<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 2000
REGISTRATION STATEMENT NO. 333-32372
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
NOGATECH, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3674 77-0525268
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
5201 Great America Parkway
Santa Clara, California 95054
(408) 562-6200
(Address, Including Zip Code, and Telephone Number
Including Area Code, of Registrant's Principal Executive Offices)
--------------------------
Nathan Hod
Chairman of the Board
Nogatech, Inc.
5201 Great America Parkway
Santa Clara, California 95054
(408) 562-6200
(Name, Address, Including Zip Code, and Telephone Number
Including Area Code, of Agent for Service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Donald C. Reinke, Esq. Bruce A. Mann, Esq.
James L. Berg, Esq. Lloyd Harmetz, Esq.
Nicola R. Knight, Esq. Morrison & Foerster LLP
Gizelle A. Barany, Esq. 425 Market Street
Bay Venture Counsel, LLP San Francisco, California 94105-2482
1999 Harrison Street, Suite 1300 (415) 268-7584
Oakland, California 94612
(510) 273-8750
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant under Rule 415 of 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, 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share................. 4,025,000 $16.00 $64,400,000 $17,002(2)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Of this amount, $15,180 has been previously paid.
------------------------
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
[Cover design to include graphics]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 3
The Offering................................................ 4
Summary Consolidated Financial Data......................... 5
Risk Factors................................................ 6
Cautionary Note on Forward-Looking Statements............... 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 21
Selected Consolidated Financial Data........................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 29
Management.................................................. 41
Certain Relationships and Related Transactions.............. 51
Principal Stockholders...................................... 53
Description of Capital Stock................................ 56
Shares Eligible for Future Sale............................. 58
Plan of Distribution........................................ 60
Legal Matters............................................... 66
Experts..................................................... 66
Where You Can Get More Information.......................... 66
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
Our logo is our registered trademark. Other service marks, trademarks and
trade names referred to in this prospectus are the property of their respective
owners.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY. ALL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO A
ONE-FOR-TWO REVERSE STOCK SPLIT WITH RESPECT TO OUR COMMON STOCK THAT WILL BE
EFFECTED PRIOR TO THE CLOSING OF THIS OFFERING.
NOGATECH
We provide computer chips that compress digital video images and establish
connections, or video connectivity, between video devices and computers, as well
as between video devices across a variety of networks. Our products enable
real-time transmission of video, audio and data signals into personal computers
and hand-held personal computing devices known as personal digital assistants.
Our chips are small, power efficient and work together with our related
decompression software for use in processing video images on all major operating
systems. Our products are based on our proprietary mathematical procedures,
known as algorithms, and enable communication of video and other data from a
variety of video sources through standard interfaces into PCs. Our chips and
software provide high quality video while efficiently using the resources of the
PC's central processing unit.
We principally sell our chips on a stand-alone basis to original equipment
manufacturers, who design them into products such as PC digital video cameras,
video capture devices and PC-TVs. In addition, we sell to original equipment
manufacturers our own video devices that incorporate our chips. In 1999,
purchasers of our products included AME Group, Camtel Technology, Fujitsu
General, Hauppauge Computer Works, Interex, IO Data, Pinnacle Systems, Sharp
Electronics and X-10.com. Our chips are manufactured and tested by
subcontractors.
The convergence of TV and PC applications, the growth of the Internet and
the establishment of high speed broadband communication networks have created an
increased demand for high quality video connections. We believe that the
marketplace will demand additional digital video compression chips that are
compatible with the new industry standard for video compression, known as
MPEG-4. We are developing chips based on the MPEG-4 standard that will enable a
variety of applications, including processing and storing digital video data
across the Internet and mobile and broadcast networks.
Our objective is to be a leading provider of video connection chips for
computer products using advanced video compression technology and standard
computer connections between PCs and video accessories, known as plug-and-play
interfaces. Key elements of our strategy are to:
- maintain our expertise in video compression technology;
- focus on high volume applications;
- create and strengthen relationships with key customers; and
- build upon existing technologies to penetrate new markets.
Our sales were $3.2 million in 1998, $8.9 million in 1999 and $2.9 million
in the three months ended March 31, 2000, with net losses of $1.8 million in
1998 and $1.1 million in 1999, and net income of $93,000 in the three months
ended March 31, 2000.
We were initially incorporated in California in 1993 and reincorporated in
Delaware in 1999. Our principal executive offices are located at 5201 Great
America Parkway, Santa Clara, California, 95054, and our telephone number is
(408) 562-6200. The address of our office in Israel is 3 Gavish Street, Kfar
Saba 44641. Our world wide web address is www.nogatech.com. The information on
our website does not constitute part of this prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered......................... 3,500,000 shares
Common stock to be outstanding after this
offering................................... 14,734,669 shares
Use of proceeds.............................. We expect to use the net proceeds from this
offering for working capital and other
general corporate purposes. We may use a
portion of the net proceeds to acquire
complementary products, technologies or
businesses.
Proposed Nasdaq National Market symbol....... NGTC
</TABLE>
The common stock to be outstanding after this offering is based on
11,234,669 shares outstanding as of March 31, 2000, after giving effect to:
- the conversion of our outstanding shares of Series A preferred stock into
8,609,783 shares of common stock;
- the conversion of our outstanding shares of Series B preferred stock into
an estimated 683,527 shares of common stock; and
- the assumed issuance of 1,213,319 shares of common stock upon the exercise
of options and warrants at a weighted average exercise price of $1.57 per
share that terminate upon the closing of this offering, a portion of which
are exercisable on a cashless basis.
The common stock to be outstanding after this offering excludes:
- 1,065,014 shares of common stock issuable as of March 31, 2000 upon the
exercise of outstanding stock options issued under our 1999 Stock Option
Plan at a weighted average exercise price of $1.47 per share;
- 3,850,000 shares of common stock reserved for issuance under our 2000
Equity Incentive Plan and 2000 Stock Purchase Plan; and
- 350,000 shares of common stock issuable as of March 31, 2000 upon the
exercise of warrants at an exercise price of $0.13 per share.
This offering will be made through the OpenIPO process, in which the
allocation of shares and the public offering price are primarily based on an
auction in which prospective purchasers are required to bid for the shares. This
process is described under "Plan of Distribution." Except as otherwise
indicated, the information in this prospectus assumes no exercise of the
underwriters' over-allotment option.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes the consolidated financial data of our
business. The pro forma 2000 statement of operations data gives effect to the
automatic conversion of our Series A and Series B preferred stock. The
statements of operations data assume a one-for-two reverse stock split with
respect to our common stock that will be effected prior to the closing of this
offering. See note 1(k) to our consolidated financial statements for a
discussion of our pro forma basic and diluted net loss per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $ 2,551 $ 3,205 $ 8,856 $ 870 $ $2,945
Gross profit................................... 852 1,167 3,745 352 1,284
Operating income (loss)........................ (1,430) (1,913) (1,107) (814) 105
Net income (loss).............................. (1,462) (1,823) (1,096) (817) 93
Charge for beneficial conversion feature of
Series B preferred stock..................... (4,570)
Accretion of redemption value of Series A
redeemable convertible preferred stock....... (300) (383) (427) (107) (165)
Net loss applicable to common stock............ (1,762) (2,206) (1,523) (924) (4,642)
Net loss per share of common stock, basic and
diluted...................................... $ (5.86) $ (7.13) $ (4.50) $ (2.97) $ (8.14)
Weighted average number of shares of common
stock outstanding............................ 300,709 309,536 338,295 310,995 570,557
======== ======== ========== ========== ==========
Pro forma net income (loss) per share of common
stock, basic and diluted..................... $ (0.12) $ (0.09) $ 0.01
========== ========== ==========
Pro forma weighted average number of shares of
common stock outstanding..................... 8,948,078 8,920,778 9,749,945
========== ========== ==========
</TABLE>
The following table summarizes our balance sheet data as of March 31, 2000.
This balance sheet data is presented:
- on an actual basis;
- on an as adjusted basis to give effect to:
- the conversion of all outstanding shares of preferred stock into an
estimated 9,293,310 shares of common stock upon the closing of this
offering;
- the assumed exercise of options and warrants to purchase up to
1,213,319 shares of our common stock upon completion of this offering
at a weighted average exercise price of $1.57 per share; and
- the sale of the shares of common stock in this offering at the assumed
initial public offering price of $14.00 per share, after deducting the
estimated underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,612 $53,017
Working capital............................................. 8,627 55,032
Total assets................................................ 11,252 57,657
Series A redeemable convertible preferred stock............. 8,408
Series B redeemable convertible preferred stock............. 5,000
Stockholders' equity (capital deficiency)................... (4,253) 55,560
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND ALL OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. WE HAVE
INCLUDED A DISCUSSION OF EACH MATERIAL RISK THAT WE HAVE IDENTIFIED AS OF THE
DATE OF THIS PROSPECTUS. HOWEVER, ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR OPERATING RESULTS COULD SUFFER. IF THIS OCCURS, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART
OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
RISKS RELATING TO NOGATECH
OUR SALES WILL BE REDUCED IF WE ARE UNABLE TO KEEP PACE WITH TECHNOLOGICAL
CHANGES.
The emerging video compression and video image processing industry is
characterized by:
- rapidly changing technologies;
- frequent new product introductions; and
- rapid changes in customer requirements.
Video compression and video image processing technologies have reached
commercially acceptable levels only in the last several years and continue to
experience numerous changes. As a result, we must be able to sell products that
incorporate the technological advances in our industry in order to ensure that
they remain commercially viable.
Our future success will depend on our ability to enhance our existing
products and to develop and introduce new products and product features. These
products and features must be cost-effective and keep pace with technological
developments and address the increasingly sophisticated needs of our customers.
We may not be successful at these tasks. We may also experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these new products and features. In either case, our sales would be
reduced.
WE MAY NOT BE ABLE TO TIMELY ADOPT EMERGING INDUSTRY STANDARDS, WHICH MAY MAKE
OUR PRODUCTS UNACCEPTABLE TO POTENTIAL CUSTOMERS, DELAY OUR PRODUCT
INTRODUCTIONS OR INCREASE OUR COSTS.
Our products must comply with a number of current industry standards and
practices established by various international bodies. Our failure to comply
with evolving standards, including video compression and computer interface
standards, will limit acceptance of our products by market participants. In
particular, the MPEG-4 standard is becoming the primary standard for PC
applications requiring video compression, but we have not yet completed our
development of any products that are based upon MPEG-4. Although we expect to
introduce products based upon MPEG-4 during the second half of 2001, we may not
succeed in doing so either within that time frame, or at all. If new standards
are adopted in our industry, we may be required to adopt those standards in our
products. It may take us a significant amount of time to develop and design
products incorporating these new standards, and we may not succeed in doing so.
We may also become dependent upon products developed by third parties and have
to pay royalty fees, which may be substantial, to the developers of the
technology that constitutes the newly adopted standards.
IF WE DO NOT DEVELOP NEW PRODUCTS OR NEW PRODUCT FEATURES IN RESPONSE TO
CUSTOMER REQUIREMENTS OR IN A TIMELY WAY, CUSTOMERS MAY NOT BUY OUR PRODUCTS.
Our customers' products tend to have short life cycles, which require both
them and us to design and introduce new products within a relatively limited
period of time. We must, therefore, coordinate our sales cycle with the sales
and development cycles of our customers. If we experience development, design or
manufacturing difficulties that delay or prevent our timely introduction or
marketing of a new
6
<PAGE>
chip, we would miss the opportunity to have the chip incorporated into a
customer's new product, which would cause us to lose sales.
WE RELY UPON OUR SALES OF A SMALL NUMBER OF PRODUCTS, AND THE FAILURE OF ANY ONE
OF OUR PRODUCTS TO BE SUCCESSFUL IN THE MARKET COULD SUBSTANTIALLY REDUCE OUR
SALES.
We currently rely upon sales from two products, our NT1003 and NT1004 chips,
to generate most of our sales. Sales of these products amounted to 41% of our
sales in 1999, and 68% of our sales in the three months ended March 31, 2000. We
are developing additional chips, but there can be no assurance that we will be
successful in doing so. Consequently, if our existing products are not
successful, our sales could decline substantially, which would adversely affect
our financial performance, and could cause us to incur significant losses.
THE LOSS OF ANY OF OUR LARGE CUSTOMERS, OR THE FAILURE OF ONE OF THESE CUSTOMERS
TO SELL A SUBSTANTIAL AMOUNT OF ITS PRODUCTS INCORPORATING OUR CHIPS, COULD
SUBSTANTIALLY REDUCE OUR SALES.
Historically, a substantial portion of our sales has come from purchases by
a few large customers. We expect this trend to continue. For example, our top
three customers accounted for approximately 51% of our sales in 1999, and 54% of
our sales in the three months ended March 31, 2000. Accordingly, our future
operating results depend on the ability of our largest customers to sell
products incorporating our chips and on our success in selling large quantities
of our products to them. We have not entered into long-term agreements with any
of our customers, nor have we obtained their commitment to purchase any specific
quantities of our products. Our customers may cancel or reschedule orders on
short notice or may discontinue using our products at any time. If we lose a
large customer and fail to add new customers to replace lost sales, our
operating results may not recover.
The concentration of our sales with a few customers makes us particularly
dependent on commercial factors affecting those customers. For example, if
demand for their products decreases, or if they identify alternative sources for
our chips, they may stop purchasing our products and our operating results will
suffer. These customers often have the resources to design and/or manufacture
products like ours internally, and if they elect to do so, they may cease to do
business with us. Additionally, if our target markets undergo a consolidation,
we may lose existing customers or have difficulties in obtaining new ones.
WE RELY ON OTHERS TO MANUFACTURE OUR CHIPS AND THEREFORE HAVE ONLY A LIMITED
ABILITY TO CONTROL MANUFACTURING COSTS, CHIP DELIVERY SCHEDULES OR MANUFACTURING
QUALITY.
Our chips are manufactured and tested by subcontractors located in Korea and
Japan, each of which provides a single type of chip. An affiliate of Hyundai in
Korea manufactures our NT1003 chip, and an affiliate of Fujitsu in Japan
manufactures our NT1004 chip. As a result of our reliance on subcontractors, we
cannot directly control chip delivery schedules. Recently, chip fabricating
subcontractors have not had sufficient capacity to keep up with chip fabrication
demand. This has led to longer chip manufacturing cycles and longer lead times
on orders. Any problems that occur and persist in connection with the delivery,
quality or costs of assembly of our chips could cause us to lose customers or
increase the expenses that we incur. Our reliance on subcontractors could lead
to product shortages or quality assurance problems. In addition, these
manufacturers could significantly increase the prices that they charge us, and
we may be unable to obtain alternative sources of supplies. We may need to hold
more inventory than is immediately required to compensate for potential
component shortages or discontinuation. These factors could lead to an increase
in the costs of manufacturing or assembling our chips.
We are in the process of qualifying additional subcontractors in order to
satisfy the demand for our products. However, qualification of new
subcontractors will require a significant period of time. Therefore, we may not
be able to obtain new subcontractors within a period of time that is sufficient
to respond to the needs of our customers.
7
<PAGE>
WE ACCUMULATE INVENTORY TO MINIMIZE THE IMPACT OF SHORTAGES FROM MANUFACTURERS,
AND MAY HAVE OBSOLETE INVENTORY THAT WE HAVE TO WRITE OFF AND SUFFER RESULTING
LOSSES.
Managing our inventory is complicated by fluctuations in the demand for our
products; however, we must have sufficient quantities of our products available
to satisfy our customers' demand. As a result, we generally accumulate inventory
for a period of time to minimize the impact of undercapacity at our suppliers'
plants. Although we expect to sell the inventory within a short period of time,
products may remain in inventory for extended periods of time and may become
obsolete because of the passage of time and the introduction of new products. In
these situations, we would be required to write off obsolete inventory and would
suffer losses accordingly.
IF WE MAY FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY, IT MAY BE
MISAPPROPRIATED BY OTHERS, INVALIDATED OR CHALLENGED, WHICH WOULD MATERIALLY
HARM OUR ABILITY TO SELL OUR PRODUCTS.
Our success and ability to compete depend primarily upon our proprietary
technology. We rely on a combination of trade secrets, copyright and trademark
laws, nondisclosure and other contractual agreements and technical measures to
protect our proprietary rights. Currently, we have three U.S. patents pending
that relate to our video technology. However, we have not obtained patent
protection for our proprietary algorithms, and the absence of patent protection
may increase the risk that those algorithms will be misappropriated.
We are subject to a number of risks relating to intellectual property
rights, including the following:
- the means by which we seek to protect our proprietary rights may not be
adequate to prevent others from misappropriating our technology or from
independently developing or selling technology or products with features
based on or similar to ours;
- our products may be sold in foreign countries that provide less protection
to intellectual property than is provided under U.S., Japanese or Israeli
laws;
- our intellectual property rights may be challenged, invalidated, violated
or circumvented and may not provide us with any competitive advantage; and
- our patents pending may not be approved or may be only partially approved.
IF OUR PROPRIETARY TECHNOLOGY INFRINGES UPON THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS, OUR COSTS COULD INCREASE AND OUR ABILITY TO SELL OUR PRODUCTS COULD BE
LIMITED.
Other companies may hold or obtain patents or may otherwise claim
proprietary rights to technology that is necessary to our business. Particular
aspects of our technology could be found to violate the intellectual property
rights of other parties. The resulting risks include the following:
- if we violate the intellectual property rights of other parties, we may be
required to modify our products or intellectual property or to obtain a
license to permit their continued use; and
- any future litigation to defend us against allegations that we have
infringed upon the rights of others could result in substantial costs to
us, even if we ultimately prevail.
There are a number of companies that hold patents for various aspects of the
technology incorporated in our industry's standards. We expect that companies
seeking to gain competitive advantages will increase their efforts to enforce
any patent rights that they may have. The holders of patents from which we have
not obtained licenses may take the position that we are required to obtain a
license from them. We cannot be certain that we would be able to negotiate any
license at an acceptable price. Our inability to do so could substantially
increase our operating expenses or require us to seek and obtain alternative
sources of technology necessary to produce our products.
8
<PAGE>
WE BEGAN SELLING OUR CURRENT PRODUCT LINE OF CHIPS ONLY RECENTLY AND, AS A
RESULT, YOUR ABILITY TO EVALUATE OUR PROSPECTS MAY BE LIMITED.
Although we have been operating since 1993, we did not begin commercial
shipments of our present product line of video compression chips until 1998.
Prior to that time, we sold different products, which we do not anticipate
selling after 2000. As a result, our future success will depend primarily upon
the sales of our chips. Our limited operating history with respect to our chips
may limit your ability to evaluate our prospects because of:
- our limited historical financial data relating to sales of our chips;
- our unproven potential to generate profits from sales of our chips; and
- our limited experience in addressing emerging trends that may affect our
chip business.
As a young company that recently commenced a new product line, we face risks
and uncertainties relating to our ability to implement our business plan
successfully. You should consider our prospects in light of the risks, expenses
and difficulties we may encounter.
WE HAVE ONLY RECORDED NET INCOME DURING THE LAST THREE QUARTERS, AND MAY NOT BE
PROFITABLE IN THE FUTURE.
We incurred net losses of $1.8 million in 1998 and $1.1 million in 1999. As
of December 31, 1999, we had an accumulated deficit of $9.2 million. Our sales
may not grow or even continue at their current level. Although we have recorded
net income for the last three quarters, if our sales do not increase or if our
expenses increase at a greater pace than our sales, we will not remain
profitable. In addition, we recognized a beneficial conversion charge of
$4.6 million in the first three months of 2000 on account of our issuance of
Series B preferred stock, which increased our net loss applicable to our common
stock in that period, and which will adversely affect our operating results
during the fiscal year ending December 31, 2000. Any losses that we incur could
be substantial.
OUR INABILITY TO MANAGE EFFECTIVELY OUR RECENT GROWTH, AND OUR EXPECTED
CONTINUING INCREASED GROWTH, COULD INCREASE OUR COSTS AND IMPAIR OUR ABILITY TO
MAINTAIN OR INCREASE OUR CUSTOMER BASE.
The growth in our business has placed, and is expected to continue to place,
a significant strain on our management and operations. To manage our growth, we
must continue to implement and improve our operational, financial and management
information systems and expand, train and manage our employees. We may not have
made adequate allowances for the costs and risks associated with this expansion,
and our systems, procedures or controls may not be adequate to support our
operations. Our failure to manage growth effectively could cause us to incur
substantial additional costs, lose opportunities to generate sales or impair our
ability to maintain our customers.
WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES, INCLUDING THE RISK THAT THE
PRICES OF OUR PRODUCTS MAY BECOME LESS COMPETITIVE BECAUSE OF FOREIGN EXCHANGE
FLUCTUATIONS.
Sales to customers located outside the U.S. accounted for 51.8% of our sales
in 1997, 57.2% of our sales in 1998, 38.6% of our sales in 1999 and 50.4% of our
sales in the three months ended March 31, 2000. We expect that international
sales will continue to be significant. International sales are subject to a
variety of risks, including risks arising from currency fluctuations, trading
restrictions, tariffs, trade barriers and taxes.
Because most of our sales are denominated in dollars, our products become
less price competitive in countries with currencies that are low or are
declining in value against the dollar. In addition, our international customers
may not continue to place orders denominated in dollars. If they do not, our
reported sales and earnings will be subject to foreign exchange fluctuations.
9
<PAGE>
WE MAY EXPERIENCE FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS, WHICH WILL MAKE
PREDICTING OUR FUTURE RESULTS DIFFICULT.
Historically, our quarterly and annual operating results have varied
significantly from period to period, and we expect that they will continue to do
so. These fluctuations result from a variety of factors, including:
- market acceptance of our products, including changes in order flow from
our largest customers, and our customers' ability to forecast their needs;
- the timing of new product announcements by us and our competitors, such as
chips that are compatible with the MPEG-4 standard;
- the lengthy sales cycle of our products;
- increased competition between chip manufacturers, including changes in
pricing by us or our competitors; and
- delays in deliveries by our limited number of suppliers and
subcontractors.
Accordingly, any sales or net income in any particular period may be lower
than our sales and net income in a preceding or comparable period.
Period-to-period comparisons of our results of operations may not be meaningful,
and you should not rely upon them as indications of our future performance. In
addition, our operating results may be below the expectations of securities
analysts and investors in future periods. Our failure to meet these expectations
will likely cause our share price to decline.
WE RELY ON A SINGLE DISTRIBUTOR FOR MOST OF OUR SALES IN JAPAN, AND THE LOSS OF
THIS DISTRIBUTOR COULD SUBSTANTIALLY REDUCE OUR SALES.
Our future performance depends on our ability to compete successfully in
Japan, where all of our sales to date have been made through a single
distributor, Tomen Electronics Corporation. Upon completion of this offering,
Tomen will own approximately 8.5% of our common stock. We do not have a
distribution agreement with Tomen, and Tomen could terminate its relationship
with us at any time. In addition, Tomen is free to distribute the products of
our competitors as well as our products, and it is not required to maintain any
minimum sales levels. The loss of our relationship with Tomen, or any inability
or failure by Tomen to sell our products, could substantially reduce our sales.
In addition, we may not succeed in attracting new distributors for the Japanese
market or in replacing Tomen in the event that we do not continue our
relationship.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL, IN PARTICULAR NATHAN HOD, OUR
CHAIRMAN, AND ARIE HEIMAN, OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND THE
LOSS OF ANY OF THEIR SERVICES COULD ADVERSELY AFFECT OUR FUTURE GROWTH AND
PROFITABILITY AND COULD SUBSTANTIALLY INTERFERE WITH OUR OPERATIONS.
