS Certification. Apple will not provide any technical support for New ALD-based systems. ** Power Computing will stop shipping systems based on the New ALD/Tsunami designs by **. Power Computing will stop shipping systems based on the Catalyst 603 design by **. PART TWO - NEW LICENSES MAC OS 8.X LICENSE Apple will grant a non-exclusive, non-transferable, royalty-bearing license to distribute Mac OS 8.x with Certified Computers based on Apple Licensed Designs manufactured by or for Power Computing, including all maintenance and minor releases of Mac OS 8 made available to licensees during the term of the license. LICENSE TERMS Terms of the Mac OS 8 License for Certified Computers based on Apple Licensed Designs are substantially the same as the current Apple-Power Computing Mac OS License Agreement terms, with the following exceptions: o Mac OS 8.x royalty rates, including OEM royalty rates, will be ** of the System 7.x royalty rates; o There is no additional Up Front Payment for existing Mac OS 7.X licensees. APPLE CONFIDENTIAL 2 PAGE 2 5 Mac OS 8 Lic. Agmt.-Terms & Conditions Rev. 061897 Prepayment. Non-refundable, minimum payment required at beginning of each quarter based on past royalties and future projections. Prepayment will be the greater of ** of (1) the royalties incurred in the previous quarter or (2) Power Computing's projections of royalties for the coming quarter. Final payment and reporting are due 30 days after the close of the quarter. ROYALTY RATES
U.S. Other Quarterly Unit Volumes English Languages ---------------------- ------- --------- ** $ ** $ **
TERM From effective date until December 31, 1998. CONTINGENCY These terms are contingent upon execution by the parties of an agreement for the licensing of the CHRP/Mac OS 8 Kit. APPLE CONFIDENTIAL 3 PAGE 3 6 CHRP Kit Agmt.-Terms & Conditions Rev. 061897 TERMS AND CONDITIONS FOR THE POWER COMPUTING-APPLE CHRP KIT LICENSE AGREEMENT INTENT To enable the manufacture and distribution of desktop systems and portable systems based on the Common Hardware Reference Platform running Mac OS 8.x by Power Computing, Apple will provide Power Computing with necessary software and access to proprietary hardware, documentation and support in a new, two-part, CHRP/Mac OS 8 Kit, which consists of an End User Kit and a CHRP Development Kit. END USER KIT The End User Kit will consist of: o a non-exclusive, non-transferable, royalty-bearing license to purchase from Apple or Apple's authorized supplier and install on a desktop computer system that meets Apple's certification requirements ("Certified Computer") one unit of the Mac OS Toolbox ROM for CHRP; o a non-exclusive, non-transferable, royal-bearing license to install on a Certified Computer one copy of Mac OS 8.x, including all maintenance and minor releases of Mac OS 8.x made available to licensees during the term of the license; and o the right to purchase from Apple or Apple's designated replicator a shrinkwrapped kit including a copy of Mac OS 8.x, including all maintenance and minor releases of Mac OS 8.x made available to licensees during the term of the license, a copy of the Apple end-user documentation for Mac OS 8, a copy of the Apple End User Software License, and a copy of the registration card, for distribution by Power Computing with a Certified Computer. CHRP DEVELOPMENT KIT The CHRP Development Kit will consist of: o a master softcopy of the licensee version of Mac OS 8 for reproduction onto Certified Computer hard drives by Power Computing, including all maintenance and minor releases of Mac OS 8 made available to licensees during the term of the license; APPLE CONFIDENTIAL 1 PAGE 1 7 CHRP Kit Agmt.-Terms & Conditions Rev. 061897 o the right for Power Computing to submit systems based on the CHRP architecture to Apple for Technical Evaluation and Mac OS Certification on Mac OS 8.x; o a copy of, and a license for Power Computing to use internally, the most recent version of Macintosh Certification Environment (MCE) and documentation; o Apple's standard Mac OS technical support package for licensee support; Power Computing to support is own customers. BLOOM COUNTY 1.0 Apple will grant a non-exclusive, non-transferable, royalty-bearing license for Power Computing to install on a Certified Computer one copy of Mac OS 7.6 for CHRP, release 1.0 ("Bloom County 1.0") under the following terms: o Mac OS Toolbox ROM for CHRP (Bloom Co. 1.0) royalty will be $ ** ; o Mac OS royalty will be the same as for Mac OS System 7.x for non-CHRP; o Bloom County 1.0 will support Helmwind, Golden Eye, Scirocco and Valiant processors; it will not support any other processors including Mach 5 or Arthur processors; o Power Computing can ship Mac OS 7.6 with Bloom County 1.0 until Mac OS 8 is made available to licensees; o Systems shipped with Bloom County 1.0 and Mac 0S 8.x are subject to the CHRP/Mac OS 8 Kit royalties, and not the Mac OS Toolbox ROM for CHRP royalty. BLOOM COUNTY 1.1 Apple will deliver to Power Computing for general commercial release under a non-exclusive, non-transferable, royalty-bearing license, Mac OS Toolbox ROM for CHRP (Bloom County 1.1) approximately 30 days after the general commercial release of Mac OS 8. Apple currently expects that Bloom County 1.1 will include: o Support for IDE drives; and APPLE CONFIDENTIAL 2 PAGE 2 8 CHRP Kit Agmt.-Terms & Conditions Rev. 061897 o Support for Mach 5 and Arthur processors, subject to processor qualification on Mac OS. Bloom County 1.1 will only be available as part of the CHRP/Mac OS 8 Kit, and will be subject to the CHRP/Mac OS 8 Kit royalty. TERM From the effective date until August 31, 1999. TECHNICAL EVALUATION Each new system configuration based on CHRP must be submitted to Apple for Technical Evaluation prior to the system being submitted for Certification, under the following parameters: o Technical evaluation will be routinely completed by Apple within two business days of system receipt; o Technical evaluation will be limited to ascertaining that the submitted system complies with the CHRP specifications, includes a processor previously qualified or in the process of being qualified for Mac OS, and does not include any Mac OS Toolbox for CHRP ROM or System or System Enabler patching; o Upon request from Power Computing, the submitted system may be sealed and not opened by Apple; o Power Computing is requested to submit a Bill of Materials indicating the contents of the submitted system; o A new system need not be submitted for Technical Evaluation if the only changes from an Approved System are changes to the Peripheral Logic (video and audio), PCI Cards or Add-In Peripherals (Drives, CD-ROM, Zip); o A new system must be submitted for Technical Evaluation if there are any other changes, including a new processor type, a new processor speed outside the previously-approved range, or a change to the Core Logic; APPLE CONFIDENTIAL 3 PAGE 3 9 CHRP Kit Agmt.-Terms & Conditions Rev. 061897 MAC OS CERTIFICATION Each Approved System based on CHRP must pass the requirements specified in the then-current Certification Requirements Document, including the MCE test suite, demonstrating Mac OS and application compatibility. Upon receipt of system and evidence of MCE compliance from Power Computing, and upon successful completion of Technical Evaluation, configurations will be admitted for certification testing. Mac OS Certification will be performed by Apple at a rate consistent with the current fee structure. Full certification will be routinely completed by Apple within five business days of receipt of system. Upon completion of the certification process, Apple will communicate whether the system passed or not, and if not, the reasons why. Apple reserves the right to modify the test suite (MCE and applications list) not more than once a quarter. If Apple changes the MCE, Apple will promptly provide Power Computing with a copy of the new MCE. LICENSE FEE One-time payment of $ ** payable upon execution of the CHRP/Mac OS 8 Kit license agreement; as a current Mac OS System 7.x licensee, Power Computing is exempt. KIT ROYALTY PAYMENTS Power Computing will pay Apple a royalty for each CHRP/Mac OS 8 kit shipped by Power Computing with a Certified Computer. Prepayment. Non-refundable, minimum payment required at beginning of each quarter based on past royalties and future projections. Prepayment will be the greater of ** of the (1) royalties incurred in the previous quarter or (2) Power Computing's projection of royalties for the coming quarter. Final payment and reporting is due 30 days after close of the quarter. Rates. The royalty for a kit distributed with any given desktop system configuration will be based on the type and speed of the processor that is included with the system. The royalty table through December 31, 1997 is set forth as Table A below. The royalty table in effect from January 1, 1998 through March 31, 1998 is set forth as Table B below. APPLE CONFIDENTIAL 4 PAGE 4 10 CHRP Kit Agmt.