Because our products are complex and our market is new and evolving, the
success of our business depends in large part upon the continuing contributions
of our management and technical personnel. The loss of the services of several
of our key officers, including Nathan Hod, our Chairman of the Board, and Arie
Heiman, our President and Chief Executive Officer, could adversely affect our
future growth and profitability and could substantially interfere with our
operations. Our dependence upon these officers is increased by the fact that
they are responsible for our sales and marketing efforts, as well as our overall
operations. We do not have key person life insurance policies covering any of
our employees other than Arie Heiman. The insurance coverage that we have on Mr.
Heiman is likely to be insufficient to compensate us for any loss of his
services.
WE WILL NOT INCREASE OUR SALES OR GROW OUR BUSINESS IF WE ARE UNABLE TO ATTRACT,
TRAIN AND RETAIN QUALIFIED ENGINEERS AND SALES AND MARKETING AND TECHNICAL
SUPPORT PERSONNEL.
We will need to hire additional engineers and highly trained technical
support personnel in order to succeed. We will need to increase our technical
staff to support new customers and the expanding
10
<PAGE>
needs of existing customers, as well as our continued research and development
operations. We will need to hire additional sales and marketing personnel to
target our potential customers. Hiring engineers and sales and marketing and
technical support personnel is very competitive in our industry because of the
limited number of people available with the necessary skills and understanding
of our products. This is particularly true in Israel and California, where the
competition for qualified personnel is intense. If we are unable to hire and
retain necessary personnel, our business will not develop, we may lose customers
and we may incur substantial losses.
OUR PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD RESULT IN DELAYS IN RECOGNITION
OR LOSS OF SALES, LOSS OF MARKET SHARE OR MARKET ACCEPTANCE, OR CLAIMS AGAINST
US.
We develop complex chips and related software for video compression and
video image processing. Despite testing by our subcontractors and our customers,
errors may be found in our existing or future products. This could result in,
among other things, a delay in recognition or loss of sales, loss of market
share, failure to achieve market acceptance or substantial damage to our
reputation. We could be subject to material claims by customers, and we may need
to incur substantial expenses to correct any product defects. We do not have
product liability insurance to protect us against losses caused by defects in
our products, and we do not have "errors and omissions" insurance. As a result,
any payments that we may need to make to satisfy our customers may be
substantial.
FUTURE ACQUISITIONS BY US COULD DIVERT SUBSTANTIAL MANAGEMENT RESOURCES, GIVE
RISE TO UNKNOWN OR UNANTICIPATED LIABILITIES AND LEAD TO ADVERSE MARKET
CONSEQUENCES FOR OUR STOCK.
We may acquire or make substantial investments in other companies or
businesses in order to maintain our technological leadership or to obtain other
commercial advantages. Identifying and negotiating these transactions may divert
substantial management resources. An acquisition could require us to expend
substantial cash resources, to incur or assume debt obligations, or to issue
additional common or preferred stock. These additional equity securities would
dilute your holdings, and could have rights that are senior to or greater than
the shares that you purchase in this offering. We have no experience in making
acquisitions and we may not be successful in executing an acquisition
transaction or integrating an acquired entity into our operations. An
acquisition could involve significant one-time non-cash write offs, or could
involve the amortization of goodwill over a number of years, which would
adversely affect earnings in those years. Acquisitions outside our current
business may be viewed by market analysts as a diversion of our focus. For these
and other reasons, the market for our stock may react negatively to the
announcement of any acquisition. An acquisition will continue to require
attention from our management to integrate the acquired entity into our
operations, may require us to develop expertise in fields outside our current
area of focus, and may result in departures of management of the acquired
entity. An acquired entity may have unknown liabilities, and its business may
not achieve the results anticipated at the time of the acquisition.
RISKS RELATING TO OUR INDUSTRY
IF VIDEO COMPRESSION TECHNOLOGY OR OUR IMPLEMENTATION OF THIS TECHNOLOGY IS NOT
ACCEPTED, WE WILL NOT BE ABLE TO SUSTAIN OR EXPAND OUR BUSINESS.
Our future success depends on the growing use and acceptance of video
applications for PCs, including the growth of video on the Internet. The market
for these applications is new and is still evolving, and may not develop to the
extent necessary to enable us to expand our business. We have recently invested
and expect to continue to invest significant time and resources in the
development of new products for this market. Our dependence on sales of chips
and lack of product diversification exposes us to a substantial risk of loss in
the event that the video compression market does not develop or if a competing
technology replaces our chips. If the target market for our products does not
grow, we may not obtain any benefits from these investments.
11
<PAGE>
WE ARE HEAVILY DEPENDENT ON THE U.S. AND ASIAN MARKETS FOR SALES OF OUR
PRODUCTS, AND ADVERSE CHANGES IN THESE MARKETPLACES COULD REDUCE OUR SALES.
Our future performance will be dependent, in large part, on our ability to
continue to compete successfully in the U.S. and Asian markets, particularly
Japan and Taiwan, where a large portion of our current and potential customers
are located. Our ability to compete in these markets will depend on several
factors, including:
- the state of trade relations among Japan, Taiwan, Israel and the United
States;
- the imposition of tariffs by the U.S., Taiwan or Japan on products of the
type that we develop;
- adverse changes in the political, economic or regulatory environments of
Taiwan, Japan or the U.S.;
- adverse changes in the relationships between major Asian countries;
- our ability to develop video compression products that meet the technical
requirements of Japanese, Taiwanese and American customers;
- our ability to maintain satisfactory relationships with our Japanese,
Taiwanese and American customers and distributors; and
- our ability to enforce our agreements and other rights in Japan or Taiwan.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE, AND MANY OF OUR
COMPETITORS HAVE MUCH GREATER RESOURCES THAN WE DO, WHICH MAY MAKE IT DIFFICULT
FOR US TO REMAIN PROFITABLE.
Competition in our industry is intense, and we expect competition to
increase. Competition could force us to charge lower prices for our products,
reduce demand for our products and reduce our ability to recover development and
manufacturing costs.
Some of our competitors:
- have greater financial, personnel and other resources than we have;
- offer a broader range of products and services than we offer;
- may be able to respond faster to new or emerging technologies or changes
in customer requirements than we can;
- may have a more substantial distribution network than we do;
- benefit from greater purchasing economies than we do;
- offer more aggressive pricing than we offer; and
- devote greater resources to the promotion of their products than we do.
We will not be able to compete effectively if we are not able to develop and
implement appropriate strategies to address these factors.
INTERNAL DEVELOPMENT EFFORTS BY OUR CUSTOMERS AND NEW ENTRANTS TO THE MARKET MAY
INCREASE COMPETITION, AND MAKE IT MORE DIFFICULT FOR US TO INCREASE OUR
PROFITABILITY.
In the future, some of our customers may internally develop products that
will replace the products that we currently sell to them. In addition, some
leading companies, with substantially greater resources than we have, may
attempt to enter our market. The recent substantial growth in the market for
video compression and related technologies is attracting large entrants. We
believe that some large companies may have already begun to develop internally
the technology that we provide. Furthermore, alliances between semiconductor
companies and companies providing software to them could increase our
competition. These factors could make it more difficult for us to increase our
profitability.
12
<PAGE>
WE HAVE EXPERIENCED, AND EXPECT TO CONTINUE TO EXPERIENCE, INTENSE DOWNWARD
PRICING PRESSURE ON OUR PRODUCTS, WHICH COULD SUBSTANTIALLY IMPAIR OUR OPERATING
PERFORMANCE.
We are experiencing, and are likely to continue to experience, downward
pricing pressure on our chips. As a result, we have experienced, and expect to
continue to experience, declining average sales prices for our products.
Increases in the number of units that we are able to sell or reductions in per
unit costs may not be sufficient to offset reductions in per unit sales prices,
in which case our net income could be reduced or we could incur losses. Since we
must typically negotiate supply arrangements far in advance of delivery dates,
we may need to commit to price reductions for our products before we are aware
of how, or if, these cost reductions can be obtained. As a result, any current
or future price reduction commitments and any inability of our company to
respond to increased price competition could result in substantially reduced
revenues and significant losses.
OUR PRODUCTS GENERALLY HAVE LONG SALES CYCLES AND IMPLEMENTATION PERIODS, WHICH
INCREASE OUR COSTS IN OBTAINING ORDERS AND REDUCES THE PREDICTABILITY OF OUR
EARNINGS, AND WE MAY NOT BE ABLE TO RECOUP COSTS FOR PROPOSALS THAT ARE NOT
ACCEPTED.
Our products are technologically complex and are typically designed into
applications and products that may be critical to the business of our customers.
Prospective customers generally must make a significant commitment of resources
to test and evaluate our chips and to integrate them into their products. As a
result, our sales process is often subject to delays associated with lengthy
approval processes that typically accompany the design and testing of new
computer accessories. For these and other reasons, the sales cycles of our
products to new customers are often lengthy, recently averaging approximately
six to nine months.
Long sales cycles are also subject to a number of significant risks over
which we have little or no control. These risks include our customers' budgetary
constraints, internal acceptance reviews and cancellations. In addition, orders
expected in one quarter could shift to another because of the timing of our
customers' procurement decisions. This complicates our planning process and
reduces the predictability of our financial results. We could incur costs that
might not be recouped if we respond to a request for proposals from a potential
customer who does not purchase our chips.
RISKS RELATING TO THIS OFFERING
OUR MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF THE NET PROCEEDS OF THIS
OFFERING AND, IF WE DO NOT ALLOCATE THESE PROCEEDS EFFECTIVELY, YOUR INVESTMENT
COULD SUFFER.
We intend to use the net proceeds from this offering for working capital and
general corporate purposes, including funding additional research and
development projects and expanding our sales and marketing activities. We may
also use a portion of the net proceeds to acquire complementary products,
technologies or businesses. However, there is no specific allocation of the
proceeds, and our management retains the right to use the net proceeds as they
determine. There can be no assurance that management will be able to use the
proceeds to continue the growth of our business effectively or to increase our
market value.
WE MAY NEED ADDITIONAL FINANCING, AND MAY NOT BE ABLE TO RAISE ADDITIONAL
FINANCING ON FAVORABLE TERMS OR AT ALL, WHICH COULD LIMIT OUR ABILITY TO GROW
AND INCREASE OUR COSTS.
We anticipate that we may need to raise additional capital in the future to
continue our longer term expansion plans, to respond to competitive pressures or
to respond to unanticipated requirements. We cannot be certain that we will be
able to obtain additional financing on commercially reasonable terms or at all.
Our failure to obtain additional financing or our inability to obtain financing
on acceptable terms could require us to limit our plans for expansion, incur
indebtedness that has high rates of interest or substantial restrictive
covenants, issue equity securities that will dilute your holdings or discontinue
a portion of our operations.
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<PAGE>
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AN ACTIVE MARKET MAY NOT
DEVELOP, THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, AND
THE MARKET PRICE MAY NOT EXCEED THE INITIAL PUBLIC OFFERING PRICE.
Before this offering, our common stock did not trade in any market, and we
cannot be certain that an active market will develop. The initial public
offering price may not be indicative of our actual value. Numerous factors, many
of which are beyond our control, may cause the market price of the common stock
to fluctuate significantly. These factors include, but are not limited to, the
following:
- fluctuations in our quarterly sales and operating results;
- shortfalls in our operating results from levels forecast by securities
analysts;
- announcements concerning us, our competitors or our customers;
- expectations and forecasts regarding the demand for the products produced
by our customers;
- announcements of technological innovations, new industry standards or
changes in product price by us or our competitors; and
- market conditions in the industry and the general state of the securities
markets, particularly the technology and Israeli sectors.
In addition, the stock prices of many technology companies fluctuate
significantly for reasons that may be unrelated to operating results. These
fluctuations, as well as general economic, political and market conditions,
including recession, international instability or military tension or conflicts,
or any such conditions specifically affecting Israel, may adversely affect the
market price of our common stock. If we are named as a defendant in any
securities-related litigation as a result of decreases in the market price of
our shares, we may incur substantial costs, and our management's attention may
be diverted, for lengthy periods of time. The market price of our common stock
may not increase above the initial public offering price or maintain its price
at or above any particular level.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK
PRICE.
After this offering, we will have outstanding 14,734,669 shares of common
stock. Sales of a substantial number of shares of our common stock in the public
market following this offering could cause our stock price to decline. All the
shares sold in this offering will be freely tradable. Of the 11,234,669
remaining shares of common stock outstanding after this offering, an estimated
9,337,823 shares will be eligible for sale in the public market beginning 180
days after the effective date of this offering. The remaining 1,896,846 shares
will become freely tradable at various times thereafter. The holders of these
1,896,846 restricted shares of our common stock will have the right to require
us to register their shares for resale beginning 180 days after the effective
date of this offering. We intend to file a registration statement registering
shares of common stock subject to outstanding options or reserved for future
issuance under our stock option and purchase plans. As of March 31, 2000,
options to purchase a total of 1,446,514 shares were outstanding under our 1999
Stock Option Plan. As a result, common stock issuable upon exercise of
outstanding vested options, other than common stock issuable to our affiliates,
will be available for immediate resale in the open market. In addition, the sale
or registration of these shares could impair our ability to raise capital
through the sale of additional stock. See "Shares Eligible for Future Sale."
14
<PAGE>
BECAUSE OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE
SUBSTANTIAL CONTROL OVER MOST MATTERS SUBMITTED TO A VOTE OF THE STOCKHOLDERS,
YOUR ABILITY TO CONTROL OUR MANAGEMENT WILL BE LIMITED, AND ANY PREMIUM OVER
MARKET PRICE THAT AN ACQUIROR MIGHT OTHERWISE PAY MAY BE REDUCED AND ANY MERGER
OR TAKEOVER MAY BE DELAYED.
We anticipate that after this offering our officers, directors and present
stockholders will beneficially own 76.2% of our common stock, or 73.6% if the
underwriters' over-allotment option is exercised in full. As a result, these
stockholders will have the power to control the outcome of most matters
submitted to a vote of stockholders, including the election of members of our
board, and the approval of significant corporate transactions. The stockholders
purchasing shares in this offering will have little influence on these matters.
This concentration of ownership may also impede a merger, consolidation,
takeover or other business consolidation involving us, or discourage a potential
acquiror from making a tender offer for our shares. This concentration of our
ownership could also negatively affect our stock's market price or decrease any
premium over market price that an acquiror might otherwise pay.
THE EFFECTS OF ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND
BYLAWS MAY DISCOURAGE, DELAY OR PREVENT AN ACQUISITION OF US THAT A STOCKHOLDER
MAY CONSIDER FAVORABLE.
Several provisions of our certificate of incorporation and bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of our company even if that change in control would be beneficial to
our stockholders. For example, only one-third of our board of directors will be
elected at each of our annual meetings of stockholders, which will make it more
difficult for a potential acquirer to change the management of our company, even
after acquiring a majority of the shares of our common stock. These provisions,
which cannot be amended without the approval of two-thirds of our stockholders,
could diminish the opportunities for a stockholder to participate in tender
offers, including tender offers at a price above the then current market value
of our common stock. In addition, our board of directors, without further
stockholder approval, may issue preferred stock, with such terms as the board of
directors may determine, that could have the effect of delaying or preventing a
change in control of our company. The issuance of preferred stock could also
adversely affect the voting powers of the holders of common stock, including the
loss of voting control to others. We are also afforded the protections of
Section 203 of the Delaware General Corporation Law, which could delay or
prevent a change in control of our company or could impede a merger,
consolidation, takeover or other business combination involving our company or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.
RISKS RELATING TO OUR OPERATIONS IN ISRAEL
POLITICAL OR ECONOMIC INSTABILITY OR MILITARY HOSTILITIES IN ISRAEL COULD RESULT
IN A LOSS OF SALES OR THE DISRUPTION OF OUR OPERATIONS.
The offices of our principal operating subsidiary are located in Israel.
This facility is the location of, among other things, our research and
development efforts. As a result, political, economic and military conditions in
Israel directly affect our operations. Accordingly, any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its present trading partners or a significant downturn in the economic or
financial condition of Israel could result in a loss of sales or the disruption
of our operations. Despite the progress towards peace among Israel, neighboring
countries and the Palestinians, the future of these peace efforts is uncertain.
A number of countries continue to restrict or ban business with Israel or
Israeli companies. Restrictive laws or policies directed towards Israel or
Israeli businesses could impair our ability to increase our international sales.
Additionally, some of our officers and employees in Israel are obligated to
perform up to 39 days of military reserve duty annually. The absence of these
employees for significant periods during the workweek may cause us to operate
inefficiently during these periods.
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<PAGE>
CURRENCY FLUCTUATIONS AND THE RATE OF INFLATION IN ISRAEL MAY INCREASE OUR
EXPOSURE TO VOLATILITY IN INTERNATIONAL MARKETS AND NEGATIVELY IMPACT OUR
FINANCIAL PERFORMANCE.
Most of our sales are in dollars or linked to dollars, and approximately
26.5% of our expenses were incurred in New Israeli Shekels (NIS) in the three
months ended March 31, 2000. As a result, we bear the risk that the rate of
inflation in Israel will differ from the rate of devaluation of the NIS in
relation to the dollar. For example, the annual rate of inflation in Israel was
an increase 7.0% in 1997, 8.6% in 1998, 1.3% in 1999 and a decrease of 1.2% in
the three months ended March 31, 2000, while the NIS was devalued against the
dollar by 8.8% in 1997 and 17.6% in 1998, and the dollar was devalued against
the NIS by 0.2% in 1999 and by 3.05% in the three months ended March 31, 2000.
The recent devaluation may be followed by an increased rate of inflation in
Israel, but the current economic outlook in Israel is uncertain. We may incur
losses in the future if the rate of inflation in Israel exceeds the devaluation
of the NIS against the dollar or if the timing of a devaluation lags behind
increases in inflation in Israel.
To date, we have not engaged in hedging transactions. In the future, we may
enter into currency hedging transactions to decrease the risk of financial
exposure from fluctuations in the exchange rate of the dollar against the NIS.
These measures may not adequately protect us against these risks.
THE GOVERNMENT PROGRAMS AND TAX BENEFITS THAT WE CURRENTLY PARTICIPATE IN OR
RECEIVE REQUIRE US TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR REDUCED
IN THE FUTURE, WHICH WOULD INCREASE OUR COSTS.
We benefit from a variety of government programs and tax benefits,
particularly as a result of exemptions and reductions resulting from the
"Approved Enterprise" status of our existing facility in Israel. To be eligible
for these programs and tax benefits, we must continue to meet specific
conditions, including making specified investments in fixed assets and financing
a percentage of investments with share capital. If we fail to meet these
conditions in the future, the tax benefits would be canceled and we could be
required to refund the tax benefits to which we are entitled. Israeli
governmental authorities have indicated that these programs and tax benefits may
not be continued in the future at their current levels or at any level. The
termination or reduction of these programs and tax benefits could increase our
expenses substantially.
Prior to 1995, we obtained royalty-bearing grants from the Office of the
Chief Scientist in Israel's Ministry of Industry and Trade to fund a portion of
our research and development. The terms of the grants from the Chief Scientist
prohibit the transfer of technology developed under these grants to any person
without the prior written consent of the Chief Scientist. We may apply for such
grants for the development of new products in the future.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND SOME OF THE EXPERTS NAMED IN THIS PROSPECTUS, OR TO ASSERT U.S.
SECURITIES LAWS CLAIMS IN ISRAEL.
Substantially all of our executive officers and directors and some of the
experts named in this prospectus are nonresidents of the U.S., and a substantial
portion of our assets and the assets of these persons are located outside the
U.S. Therefore, it may be difficult to enforce a judgment obtained in the U.S.
against us or any of those persons or to effect service of process on them
outside the U.S. Additionally, it may be difficult for you to enforce civil
liabilities under U.S. federal securities laws in original actions instituted in
Israel.
16
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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
- implementing our business strategy;
- attracting and retaining customers;
- obtaining and expanding market acceptance of the products and services we
offer;
- forecasts of Internet usage and the size and growth of relevant markets;
- rapid technological changes in our industry and relevant markets; and
- competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those implied by the forward-looking
statements. A description of risks that could cause our results to vary appears
under the caption "Risk Factors" and elsewhere in this prospectus. These
forward-looking statements are made as of the date of this prospectus, and
except as required under applicable securities law, we assume no obligation to
update them or to explain the reasons why actual results may differ.
17
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of shares of our
common stock in this offering of approximately $44.5 million, and $51.4 million
if the underwriters exercise their over-allotment option in full, based upon an
assumed offering price of $14.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses. The principal
purposes of this offering are to obtain additional capital and to create a
public market for our common stock. We expect to use the net proceeds from this
offering for working capital and other general corporate purposes. We may use a
portion of the net proceeds to acquire complementary products, technologies or
businesses; however, we currently have no commitments or agreements relating to
any of these types of transactions.
We will have significant discretion in the use of the net proceeds of this
offering. Investors will be relying on the judgment of our management regarding
the application of the proceeds of this offering. Pending use of the net
proceeds as discussed above, we intend to invest these funds in short-term,
interest-bearing, investment-grade obligations.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We expect
to retain any future earnings to fund the development and expansion our
business. Therefore, we do not anticipate paying cash dividends on our common
stock in the foreseeable future. Through our subsidiary, Nogatech Ltd., we
participate in the "alternative benefits program" under the Israeli Law for the
Encouragement of Capital Investments--1959, under which we receive a number of
tax exemptions. These tax exemptions will apply only after our net operating
losses are utilized. As a result, we have not yet benefited from these
exemptions. If Nogatech Ltd. distributes a cash dividend to us from income which
is tax exempt, it would have to pay corporate tax at the rate of between 10% to
15% on an amount equal to the amount distributed and the corporate tax which
would have been due in the absence of the tax exemption. As a result, we may
determine that it is not in your best interests to cause Nogatech Ltd. to
declare a dividend on any of its own profits to us in order to enable us to pay
a dividend to our stockholders.
18
<PAGE>
CAPITALIZATION
The following table summarizes our balance sheet data as of March 31, 2000.
This balance sheet data is presented:
- on an actual basis;
- on an as adjusted basis to give effect to:
- the conversion of all outstanding shares of preferred stock into an
estimated 9,293,310 shares of common stock upon the closing of this
offering;
- the assumed exercise of options and warrants to purchase up to
1,213,319 shares of our common stock upon completion of this offering
at a weighted average exercise price of $1.57 per share; and
- the sale of the shares of common stock in this offering at the assumed
initial public offering price of $14.00 per share, after deducting the
estimated underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Series A redeemable convertible preferred stock, $0.001 par
value, at redemption value; 30,000,000 shares authorized,
actual; no shares authorized, as adjusted; 15,906,304
shares issued and outstanding, actual; no shares issued
and outstanding, as adjusted (1).......................... $ 8,408 --
Series B redeemable convertible preferred stock, $0.001 par
value, at redemption value; 1,196,172 shares authorized,
issued and outstanding, actual; no shares authorized,
issued and outstanding, as adjusted(1).................... 5,000 --
Stockholders' equity:
Common stock, $0.001 par value; 40,000,000 shares
authorized; 728,040 shares issued and outstanding, actual;
14,734,669 shares issued and outstanding, as adjusted..... 1 15
Additional paid-in-capital.................................. 10,188 69,987
Deferred compensation....................................... (343) (343)
Accumulated deficit......................................... (14,099) (14,099)
------- --------
Total stockholders' equity (capital deficiency) (4,253) 55,560
------- --------
------- --------
Total capitalization........................................ $ 9,155 55,560
======= ========
</TABLE>
- ------------------------------
(1) Our shares of Series A and Series B preferred stock entitle their holders to
a liquidation preference in the event that our operations terminate. The
terms of the preferred stock provide that events such as a change of control
are considered a liquidation that entitles the holders to the liquidation
preference.