-Terms & Conditions Rev. 061897 ** There will be an additional $ ** royalty for each processor beyond the first processor in a multi-processor-configured system distributed with a kit. For example, in a four-processor system, there would be an additional $ ** royalty beyond the single-processor royalty. If a multi-processor system contains more than one category of processors, then the base royalty is set at the highest category of the processors used. A processor package that contains more than one processor core will be assessed a royalty for each processor core in the package. After March 1998, Apple reserves the right to reset the royalty schedule, including category contents, to reflect market changes; Apple intends to review the royalty schedule every 3 months beginning April 1998. Apple will not raise the royalty for any particular processor type and speed. Prior to the beginning of each quarter, Apple will provide a royalty schedule for that quarter, plus Apple's "best guess" estimate of the royalty schedule for the following quarter. Royalty table applies to both U.S. Standard and non-U.S. Standard versions of the Mac OS that Apple makes available to licensees. Processor Placement Methodology. Apple's modification of the royalty schedule will be guided by the following principles: o Highest tier will contain the fastest available silicon/systems (for example, today ** ); o Processors will be placed in the other tiers based on the estimated system performance of Apple systems with each processor; APPLE CONFIDENTIAL 5 PAGE 5 11 CHRP Kit Agmt.-Terms & Conditions Rev. 061897 o System performance will be determined by looking at the processor, bus speed and cache for a particular system; o Processors not used in Apple systems will be placed in a tier based on the estimated system performance of a system with that processor. ACCESS TO RHAPSODY It is Apple's intent to institute a generally-available program to license the Rhapsody operating system to third parties for distribution with Certified Computers. If Power Computing has entered into a license agreement for Mac OS 8 on CHRP and is in good standing as to that agreement, when Apple institutes such a licensing program, it will offer to Power Computing its then standard terms and conditions for such program. Power Computing may include such language in its IPO prospectus. NEW PROCESSORS Apple commits to working with IBM Microelectronics and Motorola SPS to develop an objective process (series of tests) to qualify new processors on Mac OS over the coming months. If Power Computing wishes to qualify a processor on Mac OS that Apple does not intend to use on its systems, then, upon appropriate documentation from Apple, Power Computing will cover the costs of qualification of that processor. Licensees may submit systems for Technical Evaluation and Mac OS Certification prior to qualification of the new processor on Mac OS, provided that the Mac OS Toolbox ROM and Mac OS are GM. CHRP EVOLUTION Apple will deliver to Power Computing a plan outlining its CHRP evolution plans no later than thirty days after the general commercial release of Mac OS 8. Thereafter, Apple will host quarterly reviews with Power Computing and other licensees to discuss requests and progress. Apple will define an exceptions process to handle discrepancies existing in the Mac OS Toolbox for CHRP ROM or System which do not exist on comparable Apple systems. APPLE CONFIDENTIAL 6 PAGE 6 12 CHRP Kit Agmt.-Terms & Conditions Rev. 061897 Apple agrees to provide reasonable commercial efforts to resolve fatal bugs which prevent a major Mac OS feature (e.g., QuickTime) from working with the Mac OS Toolbox ROM for CHRP but not with the Mac OS Toolbox ROM. For "Mobile CHRP" (modification of Mac OS Toolbox ROM for CHRP, Mac OS and CHRP Specifications to enable mobile CHRP systems), it is Apple's intent to provide Mobile CHRP support in an architecturally-abstracted manner. PORTABLES Apple will receive for Technical Evaluation and Certification portable, CHRP- based systems under the following conditions: o Until Mobile CHRP is completed, Power Computing may enable portable systems by writing Extensions, writing Control Panels, or writing drivers, but may not (directly or indirectly) patch the System file, the System Enabler or the Mac Toolbox ROM. o Power Computing agrees that Apple shall have no responsibility to make changes in the Mac OS or Mac Toolbox ROM to support features and functions in a Mobile CHRP portable product outside those specified in the then-current CHRP specification. If a problem is found with a mobile CHRP system before Mobile CHRP is completed and customers of Power Computing complain to Apple to fix the problem, Power Computing will announce to such customers that it is a Power Computing issue and not an Apple issue. Power Computing will take responsibility for any customer complains Apple receives regarding pre-Mobile CHRP portable products. o Power Computing will not OEM portable systems. The royalty for a kit distributed with any given portable system configuration will be based on the type of processor and speed that is included with the system, according to the following table through December 31, 1997: ** APPLE CONFIDENTIAL 7 PAGE 7 13 CHRP Kit Agmt.