The previous information should be read together with our consolidated
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.
The shares of common stock outstanding in the pro forma as adjusted columns
exclude:
- 1,065,014 shares of common stock issuable as of March 31, 2000 upon the
exercise of outstanding stock options issued under our 1999 Stock Option
Plan at a weighted average exercise price of $1.47 per share;
- 3,850,000 shares of common stock reserved for issuance under our 2000
Equity Incentive Plan and 2000 Stock Purchase Plan; and
- 350,000 shares of common stock issuable as of March 31, 2000 upon the
exercise of outstanding warrants at an exercise price of $0.13 per share.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$9,155,000, or $0.91 per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by 10,021,350, the number of shares of common stock treated
as outstanding on a pro forma basis after giving effect to the conversion of our
Series A and Series B preferred stock. After giving effect to the sale of the
shares of common stock offered in this offering at the assumed public offering
price, net of offering expenses, our pro forma net tangible book value at March
31, 2000 would have been $53,655,000, or $3.97 per share of common stock. This
represents an immediate increase in net pro forma tangible book value to
existing stockholders of $3.06 per share and an immediate dilution of $10.03 per
share to new investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $ 14
Pro forma net tangible book value per share before this
offering as of March 31, 2000......................... $ 0.91
Increase per share attributable to new investors........ 3.06
------
Pro forma net tangible book value per share after this
offering................................................ 3.97
------
Dilution per share to new investors.......................
$10.03
======
</TABLE>
The following table summarizes on a pro forma basis, after giving effect to
the conversion of our Series A and Series B preferred stock, the total number of
shares of common stock purchased from us, the total consideration paid to us and
the average price per share paid by existing stockholders and by new investors,
in each case based upon the number of shares of common stock and Series A and
Series B preferred stock outstanding as of March 31, 2000, and assuming that
this offering is completed prior to May 30, 2000.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 10,021,350 74.0% $17,420,000 28.0% $1.74
New investors............................. 3,500,000 26.0% $44,500,000 72.0%
---------- ----- ----------- -----
Total................................... 13,521,350 100.0% $61,920,000 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by existing stockholders will be reduced to 71.3%
of the total number of shares of common stock to be outstanding after this
offering and the number of shares of common stock held by new investors will
increase to 4,025,000 shares, or 28.7% of the total number of shares of common
stock to be outstanding immediately after this offering.
The foregoing discussions and tables assume no exercise of any stock options
or warrants outstanding. As of March 31, 2000, there were options outstanding to
purchase 1,065,014 shares of common stock at a weighted average exercise price
of $1.47 and 1,213,319 warrants and options outstanding to purchase shares of
common stock at a weighted average exercise price of $1.57 per share. If all of
these options and warrants were exercised on March 31, 2000, our pro forma net
tangible book value as of that date would have been $57,125,481, or $3.62 per
share of common stock, and this offering would represent an immediate dilution
of $10.38 per share to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data for each of the years in the three-year
period ended December 31, 1999 and the balance sheet data at December 31, 1998
and December 31, 1999 are derived from our audited financial statements included
elsewhere in this prospectus. The statement of operations data for each of the
three-month periods ended March 31, 1999 and 2000 and the balance sheet data at
March 31, 2000 are derived from our unaudited financial statements included
elsewhere in this prospectus. Such unaudited interim financial statements have
been prepared on the same basis as the audited financial statements and reflect
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial information, in accordance with generally
accepted accounting principles. The statement of operations data for the year
ended December 31, 1996 and the balance sheet data at December 31, 1996 and 1997
are derived from our audited financial statements that are not included in this
prospectus. The statement of operations data for the year ended December 31,
1995 and the balance sheet data at December 31, 1995 are derived from our
unaudited financial statements that are not included in this prospectus. The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
----------- -------- -------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales....................................... $ 931 $ 2,630 $ 2,551 $ 3,205 $ 8,856 $ 870 $ 2,945
Cost of sales............................... 777 1,855 1,699 2,038 5,111 518 1,661
----------- -------- -------- -------- ---------- ---------- ----------
Gross profit................................ 154 775 852 1,167 3,745 352 1,284
Operating expenses:
Research and development.................. 1,314 997 1,266 1,451 2,283 588 685
Sales and marketing....................... 491 898 695 1,020 1,689 383 290
General and administrative................ 258 473 321 609 880 195 204
----------- -------- -------- -------- ---------- ---------- ----------
Total operating expenses.................... 2,063 2,368 2,282 3,080 4,852 1,166 1,179
----------- -------- -------- -------- ---------- ---------- ----------
Operating (loss) income..................... (1,909) (1,593) (1,430) (1,913) (1,107) (814) 105
Other income (expense), net................. (288) (21) (32) 90 11 (3) (12)
----------- -------- -------- -------- ---------- ---------- ----------
Net (loss) income........................... (2,197) (1,614) (1,462) (1,823) (1,096) (817) 93
Charge for beneficial conversion feature of
Series B redeemable preferred stock....... - - - - - - (4,570)
Accretion of redemption value of Series A
redeemable convertible preferred stock.... (120) (173) (300) (383) (427) (107) (165)
----------- -------- -------- -------- ---------- ---------- ----------
Net loss applicable to common stock......... $ (2,317) $ (1,787) $ (1,762) $ (2,206) $ (1,523) $ (924) $ (4,642)
=========== ======== ======== ======== ========== ========== ==========
Net loss per share of common stock, basic
and diluted............................... $ (4.04) $ (3.12) $ (5.86) $ (7.13) $ (4.50) $ (2.97) $ (8.14)
=========== ======== ======== ======== ========== ========== ==========
Weighted average number of shares of common
stock outstanding......................... 573,250 573,250 300,709 309,536 338,295 310,995 570,557
=========== ======== ======== ======== ========== ========== ==========
Pro forma net income (loss) per share of
common stock, basic and diluted........... $ (0.12) $ (0.09) $ 0.01
========== ========== ==========
Pro forma weighted average number of shares
of common stock outstanding............... 8,948,078 8,920,778 9,749,945
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------- AS OF MARCH 31,
1995 1996 1997 1998 1999 2000
----------- -------- -------- -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 1,114 $ 95 $ 271 $ 3,791 $ 2,475 $ 6,612
Working capital....................................... 915 (96) 223 4,171 3,111 8,627
Total assets.......................................... 2,235 1,368 1,568 5,769 6,577 11,252
Series A redeemable convertible preferred stock....... 3,783 4,147 4,954 7,816 8,243 8,408
Series B redeemable convertible preferred stock....... - - - - - 5000
Stockholders' equity (capital deficiency)............. (1,919) (4,047) (4,524) (3,517) (4,886) (4,253)
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN
THIS PROSPECTUS. EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE PRINCIPAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
DIFFERENCES IN OUR ACTUAL RESULTS ARE DISCUSSED IN THE SECTION TITLED "RISK
FACTORS."
OVERVIEW
We design and sell chips that establish connections between video devices
and computers, as well as connections between video devices across a variety of
networks. Our chips and related decompression software use proprietary
algorithms designed to provide high quality video, low power consumption and
advanced capabilities. These features enable cost-effective plug-and-play video
connections.
In 1995 and 1996, we introduced our NT1001 video chip and NT1002 sound chip
for connecting video sources to laptop computers. We sold both of these chips
embedded in PCMCIA cards, which are connectors that allow accessory equipment,
such as modems, CD-ROM drives and video cameras, to be connected to personal
computers. In 1998, we introduced our NT1003 chip, which compresses video for
transfer through the Universal Serial Bus (USB) interface between computer
accessories and computers. The USB is an interface standard for connections
between a computer and its accessories using a standard cable. We sold the
NT1003 chip on a stand-alone basis to original equipment manufacturers for
integration into their video products and also incorporated into our own video
devices.
With the introduction of our NT1003 chip, we began to reduce our sales of
NT1001 and NT1002 chips embedded in PCMCIA cards. In addition, we began to
increase our sales of NT1003 chips on a stand-alone basis. Our strategy is to
continue increasing our sales of chips on a stand-alone basis rather than
incorporated into our own video devices. We anticipate that these sales will
constitute the primary portion of our future sales.
We primarily sell our chips to original equipment manufacturers that
incorporate our chips into their video applications and products. Purchasers of
our chips in 1999 were AME Group, Camtel Technology, Fujitsu General, Hauppauge
Computer Works, Ingram Micro, Interex, IO Data, Pinnacle Systems, Sharp
Electronics and X-10.com. In the first quarter of 2000, approximately 50% of our
sales were derived from customers in North America, 26% from customers in Asia
and 24% from customers in Europe and other regions. In 1999, approximately 61%
of our sales were derived from customers in North America, 31% from customers in
Asia, and 8% from customers in Europe and other regions.
Our sales are concentrated among relatively few customers. In the first
quarter of 2000, sales to Hauppauge represented approximately 31% of sales,
sales to Camtel represented approximately 12% of sales, and sales to Pinnacle
represented approximately 11% of sales. In 1999, sales to Hauppauge represented
approximately 24% of sales, sales to Tomen Electronics, our Japanese
distributor, represented approximately 14% of sales, and sales to Interex
represented approximately 13% of sales. Tomen Electronics accounted for
approximately 41% of sales in 1998 and 17% of sales in 1997. Although our
principal customers are likely to vary on a quarterly basis, we anticipate that
our sales will remain concentrated among a few customers for the foreseeable
future.
The sales prices of our chips decreased in 1999 and in the first quarter of
2000 primarily as a result of increased volume and competition, and we may need
to reduce prices further in order to remain competitive. We have offset
decreased chip prices by reducing the prices we pay our chip suppliers due to
increased volume. In addition, we design each generation of our chips to use
more advanced micron process technology, which determines the relative size of
our chips. For example, our NT1003 chip uses 0.60-micron process technology
while our NT1004 chip uses 0.35-micron process
22
<PAGE>
technology. Our use of smaller micron process technology allows us to reduce the
size of our chips and results in lower costs per chip. We are designing our next
generation of chips to be manufactured using smaller micron process technology,
which we believe will enable us to reduce manufacturing costs further.
We have incurred significant net losses since our inception, and we may
continue to do so for the foreseeable future. We incurred net losses of $1.8
million in 1998 and $1.1 million in 1999. Our accumulated deficit was $9.2
million as of December 31, 1999 and $14.1 million as of March 31, 2000.
Our results of results of operations include our subsidiaries, Nogatech
Ltd., an Israeli corporation, and Nogatech California, Inc., unless the context
requires otherwise.
RESULTS OF OPERATIONS
The following table sets forth selected data from our consolidated statement
of operations as a percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(AS A PERCENTAGE OF SALES)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 66.6 63.6 57.7 59.5 56.4
------ ------ ------ ------ ------
Gross profit................................. 33.4 36.4 42.3 40.5 43.6
Operating expenses:
Research and development................... 49.6 45.3 25.8 67.6 23.3
Sales and marketing........................ 27.2 31.8 19.1 44.0 9.9
General and administrative................. 12.6 19.0 9.9 22.4 6.9
------ ------ ------ ------ ------
Total operating expenses..................... 89.4 96.1 54.8 134.0 40.1
------ ------ ------ ------ ------
Operating income (loss)...................... (56.0) (59.7) (12.5) (93.5) 3.5
Other income (expense), net.................. (1.3) 2.8 0.1 (0.3) (0.4)
------ ------ ------ ------ ------
Net income (loss)............................ (57.3)% (56.9)% (12.4)% (93.8)% 3.1%
====== ====== ====== ====== ======
</TABLE>
SALES. Sales to original equipment manufacturers are recorded when we ship
our products. We recognize sales to distributors when they ship our products to
their customers. We accrue for estimated product warranty and liability costs
upon recognition of product sales.
Sales increased approximately 26% from $2.6 million in 1997 to $3.2 million
in 1998 and 176% to $8.9 million in 1999, and approximately 239% from
$0.9 million in first quarter 1999 to $2.9 million in the first quarter of 2000.
These increases primarily reflect the increase in unit sales of our products.
Sales increased from 1998 to 1999 and from the first quarter of 1999 to the
first quarter of 2000 primarily as a result of increased sales of our NT1003
chip, on both a stand-alone basis and incorporated into our video devices. Our
sales in 1997 and 1998 were primarily derived from sales of PCMCIA cards, which
we are no longer selling.
COST OF SALES. Cost of sales consists of component costs, warranty costs,
royalties and overhead related to manufacturing our products. Cost of sales
increased from $1.7 million in 1997 to $2.0 million in 1998 and to $5.1 million
in 1999, and from $0.5 million in the first quarter of 1999 to $1.7 million in
the first quarter of 2000. These increases were primarily due to increased
shipments of our products. Gross margins were 33.4% in 1997, 36.4% in 1998 and
42.3% in 1999, and were 40.5% in the first
23
<PAGE>
quarter of 1999 and 43.6% in the first quarter of 2000. The increase from 1997
to 1998 was primarily due to cost reductions that we implemented in our PCMCIA
cards, and the increases from 1998 to 1999 and from the first quarter of 1999 to
the first quarter of 2000 were primarily due to the transition to our higher
margin video compression chip business.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel, equipment, software tools and supplies for our
research and development activities. Substantially all of our research and
development activities occur in our facility in Israel. These expenses are
charged to operations as incurred. Our research and development expenses
increased from $1.3 million in 1997 to $1.5 million in 1998 and to $2.3 million
in 1999, and from $0.6 million in the first quarter of 1999 to $0.7 million in
the first quarter of 2000. These increases were primarily due to increased
levels of research and development activities and related costs of personnel.
Research and development expenses as a percentage of sales were 49.6% in 1997,
45.3% in 1998 and 25.8% in 1999, and were 67.6% in the first quarter of 1999 and
23.3% in the first quarter of 2000. The decreases as a percentage of sales from
1998 to 1999 and from the first quarter of 1999 to the first quarter of 2000
were due to our substantial increase in sales in 1999 and in the first quarter
of 2000. We believe significant investment in research and development is
essential to our future success. We plan to increase our research and
development activities, including recruiting and hiring additional personnel,
and to incur non-recurring engineering expenses associated with the manufacture
of our next generation chips, which will result in increased expenses in
absolute dollars.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist of
salaries and related costs of sales and marketing employees, consulting fees,
and expenses for travel, trade shows and promotional activities. Sales and
marketing expenses increased from $0.7 million in 1997 to $1.0 million in 1998
and to $1.7 million in 1999, and from $0.4 million in the first quarter of 1999
to $0.3 million in the first quarter of 2000. These increases were primarily due
to increases in the number of our sales and marketing personnel. Sales and
marketing expenses as a percentage of sales were 27.2% in 1997, 31.8% in 1998
and 19.1% in 1999, and 44.0% in the first quarter of 1999 and 9.9% in the first
quarter of 2000. The decreases as a percentage of sales from 1998 to 1999 and in
the first quarter of 1999 to the first quarter of 2000 were due to our
substantial increase in sales in 1999 and in the first quarter of 2000. We plan
to increase our sales and marketing activities, including recruiting and hiring
additional senior personnel, which will result in increased expenses in absolute
dollars.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance, accounting, strategic and business development,
human resources and legal. General and administrative expenses increased from
$321,000 in 1997 to $609,000 in 1998 and to $880,000 in 1999, and from $195,000
in the first quarter of 1999 to $204,000 in the first quarter of 2000. General
and administrative expenses as a percentage of sales were 12.6% in 1997, 19.0%
in 1998 and 9.9% in 1999, and 22.4% in the first quarter of 1999 and 6.9% in the
first quarter of 2000. In the fourth quarter of 1999, we recorded a $126,000
allowance for doubtful accounts to reflect a past due receivable from a single
customer. As of March 31, 2000, this receivable was $197,000. We believe that
the allowance is sufficient to reflect the potential loss related to this
receivable. We expect general and administrative expenses to increase in
absolute dollars as a result of our growing operational and corporate
activities, including activities related to our operations as a public company.
OTHER INCOME (EXPENSE), NET. Other income (expense) consists of interest
earned on cash and cash equivalents offset by interest expense related to bank
loans. Net interest income (expense) was an expense of $32,000 in 1997, income
of $90,000 in 1998 and income of $11,000 in 1999 and an expense of $3,000 in the
first quarter of 1999 and $12,000 in the first quarter of 2000.
INCOME TAXES. As of March 31, 2000, we had approximately $2.0 million of
Israeli net operating loss carryforwards, $5.2 million of U.S. federal net
operating loss carryforwards and $1.7 million of
24
<PAGE>
state net operating loss carryforwards. The Israeli net operating loss
carryforwards have no expiration date. The U.S. net operating loss carryforwards
expire in various amounts between the years 2004 and 2019.
25
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The tables below set forth unaudited statement of operations data for each
of the eight consecutive quarters ended March 31, 2000. This information has
been prepared on the same basis as our audited consolidated financial
statements. The information should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this prospectus
and, in the opinion of management, includes all adjustments, consisting only of
normal recurring adjustments, that we believe are necessary to present fairly
the unaudited quarterly results. Our limited operating history with respect to
our current chips makes the prediction of future operating results difficult or
impossible. We believe that period-to-period comparisons of our financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales............................ $ 589 $ 873 $ 1,073 $ 870 $ 1,953 $ 2,947 $ 3,086 $ 2,945
Cost of sales.................... 361 529 648 518 1,167 1,678 1,748 1,661
----- ----- ------- ------- ------- ------- ------- -------
Gross profit..................... 228 344 425 352 786 1,269 1,338 1,284
Operating expenses:
Research and development....... 352 369 370 588 520 622 554 685
Sales and marketing............ 239 244 329 383 511 413 382 290
General and administrative..... 133 153 207 195 183 215 286 204
----- ----- ------- ------- ------- ------- ------- -------
Total operating expenses......... 724 766 906 1,166 1,214 1,250 1,222 1,179
===== ===== ======= ======= ======= ======= ======= =======
Operating income (loss).......... (496) (422) (481) (814) (428) 19 116 105
Other income (expenses), net..... (17) 64 55 (3) 9 59 (54) (12)
----- ----- ------- ------- ------- ------- ------- -------
Net income (loss)................ $(513) $(358) $ (426) $ (817) $ (419) $ 78 $ 62 93
===== ===== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF SALES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 61.3 60.6 60.6 59.5 59.8 56.4 56.6 56.4
----- ----- ------- ------- ------- ------- ------- -------
Gross profit..................... 38.7 39.4 39.6 40.5 40.2 43.1 43.4 43.6
Operating expenses:
Research and development....... 59.8 42.3 34.5 67.6 26.6 21.1 18.0 23.3
Sales and marketing............ 40.6 27.9 30.7 44.0 26.2 14.0 12.4 9.9
General and administrative..... 22.6 17.5 19.3 22.4 9.4 7.3 9.2 6.9
----- ----- ------- ------- ------- ------- ------- -------
Total operating expenses: 123.0 87.7 84.5 134.0 62.2 42.4 39.6 40.1
----- ----- ------- ------- ------- ------- ------- -------
Operating income (loss).......... (84.3) (48.3) (44.9) (93.5) (22.0) 0.70 3.8 3.5
Other income (expenses), net..... (2.9) 7.3 5.1 (0.3) 0.5 2.0 (1.7) (0.4)
----- ----- ------- ------- ------- ------- ------- -------
Net income (loss)................ (87.2)% (41.0)% (39.8)% (93.8)% (21.5)% 2.7% 2.1% 3.1%
===== ===== ======= ======= ======= ======= ======= =======
</TABLE>
Our quarterly results tend to fluctuate significantly. Sales decreased from
the fourth quarter of 1998 to the first quarter of 1999 because of our shift in
product mix from selling chips embedded in PCMCIA cards to selling our chips and
video devices to original equipment manufacturers and the associated time
required to ramp-up sales of those products. Sales increased on a quarterly
basis in each year as a result of increased unit shipments of our NT1003 chip,
which was introduced in the
26
<PAGE>
second quarter of 1998. Gross margins have generally increased due to the
transition to our higher margin video compression chip business. `
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded operations primarily through the private
placement of our preferred stock and bank loans. We raised proceeds of
approximately $1.8 million in 1997, $5.6 million in 1998 and $4.7 million in
January 2000 from private placements of our securities, net of issuance costs.
Through January 2000, we issued an aggregate of 15,906,304 shares of Series A
preferred stock and 1,196,172 shares of Series B preferred stock. We estimate
that these shares will be converted into approximately 9,293,310 shares of our
common stock upon the closing of this offering. As of December 31, 1999, we had
cash and cash equivalents of $2.5 million, and as of March 31, 2000, we had cash
and cash equivalents of $6.6 million.
Cash used in operations include expenditures associated with development
activities and marketing efforts related to commercialization and improvement of
our current products, as well as the development of our future products. Cash
used in operations was $1.1 million in 1997, $1.8 million in 1998, $1.1 million
in 1999 and $1.2 in the first quarter of 2000. We made investments in fixed
assets of approximately $495,000 between January 1, 1997 and March 31, 2000.
We have a line of credit arrangement with a bank for an aggregate amount of
$2.0 million. The loans under this line of credit bear interest at a rate that
is a fixed percentage in excess of the interest rate set by the Bank of Israel.
The line of credit is secured by liens on our assets. Bank guarantees provided
under the line of credit amounted to approximately $0.5 million at March 31,
2000. As of that date, we had $1.5 million available under the line of credit.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
additional international operations and other factors. We expect to devote
substantial capital resources to expand our research and development and our
sales and marketing activities, and to other general corporate activities. We
expect that the net proceeds from this offering, our cash on hand and cash from
operations will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. After that, we may need to
raise additional funds which we may not be able to obtain on acceptable terms,
if at all.
BENEFICIAL CONVERSION CHARGE
In January 2000, we issued 1,196,172 shares of our Series B preferred stock
to a financial investor, which will convert into shares of our common stock upon
the closing of this offering. In connection with this issuance, we have recorded
a beneficial conversion charge of $4.6 million in the three months ended
March 31, 2000. This charge is calculated as the difference between the
estimated fair value of one share of our common stock on the date of issuance
and the per share conversion price applicable to the Series B preferred stock,
multiplied by the number of shares of common stock into which the shares of
Series B preferred stock are convertible. This nonrecurring charge has been
reflected as a decrease of the net income that we recorded as applicable to
common stock during this period, against a corresponding credit to additional
paid-in capital.
EFFECTIVE CORPORATE TAX RATES
Our tax rate will reflect a mix of the U.S. federal and state tax on our
U.S. income and Israeli tax on non-exempt income. The majority of our Israeli
subsidiary's income is derived from our capital investment program with
"Approved Enterprise" status under the Israeli Law for the Encouragement of
Capital Investments--1959, and therefore is eligible for tax benefits. Under
these benefits, we will enjoy a tax exemption on income derived during the first
four years in which this investment program
27
<PAGE>
produces taxable income, provided that our Israeli subsidiary does not
distribute this income to us as a dividend, and a reduced tax rate of 10% to 15%
for the remaining term of the program. All of these tax benefits are subject to
various conditions and restrictions. Since we have incurred tax losses through
March 31, 2000, we have not yet used the tax benefits for which we are eligible.
YEAR 2000 ISSUES
We currently are not aware of any Year 2000 problem in any of our critical
systems and products. However, the success to date of our Year 2000 efforts
cannot guarantee that a Year 2000 problem affecting third parties upon which we
rely will not become apparent in the future and interfere with our operations or
otherwise harm our business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires recognition of all derivatives at fair value
in the financial statements. We believe that, upon implementation, the standard
will not have a significant effect on our financial statements.
In December 1999, the U.S. Securities and Exchange Commission issued SAB
101, "Revenue Recognition in Financial Statements," which summarizes some of the
Commission's views in applying generally accepted accounting principles to
revenue recognition in financial statements. Our adoption of SAB 101 has not had
a material impact on our financial statements.
MARKET RISK
We are exposed to financial market risks including changes in interest rates
and foreign currency exchange rates. Substantially all of our cash and cash
equivalents consisted of short-term deposits and therefore are not subject to
significant interest rate risk. Substantially all of our sales and capital
spending is transacted in U.S. dollars, although approximately 54.3% of the cost
our operations, relating mainly to our personnel and facilities in Israel, was
incurred in New Israeli Shekels or NIS in the three months ended March 31, 2000.
We have not engaged in hedging transactions to reduce our exposure to
fluctuations that may arise from changes in foreign exchange rates. In the event
of an increase in inflation rates in Israel, or if appreciation of the NIS
occurs without a corresponding adjustment in our dollar-denominated sales, our
results of operations could be materially harmed.
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BUSINESS
OVERVIEW
We design and sell computer chips that establish connections between video
devices and computers, as well as connections between video devices across a
variety of networks. Our chips and related decompression software use
proprietary mathematical procedures known as algorithms and are designed to
provide high quality video, low power consumption and advanced capabilities.
Our products simultaneously compress digital video signals and process audio
and data, enabling real-time transmission of signals from video sources into
personal computers and hand-held personal computing devices known as personal
digital assistants through the Universal Serial Bus (USB) interface standard.
The USB is a widely accepted interface standard for simplified plug-and-play
connections between a PC and its accessories. Our chips are integrated into PC
digital video cameras, video capture devices and PC-TVs.
Our products are compatible with the Windows 95, Windows 98, Windows 2000,
Mac OS and Windows CE operating systems. In addition to our chips, we also sell
our own video devices that incorporate our chips.
Demand for video over the Internet and over other communication networks,
for convenient connectivity solutions and for low-cost video-enabled consumer
products is currently undergoing substantial growth. In order to meet this
demand, the Moving Picture Experts Group, an industry committee commonly known
as MPEG, has developed a new standard for video compression known as MPEG-4.
MPEG-4 has been adopted by Microsoft in its new operating system, Windows
Millennium, which is expected to be released by the end of 2000. It has also
been adopted as the standard for the transmission of video in many new models of
mobile telephones. We expect that MPEG-4 will be the primary standard for
integrating and standardizing a wide range of video applications. We are
currently in the early stages of developing our next generation of chips to be
compatible with the MPEG-4 compression standard. We expect to release these
chips in the second half of 2001 and believe that compatibility with the MPEG-4
standard will enhance the market for our chips.
In 1999, purchasers of our products included AME Group, Camtel Technology,
Fujitsu General, Hauppauge Computer Works, Interex, IO Data, Pinnacle Systems,
Sharp Electronics and X-10.com.
INDUSTRY BACKGROUND
RECENT MARKET TRENDS
The markets for products that incorporate our chips are growing rapidly. The
primary factors driving this growth include the following:
- IMPLEMENTATION OF PLUG-AND-PLAY CONNECTIONS: New PC systems today are
generally being developed and shipped to the market with standard
plug-and-play interface ports. The USB is a widely accepted standard
interface between PCs and computer accessories. International Data
Corporation estimated that the USB would be available on 92.2% of all
desktop PC shipments in the U.S. in 1999 and would reach 100% by the year
2001. As a result, we expect that the demand for plug-and-play computer
accessories, especially in the video area, will increase.
- CONVERGENCE OF TV AND PC: In recent years, there has been substantial
convergence of applications designed for television sets and PCs,
including the capacity to watch television broadcasts on a PC. This
development has resulted in the introduction of new services and products,
such as targeted interactive Internet and TV advertising, video streaming
and digital TV and set top boxes.
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- ESTABLISHMENT OF BROADBAND COMMUNICATION NETWORKS: Broadband communication
networks based on cable and wide-band digital subscriber line (DSL) modems
enable the use of digital video applications for high speed Internet
access and voice, data and video communications. We believe that broadband
communication networks will increase the popularity of applications such
as video conferencing and video streaming, or the transmission of video
data in real time. These networks may also lead to the development of
future applications, such as video cellular phones, that will require
advanced video compression and capture technology. According to a November
1999 International Data Corporation study, the number of U.S. households
using cable modems was expected to grow to 1.3 million in 1999 and to
reach 9.0 million by 2003.
- DRAMATIC GROWTH OF INTERNET COMMUNICATION: According to International
Data Corporation, there were an estimated 142 million users of the
Internet at the end of 1998 and the number of users is expected to grow to
over 500 million by the end of 2003. The dramatic growth of the Internet
has led to substantial increases in the amount of video, audio and other
data that is transferred between computers. In addition, Internet
communication increasingly involves video and audio streaming. As a
result, there has been substantial growth in the use of digital cameras
for video e-mail, webcams, video conferencing and website development,
driving demand for products that can input video images into computers.
- STANDARDIZATION OF DIGITAL VIDEO COMPRESSION: The sharp increase in
demand for video compression for the Internet, for convenient connections
between computers and for video-enabled consumer products has fueled the
computer industry's search for a compression standard. We expect that
MPEG-4 will become the primary standard for integrating and standardizing
a wide range of video compression applications, including video streaming,
digital television broadcasting, home video archiving, interactive local
multimedia and other modes of video communication across the Internet and
third generation mobile phone and broadcast networks. We believe that the
standardization of video compression through the growing acceptance of
MPEG-4 will significantly expand the range of products and devices that
use the next generation of our chips.
THE CHALLENGES
The technologies involved in video compression and its integration into
computer products pose unique challenges:
- TIME TO MARKET: In the computer industry, the average product life cycle
is short, making time to market critical. As a result, manufacturers must
continuously, effectively and rapidly offer new products.
- CPU EFFICIENCY: Video applications, such as video conferencing, video
e-mail and other related video capture software programs, use significant
power and memory of the CPU to compress and decompress video data.
Typically, the more complex the video application, the greater the
utilization of the CPU. The continued expansion of video applications
requires improvements in CPU speed and efficiency and, in particular,
requires an efficient balance between video compression and decompression
in order to minimize CPU usage.
- FLEXIBLE ADAPTATION TO CHANGING COMPUTER INTERFACES AND MULTIPLE OPERATING
SYSTEMS: The Universal Serial Bus is currently the most popular standard
for connecting PCs and video-based computer accessories. In the future,
however, manufacturers may introduce interfaces based on new standards. In
addition, original equipment manufacturers offer their products for use on
a wide range of operating systems. As a result, the chips used for video
devices must operate with major operating systems for PCs and personal
digital assistants, including Windows and Mac.
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- QUALITY OF VIDEO IMAGE: Efficient video compression algorithms are
essential for high quality video imaging. Without seamless migration of
the video image from the camera to the ultimate display on the screen,
poor quality video images will occur. As a result, the efficiency of
algorithms must continue to develop in a manner consistent with the
complexity of the video data that is being transmitted.
- DEMAND FOR STANDARD VIDEO COMPRESSION: The proliferation of video
communication applications has fueled the demand for standard video
compression for wide and narrow band video communication across the
Internet and mobile and broadcast networks. Video compression chips and
the algorithms on which those chips are based must enable video
compression and archiving for a broad range of applications in the
environment that we expect will be governed by the MPEG-4 video
compression standard.
THE NOGATECH SOLUTION
Our products are designed to address the substantial need for video
connections for computers. Our video compression chips, which are based upon our
algorithms, are incorporated into new video-to-PC solutions for consumer
electronics products, such as PC-TVs and PC digital video cameras. We expect to
develop new algorithms and chips that will respond to the growing demands for
connections between video devices across a variety of networks resulting from
increasing Internet video use and plug-and-play applications.
We believe that we were the first company to introduce a single chip that
enabled the streaming of video, audio and data through the Universal Serial Bus
interface for a variety of PC video products and applications. Our chips operate
on all major operating systems for PCs and personal digital assistants and are
compatible with a wide variety of video applications.
We believe that our technology and expertise will enable us to develop
future products that will comply with the evolving standardization of video
compression reflected in MPEG-4. We anticipate that our chips will have wide
applications for the broadband communication networks that are being established
and will ensure high video quality for the advanced video communication that
those networks will facilitate.
We believe that our products have successfully addressed the market's
challenges as follows:
- TIME TO MARKET: We design our chips to be compatible with products of
leading original equipment manufacturers and consumer electronics
companies. We support our customers with reference designs that facilitate
their ability to respond quickly and efficiently to market demands. In
addition, we work closely with our customers to tailor our products to
meet their specific needs. We assist our customers in integrating our
chips into their products and to help them bring their new products to
market on a cost-effective and timely basis.
- CPU EFFICIENCY: Our chips require low usage of CPU processing time,
memory and power. This is achieved through the combination of advanced
compression algorithms and efficient decompression software tailored
specifically to transferring video into the computer through the USB
interface.
- FLEXIBLE ADAPTATION TO CHANGING COMPUTER INTERFACES AND MULTIPLE OPERATING
SYSTEMS: We have developed compression algorithms that respond to the
changing requirements of a wide variety of computer interfaces. As the
interfaces have changed and advanced, we have adapted our technology to
the new interfaces. In addition, our products are used on a variety of
operating systems. We believe that we can rapidly adapt our software to
other operating systems. Our design also offers our customers additional
versatility in that our chips can be incorporated into different
video-based accessories, which reduces the customers' time to market,
support costs and overall chip costs.
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- QUALITY OF VIDEO IMAGE: Our compression algorithms are designed to
minimize noticeable degradation in video images.
- DEMAND FOR STANDARD VIDEO COMPRESSION: We have developed substantial
knowledge and experience in developing video compression algorithms in
order to develop algorithms and chips that can implement the broad range
of video applications that will be possible in the standardized MPEG-4
environment.
BUSINESS STRATEGY
Our goal is to be the leading provider of video connection solutions using
enhanced video compression technology and plug-and-play interfaces.
The following are the key elements of our strategy:
- MAINTAIN EXPERTISE IN VIDEO COMPRESSION TECHNOLOGY: We use our expertise
in developing and implementing algorithms and software to develop chips
that establish connections between video devices and computers, as well as
connections between video devices across a variety of networks and media.
We believe that our expertise in all aspects of video compression
technology and our focus on emerging industry standards enable us to
design chips that are attractive to a broad range of customers because
they incorporate several different operating functions on a single chip.
As a result, our products are referred to as "systems-on-chips." In
addition, our engineering team of mathematicians and chip designers, of
which a significant number hold Ph.D. and MSEE degrees, is experienced in
all aspects of algorithm development. For over 15 years, our key
development personnel have been developing video compression technology
and video connectivity products. We are active committee members in the
Video Class USB Implementers Forum, an industry organization founded by
the companies that developed the Universal Serial Bus standard.
- FOCUS ON HIGH VOLUME APPLICATIONS: We focus on designing chips for
manufacturers of video products for emerging high volume PC business and
consumer applications, such as video streaming, interactive multimedia on
mobile networks and digital multimedia broadcasting. We attempt to
identify market segments that have the potential for substantial growth
and to tailor our products for these markets. By focusing our marketing
efforts on leading OEMs with large volume potential, we believe that we
will reach a substantial segment of our potential customer base while
minimizing the cost and complexity of our marketing efforts.
- CREATE AND STRENGTHEN OUR RELATIONSHIPS WITH KEY CUSTOMERS: Our goal is
to sell our products to leading original equipment manufacturers in the
consumer electronics market and to develop long-term working relationships
with them. Our engineers work closely with our current and potential
customers both before and after we introduce our chips to develop and
modify our designs to meet their particular needs and to support their
future products. Based upon our experience with our customers' projects,
we typically are involved from the design stage to the product launch
stage.
- BUILD EXISTING TECHNOLOGIES TO PENETRATE NEW MARKETS: We plan to use the
algorithms that we developed in connection with the current video-based
Universal Serial Bus market to develop new chips for future products. Our
new products use many of the same design features that we have previously
developed. We believe that these factors will enable us to quickly
establish new reference designs for emerging new market opportunities for
our existing and potential original equipment manufacturer customers.
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PRODUCTS
We design, develop and market chips for video connectivity that enable
video-to-PC connections and high quality video on PCs. Our chips are
"system-on-chip" products that process and compress video images and handle the
transfer of data through the USB interface. Our chips work in tandem with our
PC-based software, which decompresses and processes the video. We believe that
our chips, which are small, power-efficient and compatible with a variety of
operating systems, are effective PC interface solutions for manufacturers of
Universal Serial Bus-based digital video cameras, PC-TVs and video capture
devices. We also provide our customers with comprehensive reference designs for
our chips. These reference designs enable our customers to design and build new
products rapidly and to reduce significantly the amount of time that they need
to introduce new products.
Each of our chips incorporates its own related software. Our software is the
interface between the chips and PCs and can be installed and used rapidly,
enabling plug-and-play connectivity. Our software enables video decompression,
Universal Serial Bus protocol implementation and video device control, such as
brightness, hue and zoom control. The key feature of our software is its ability
to maintain high video quality while using the CPU's resources efficiently.
The role that our chips play in the transmission of digital video from a
video device to a PC is illustrated below:
[CHART]
In the future, we expect that more advanced versions of our chips will
support additional connections between PCs and video-based accessories, as well
as video network connections for the Internet and mobile and broadcast
communication networks. We anticipate that our next-generation chips will be
compatible with MPEG-4 standard applications. These applications include
advanced video streaming through the Internet, digital video archiving, personal
video recorders and high quality streaming using wireless networks.
In 1995 and 1996, we introduced our NT1001 video chip and NT1002 sound chip
for connecting video sources to laptop computers. We sold both of these chips
embedded in PCMCIA cards. In 1998 we introduced our NT1003 chip which compresses
video for transfer through the Universal Serial Bus interface to computers. We
sold the NT1003 chip on both a stand-alone basis to original equipment
manufacturers for integration into their video products and also incorporated
into our own video devices.
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The following table describes our current and anticipated future chips and
the products in which they are or are expected to be used:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CHIP DATE INTRODUCED DESCRIPTION OEM PRODUCTS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NT1003 Second quarter 1998 - Video compression across USB - PC-TVs
interface - Video capture devices
- Plug-and-play - PC digital video cameras
- Low power consumption
- --------------------------------------------------------------------------------------------------
NT1004 Fourth quarter 1999 - Video compression, audio and - PC-TVs
data streaming across USB - PC digital video cameras
interface - Video capture devices
- Plug-and-play
- Low power consumption
- --------------------------------------------------------------------------------------------------
NT1005 Second quarter 2000 - Companion chip for NT1004 chip - PC-TVs with Vertical Blank
- Data streaming enhancements: Interval (VBI)
Vertical Blank Interval (VBI)
- --------------------------------------------------------------------------------------------------
NT1006 Scheduled for third - Chip that allows cameras to - PC digital video cameras, with
quarter 2000 take digital still pictures when possible dual mode for digital
detached from computer and live still pictures
video when connected to - Webcams
computer
- For USB and wireless Bluetooth
interfaces
- --------------------------------------------------------------------------------------------------
</TABLE>
NT1003. The NT1003 is a video chip for video communication across the USB
channel to the PC. The NT1003 chip is incorporated into a variety of video
products, including PC-TVs, PC digital cameras and video capture devices. We
also sell our own video devices that incorporate the NT1003 chip. These devices
include our PC-TV device, which enables users to watch television on a PC, video
cable adapters and PC digital video cameras.
NT1004. The NT1004 chip incorporates video, audio and data streaming into a
single chip for video, audio and data transfer across the USB channel to the PC.
In addition to its use with PC cameras and PC-TVs, the NT1004 can be
incorporated into PC set-top boxes, cable modems and computer displays.
NT1005. The NT1005 is a companion chip to the NT1004. It enhances the
NT1004 chip by offering additional features such as data streaming for vertical
blank interval, which is a standard technique enabling transmission of digital
data simultaneously with standard analog video in connection with PC-TV
applications. We introduced this chip in April 2000 but have not yet made
substantial sales.
NT1006. The NT1006 chip is scheduled to be introduced in the third quarter
of 2000. It is being designed to enable larger video images than the NT1004 chip
and has additional features, such as permitting PC digital cameras to take both
still and video images. It also enables the transmission of live video through
the Bluetooth interface, a standard for short range wireless transmissions.
NEXT GENERATION. We are designing our next generation chips to be
compatible with the MPEG-4 standard. These chips will be designed to provide
video streaming through the Internet and video archiving for personal computers,
personal digital assistants, PC digital video cameras, video capture devices and
PC-TVs.
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SALES AND MARKETING
The majority of our customers are original equipment manufacturers that buy
our chips and design them into their products. We work closely with existing and
potential customers to assist them in integrating our chips into their products
by offering reference designs and close collaboration with our application
engineers. In some cases, we collaborate with manufacturers whose products work
together with our chips to create and market reference designs for original
equipment manufacturer customers. This approach encourages these manufacturers
to market our chips with their products, increasing our market reach and
visibility.
We market our products worldwide from our direct sales offices in the U.S.
and Israel. We depend solely upon Tomen Electronics for distribution of our
products in Japan, which we view as a critical market for our success. We
provide marketing and customer support services from our U.S. office.
The following table sets forth original equipment manufacturers that
purchased products in 1999 and their products incorporating our chips:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C>
PURCHASER PRODUCTS
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C>
AME Group Video capture devices, PC digital video cameras, PC-TVs
Camtel Technology Video capture devices, PC digital video cameras, PC-TVs
Fujitsu General PC digital video cameras
Hauppauge Computer Works Video capture devices, PC-TVs
Interex Video capture devices
IO Data Video capture devices
Pinnacle Systems PC-TVs
Sharp Electronics Video capture devices
X-10.com Video capture devices
- --------------------------------------------------------------------------------------------------
</TABLE>
We do not have long-term contracts with any of our customers. Sales of our
products are made under firm purchase orders. However, we do at times allow
customers to reschedule deliveries. Our business is characterized by short lead
times and quick delivery schedules. Our backlog fluctuates substantially from
period to period. As a result, we do not believe that backlog at any given time
is a meaningful indicator of future sales.
CORE TECHNOLOGY
We believe that one of our key competitive advantages is our unique core
technologies. These range from advanced video compression and image processing
algorithms to the design of our system architecture, efficient software
implementation, cost-effective design of high-performance video processing chips
and the integration of these core technologies into our chips. We have developed
and continue to build on the following key technology areas:
- standard and proprietary high quality video compression algorithms;
- advanced image processing algorithms that enable our bit rate control of
USB data, vertical blank interval detection, infrared remote control
detection and scene analysis for computer control applications;
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- multiple-platform video streaming software for Windows 95, 98, 2000, CE
and Mac operating systems; and
- implementation of "system-on-chip" architecture for multiple video
applications.
Each of these technologies is described in further detail below:
STANDARD AND PROPRIETARY HIGH QUALITY VIDEO COMPRESSION ALGORITHMS
Video compression techniques exploit unchanged parts of a video image and
identical images in consecutive video frames. These redundancies are used to
reduce the data required for representing video on the computer while
maintaining acceptable video quality. In "closed loop systems," such as video
data transmitted through the Universal Serial Bus interface, no industry
standard is required. However, in open systems such as the Internet, standard
protocols must be used to facilitate communications between different systems.
As a result, our technology addresses standard as well as proprietary video
compression techniques.
Our compression technology provides the following features:
- high quality image with minimal and imperceptible degradation of the
picture;
- high frequency details of the image, including edges;
- efficient use of CPU resources;
- use of minimal silicon area on the chip;
- ability to compress images and display them in real time; and
- highly efficient cost and performance.
We are developing advanced video processing technology for implementation
and enhancement of the MPEG-4 video compression standard for PC video
accessories and for communication across networks. MPEG-4 builds on the
experience of the MPEG-1 and MPEG-2 standards, which are currently used in
digital video applications. MPEG-4 is rich in features, and can be customized to
serve the needs of specific industries while preserving a high level of
interoperability across a variety of applications. It allows a new level of
interaction with visual content, providing the ability to view, access and
manipulate objects rather than pixels. MPEG-4's impact is especially significant
in video streaming, digital television, mobile multimedia and game applications.
We are adapting and enhancing our existing core technologies in order to develop
algorithms and chips that will be compatible with the variety of Internet video,
plug-and-play and other applications based upon MPEG-4.
IMAGE PROCESSING ALGORITHMS
We have developed a library of digital signal, image and video processing
algorithms that provide video image processing solutions for different video
applications. These algorithms enable the delivery of additional functionality,
such as segmentation of objects by motion, bit rate control, vertical blank
interval detection and camera-aided touch-screen, as described below. The
segmentation of objects by motion involves the separation of images into
distinct visual objects and is an important feature of the MPEG-4 standard. As a
result, the MPEG-4 standard supports higher quality video images, especially for
mobile applications. We use bit rate control, vertical blank interval detection,
multiple-platform video streaming software and system-on-chip architecture in
our products, and we expect to include camera-aided touch screen in our future
products. These additional functions are described as follows:
- Bit rate control
In the USB interface, the available channel bandwidth between the PC and
its accessories varies. Consequently, when only a single accessory is
connected to the PC, available bandwidth
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may be fairly broad, while in cases where multiple accessories are
connected, the available bandwidth per accessory will be narrower. Our
flexible image processing algorithms allow the PC to choose any bandwidth
per accessory at variable rates. This technology, which is known as bit
rate control, can be modified to comply with restrictions imposed by the
MPEG-4 standard and for other computer interfaces.
- Vertical blank interval detection
Vertical blank interval (VBI) is a standard technique that enables
transmission of digital data simultaneously with standard analog video.
This technique is used by most cable, over the-air and satellite
television companies and involves the insertion of information such as
closed-captions into the blank vertical lines in the broadcast video data
stream. We have developed an algorithm that allows detection of the VBI
information. In addition, we have developed technology that allows our
chips to use the VBI information to integrate television, VBI and
Internet capabilities.
- Multiple-operating system video streaming software
We have developed software that can be implemented on various operating
systems while maintaining an efficient decompression algorithm and bit
rate control. Our software maintains system stability, plug-and-play and
ease of use while achieving high performance on the target operating
system. The software, when used together with our chips, provides a
complete system solution. We work with Microsoft Corporation and Apple
Corporation to ensure that our software works properly on their operating
systems.
- "System-on-chip" architecture
Our chips are "system-on-chip" solutions, consisting of an image
processing unit, image compression unit and an interface protocol unit.
The image processing unit is designed to comply with as many available
digital video sources as possible. Our chips can process images from most
video sources without additional hardware changes. Using our chips,
systems designers are able to develop many cost-effective applications
for camera sensors, tuners or video decoders without any restrictions.
The image compression unit compresses the video signal to the desired bit
rate. The interface protocol unit handles the data transfer over the
Universal Serial Bus interface while optimizing overall system
performance, reliability, flexibility, image quality, size, cost and
power consumption.
- Camera-aided touch-screen
We developed our camera-aided touch-screen technology to provide
touch-screen pointing and selecting functionality using a conventional
low cost video camera together with image processing software running on
the PC. The video camera is used to obtain a video image of a finger or a
pointing device, pointing at an icon on the screen. The image processing
algorithm analyzes the video image and determines whether the icon is
being touched. In response, the computer performs the required operation
of the icon. We have applied for a patent relating to this technology,
which we plan to incorporate into our software.
RESEARCH AND DEVELOPMENT
In order to accommodate the rapidly changing needs of the markets that we
serve, we place a major emphasis on research projects designed to improve our
existing chips, software and reference designs. We are developing more advanced
video compression and video connectivity technology to meet the new standards
that are currently evolving. These new products will enable our customers to
operate their video-enhanced devices with the interfaces that will be used on
future PC platforms. From time to time, we engage in research and development
projects with our customers to develop special devices for their specific
product designs.