-Terms & Conditions Rev. 061897 There will be an additional $ ** royalty for each processor beyond the first processor in a portable system with a multi-processor configuration distributed with a CHRP/Mac OS 8 Kit. For example, in a four-processor system, thee would be an additional $ ** royalty beyond the single-processor royalty. If a multi-processor system contains more than one category of processors, then the base royalty is set at the highest category of the processors used. A processor package that contains more than one processor core will be assessed a royalty for each processor core in the package. After December 1997, Apple reserves the right to reset the portable systems royalty schedule, including category contents, to reflect market changes; Apple intends to review the royalty schedule every 3 months beginning January 1998. Apple will not raise the royalty for any particular processor type. At the beginning of each quarter, Apple will provide a royalty schedule for that quarter, plus Apple's "best guess" estimate of the royalty schedule for the following quarter. Royalty table applies to both U.S. Standard and non-U.S. Standard versions of the Mac OS that Apple makes available to Licensees. Apple will use the same Processor Placement Methodology for portable systems as was set forth for desktop systems. CONTINGENCY These terms are contingent upon execution by the parties of an agreement for the licensing of Mac OS 8 (for non-CHRP systems). APPLE CONFIDENTIAL 8 PAGE 8 EX-11 15 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 Power Computing Corporation Computation of Income per Common and Common Equivalent Share
YEARS ENDED NINE MONTHS ENDED ----------------------------------------- --------------- 1994 1995 1996 March 31, 1997 ----------------------------------------- --------------- (In thousands, except per share amounts) Primary: Net income (loss) $(1,012,000) $(2,941,000) $ 4,906,000 $ 7,737,000 Adjustments, net of income taxes: Interest expense -- -- -- -- Investment income -- -- -- -- ----------------------------------------- ----------- Adjusted net income (loss) $(1,012,000) $(2,941,000) $ 4,906,000 $ 7,737,000 ========================================= =========== Weighted average common shares outstanding 3,782,623 5,199,185 5,377,439 5,485,788 Weighted average common equivalent shares from stock options, convertible preferred stock, and warrants -- -- 7,854,253 10,722,470 Staff Accounting Bulletin No. 83 grants 791,858 791,858 791,858 791,858 ----------------------------------------- ----------- Common and common equivalent shares 4,574,481 5,991,043 14,023,550 17,000,116 ========================================= =========== Net income (loss) per common and common equivalent share $ (0.22) $ (0.49) $ 0.35 $ 0.46 ========================================= =========== Fully diluted: Net income (loss) $(1,012,000) $(2,941,000) $ 4,906,000 $ 7,737,000 Adjustments, net of income taxes: Interest expense -- -- -- -- Investment income -- -- -- -- ----------------------------------------- ----------- Adjusted net income (loss) $(1,012,000) $(2,941,000) $ 4,906,000 $ 7,737,000 ========================================= =========== Weighted average common shares outstanding 3,782,623 5,199,185 5,377,439 5,485,788 Weighted average common equivalent shares from stock options, convertible preferred stock, and warrants -- -- 7,895,588 10,735,809 Staff Accounting Bulletin No. 83 grants 791,858 791,858 791,858 791,858 ----------------------------------------- ----------- Common and common equivalent shares 4,574,481 5,991,043 14,064,885 17,013,455 ========================================= =========== Net income (loss) per common and common equivalent share $ (0.22) $ (0.49) $ 0.35 $ 0.45 ========================================= ===========
EX-23.1 16 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated June 26, 1997, in the Registration Statement (Form S-1 No. 333-_______) and related Prospectus of Power Computing Corporation dated June 27, 1997. Ernst & Young LLP Austin, Texas June 26, 1997 EX-27 17 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 9-MOS JUN-30-1996 JUN-29-1997 JUL-01-1995 JUL-01-1996 JUN-30-1996 MAR-30-1997 2,161 3,438 0 0 20,429 30,360 (1,587) (4,243) 23,226 28,206 46,808 63,039 2,915 12,081 (664) (1,236) 49,059 73,884 34,196 50,509 0 0 0 0 91 91 54 56 14,416 22,504 49,059 73,884 131,075 247,207 131,075 247,207 104,408 194,495 104,408 194,495 20,883 39,506 2,091 2,798 462 886 5,368 12,353 462 4,616 4,906 7,737 0 0 0 0 0 0 4,906 7,737 .35 .46 .35 .45
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