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We are designing the NT1006 chip to support multiple applications, including
digital still camera mode as well as live video camera mode and the transmission
of live video for wireless applications. In 2000, a significant part of our
development efforts will concentrate on technology that is compatible with the
MPEG-4 video compression standard.
As of March 31, 2000, 18 of our employees were engaged in research and
development.
Prior to 1995, we participated in two Israeli government research and
development incentive programs, under which we received research and development
participation of approximately $263,000. We are obligated to pay royalties to
the Office of the Chief Scientist of Israel's Ministry of Industry and Trade, at
rates that generally range from 100% to 150% of revenues resulting from the
funded projects up to maximum amounts of 100% to 150% of the funded amount.
Because we no longer intend to manufacture and sell products developed under the
projects funded by the Office of the Chief Scientist, we believe that we no
longer have these royalty liabilities.
MANUFACTURING
Our manufacturing process consists primarily of the production of chips,
test engineering, assembly of chips and original equipment manufacturer products
and quality control. In 1998 and 1999, Fujitsu Microelectronics Europe and
Hyundai Electronics manufactured all of our chips, which we purchased from an
independent distributor. We may use additional manufacturing sources in the
future. Our manufacturers use a range of manufacturing technology, known as
process technology. Our NT1003 chip is based on 0.60-micron process technology.
Our NT1004 and NT1005 chips are based on the more advanced 0.35-micron process
technology, which enables us to produce a smaller and less expensive chip than
the 0.60 micron process technology used in the NT1003 chip. We believe that
other components are generic in nature and can be obtained from a variety of
suppliers. Our USB video devices are assembled by subcontractors in Israel.
COMPETITION
Our industry is characterized by intense competition. The markets in which
we operate are characterized by rapid technological change, evolving industry
standards and declining average selling prices, and we expect them to become
increasingly competitive. We believe that the key competitive factors in our
markets are product design, performance, price, features, size, reliability,
time to market and customer support. In particular, we believe that our ability
to offer chips that have the flexibility to be used in a variety of products and
on a variety of operating systems will be critical to the competitiveness of our
products.
Our principal competitors in the sale of USB-compliant chip solutions for
video applications include Divio, SunPlus Technology and Winbond Electronics,
each of which supplies these chips to original equipment manufacturers for use
in consumer electronics products. We expect that large manufacturers of generic
chips or manufacturers of chips in the video compression arena, such as Zoran
and C-Cube Microsystems, may begin marketing competing chips and become more
active in our target markets. Additionally, in the future, some of our customers
may internally develop products that we currently sell to them.
Some of our competitors have greater financial, personnel and other
resources or offer a broader range of products and services than we do, and may
be able to respond more quickly to new or emerging technologies or changes in
customer requirements, benefit from greater purchasing economies, offer more
aggressive pricing or devote greater resources to the promotion of their
products. In addition, one or more of our competitors may develop products that
are superior to ours or that will achieve greater market acceptance than our
products.
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We believe that our success will depend primarily on our ability to provide
technologically advanced and cost-effective video connectivity solutions for
consumer electronics products. Additionally, we will have to provide our
customers with a short time to market for their products and responsive customer
support.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success is largely dependent upon proprietary technology. We rely
primarily on a combination of copyright and trade secret laws, as well as
confidentiality procedures and contractual provisions, to protect our
proprietary rights. We also rely to a lesser extent on trademark protection
concerning various names and marks that serve to identify our products.
We have applied for three U.S. patents that relate to our video technology.
These patent applications do not cover our proprietary algorithms, for which we
have not applied for patents to date. While we do not currently intend to seek
patent protection for our algorithms, we may do so in the future. We also seek
to protect our proprietary rights through copyright protection and through
restrictions on access to our trade secrets and other proprietary information
contained in confidentiality agreements with our customers, suppliers, employees
and consultants. While our ability to compete may be affected by our ability to
protect our intellectual property, we believe that, because of the rapid pace of
technological change in our industry, maintaining our technological leadership
and our comprehensive familiarity with all aspects of the technology contained
in our chips and associated software is of great importance in addition to
patent protection.
EMPLOYEES
As of March 31, 2000, we employed a total of 37 persons worldwide, including
18 in research and development, eight in technical service support and sales and
marketing, eight in management and administration and three in operations. 33 of
our employees are based in Israel and four of our employees are based in Santa
Clara, California. None of our employees is subject to a collective bargaining
agreement, and we consider our relations with our employees to be good.
Israeli labor laws and regulations are applicable to our employees in
Israel. These laws principally concern matters such as paid annual vacation,
paid sick days, length of the workday, pay for overtime, insurance for
work-related accidents, severance pay and other conditions of employment.
Israeli law generally requires severance pay, which may be funded by Manager's
Insurance, described below, upon the retirement or death of an employee or
termination of employment without cause. This insurance policy provides a
combination of savings plans, insurance and severance pay, if the employee is
legally entitled upon termination of employment. Furthermore, Israeli employees
and employers are required to pay specified sums to the National Insurance
Institute. Since January 1, 1995, these amounts also include payments for
national health insurance. The payments to the National Insurance Institute are
approximately 14% of wages, up to a specified amount. The employee contributes
approximately 66% and the employer contributes approximately 34% of these
amounts. Although not legally required, we regularly contribute to a "Manager's
Insurance" fund or to a privately managed pension fund on behalf of our
employees located in Israel.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
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<PAGE>
FACILITIES
We lease a 1,800 square foot facility in Santa Clara, California at an
annual rental of approximately $60,000. This lease expires in September 2002.
Our main office and research and development facilities, located in Kfar Saba,
Israel, occupy approximately 7,800 square feet, which we lease at an annual
rental of approximately $95,000. This lease expires in February 2003, with an
option to extend until February 2008, subject to an increase in our annual
rental payments to a range of $100,000 to $160,000. We believe that our
properties are adequate to meet our current needs and that any additional space
that we may need in the future will be available on commercially reasonable
terms.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our directors and
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Nathan Hod............................. 54 Chairman of the Board
Arie Heiman............................ 53 President and Chief Executive Officer and Director
Yaron Garmazi.......................... 35 Chief Financial Officer and Secretary
Arie Gavriely.......................... 38 Vice President of Engineering
Liat Hod............................... 26 Vice President of Business Development
Gerald Dogon........................... 60 Director
Avraham Fischer........................ 43 Director
Davidi Gilo............................ 43 Director
Moshe Harel............................ 59 Director
Yirmiyahu Kaplan....................... 64 Director
Andrew Schonzeit....................... 43 Director
Yossi Vinitski......................... 33 Director
</TABLE>
NATHAN HOD co-founded Nogatech in 1993. Mr. Hod has served as our Chairman
since August 1995. From August 1995 though November 1995, Mr. Hod also served as
our Chief Executive Officer, Treasurer and Chief Financial Officer. From March
1994 until July 1998, Mr. Hod also served as Chief Executive Officer and
President of DSP Communications, a manufacturer of digital wireless technology
that was acquired by Intel in 1999. From November 1997 until October 1998,
Mr. Hod also served as Chairman of the Board of DSP Communications. Mr. Hod also
served as General Manager of Scitex Japan, a subsidiary of Scitex Corporation, a
developer of imaging and publishing systems, from 1986 until 1992. Mr. Hod has a
Masters degree in Business Administration from the University of Massachusetts,
Amherst.
ARIE HEIMAN, PH.D., co-founded Nogatech in 1993. Dr. Heiman has served as a
director and as our Chief Executive Officer since November 1995 and served as
our Chief Financial Officer between November 1995 and February 1999. In
addition, from January 1993 to November 1995, Dr. Heiman served as our Vice
President of Engineering and Technology. From 1990 to 1993, Dr. Heiman served as
Vice President, Image Activity for DSP Group, a computer technology company.
From 1978 to 1990, Dr. Heiman was Head of Digital Signal Processing Activities
for Tadiran Communications Group, an electronics/communications manufacturing
company. Dr. Heiman has a Ph.D. degree in Electrical Engineering from Tel Aviv
University.
YARON GARMAZI has served as our Chief Financial Officer since February 1999.
From 1995 until that time, he served as Controller for DSP Communications, where
he was responsible for the company's financial reporting system. Prior to that
time he was an auditor with Doron & Co., an Israeli accounting firm.
Mr. Garmazi has a Bachelors degree from Tel Aviv Management College.
Mr. Garmazi is an Israeli certified public accountant.
ARIE GAVRIELY has served as our Vice President of Engineering since January
1998. From January 1997 to December 1997, Mr. Gavriely served as our Vice
President of Mobile Video Conference Products. From 1993 to December 1996 he
held various engineering positions with us. Mr. Gavriely was with the image
processing group at DSP Group from 1991 to 1993. He was with the Israeli Defense
Forces during from 1985 to 1991. Mr. Gavriely has a Masters of Science degree in
Electrical Engineering from the Technion Israel Institute of Technology.
LIAT HOD has served as our Vice President of Business Development since
August 1996. Between January 1996 and July 1996, she was our U.S. Marketing
Manager. Ms. Hod received her Masters
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<PAGE>
degree in Business Administration from San Francisco State University in June
1996. Ms. Hod is the daughter of Nathan Hod, our Chairman of the Board.
GERALD DOGON has served as a director since August 1999. Mr. Dogon served as
a director of DSP Communications from November 1997 through January 1999, as
Chief Financial Officer of DSP Communications from August 1994 through October
1998, as Executive Vice President of DSP Communications from July 1996 through
October 1998 and as Senior Vice President of DSP Communications from August 1994
through July 1996. Between April 1992 and August 1994, Mr. Dogon served as
Director of Finance of Nilit, an Israeli manufacturer of nylon fibers. From
March 1991 to March 1992, Mr. Dogon served as Vice President of Finance of
Mul-T-Lock, an Israeli manufacturer of security devices. Between March 1989 and
March 1991, he served as Manager of the International Division of the Israel
General Bank. From December 1987 to March 1989, he served as Chief Financial
Officer of Indigo, an Israeli developer of imaging systems. Prior to December
1987, he was employed for 17 years by Scitex, where he last served as Executive
Vice President and Chief Financial Officer. Mr. Dogon has a Bachelors degree in
Economics and Commerce from the University of Cape Town, South Africa.
AVRAHAM FISCHER has served as a director since January 1995. Mr. Fischer is
a managing partner of the law firm Fischer, Behar, Chen & Co., of Tel Aviv,
Israel, where he has practiced since 1982. Mr. Fischer has also served as a
director of DSP Group from 1989 through 1997, of DSP Communications from 1996
through 1999, and of Vyyo, a developer of wireless broadband technologies, since
April 1996. Since January 1998, Mr. Fischer has served as co-Chairman of the
Board of Israir Aviation and Tourism and since January 1997, he has been
co-Chairman of the Board of Ganden Investment, which has holdings in a group of
Israeli tourism and aviation companies. Mr. Fischer has a law degree from the
Tel Aviv University Law School and was a lecturer at the school from 1982 to
1987.
DAVIDI GILO has served as a director since August 1999. Mr. Gilo has served
as the Chairman of the Board of Vyyo since its inception in 1996. In March and
April 1996, and from April 1999 through the present, Mr. Gilo has served as the
Chief Executive Officer of Vyyo. Mr. Gilo served as the Chairman of the Board of
DSP Communications from October 1998 through November 1999, and as Chief
Executive Officer of DSP Communications from June 1999 through November 1999.
Mr. Gilo also served as the Chairman of the Board of DSP Communications from its
founding in 1987 through November 1997. Since 1996, Mr. Gilo has also been the
manager of the Gilo Group, an investment company he founded in 1996. Between
1987 and 1993, Mr. Gilo was the President and Chief Executive Officer of DSP
Group, and he served as Chairman of the board of DSP Group from 1987 until April
1995.
MOSHE HAREL has served as a director since July 1998. Mr. Harel joined the
Van Leer Group Foundation in 1991 as the General Manager of Sor-Van Radiation.
He is currently responsible for the business activities of the Van Leer Group
Foundation in Israel. Since 1994, Mr. Harel has served as a director and member
of the executive board of Inventech, Mercator Management and several companies
in which Inventech has invested. From 1980 to 1991, Mr. Harel served in
management positions at several Israeli and U.S. companies. In 1964, Mr. Harel
joined the Israeli Air Force and served as a research and development engineer
and a fighter pilot. He retired in 1980 after commanding the air force flight
test center. Mr. Harel has a Bachelors of Science degree in Aeronautical
Engineering from the Technion in Israel and a Masters of Science degree in Data
Management and Automation from Princeton University.
YIRMIYAHU KAPLAN has served as a director since July 1998. Since 1993,
Mr. Kaplan has been Managing Director of Ophir Holdings. From 1986 to 1993,
Mr. Kaplan managed various projects and activities for the Investment Company of
Bank Hapoalim. Mr. Kaplan is a director of a number of private companies in
which Ophir Holdings is a shareholder, including Memco Software. Mr. Kaplan
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<PAGE>
has a Bachelor of Arts degree in Economics and a Masters degree in Business
Administration from the Hebrew University.
ANDREW SCHONZEIT has served as a director since January 1996. Since 1984
Mr. Schonzeit has served as the President of Idesco, a manufacturer and
distributor of identification, security and safety products, and as its Chairman
of the board since 1989. Mr. Schonzeit served as a director of DSP
Communications from 1992 to 1999. Mr. Schonzeit has a Bachelors degree in
Economics from New York University.
YOSSI VINITSKI was appointed a director in December 1999. Mr. Vinitski is a
Vice President and investment committee member at Challenge Fund-Etgar, a
venture capital fund. From 1995 to 1999, Mr. Vinitski was a Senior Investment
Manager at Yozma Management and Investment Ltd., an Israeli venture capital
fund. From 1993 to 1995, Mr. Vinitski served as a development engineer for
several high-tech companies. Mr. Vinitski has a Bachelors of Science degree, cum
laude, in Mechanical Engineering and a Masters degree in Business Administration
from Tel Aviv University.
CLASSIFIED BOARD AND TERM OF OFFICES
Our bylaws provide for a board of directors consisting of nine members.
There are currently nine directors on the board. Effective upon the closing of
this offering, our board will be divided into three classes of directors,
denominated Class I, Class II and Class III. Members of each class will hold
their office for three-year staggered terms. At the annual meeting of our
stockholders to be held in 2001, the term of office of the Class I directors
will expire, and Class I directors will be elected for a three-year term. At the
annual meeting of our stockholders to be held in 2002, the term of office of the
Class II directors will expire, and Class II directors will be elected for a
three-year term. At the annual meeting of our stockholders to be held in 2003,
the term of office of the Class III directors will expire, and Class III
directors will be elected for a three-year term. At each succeeding annual
meeting of stockholders, successors to the class of directors whose term expires
at that annual meeting will be elected to a three-year term. The initial Class I
directors will be Messrs. Fischer, Heiman and Hod. The initial Class II
directors will be Messrs. Harel, Kaplan and Vinitski. The initial Class III
directors will be Messrs. Dogon, Gilo and Schonzeit.
Our certificate of incorporation does not provide for cumulative voting;
therefore, our stockholders representing a majority of the shares of common
stock outstanding will be able to elect all of the directors. The classification
of the board of directors and lack of cumulative voting will make it more
difficult for our existing stockholders to replace the board of directors or for
another party to obtain control of our company by replacing the board of
directors. Since the board of directors has the power to retain and discharge
our officers, these provisions could also make it more difficult for existing
stockholders or another party to effect a change in our management.
Under a stockholders' agreement dated as of January 13, 2000, Holland
Ventures, Ophir Holdings, Docor International, Inventech and Ronchal Investments
(the "Holland Investors"), together with some of our other stockholders,
including Nomura International, Challenge Fund-Etgar and Corex Israeli
Industries, agreed to vote their shares in favor of the election of the
following members of our board:
- Holland Investors Nominees:
- two representatives nominated by the Holland Investors, one of whom is
nominated by Holland Ventures, so long as the Holland Investors
collectively hold at least 10% of our issued and outstanding capital
stock; and
- one representative nominated by the Holland Investors, who is selected
by Holland Ventures, so long as the Holland Investors collectively own
less than 10%, and at least 5% of our issued and outstanding capital
stock.
- Challenge Nominee:
- one representative nominated by Challenge, so long as Challenge holds
at least 89,928 shares of our common stock.
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<PAGE>
Upon completion of the offering, the parties to this agreement will hold up
to approximately 8,262,698 shares of our common stock, or 56.1% of the total
outstanding number of shares. Mr. Vinitski currently serves as the designee of
Challenge and Messrs. Harel and Kaplan currently serve as the designees of the
Holland Investors. Unless otherwise terminated by the parties, this agreement
will continue in effect after the closing of the offering.
BOARD COMMITTEES
We have established an audit committee and a compensation committee. The
audit committee reviews our internal accounting procedures and considers and
reports to the board of directors with respect to other auditing and accounting
matters, including the selection of our independent auditors, the scope of
annual audits, the fees to be paid to our independent auditors and the
performance of our independent auditors. The audit committee consists of
Messrs. Dogon, Harel and Kaplan. The compensation committee reviews and
recommends to the board of directors the salaries, benefits and stock option
grants for all employees, consultants, directors and other individuals
compensated by us. The compensation committee also administers our stock option
and benefit plans. The compensation committee consists of Messrs. Fischer, Hod
and Schonzeit.
DIRECTOR COMPENSATION
Directors who are also our officers or employees do not receive any
compensation for their services as directors. Each nonemployee director receives
an annual retainer of $20,000, payable in quarterly installments of $5,000 each
at the end of each fiscal quarter. The retainer contemplates attendance at four
board meetings per year. Additional board meetings attended in person are
compensated at the rate of $1,000 per meeting. Additional board meetings
attended by telephone are compensated at the rate of $250 per meeting. In
addition, each committee member receives $500 for attending in person, and $250
for attending by telephone, each committee meeting held on a day other than a
day on which a board meeting is held. Directors are reimbursed for expenses
incurred in connection with attending board and committee meetings. Under our
2000 Equity Incentive Plan, each of our non-employee directors elected to the
board for the first time after the effective date of this offering will
automatically receive options to purchase 20,000 shares of our common stock at
fair market value on the date of grant. These options will have a 10-year term
and will vest over a four-year period. In addition, under the 2000 Plan, each of
our non-employee directors will annually receive options to purchase
5,000 shares of our common stock. These options will have a 10-year term and
will vest immediately upon the date of grant. In 1999, some of our directors
received options to purchase shares of our common stock as compensation for
their services. See "Stock Option Plans" and "Certain Relationships and Related
Transactions."
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION. The following table sets forth all compensation
earned or paid for services rendered to us in all capacities for the year ended
December 31, 1999 by our Chief Executive Officer and by our only other executive
officer who earned more than $100,000 in salary and bonus for the year ended
December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- ------------------------------------------
ALL OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)(1)
- --------------------------- --------- ---------- ---------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Arie Heiman............... $168,500 -- -- 37,500 $34,621
President and Chief
Executive Officer
Arie Gavriely............. $129,640 -- -- 15,000 $12,020
Vice President of
Engineering
</TABLE>
- --------------------------
(1) On behalf of each of these officers, we make monthly payments to a severance
fund, a pension fund and a risk/disability fund. The amounts held in such
funds on their behalf are payable to them upon termination of their
employment.
OPTION GRANTS. The following table sets forth information with respect to
stock options granted during 1999 to the executive officers named in the summary
compensation table. In accordance with the rules of the Securities and Exchange
Commission, also shown below is the potential realizable value over the term of
the option based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. We assume that:
- the fair market value of our common stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of
the option; and
- the option is exercised and sold on the last day of its term for the
appreciated stock price.
These amounts are based on assumed rates of appreciation and do not
represent an estimate of our future stock price. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
----------------------------------------------------- ASSUMED RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM($)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED(#)(1) 1999(%)(2) PRICE($) DATE(3) 5% 10%
- ---- ------------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Arie Heiman................... 37,500 13.8% $3.00 08/06 $181,198 $272,596
Arie Gavriely................. 15,000 5.5% $3.00 08/06 $ 72,479 $109,038
</TABLE>
- --------------------------
(1) All options were granted under the 1999 Stock Option Plan.
(2) Based on an aggregate of 271,000 options granted to employees.
(3) These options will vest immediately if a change of control of our company
occurs or if we are merged into another company, unless these options are
assumed by our successor.
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<PAGE>
OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises and
the aggregate value of unexercised options for the year ended December 31, 1999,
held by each executive officer named in the summary compensation table above.
Neither of these officers exercised any stock options in 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE
UNEXERCISED OPTIONS AS OF MONEY OPTIONS AS OF
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------------- ---------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- ---- ----------- ----------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Arie Heiman................ -- -- 364,473 134,791 $5,040,000 $1,761,700
Arie Gavriely.............. -- -- 20,000 32,500 $ 274,525 $ 397,400
</TABLE>
- ------------------------
(1) Value is based on the difference between the option exercise price and
$14.00, the estimated initial public offering price of our common stock,
multiplied by the number of shares of common stock underlying the option. No
market existed for our common stock prior to this offering.
STOCK OPTION PLANS
1999 STOCK OPTION PLAN. Our 1999 Stock Option Plan provides for the grant
of incentive stock options and non-qualified stock options to our directors,
officers, employees and consultants, including some of our employees and
consultants that are based in Israel. A total of 3,041,537 shares of common
stock have been reserved for issuance under the 1999 Plan. As of March 31, 2000,
options to purchase 1,446,514 shares of common stock were outstanding under the
1999 Plan at a weighted average exercise price of $1.09 per share. We do not
currently anticipate granting options pursuant to the 1999 Plan following the
offering. The 1999 Plan will automatically terminate in October 2009.
The 1999 Plan is administered by our compensation committee. The
compensation committee has the authority to construe, apply and interpret the
terms of the 1999 Plan. In the event that we merge with or into another
corporation or sell substantially all of our assets, the 1999 Plan provides for
the full acceleration of the exercisability of all outstanding options, unless
an outstanding option is assumed or an equivalent option is substituted by the
successor corporation or the option is replaced by a cash incentive program of
the successor corporation that preserves the compensation element of the option
at the time of the transaction and provides for subsequent payout in accordance
with the vesting schedule applicable to the option.
2000 EQUITY INCENTIVE PLAN. Our 2000 Equity Incentive Plan was adopted in
March 2000 and will serve as the successor to our 1999 Plan. We do not intend to
issue any shares under the 2000 Plan until this offering is completed. The 2000
Plan is for the benefit of our officers, directors, employees, advisors and
consultants and provides for the issuance of stock-based incentive awards,
including stock options, stock appreciation rights, limited stock appreciation
rights, restricted stock, deferred stock and performance shares. An award may
consist of one arrangement or benefit or two or more of them. Under the 2000
Plan, awards covering no more than 80% of the shares reserved for issuance under
the 2000 Plan may be granted to any participant in any one year. We have
reserved 3,500,000 shares of common stock for issuance under the 2000 Plan. The
2000 Plan provides for an annual increase of the shares of common stock reserved
for issuance to be added automatically on the first day of each fiscal year,
commencing in 2001, equal to the lesser of 500,000 shares or 5% of the number of
outstanding shares of our common stock on the last day of the immediately
preceding fiscal year.
Each of our non-employee directors elected to the board for the first time
after the effective date of this offering will receive, upon election, options
to purchase 20,000 shares of our common stock at fair market value on the date
of grant. These options will have a 10-year term and will vest over a four-year
period. In addition, under the 2000 Plan, each of our non-employee directors
will annually
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<PAGE>
receive options to purchase 5,000 shares of our common stock. These options will
have a 10-year term and will vest immediately upon the date of grant.
The compensation committee of our board of directors initially will be the
plan administrator of the 2000 Plan. The plan administrator may interpret the
2000 Plan and may prescribe, amend and rescind rules and make all other
determinations necessary or desirable for the administration of the 2000 Plan.
The 2000 Plan permits the plan administrator to select the officers, directors,
employees, advisors and consultants, including directors who are also employees,
who will receive awards and generally to determine the terms and conditions of
those awards.
We may issue two types of stock options under the 2000 Plan: incentive stock
options which are intended to qualify under the Internal Revenue Code and
non-qualified stock options. The option price of each incentive stock option
granted under the 2000 Plan must be at least equal to the fair market value of a
share of common stock on the date the incentive stock option is granted.
Stock appreciation rights and limited stock appreciation rights may be
granted under the 2000 Plan either alone or in conjunction with all or part of
any stock option granted under the 2000 Plan. A stock appreciation right granted
under the 2000 Plan entitles its holder to receive, at the time of exercise, an
amount per share equal to the excess of the fair market value at the date of
exercise of a share of common stock over a specified price fixed by the plan
administrator. A limited stock appreciation right granted under the 2000 Plan
entitles its holder to receive, at the time of exercise, an amount per share
equal to the excess of the price of a share of common stock upon a change in
control of our company over a specified price fixed by the plan administrator. A
limited stock appreciation right may only be exercised within the 30-day period
following a change in control.
Restricted stock, deferred stock and performance shares may be granted under
the 2000 Plan. The plan administrator will determine the purchase price,
performance period and performance goals, if any, with respect to the grant of
restricted stock, deferred stock and performance shares. Participants holding
restricted stock and performance shares generally have all of the rights of a
stockholder. With respect to deferred stock, during the deferral period, subject
to the terms and conditions imposed by the plan administrator, the deferred
stock units may be credited with dividend equivalent rights. If the performance
goals and other restrictions are not attained, the participant will forfeit his
or her shares of restricted stock, deferred stock and/or performance shares.
In the event we merge or consolidate with another entity in which we are not
the surviving corporation, dissolve or liquidate or sell substantially all of
our assets, outstanding awards under the 2000 Plan may be assumed or replaced by
the successor corporation, if any, or its parent. If the successor corporation
or its parent does not assume outstanding awards or substitute equivalent
awards, these awards will automatically become fully vested and exercisable and
be released from any restrictions on transfer or any repurchase or forfeiture
right.
The terms of the 2000 Plan provide that the plan administrator may amend,
suspend or terminate the 2000 Plan at any time, provided, however, that some
amendments require approval of our stockholders. Further, no action may be taken
that adversely affects any rights under outstanding awards without the holder's
consent. The 2000 Plan will terminate in 2010.
SPECIAL PROVISIONS FOR OPTION GRANTS TO ISRAELI EMPLOYEES AND
CONSULTANTS. The 2000 Plan and the 1999 Plan set forth special provisions to
ensure that awards to Israeli employees and consultants of Nogatech Ltd. conform
to the Israeli Income Tax Ordinance [New Version]--1961. All awards to Israeli
employees and consultants of Nogatech Ltd. will be subject to a trust agreement
among us, Nogatech Ltd., and a trustee who will hold the awards on behalf of
these employees and consultants in accordance with applicable law. All issuances
of common stock upon exercise of the options will be issued in the name of the
trustee until the shares may be released to the employee or consultant
beneficiary in accordance with applicable law. No shares of common stock will be
released to a
47
<PAGE>
beneficiary of the trust unless the beneficiary deposits sufficient funds to
discharge his or her tax obligations under Israeli law, or otherwise establishes
that those obligations have been satisfied. Once the shares have been issued to
the trustee, the employee or consultant beneficiary will have the right to vote
his or her shares and receive cash dividends on those shares.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan, or Purchase Plan, was adopted in
March 2000. We do not intend to issue any shares under the Purchase Plan until
this offering is completed. The Purchase Plan allows eligible employees to
purchase our common stock at a discount from fair market value. The Purchase
Plan initially will be administered by the compensation committee of our board
of directors A total of 350,000 shares of our common stock have initially been
reserved for issuance under the Purchase Plan. The number of shares reserved for
issuance will be increased automatically on the first day of our fiscal year,
commencing in 2001, by an amount equal to the lesser of 100,000 shares or 1% of
the number of outstanding shares on the last trading day of the immediately
preceding fiscal year. The plan administrator may interpret the Purchase Plan
and, subject to its provisions, may prescribe, amend and rescind rules and make
other determinations necessary or desirable for the administration of the
Purchase Plan.
Employees generally will be eligible to participate in our Purchase Plan if
they are employed by us, or any subsidiaries that we designate, for more than 20
hours per week and more than five months in a calendar year. Employees are not
eligible to participate in our Purchase Plan if they are 5% stockholders, or
would become 5% stockholders as a result of their participation in this plan.
Under our Purchase Plan, eligible employees may acquire shares of our common
stock through payroll deductions. Eligible employees select a rate of payroll
deduction between 1% and 15% of their cash compensation and are subject to a
maximum purchase limitations. An employee's participation in the Purchase Plan
ends automatically upon termination of employment for any reason. A participant
will not be able to purchase shares having a fair market value of more than
$25,000, determined as of the first day of the applicable offering period, for
each calendar year in which the employee participates. Each offering period
under the Purchase Plan will be for two years and will consist of four six-month
purchase periods. The first offering period is expected to begin on the first
business day after the date of this prospectus. Offering periods thereafter will
begin on February 15 and August 15. The purchase price for common stock
purchased under this plan will be 85% of the lesser of the fair market value of
our common stock on the first day of the applicable offering period or the last
day of each purchase period. The plan administrator will have the power to
change the duration of offering periods. Our Purchase Plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code. This plan will terminate in 2010, unless it is terminated earlier
under its terms.
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Arie Heiman, our President
and Chief Executive Officer. The agreement with Dr. Heiman became effective on
March 1, 2000 and is for an initial term of 12 months and will automatically
renew for successive 12 month periods unless sooner terminated by us immediately
for cause or on 12 months notice without cause, or by Dr. Heiman on 30 days
notice. Under his agreement, Dr. Heiman is entitled to receive a monthly salary
equal to NIS 51,000, or approximately $12,700, adjusted periodically to reflect
changes to the Israeli consumer price index. We also contribute to a "Manager's
Insurance" policy on behalf of Dr. Heiman in an amount equal to 15.83% of his
salary and to a continuing education fund in an amount equal to 7.5% of his
salary. If Dr. Heiman's employment is terminated by us without cause, he is
entitled to the amounts accumulated in his Manager's Insurance policy and
education fund. We are also required on such a termination to extend to Dr.
Heiman a loan, repayable in five years, in an amount equal to the aggregate
price of his vested and unexercised stock options.
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<PAGE>
We have entered into an employment agreement with Arie Gavriely, our Vice
President of Engineering. The agreement with Mr. Gavriely became effective on
January 1, 1993 and is for an indefinite term. Mr. Gavriely's employment may be
terminated by Mr. Gavriely or by us with 30 days advance notice. Under this
agreement, Mr. Gavriely currently receives a monthly salary equal to
approximately NIS 25,000, or approximately $6,250 per month, adjusted
periodically to reflect changes to the Israeli consumer price index. Mr.
Gavriely is entitled to receive overtime payments at a rate of 175% of his
salary calculated on an hourly basis. We also contribute to a "Manager's
Insurance" policy on behalf of Mr. Gavriely in an amount equal to 13.33% of his
salary and to a continuing education fund in an amount equal to 7.5% of his
salary. If Mr. Gavriely's employment is terminated by us without cause, he is
entitled to the amounts accumulated in his Manager's Insurance policy and
continuing education fund.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee was formed in March 2000 and currently consists
of Messrs. Fischer, Hod and Schonzeit. Prior to that time, compensation
decisions were made by our board of directors. In 1999, Nathan Hod, our Chairman
of the Board, and Arie Heiman, our President and Chief Executive Officer,
participated in deliberations of our board of directors concerning executive
compensation. None of our executive officers serve as members of the board of
directors or compensation committee of any entity that has one or more executive
officers who serve on our board or compensation committee.
LIMITATION ON LIABILITIES AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the personal liability of our
directors to our stockholders to the maximum extent permitted by Delaware law.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
except with respect to liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This provision will have no effect on any non-monetary remedies that may be
available to us or our stockholders, nor will it relieve us or other officers or
directors from compliance with federal or state securities laws.
Our certificate of incorporation and bylaws also generally provide that we
will indemnify, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit,
investigation, administrative hearing or any other proceeding by reason of the
fact that he or she is or was a director or officer of ours, or is or was
serving at our request as a director, officer, employee or agent of another
entity, against expenses incurred by him or her in connection that proceeding.
An officer or director will not be entitled to indemnification by us if:
- the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests; or
- with respect to any criminal action or proceeding, the officer or director
had reasonable cause to believe his or her conduct was unlawful.
49
<PAGE>
In addition, we have entered into indemnification agreements with our
directors and executive officers containing provisions that may require us,
among other things, to indemnify them against various liabilities that may arise
by virtue of their status or service as directors or executive officers and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
At the present time there is no pending litigation or proceeding involving
any of our directors, officers, employees or agents for which indemnification
will be required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1997, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock, or an immediate
family member of any of the foregoing, had or will have a direct or indirect
interest other than:
- compensation arrangements described where required under "Management"; and
- the transactions described below.
SALES OF STOCK AND WARRANTS
On February 1, 2000, we sold 79,617 shares of common stock at $3.14 per
share to Les Fils Dreyfus & Cie., one of our principal shareholders, upon
exercise of a warrant.
On January 13, 2000, we sold 1,196,172 shares of Series B preferred stock at
$4.18 per share to Nomura International.
On July 15, 1998, we sold Series A preferred stock at $1.04 per share and
warrants to purchase shares of our common stock at an exercise price of $2.08
per share to the following investors, among others:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES NUMBER OF WARRANTS
- ---- ---------------- ------------------
<S> <C> <C>
Holland Ventures............................................ 1,921,667 144,125
Ophir Holdings.............................................. 1,441,251 108,094
Docor International......................................... 960,834 72,062
Inventech................................................... 960,834 72,062
</TABLE>
On February 4, 1997, we sold 159,235 shares of Series A preferred stock at
$1.57 per share and warrants to purchase 79,617 shares of our common stock at an
exercise price of $3.14 per share to Les Fils Dreyfus & Cie.
STOCK OPTION GRANTS
We have granted the following options to purchase shares of our common stock
to our directors and executive officers as set forth below:
<TABLE>
<CAPTION>
NAME NUMBER OF OPTIONS EXERCISE PRICE GRANT DATE RELATIONSHIP TO NOGATECH
- ---- ----------------- -------------- ---------- -------------------------------
<S> <C> <C> <C> <C>
Nathan Hod..................... 259,000 $0.02 07/98 Director, Chairman of the Board
Arie Heiman.................... 12,500 $0.72 01/98 Director, Chief Executive
Officer
122,500 $0.02 07/98
37,500 $3.00 08/99
Yaron Garmazi.................. 22,500 $0.72 03/99 Chief Financial Officer,
Secretary
2,500 $3.00 08/99
Arie Gavriely.................. 10,000 $0.72 03/97 Vice President of Engineering
12,500 $0.72 08/98
15,000 $3.00 08/99
Liat Hod....................... 20,000 $0.72 01/98 Vice President of Business
2,500 $0.72 08/98 Development
35,000 $3.00 08/99
Gerald Dogon................... 40,000 $3.00 08/99 Director
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
NAME NUMBER OF OPTIONS EXERCISE PRICE GRANT DATE RELATIONSHIP TO NOGATECH
- ---- ----------------- -------------- ---------- -------------------------------
<S> <C> <C> <C> <C>
Avraham Fischer................ 12,500 $0.72 01/98 Director
12,500 $3.00 08/99
Davidi Gilo.................... 75,000 $3.00 08/99 Director
Moshe Harel.................... 12,500 $3.00 08/99 Director
Andrew Schonzeit............... 12,500 $0.72 01/98 Director
12,500 $3.00 08/99
</TABLE>
In January 2000, Andrew Schonzeit, a member of our board, exercised options
to purchase 25,000 shares of our common stock at an exercise price of $0.14 per
share.
In January 2000, Nathan Hod, our Chairman of the Board, exercised options to
purchase 77,205 shares of our common stock at an exercise price of $0.14 per
share.
In February 2000, Davidi Gilo, a member of our board, exercised options to
purchase 75,000 shares of our common stock at an exercise price of $3.00 per
share.
OTHER
Tomen Electronics Corporation is our distributor in Japan and one of our
principal stockholders. Tomen purchases products from us and resells them to
OEMs. Our sales to Tomen were approximately $439,000 in 1997, approximately $1.3
million in each of 1998 and 1999, and approximately $242,000 in the first three
months of 2000. We purchased from Tomen components of our video devices having
an aggregate purchase price of approximately $194,000 in 1998 and $151,000 in
1999. We did not purchase any components from Tomen in the three months ended
March 31, 2000. In 1997, we entered into an engineering agreement with Tomen. In
1997, we received $100,000 under this agreement, which was terminated in 1998.
We believe that these transactions were on terms comparable to the terms that
would have applied to similar transactions with unrelated parties. Upon
completion of this offering, Tomen will own approximately 8.5% of the shares of
our common stock.
In 1997, Kenwood Corporation, one of our principal stockholders, subleased
property from us. Kenwood's rental payments to us amounted to approximately
$75,000.
In 1999, Fischer, Behar, Chen & Co., our Israeli counsel, provided us with
legal services with respect to a variety of matters. Mr. Avraham Fischer, one of
our directors, is a managing partner of the firm.
On July 8, 1997, Mr. Nathan Hod, our Chairman of the Board, issued to us an
amended and restated secured promissory note in the principal amount of $56,500
with accrued interest at an annual rate of 5.5%. This amended note extended the
term of a secured promissory note that Mr. Hod issued to us in July 1994 in
connection with his purchase of shares of our common stock. All principal and
accrued interest on this amended note was paid in full on March 8, 2000.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table indicates information as of March 31, 2000 regarding the
beneficial ownership of our common stock by:
- each person known to the board of directors to own beneficially 5% or more
of our common stock;
- each of our directors;
- the executive officers identified in the Summary Compensation table under
"Management"; and
- all of our directors and executive officers as a group.
Information with respect to beneficial ownership has been furnished by each
director, officer or 5% or more stockholder, as the case may be. Except as
otherwise noted below, the address for each person listed on the table is c/o
Nogatech, Inc., 5201 Great America Parkway, Santa Clara, California 95054.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities and includes shares of common
stock issuable pursuant to the exercise of stock options or warrants that are
immediately exercisable or exercisable within 60 days of March 31, 2000. These
shares are deemed to be outstanding and to be beneficially owned by the person
holding those options or warrants for the purpose of computing the percentage
ownership of that person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Unless otherwise
indicated, the persons or entities identified in this table have sole voting and
investment power with respect to all shares shown as beneficially owned by them,
subject to applicable community property laws.
<TABLE>
<CAPTION>
PERCENT OF SHARES
NUMBER OF OUTSTANDING
SHARES BENEFICIALLY ----------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE THE OFFERING AFTER THE OFFERING
- ------------------------------------ ------------------- ------------------- ------------------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Nathan Hod(1)..................................... 1,119,205 10.5% 7.3%
Arie Heiman(2).................................... 491,097 4.7 3.2
Arie Gavriely..................................... 22,500 * *
Gerald Dogon(3)................................... 40,000 * *
Avraham Fischer(4)................................ 85,000 * *
Davidi Gilo(5).................................... 75,000 * *
Moshe Harel(6).................................... 12,500 * *
Yirmiyahu Kaplan(7)............................... 828,719 8.2 5.3
Andrew Schonzeit(8)............................... 145,489 1.5 *
Yossi Vinitski.................................... -- * *
All directors and executive officers as a group 2,890,760 28.0% 17.2
(12 persons)....................................
</TABLE>
- ------------------------
* represents less than 1%
53
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF SHARES
NUMBER OF OUTSTANDING
SHARES BENEFICIALLY ----------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE THE OFFERING AFTER THE OFFERING
- ------------------------------------ ------------------- ------------------- ------------------
<S> <C> <C> <C>
5% STOCKHOLDERS
Kenwood Corporation ............................. 1,255,496 12.6% 8.5%
Alive Mitake
2-5, Shibuya 1-chome
Shibuya-ku
Tokyo, 150 Japan
Tomen Electronics Corporation ................... 1,255,496 12.6 8.5
1-1, Uchisaiwai-cho
2-Chome, Chiyoda-ku
Tokyo 100, Japan
Holland Ventures B.V.(9) ........................ 1,104,958 11.0 7.4
Dreeftoren-Etagel 14
Haaksbergweg 55
1101 BR Amsterdam Z.O.
Netherlands
Les Fils Dreyfus & Cie S.A. ..................... 838,876 8.4 5.7
c/o Ajax Trading Co.
2525 Davie Rd. Extension, Suite 320
Davie, FL 33317
Ophir Holdings Ltd.(10) ......................... 828,719 8.2 5.6
Amot Mishpat Bldg, 10(th) Floor
8 Shaul Hamelech Boulevard
Tel Aviv 64733, Israel
Nomura International plc ........................ 683,297 6.9 4.6
Nomura House
1 St. Martins-le-Grand
London EC1A 4NP, United Kingdom
Docor International B.V.(11) .................... 552,479 5.5 3.7
P.O. Box 448
Kiryat Weizman
Rehovot, 76100 Israel
Inventech Ltd.(12) .............................. 552,479 5.5 3.7
Shalom Tower
Echad Ha'am 9
P.O. Box 29076
Tel Aviv 65251, Israel
</TABLE>
- ------------------------
(1) Includes outstanding options and warrants to purchase 374,999 shares of
common stock that are exercisable on or prior to May 30, 2000. Also
includes an option to purchase 259,000 shares of common stock exercisable
with respect to 86,334 shares on or prior to May 30, 2000, and exercisable
with respect to the remaining 172,666 shares on the date of this
prospectus. We have assumed that the option to purchase 172,666 shares will
be exercised in full prior to its termination on the closing of this
offering.
(2) Includes outstanding options to purchase 326,765 shares of common stock
that are exercisable on or prior to May 30, 2000. Also includes an option
to purchase 122,500 shares of common stock exercisable with respect to
40,833 shares on or before May 30, 2000, and exercisable with respect to
the remaining 81,667 shares of common stock on the date of this prospectus.
We have assumed
54
<PAGE>
that the option to purchase 81,667 shares will be exercised in full prior
to its termination on the closing of this offering.
(3) Consists of outstanding options to purchase 40,000 shares of common stock
that are exercisable on or prior to May 30, 2000.
(4) Includes outstanding options to purchase 60,000 shares of common stock that
are exercisable on or prior to May 30, 2000.
(5) Consists of 75,000 shares of common stock issued to Harmony Management, an
affiliate of Mr. Gilo.
(6) Includes outstanding options to purchase 12,500 shares of common stock that
are exercisable on or prior to May 30, 2000.
(7) Consists of 720,626 shares of common stock issuable upon conversion of
1,441,251 shares of our Series A preferred stock and a warrant to purchase
108,094 shares of common stock held by Ophir Holdings Ltd. Mr. Kaplan is
the Managing Director of Ophir Holdings Ltd. and may be deemed to share
voting and investment power with respect to the shares held by Ophir
Holdings Ltd. Mr. Kaplan disclaims beneficial ownership of these shares.
(8) Includes outstanding options to purchase 50,000 shares of common stock that
are exercisable on or prior to May 30, 2000. Excludes 13,176 shares of
common stock issuable upon conversion of 23,322 shares of our Series A
preferred stock held in four trusts for the benefit of Mr. Schonzeit's
children, as to which Mr. Schonzeit has no voting or investment power.
Mr. Schonzeit disclaims beneficial ownership of these shares.
(9) Includes 144,125 shares of common stock issuable upon exercise of warrants
that will terminate on the closing of this offering and which we have
assumed will be exercised.
(10) Includes 108,094 shares of common stock issuable upon exercise of warrants
that will terminate on the closing of this offering and which we have
assumed will be exercised.
(11) Includes 72,062 shares of common stock issuable upon exercise of warrants
that will terminate on the closing of this offering and which we have
assumed will be exercised.
(12) Includes 72,062 shares of common stock issuable upon exercise of warrants
that will terminate on the closing of this offering and which we have
assumed will be exercised.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 40,000,000 shares of common stock,
$0.001 par value per share, and 32,000,000 shares of preferred stock, $0.001 par
value per share, of which 14,897,524 are available for issuance.
As of March 31, 2000, 728,040 shares of our common stock were outstanding.
As of March 31, 2000, 15,906,304 shares of Series A preferred stock were
outstanding, which will convert into 8,609,783 shares of common stock upon
completion of this offering. We also currently have 1,196,172 shares of
Series B preferred stock outstanding. Until May 31, 2000, the Series B preferred
stock will be convertible into 683,527 shares of common stock. From June 1, 2000
until June 30, 2000, the Series B preferred stock will be convertible into
724,952 shares of common stock. Thereafter, the number of shares of our common
stock into which our Series B preferred stock is convertible increases each day
based upon a formula set forth in our certificate of incorporation until
August 1, 2000 at which time the Series B preferred stock will be convertible
into 796,178 shares of common stock. For purposes of this prospectus, we have
assumed that the closing of this offering will take place prior to May 30, 2000,
and that the Series B preferred stock will convert into 683,527 shares of common
stock. Upon the consummation of this offering, no shares of preferred stock will
be outstanding, and we have no present plans to issue any shares of preferred
stock.
We have issued warrants to purchase up to 831,819 shares of our common stock
which will terminate upon the closing of this offering. A portion of these
warrants may be exercised on a cashless basis, in which case a smaller number of
shares of our common stock will be issued. We will not be certain as to the
exact number of shares that will be issued upon exercise of these warrants until
the closing of this offering. In addition, if all of the shares issuable upon
exercise of these warrants are exercised in cash for the maximum number of
shares that may be purchased, we will receive proceeds of approximately $1.9
million.
As of March 31, 2000, there were 21 holders of our common stock, 41 holders
of our Series A preferred stock and one holder of our Series B preferred stock.
COMMON STOCK
VOTING RIGHTS. Each outstanding share of common stock is entitled to one
vote on all matters submitted to a vote of our stockholders, including the
election of directors. There are no cumulative voting rights, and therefore the
holders of a plurality of the shares of common stock voting for the election of
directors may elect all of our directors standing for election. However, our
certificate of incorporation provides that actions may only be taken by our
stockholders at a duly called meeting, and may not be taken by written consent.
DIVIDENDS. Holders of common stock are entitled to receive dividends at the
same rate if and when dividends are declared by our board of directors out of
assets legally available for the payment of dividends, subject to preferential
rights of any outstanding shares of preferred stock.
LIQUIDATION. In the event of a liquidation, dissolution or winding up our
affairs, whether voluntary or involuntary, after payment of our debts or other
liabilities and making provisions for the holders of any outstanding shares of
preferred stock, our remaining assets will be distributed ratably among the
holders of shares of common stock.
RIGHTS AND PREFERENCES. Our common stock has no preemptive, redemption,
conversion or subscription rights. The rights, powers, references and privileges
of holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock that we may
designate and issue in the future.
56
<PAGE>
FULLY PAID AND NONASSESSABLE. All of our outstanding shares of common stock
are, and the shares of common stock to be issued pursuant to this offering will
be, fully paid and nonassessable.
PREFERRED STOCK
Our board of directors has the authority, without action by our
stockholders, to provide for the issuance of preferred stock in one or more
classes or series and to designate the rights, preferences and privileges of
each class or series, which may be greater than the rights of the holders of
common stock. We cannot predict the effect of the issuance of any shares of
preferred stock upon the rights of holders of the common stock until the board
of directors determines the specific rights of the holders of the preferred
stock. However, the effects could include one or more of the following:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action by
the stockholders.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. Generally, Section 203 of the Delaware General Corporation
Law prohibits a publicly held Delaware corporation 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 became an interested
stockholder, unless:
- prior to the date of the business combination, the transaction is approved
by the board of directors of the corporation;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding voting stock of the corporation; or
- on or after the date the business combination is approved by the board of
directors of the corporation and by the affirmative vote of at least 2/3
of the outstanding voting stock which is not owned by the interested
stockholder.
A "business combination" includes mergers, asset sales and other
transactions that may result in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within the three-year period immediately prior to the
relevant date, did own, 15% or more of the corporation's outstanding voting
stock. The existence of this provision would be expected to have an
anti-takeover effect with respect to transactions not approved in advance by our
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company will serve as transfer agent and registrar for our
common stock.
LISTING
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the trading symbol "NGTC."
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our common stock, and the availability of our common stock
for sale, may depress the market price for our common stock. After this
offering, 14,734,669 shares of common stock will be outstanding. All of the
shares sold in this offering will be freely tradable except for the shares
purchased by our affiliates. The remaining shares of common stock outstanding
after this offering will be restricted as a result of securities laws or lock-up
agreements. These remaining shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
APPROXIMATE
DATE OF AVAILABILITY FOR SALE NUMBER OF SHARES
- ----------------------------- ----------------
<S> <C>
As of the date of this prospectus........................... 3,500,000
180 days after the date of this prospectus.................. 9,337,823
At various times afterwards upon expiration of applicable
lock up agreements and holding periods.................... 1,896,846
</TABLE>
Each of our directors, executive officers and holders of 1% or more of our
outstanding common stock has agreed to certain restrictions on his ability to
sell, offer, contract or grant any option to sell, pledge, transfer or otherwise
dispose of shares of our common stock for a period of 180 days after the date of
this prospectus, without the prior written consent of WR Hambrecht + Co. WR
Hambrecht + Co may release all or a portion of the shares subject to this lockup
agreement at any time without notice.
In general, under Rule 144 under the Securities Act of 1933, as currently in
effect, a person who has beneficially owned shares of our common stock for at
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 147,347 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates 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, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the holding
period requirement, of Rule 144. Any of our employees, officers, directors or
consultants who purchased shares under a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell their shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. All holders of Rule 701 shares are required to wait
until 90 days after the date of this prospectus before selling their shares.
However, substantially all Rule 701 shares are subject to lock-up agreements and
will only become eligible for sale at the earlier of the expiration of the
180-day lock-up agreements or no sooner than 90 days after the offering upon
obtaining the prior written consent of WR Hambrecht + Co.
58
<PAGE>
We intend to file a Registration Statement on Form S-8 registering shares of
common stock subject to outstanding options or reserved for future issuance
under our stock plans. As of March 31, 2000, options to purchase a total of
1,446,514 shares were outstanding under our 1999 Stock Option Plan. Common stock
issued upon exercise of outstanding vested options after the filing of this
Registration Statement on Form S-8, other than common stock issued to our
affiliates, will be available for immediate resale in the open market.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of an aggregate of up to an
estimated 10,236,593 shares of our common stock and warrants to purchase shares
of our common stock will be entitled to rights with respect to the registration
of these shares under the Securities Act of 1933. Under the terms of the
registration rights agreements, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of this registration and are entitled to include shares of common stock
in the registration. The rights are subject to conditions and limitations,
including the right of the underwriters of an offering subject to the
registration to limit the number of shares included in the registration. These
registration rights have been waived with respect to this offering. Holders of
these rights may also require us to file a registration statement under the
Securities Act at our expense with respect to their shares of common stock, and
we are required to use our best efforts to effect this registration.
Furthermore, beginning one year after the date of this prospectus, stockholders
with registration rights may require us to file additional registration
statements on Form S-3, if we qualify for the use of this form.
59
<PAGE>
PLAN OF DISTRIBUTION
In accordance with the terms of an underwriting agreement among us, W.R.
Hambrecht + Co., LLC, ING Barings LLC, and DLJDIRECT Inc. as representatives of
the underwriters, the underwriters will purchase from us the following
respective number of shares of common stock at the public offering price less
the underwriting discounts and commissions described on the cover page of this
prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
W.R. Hambrecht + Co., LLC..........................
ING Barings LLC....................................
DLJDIRECT Inc......................................
---------
Total...................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in our business, and the receipt of certificates, opinions and letters from us
and our counsel and independent accountants. Subject to those conditions, the
underwriters are committed to purchase all shares of our common stock offered if
any of the shares are purchased.
The underwriters propose to offer the shares of our common stock directly to
the public at the offering price set forth on the cover page of this prospectus,
as this price is determined by the OpenIPO process described below, and to
certain dealers at this price less a concession not in excess of $ per
share. Any dealers that participate in the distribution of our common stock may
be deemed to be underwriters within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them and any provided by the
sale of the shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. After completion of the initial public
offering of the shares, the public offering price and other selling terms may be
changed by the underwriters. The underwriters have informed us that they do not
intend discretionary sales to exceed 5% of the shares of the common stock
offered by this prospectus.
The following table shows the per share and total underwriting discount to
be paid to the underwriters by us in connection with this offering. The
underwriting discount will be determined through negotiations between us and the
representatives of the underwriters, and will be calculated as a percentage of
the offering price. These amounts are shown assuming both no exercise and full
exercise of the over-allotment option.
<TABLE>
<CAPTION>
PER SHARE NO EXERCISE FULL EXERCISE
--------- ----------- -------------
<S> <C> <C> <C>
Public Offering Price.......................
Underwriting Discounts......................
Proceeds, before expenses, to us............
</TABLE>
The expenses of the offering, exclusive of the underwriting discounts, will
be approximately $ . These fees and expenses are payable entirely by us.
These fees include, among other things, our legal and accounting fees, our
printing expenses, our expenses incurred in connection with meetings with
potential investors, the filing fees of the Securities and Exchange Commission,
and the listing fees of the Nasdaq National Market.
An electronic prospectus is available on the websites maintained by WR
Hambrecht + Co and DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation, each of which is a representative of the underwriters.
Other than the prospectus in electronic format, the information on these
websites relating to the offering is not part of this prospectus and has not
been approved or endorsed by us and should not be relied on by prospective
investors.
60
<PAGE>
THE AUCTION PROCESS
The method of distribution being used by the underwriters in this offering
is known as the OpenIPO process. It differs from that traditionally employed in
underwritten public offerings. In particular, the public offering price will be
based primarily on an auction conducted by the underwriters. The allocation of
shares of our common stock will be determined entirely by the auction process.
The following describes how WR Hambrecht + Co, other underwriters and selected
dealers will conduct the auction process and confirm bids from prospective
investors:
- Before the registration statement relating to this offering becomes
effective, the underwriters and participating dealers will solicit bids
from prospective investors through the Internet, telephone and facsimile.
The bids will specify the number of shares of our common stock the
potential investor proposes to purchase and the price the potential
investor is willing to pay for the shares. These bids may be above or
below the range set forth on the cover page of this prospectus. The
minimum size of any bid is 100 shares.
- The shares offered by this prospectus may not be sold nor may offers to
buy be accepted prior to the time that the registration statement filed
with the Securities and Exchange Commission becomes effective. A bid
received by WR Hambrecht + Co involves no obligation or commitment of any
kind prior to the closing of the auction. Bids can be modified or revoked
at any time prior to the closing of the auction.
- Approximately two business days prior to the registration statement being
declared effective, prospective investors will receive, by e-mail, phone
or facsimile, a notice indicating the proposed effective date. On or after
that time, WR Hambrecht + Co may post on its website an estimate of the
clearing price.
- After the registration statement relating to this offering becomes
effective, potential investors who have submitted bids to WR Hambrecht +
Co will be contacted by e-mail, telephone or facsimile. Potential
investors will be advised that the registration statement has been
declared effective and will be requested to confirm their bids.
- The auction will close after the registration statement becomes effective
at a time agreed to by us and WR Hambrecht + Co. The actual time at which
the auction closes will be determined by us and WR Hambrecht + Co based on
general market conditions during the period after the registration
statement becomes effective. After the registration statement has been
declared effective, the public offering price of our common stock may be
set at a price that is outside of the range set forth on the cover of this
prospectus.
- All bids that are not confirmed before the time specified by the
underwriters, or if the time is not specified, by the close of the
auction, will be deemed withdrawn.
- Once a potential investor affirmatively confirms its previous bid, the
confirmation will remain valid unless subsequently withdrawn by the
potential investor. Potential investors will be able to withdraw their
bids at any time before the close of the auction by notifying
WR Hambrecht + Co or a participating dealer.
- If the public offering price range is changed before or after a potential
investor affirmatively confirms a bid, or if the public offering price is
outside the public offering range previously provided to the potential
investor in the prospectus, the underwriters and participating dealers
will notify potential investors of the change and that offers will not be
accepted until the potential investor has again reconfirmed its bid
regardless of whether the potential investor's initial bid was above,
below or at the public offering price.
- Following the closing of the auction, WR Hambrecht + Co will determine the
highest price at which all of the shares offered, including shares that
may be purchased by the underwriters to
61
<PAGE>
cover any overallotments, may be sold to potential investors. This price,
which is called the "clearing price," will be determined based on the
results of all valid bids at the time the auction is closed. The clearing
price will not necessarily be the public offering price, which will be set
as described in "Determination of Public Offering Price" below. The public
offering price will determine the allocation of shares to potential
investors, with all bids submitted at or above the public offering price
receiving a pro rata portion of the shares bid for.
- Once the auction closes and a clearing price is set as described below, WR
Hambrecht + Co will accept the bids from those bidders whose bid is at or
above the public offering price but may allocate to a prospective investor
fewer shares than the number included in the investor's bid.
- WR Hambrecht + Co or a participating dealer will notify successful bidders
by e-mail, phone or fax that the auction has closed and that their
confirmed bids have been accepted. Other bidders will be notified that
their bids have not been accepted.
- Potential investors may at any time expressly request that all, or any
specific, communications between them and the underwriters and
participating dealers be made by specific means of communication,
including telephone and facsimile.
Some underwriters and selected dealers that participate in this offering may
request prospective investors to confirm their bids prior to the effective date
of the registration statement, if that practice is used by these institutions in
connection with initial public offerings that are not conducted using the
OpenIPO process.
DETERMINATION OF PUBLIC OFFERING PRICE
The public offering price for this offering will ultimately be determined by
negotiation between the underwriters and us after the auction closes and will
not necessarily bear any direct relationship to our assets, current earnings or
book value or to any other established criteria of value, although these factors
were considered in establishing the initial public offering price range. Prior
to the offering, there has been no public market for our common stock. The
principal factor in establishing the public offering price will be the clearing
price resulting from the auction.
The clearing price is the highest price at which all of the shares offered,
including the shares that may be purchased by the underwriters to cover any
overallotments, may be sold to potential investors, based on the valid bids at
the time the auction is run.
Factors considered in determining the initial public offering price range
included an assessment of our management, operating results, capital structure
and business potential and the demand for similar securities of comparable
companies. Changes, if any, in the public offering price range will be based
primarily on the bids received.
The public offering price may be lower, but will not be higher, than the
clearing price based on negotiations between the underwriters and us. The public
offering price will always determine the allocation of shares to potential
investors. Therefore, if the public offering price is below the clearing price,
all bids that are at or above the public offering price will receive a pro rata
portion of the shares bid for. If sufficient bids are not received, or if we do
not consider the clearing price to be adequate, or if we and the underwriters
are not able to reach agreement on the public offering price, then we and the
underwriters will either postpone or cancel this offering. Alternatively, we may
file a post-effective amendment to the registration statement in order to
conduct a new auction.
62
<PAGE>
The following simplified example illustrates how the public offering price
will be determined through the auction process:
Company X offers to sell 100 shares in its public offering through the
auction process. WR Ham-
brecht + Co, on behalf of Company X, receives five bids to purchase, all of
which are kept confidential until the auction closes.
The first bid is to pay $10 per share for 20 shares. The second bid is to
pay $9 per share for 30 shares. The third bid is to pay $8 per share for 60
shares. The fourth bid is to pay $7 per share for 40 shares. The fifth bid is to
pay $6 per share for 80 shares.
Assuming that all of these bids are confirmed and not withdrawn or modified
before the auction closes, and assuming that no additional bids are received,
the clearing price used to determine the public offering price would be $8 per
share, which is the highest price at which all 100 shares offered may be sold to
potential investors who have submitted valid bids. However, the shares may be
sold at a price below $8 per share based on negotiations between the
underwriters and Company X.
If the public offering price is the same as the $8 per share clearing price,
the underwriters will confirm bids at or above $8 per share. Because 110 shares
were bid for at or above the clearing price, each of the three potential
investors who bid $8 per share or more would receive approximately 90% of the
shares for which bids were made. The two potential investors whose bids were
below $8 per share would not receive any shares in this example.
If the public offering price is $7 per share, the underwriters will confirm
bids that were made at or above $7 per share. No bids made at a price of less
than $7 per share will be accepted. The four potential investors with the
highest bids would receive a pro rata portion of the 100 shares offered, based
on the 150 shares they requested, or two-thirds of the shares for which bids
were made. The potential investor with the lowest bid would not receive any
shares in this example.
The following table illustrates the example described above, assuming that
the initial public offering price is set at $8.00 per share. The table also
assumes that these bids are the final bids, and that they reflect any
modifications that have been made to reflect any prior changes to the offering
range, and to avoid the issuance of fractional shares.
INITIAL PUBLIC OFFERING OF COMPANY X
<TABLE>
<CAPTION>
BID INFORMATION AUCTION RESULTS
---------------------------------- ---------------------------------------------
APPROXIMATE
CUMULATIVE ALLOCATED
SHARES SHARES SHARES REQUESTED CLEARING AMOUNT
REQUESTED REQUESTED BID PRICE ALLOCATED SHARES PRICE RAISED
--------- ---------- --------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
20 20 $10.00 18 90% $8.00 $144
30 50 $ 9.00 27 90% $8.00 $216
Clearing Price --> 60 110 $ 8.00 55 90% $8.00 $440
40 150 $ 7.00 0 0%
80 230 $ 6.00 0 0%
--- ----
Total: 100 $800
=== ====
</TABLE>
REQUIREMENTS FOR VALID BIDS
Valid bids are those that meet the requirements, including eligibility,
account status and size, established by the underwriters or participating
dealers. In order to open a brokerage account with WR Hambrecht + Co, potential
investors must deposit $2,000 in their account. This brokerage account will be a
general account subject to WR Hambrecht + Co's customary rules, and will not be
limited to this
63
<PAGE>
offering. In addition, once the registration statement becomes effective and the
auction closes, a prospective investor submitting a bid through a WR Hambrecht +
Co brokerage account must have an account balance equal to or in excess of the
amount of its bid or its bid will not be accepted by WR Hambrecht + Co. However,
other than the $2,000 described above, prospective investors will not be
required to deposit any money into their accounts until after the registration
statement becomes effective. No funds will be transferred to the underwriters,
and any amounts in excess of $2,000 may be withdrawn, at any time until the
acceptance of the bid and the subsequent closing of this offering. Conditions
for valid bids, including eligibility standards and account funding requirements
of other underwriters or participating dealers other than WR Hambrecht + Co, may
vary.
THE CLOSING OF THE AUCTION AND ALLOCATION OF SHARES
The auction will close on a date estimated and publicly disclosed in advance
by the underwriters on the web site of WR Hambrecht + Co at www.wrhambrecht.com
or www.openipo.com. The 3,500,000 shares offered hereby, or 4,025,000 shares if
the underwriters' overallotment option is exercised in full, will be purchased
from us by the underwriters and sold through the underwriters and participating
dealers to investors who have submitted bids at or higher than the public
offering price. These investors will be notified by e-mail, telephone, voice
mail, facsimile or mail as soon as practicable following the closing of the
auction that their bids have been accepted.
Each participating dealer has agreed with the underwriters to sell the
shares it purchases from the underwriters in accordance with the auction process
described above, unless the underwriters otherwise consent. The underwriters
reserve the right to reject bids that they deem manipulative or disruptive in
order to facilitate the orderly completion of this offering, and they reserve
the right, in exceptional circumstances, to alter this method of allocation as
they deem necessary to ensure a fair and orderly distribution of the shares of
our common stock. For example, large orders may be reduced to ensure a public
distribution and bids may be rejected or reduced by the underwriters or
participating dealers based on eligibility or creditworthiness criteria. In
addition, the underwriters or the participating dealers may reject or reduce a
bid by a prospective investor who has engaged in practices that could have a
manipulative, disruptive or otherwise adverse effect upon the offering.
Price and volume volatility in the market for our common stock may result
from the somewhat unique nature of the proposed plan of distribution. Price and
volume volatility in the market for our common stock after the completion of
this offering may adversely affect the market price of our common stock.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to an aggregate of
525,000 additional shares of our common stock at the offering price, less the
underwriting discount, set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, the underwriters will have a
firm commitment to purchase the additional shares, and we will be obligated to
sell the additional shares to the underwriters. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of
shares offered. The underwriting agreement provides that we will indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make.
We have agreed not to offer, sell, contract to sell, or otherwise dispose of
any shares of common stock, or any options or warrants to purchase common stock
other than the shares of common stock or options to acquire common stock issued
under our stock option plans and stock purchase plan, for a period of 180 days
after the date of this prospectus, except with the prior written consent of WR
Hambrecht + Co. Each of our directors, executive officers and additional holders
of approximately 8,700,000 shares of our outstanding capital stock has agreed to
restrictions on his or her ability to sell, offer, contract or grant any option
to sell, pledge, transfer or otherwise dispose of shares of our
64
<PAGE>
common stock for a period of 180 days after the date of this prospectus, without
the prior written consent of WR Hambrecht + Co.
In connection with the offering, persons participating in the offering may
purchase and sell shares of common stock on the open market. These transactions
may include short sales, stabilizing transactions in accordance with Rule 104 of
Regulation M under the Securities Exchange Act of 1934, as amended, and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering which creates a syndicate short position. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock. The
underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representative has repurchased shares sold by or for
the account of that underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of our common stock. As a result, the price of our common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
Persons participating in this offering may also engage in passive market
making transactions in our common stock on the Nasdaq National Market. Passive
market making consists of displaying bids on the Nasdaq National Market limited
by the prices of independent market makers and affecting purchases limited by
such prices and in response to order flow. Rule 103 of Regulation M promulgated
by the SEC limits the amount of net purchases that each passive market may make
and the displayed size of each bid.
Passive market making may stabilize the market price of our common stock at
a level above that which might otherwise prevail in the open market and, if
commenced, may be discontinued at any time.
WR Hambrecht + Co currently intends to act as a market maker for our common
stock following this offering. However, WR Hambrecht + Co is not obligated to do
so and may discontinue any market making at any time.
WR Hambrecht + Co is an investment banking firm formed in February 1998. In
addition to this offering, WR Hambrecht + Co has engaged in the business of
public and private equity investing and financial advisory services since its
inception. The manager of WR Hambrecht + Co, William R. Hambrecht, has 40 years
of experience in the securities industry.
65
<PAGE>
LEGAL MATTERS
The validity of our shares of common stock being offered will be passed upon
for us by Bay Venture Counsel, LLP, Oakland, California. Fischer, Behar, Chen &
Co. will render opinions for us as to matters of Israeli law. Mr. Avraham
Fischer, senior partner of Fischer, Behar, Chen & Co., is a member of our board
of directors and owns 25,000 shares of our common stock and options to purchase
60,000 shares of our common stock. Legal matters in connection with this
offering will be passed upon for the underwriters by Morrison & Foerster LLP,
San Francisco, California.
EXPERTS
Our consolidated balance sheets at December 31, 1998 and 1999 and our
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999 included
in this prospectus have been included herein in reliance on the report of
Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International
Limited, independent certified public accountants in Israel, given upon the
authority of that firm as experts in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock being offered. This prospectus does not contain all of the
information described in the registration statement and the related exhibits and
schedules. For further information with respect to Nogatech and the common stock
being offered, reference is made to the registration statement and the related
exhibits and schedule. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to the copy
of the contract or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by the reference. A
copy of the registration statement and the related exhibits and schedule may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the registration statement may be obtained from these offices upon the payment
of the fees prescribed by the Commission. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov. Upon approval of our common stock for quotation on
the Nasdaq National Market, our reports, proxy statements and other information
may be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
We intend to provide our stockholders with annual reports containing
combined financial statements audited by an independent accounting firm and to
file with the Commission quarterly reports containing unaudited combined
financial data for the first three quarters of each year.
66
<PAGE>
NOGATECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and (unaudited) March 31, 2000............................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999 and for the (unaudited)
Three Months Ended March 31, 1999 and 2000................ F-4
Consolidated Statements of Changes in Stockholders' Equity
(Capital Deficiency) for the Years Ended December 31,
1997, 1998 and 1999 and for the (unaudited) Three Months
Ended March 31, 1999 and 2000............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 and for the (unaudited)
Three Months Ended March 31, 1999 and 2000................ F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
NOGATECH, INC.
We have audited the consolidated balance sheets of Nogatech, Inc. and its
subsidiaries (collectively, the "Company") as of December 31, 1998 and 1999 and
the related consolidated statements of operations, changes in stockholders'
equity (capital deficiency) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's Board of Directors and 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 in Israel and in the United States, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. 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 the Company's Board
of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a fair basis for our
opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1998 and 1999 and the consolidated results of
their operations, changes in stockholders' equity (capital deficiency) and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
<TABLE>
<S> <C>
Tel Aviv, Israel Kesselman & Kesselman
February 25, 2000 Certified Public Accountants (Israel)
(except for Note 6,
the date of which is
March 8, 2000)
</TABLE>
F-2
<PAGE>
NOGATECH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA
(NOTE 1O)
DECEMBER 31, -----------
------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,791 $ 2,475 $ 6,612 $ 6,612
Accounts receivable: (note 9a)
Trade................................................... 848 1,019 1,484 1,484
Other................................................... 140 197 213 213
Inventories (note 9b)..................................... 581 2,109 1,747 1,747
Other current assets...................................... 26 169 277 277
------- ------- -------- --------
Total current assets.................................. 5,386 5,969 10,333 10,333
------- ------- -------- --------
FIXED ASSETS (note 2):
Cost...................................................... 535 835 873 873
Less--accumulated depreciation and amortization........... (355) (483) (523) (523)
------- ------- -------- --------
Total fixed assets.................................... 180 352 350 350
------- ------- -------- --------
OTHER ASSETS................................................ 203 256 569 569
------- ------- -------- --------
$ 5,769 $ 6,577 $ 11,252 $ 11,252
======= ======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accruals: (note 9c)
Trade................................................... $ 508 $ 1,967 $ 830 $ 830
Other................................................... 707 891 876 876
------- ------- -------- --------
Total current liabilities............................. 1,215 2,858 1,706 1,706
EMPLOYEE RIGHTS UPON RETIREMENT (note 3).................... 255 362 391 391
------- ------- -------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (note 4)
Total liabilities....................................... 1,470 3,220 2,097 2,097
------- ------- -------- --------
SERIES A AND B REDEEMABLE CONVERTIBLE PREFERRED
STOCK, at redemption value (note 5)....................... 7,816 8,243 13,408 --
------- ------- --------
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (note 6):
Common stock*, $0.001 par value:
authorized--40,000,000 shares at December 31, 1998,
1999 and March 31, 2000;
issued and outstanding: 310,995, 419,370 and 728,040
shares at December 31, 1998, 1999 and March 31, 2000,
respectively; March 31, 2000 pro forma 10,021,350
shares................................................ 1 1 1 10
Additional paid-in capital.............................. 4,906 4,754 10,188 23,587
Note receivable from a stockholder...................... (57) (57)
Deferred compensation................................... (271) (392) (343) (343)
Accumulated deficit..................................... (8,096) (9,192) (14,099) (14,099)
------- ------- -------- --------
Total stockholders' equity (capital deficiency)........... (3,517) (4,886) (4,253) 9,155
------- ------- -------- --------
$ 5,769 $ 6,577 $ 11,252 $ 11,252
======= ======= ======== ========
</TABLE>
- --------------------------
*After giving retroactive effect to the reverse stock split, see note 6a.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-3
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES (notes 8 and 11)......................... $ 2,551 $ 3,205 $ 8,856 $ 870 $ 2,945
COST OF SALES (notes 8 and 11)................. 1,699 2,038 5,111 518 1,661
----------- ----------- ----------- ----------- -----------
GROSS PROFIT................................... 852 1,167 3,745 352 1,284
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and development..................... 1,266 1,451 2,283 588 685
Sales and marketing.......................... 695 1,020 1,689 383 290
General and administrative................... 321 609 880 195 204
----------- ----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES....................... 2,282 3,080 4,852 1,166 1,179
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS)........................ (1,430) (1,913) (1,107) (814) 105
OTHER INCOME (EXPENSE), NET.................... (32) 90 11 (3) (12)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS).............................. (1,462) (1,823) (1,096) (817) 93
CHARGE FOR BENEFICIAL CONVERSION FEATURE OF
SERIES B PREFERRED STOCK..................... -- -- -- -- (4,570)
ACCRETION OF REDEMPTION VALUE OF SERIES A
REDEEMABLE CONVERTIBLE PEREFERRED STOCK...... (300) (383) (427) (107) (165)
----------- ----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK............ $ (1,762) $ (2,206) $ (1,523) $ (924) $ (4,642)
----------- ----------- ----------- ----------- -----------
NET LOSS PER SHARE OF COMMON STOCK,
basic and diluted (note 1k).................. $ (5.86) $ (7.13) $ (4.50) $ (2.97) $ (8.14)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING (note 1k).................. 300,709 309,536 338,295 310,995 570,557
=========== =========== =========== =========== ===========
PRO FORMA NET INCOME (LOSS) PER SHARE OF COMMON
STOCK, basic and diluted (note 1k)........... $ 0.12 $ 0.09 $ 0.01
=========== =========== ===========
PRO FORMA WEIGHTED AVERAGE
NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING (note 1k)........................ 8,948,078 8,920,778 9,749,945
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE STOCKHOLDERS'
------------------------- PAID-IN FROM A DEFERRED ACCUMULATED EQUITY (CAPITAL
NUMBER* AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT DEFICIENCY)
----------- ----------- ----------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1997..................... 286,625 $ 1 $ 820 $ (57) $ (4,811) $ (4,047)
Issuance of common stock
in connection with
stock options
exercised.............. 18,120 ** 2 2
Excess of consideration
received, net of
issuance costs of $60,
over the redemption
value of series A
redeemable convertible
preferred stock issued
(note 5b(1))........... 1,283 1,283
Accretion of redemption
value of series A
redeemable convertible
preferred stock........ (300) (300)
Net loss................. (1,462) (1,462)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31,
1997..................... 304,745 1 1,805 (57) (6,273) (4,524)
Issuance of common stock
in connection with
stock options
exercised.............. 6,250 ** 1 1
Deferred compensation
related to employee
stock option grants.... 268 (268)
Deferred compensation
related to nonemployee
stock option grants.... 53 (53)
Amortization of deferred
compensation related to
stock option grants.... 50 50
Excess of consideration
received, net of
issuance costs of $355,
over the redemption
value of series A
redeemable convertible
preferred stock issued
(note 5b(1))........... 3,162 3,162
Accretion of redemption
value of series A
redeemable convertible
preferred stock........ (383) (383)
Net loss................. (1,823) (1,823)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31,
1998--FORWARD............ 310,995 $ 1 $ 4,906 $ (57) $ (271) $ (8,096) $ (3,517)
</TABLE>
F-5
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTE RECEIVABLE
----------------------- PAID-IN FROM A DEFERRED ACCUMULATED
NUMBER* AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT
---------- ---------- ---------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998--BROUGHT
FORWARD.................................. 310,995 $ 1 $ 4,906 $ (57) $ (271) $ (8,096)
Issuance of common stock in connection
with stock options exercised........... 108,375 ** 39
Deferred compensation related to employee
stock option grants.................... 214 (214)
Deferred compensation related to
nonemployee stock option grants........ 22 (22)
Amortization of deferred compensation
related to stock option grants......... 115
Accretion of redemption value of series A
redeemable convertible preferred
stock.................................. (427)
Net loss................................. (1,096)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1999............... 419,370 1 4,754 (57) (392) (9,192)
Issuance of common stock in connection
with stock options and warrants
exercised.............................. 308,670 ** 604
Deferred compensation related to employee
stock option grants.................... 35 (35)
Deferred compensation related to employee
stock option forfeited................. (40) 40
Repayment of note receivable from a
stockholder............................ 57
Amortization of deferred compensation
related to stock option grants......... 44
Accretion of redemption value of Series A
redeemable convertible preferred
stock.................................. (165)
Beneficial conversion feature - relating
to Series B convertible preferred stock
(note 5c).............................. 4,570 (4,570)
Net income............................... 93
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 2000 (UNAUDITED)...... 728,040 $ 1 $ 9,758 $ (343) $ (13,669)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (CAPITAL
DEFICIENCY)
-----------------
<S> <C>
BALANCE AT DECEMBER 31, 1998--BROUGHT
FORWARD.................................. $ (3,517)
Issuance of common stock in connection
with stock options exercised........... 39
Deferred compensation related to employee
stock option grants....................
Deferred compensation related to
nonemployee stock option grants........
Amortization of deferred compensation
related to stock option grants......... 115
Accretion of redemption value of series A
redeemable convertible preferred
stock.................................. (427)
Net loss................................. (1,096)
----------
BALANCE AT DECEMBER 31, 1999............... (4,886)
Issuance of common stock in connection
with stock options and warrants
exercised.............................. 604
Deferred compensation related to employee
stock option grants....................
Deferred compensation related to employee
stock option forfeited.................
Repayment of note receivable from a
stockholder............................ 57
Amortization of deferred compensation
related to stock option grants......... 44
Accretion of redemption value of Series A
redeemable convertible preferred
stock.................................. (165)
Beneficial conversion feature - relating
to Series B convertible preferred stock
(note 5c)..............................
Net income............................... 93
----------
BALANCE AT MARCH 31, 2000 (UNAUDITED)...... $ (4,253)
</TABLE>
F-6
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTE RECEIVABLE
----------------------- PAID-IN FROM A DEFERRED ACCUMULATED
NUMBER* AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT
---------- ---------- ---------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 2000 (UNAUDITED)--
BROUGHT FORWARD.......................... 728,040 $ 1 $ 9,758 $ (343) $ (13,669)
Pro forma conversion of series A and B
redeemable convertible preferred stock
into common stock (note 1o)............ 9,293,310 9 13,399
---------- ---------- ---------- ---------- ---------- ----------
PRO FORMA STOCKHOLDERS' EQUITY AT MARCH 31,
2000 (NOTE 1O) (UNAUDITED)............... 10,021,350 10 23,157 (343) (13,669)
========== ========== ========== ========== ========== ==========
BALANCE AT JANUARY 1, 1999................. 310,995 $ 1 $ 4,906 $ (57) $ (271) $ (8,096)
Amortization of deferred compensation
related to stock option grants......... 28
Accretion of redemption value of Series A
redeemable convertible preferred
stock.................................. (107)
Net loss................................. (817)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 1999 (UNAUDITED)...... 310,995 $ 1 $ 4,799 $ (57) $ (243) $ (8,913)
========== ========== ========== ========== ========== ==========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (CAPITAL
DEFICIENCY)
-----------------
<S> <C>
BALANCE AT MARCH 31, 2000 (UNAUDITED)--
BROUGHT FORWARD.......................... $ (4,253)
Pro forma conversion of series A and B
redeemable convertible preferred stock
into common stock (note 1o)............ 13,408
----------
PRO FORMA STOCKHOLDERS' EQUITY AT MARCH 31,
2000 (NOTE 1O) (UNAUDITED)............... 9,155
==========
BALANCE AT JANUARY 1, 1999................. $ (3,517)
Amortization of deferred compensation
related to stock option grants......... 28
Accretion of redemption value of Series A
redeemable convertible preferred
stock.................................. (107)
Net loss................................. (817)
----------
BALANCE AT MARCH 31, 1999 (UNAUDITED)...... $ (4,413)
==========
</TABLE>
- ------------------------
* After giving retroactive effect to the reverse stock-split, see note 6a.
** Representing an amount less than $1,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-7
<PAGE>
NOGATECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $(1,462) $(1,823) $(1,096) $ (817) $ 93
------- ------- ------- ------- -------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Employee rights upon retirement........................ 7 19 54 48 18
Depreciation and amortization.......................... 97 91 128 23 40
Compensation relating to stock options................. 50 115 28 44
Changes in operating asset and liability items:
Decrease (increase) in accounts receivable:
Trade.............................................. 1 (547) (171) (324) (465)
Other.............................................. (75) (65) (57) (69) (16)
Decrease (increase) in inventories................... 94 50 (1,528) (147) 362
Decrease (increase) in other current assets.......... (33) 57 (143) 7 (108)
Increase (decrease) in accounts payable and accruals:
Trade.............................................. 151 2 1,459 358 (1,152)
Other.............................................. 87 344 184 116 (15)
------- ------- ------- ------- -------
329 1 41 40 (1,292)
------- ------- ------- ------- -------
Net cash used in operating activities.................... (1,133) (1,822) (1,055) (777) (1,199)
------- ------- ------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES--purchases of fixed
assets.................................................... (108) (64) (300) (63) (23)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of series A redeemable convertible preferred
stock, net of issuance costs of $60 and $355 in 1997
and 1998, respectively................................. 1,790 5,641 -- -- --
Issuance of series B redeemable convertible preferred
stock, net of issuance costs of $302................... -- -- -- -- 4,698
Issuance of common stock in connection with stock options
and warrants exercised................................. 2 1 39 604
Receipt (repayment) of short-term credit, net............ (375) (236) 294
Repayment of note receivable from a stockholder.......... -- -- -- -- 57
------- ------- ------- ------- -------
Net cash provided by financing activities................ 1,417 5,406 39 294 5,359
------- ------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 176 3,520 (1,316) (546) 4,137
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.................................................... 95 271 3,791 3,791 2,475
------- ------- ------- ------- -------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 271 $ 3,791 $ 2,475 $ 3,245 $ 6,612
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--CASH PAID
DURING THE PERIOD FOR:
Interest................................................. $ 27 $ 57 $ 41 $ 5 $ 24
======= ======= ======= ======= =======
Taxes.................................................... $ 2 $ 9 $ 4 $ 1 $ 1
======= ======= ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-8
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
a. GENERAL
1) NATURE OF OPERATIONS:
(a) Nogatech, Inc. ("Nogatech Delaware") was incorporated in Delaware on
September 22, 1999.
On December 28, 1999, Nogatech, Inc. ("Nogatech California"), which
was incorporated in California in 1993, merged into Nogatech
Delaware. In the merger, the stockholders of Nogatech California
exchanged their shares for all of the issued and outstanding stock of
Nogatech Delaware. At the time of the merger, the wholly owned
subsidiary of Nogatech California was Nogatech Ltd., an Israeli
company ("Nogatech Israel"). The ownership interest of each of the
two companies' stockholders before and after the merger was
identical.
(b) Nogatech Delaware and its two wholly owned subsidiaries, Nogatech
Israel and Nogatech California, Inc. (collectively, the "Company"),
are engaged in research, development, production, sales and
marketing of the Company's products to customers.
The Company provides video compression chips which establish
connections between video devices and computers, as well as
connections between video devices across a variety of networks. As to
information regarding the Company's major customers and supplier, see
note 11.
(c) The merger described in (a) above has been recorded as a
reorganization of entities under common control, and has been
accounted for at the recorded amount in Nogatech California's
(predecessor) financial statements. Accordingly, the Company's
consolidated financial statements reflect the predecessor's
financial position, results of operations and cash flows, from its
inception to December 28, 1999 (date of merger), in a manner similar
to a pooling-of-interests accounting. Such presentation reflects the
combined financial statements as if the merger occurred at the
beginning of the earliest period presented herein.
2) ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in the United
States ("U.S. GAAP").
3) USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets, liabilities at the date of the financial statements and the
reported amounts of sales and expenses during the reporting periods.
Actual results could differ from those estimates.
b. FUNCTIONAL CURRENCY
The currency of the primary economic environment in which the operations of
Nogatech Delaware and Nogatech California are conducted is the U.S. dollar
("$" or "dollar").
F-9
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Most of Nogatech Israel's sales are made in dollars. Substantially all of
the subsidiary's production costs are comprised of cost of materials, which
are purchased in dollars. Most of the research and development expenses and
general and administrative expenses are incurred in Israeli currency. Most
of the sales and marketing expenses are incurred in dollars. Thus, the
functional currency of Nogatech Israel is the dollar, and accordingly, the
functional currency of the Company is the dollar.
Transactions and balances originally denominated in dollars are presented at
their original amounts. Balances in non-dollar (Israeli) currency are
translated into dollars using historical and current exchange rates for
non-monetary and monetary balances, respectively. For non-dollar
transactions and other items (stated below) reflected in the statements of
operations, the following exchange rates are used: (i) for transactions --
exchange rates at transaction dates; and (ii) for other items (derived from
non-monetary balance sheet items, such as depreciation and amortization,
changes in inventories, etc.) -- historical exchange rates. The resulting
currency transaction gains or losses are included in other income or
expenses, as appropriate.
c. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nogatech
Delaware and its two wholly owned subsidiaries. Intercompany balances and
transactions have been eliminated. Profits from intercompany sales, not yet
realized, have also been eliminated.
d. INVENTORIES
Inventories are recorded at the lower of cost or market. Cost is determined
on a "first-in, first-out" basis.
e. FIXED ASSETS
Fixed assets are stated at cost.
Depreciation in calculated using the straight-line method over the estimated
useful life of the assets, at the following annual rates:
<TABLE>
<CAPTION>
%
--------
<S> <C>
Computers and software...................................... 20-33
Office furniture and equipment.............................. 6-15
Laboratory equipment........................................ 20
Motor vehicles.............................................. 15
</TABLE>
Leasehold improvements are amortized by the straight-line method over the
term of the lease, which is shorter than the estimated useful life of the
improvements.
f. IMPAIRMENT IN VALUE OF FIXED ASSETS
The Company adopted Statement of Financial Accounting Standards FAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". This Statement refers to fixed assets
and identifiable intangible assets (hereafter -- long-lived assets). Under
the provisions of FAS 121, the Company reviews its long-lived assets for
impairment on an exception basis whenever events or changes in circumstances
indicate that the carrying amount of
F-10
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the assets may not be recoverable through future undiscounted cash flows. If
it is determined that an impairment has occurred, a loss will be recognized
in the statements of operations based on fair values determined using
discounted cash flows compared to carrying amounts.
g. REVENUE RECOGNITION
Revenue from product sales to customers, other than sales to distributors,
is recognized when products are shipped to the customers. Sales to
distributors, where the Company allows right of return on products unsold by
the distributors, are not recognized until the products are sold by the
distributors to their customers.
The provision for warranty is recorded at the time of the sale of the
related product for probable costs in connection with warranties, based on
the Company's experience.
h. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to the statements of
operations as incurred.
i. CONCENTRATION OF CREDIT RISKS AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Financial instruments that subject the Company to credit risks consist
primarily of uninsured cash and cash equivalents, which are deposited in
major financial institutions in the United States and in Israel, and of
trade receivables. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company provides
for estimated credit losses.
The provision for doubtful accounts is principally determined for specific
debts when their collection is doubtful.
j. CASH EQUIVALENTS
The Company considers all highly liquid investments, with an original
maturity of three months or less when issued, that are not restricted as to
withdrawal or use, to be cash equivalents.
k. NET LOSS PER SHARE OF COMMON STOCK ("EPS")
1) Historical EPS
a) Basic EPS is computed by dividing net loss applicable to common
stock by the weighted average number of shares of common stock
outstanding during each period.
b) Since the basic EPS for the years ended December 31, 1997, 1998 and
1999 and for the periods of three months ended March 31, 1999 and
2000, represents a loss per share of common stock, the effect of
including the incremental shares of common stock from assumed
exercise of options and from assumed conversion of redeemable
convertible preferred stock in EPS computation is anti-dilutive, and
accordingly the basic and diluted EPS are the same (see also note
9d).
2) Pro forma EPS
Pro forma basic and diluted EPS have been calculated assuming the
conversion of all outstanding shares of preferred stock that are
convertible upon the Company's initial public offering into common stock,
as if the shares had been converted immediately upon their
F-11
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
issuance. Accretion of redemption value of redeemable convertible
preferred stock and the deemed dividend relating to the beneficial
conversion feature of the Series B preferred stock have been excluded
from the calculation of pro forma basic and diluted EPS as the related
shares are assumed to have converted to common stock upon issuance.
3) Weighted average number of common shares outstanding used in the
computation of the basic and diluted historical EPS and pro forma EPS
has been calculated after giving retroactive effect in all the reported
periods, to a one-for-two reverse stock split, as approved by the
Company's Board of Directors on March 5, 2000 (note 6a).
l. STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its stock option plan grants to employees and directors, with
the disclosure provisions of Statement of Financial Accounting Standards FAS
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Under APB 25,
compensation expense is computed under the intrinsic value method of
accounting to the extent that the fair value of the underlying stock on the
date of grant exceeds the exercise price of the stock option. Compensation
so computed is deferred and then recognized over the vesting period of the
stock option.
The Company applies FAS 123 in accounting for stock options granted to
nonemployees in exchange for services received using the fair value method
of accounting. Under FAS 123, these equity transactions are accounted for
based on the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measurable. The
value of the equity instruments is calculated using a Black-Scholes pricing
model.
m. COMPREHENSIVE INCOME (LOSS)
The Company adopted FAS 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 requires reporting and display of comprehensive income (loss) and its
components, in a full set of general-purpose financial statements. The
Company has no other comprehensive income (loss) components other than the
net income (loss) for the reported periods.
n. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
1) In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 established a new
model for accounting for derivatives and hedging activities. FAS 133
requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for,
depending on the use of the derivative and whether it qualifies for hedge
accounting. FAS 133 is effective for calendar year companies beginning
January 1, 2001. The Company does not currently use derivative
instruments, accordingly, it does not anticipate that the new standard
will have any impact on its financial statements.
2) In December 1999, the U.S. Securities and Exchange Commission (SEC)
issued SAB 101, "Revenue Recognition in Financial Statement", which
summarizes certain of the SEC staff views in applying generally accepted
accounting principles to revenue recognition in financial
F-12
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
statements. The company adopted SAB 101 in these financial statements. Such
adoption has no impact on the company's financial statement.
o. UNAUDITED PRO FORMA BALANCE SHEET
Upon the planned closing of the Company's anticipated initial public
offering in May 2000, the outstanding shares of redeemable convertible
preferred stock will automatically convert into common stock. The unaudited
pro forma balance sheet reflects these transactions as if they occurred on
March 31, 2000.
p. DEFERRED INCOME TAXES
Deferred income taxes are created for temporary differences between the
assets and liabilities as measured in the financial statements and for tax
purposes. Deferred taxes are computed using the tax rates expected to be in
effect when these differences reverse. Valuation allowances in respect of
deferred tax assets are provided when it is more likely than not that all or
part of the deferred tax assets will not be realized.
q. UNAUDITED INFORMATION
The financial statements include the unaudited consolidated balance sheets
and the related consolidated statements of operations, changes in
stockholders' equity (capital deficiency) and cash flows for the three
months ended March 31, 1999 and 2000. This unaudited information has been
prepared by the Company on the same basis as the audited consolidated
financial statements and, in management's opinion, reflects all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the financial information, in accordance with generally
accepted accounting principles, for the period presented. Results for
interim periods are not necessarily indicative of the results to be excepted
for the entire year.
F-13
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FIXED ASSETS:
A. Grouped by major classifications, fixed assets are composed as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Cost:
Computers and software........................ $404 $647 $679
Office furniture and equipment................ 51 78 84
Laboratory equipment.......................... 40 45 45
Leasehold improvements........................ 40 41 41
Motor vehicles................................ -- 24 24
---- ---- ----
535 835 873
---- ---- ----
Less--accumulated depreciation and amortization:
Computers and software........................ 279 386 423
Office furniture and equipment................ 11 16 17
Laboratory equipment.......................... 36 38 39
Leasehold improvements........................ 29 40 40
Motor vehicles................................ -- 3 4
---- ---- ----
355 483 523
---- ---- ----
$180 $352 $350
==== ==== ====
</TABLE>
B. Depreciation and amortization expenses related to fixed assets totaled
$97,000, $91,000 and $128,000 for the years ended December 31, 1997, 1998
and 1999, respectively and (unaudited) $ 23,000 and (unaudited) $ 40,000
for the periods of three months ended March 31, 1999 and 2000,
respectively.
NOTE 3--EMPLOYEE RIGHTS UPON RETIREMENT:
A. Israeli labor laws and agreements require payment of severance pay upon
dismissal of an employee or upon termination of employment in certain
other circumstances. Nogatech Israel's severance pay liability for its
employees, which reflects the undiscounted amount of the liability, is
calculated based upon length of service and the latest monthly salary
(one month's salary for each year worked). This liability is mainly
covered by the Company's insurance policies.
B. The balance sheet liability for Israeli employee rights upon retirement,
and the amount funded with insurance companies, are composed as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Severance pay liability........................... $255 $362 $391
Less--amount funded (presented in other assets)... 203 256 267
---- ---- ----
Unfunded balance.................................. $ 52 $106 $124
==== ==== ====
</TABLE>
F-14
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--COMMITMENTS AND CONTINGENT LIABILITIES:
a. LEASE COMMITMENTS
1) Rent:
a) The Company leases its U.S. facility under an operating lease
agreement which expires in September 2002. The Israeli subsidiary's
facility is leased under an operating lease which expires on February
22, 2003, with an option to be extended until February 2008. Up to
$67,000 of the Israeli facility rent is guaranteed by a financial
institution. The guarantees expires on March 9, 2001 and March 10,
2001.
b) Future minimum lease commitments under non-cancelable operating lease
agreements are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Nine months ending December 31, 2000 (unaudited)............ $117
Year ending December 31:
2001........................................................ 158
2002........................................................ 141
2003........................................................ 24
----
$440
====
</TABLE>
2) Car lease:
a) The Company has four vehicles which have been leased since 1999 and
2000 under operating lease agreements for the periods ending in 2002
and 2003.
b) Future minimum lease commitment under these agreements are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Nine months ending December 31, 2000 (unaudited)............ $25
Year ending December 31:
2001........................................................ 33
2002........................................................ 31
2003........................................................ 5
---
$94
===
</TABLE>
3) Lease expenses totaled $91,000, $86,000 and $135,000 in the years ended
December 31, 1997, 1998 and 1999, respectively, and (unaudited) $22,000
and (unaudited) $39,000 in the periods of three months ended March 31,
1999 and 2000, respectively.
b. ROYALTY COMMITMENTS
The Company licensed technologies from three companies that are subject
to a per unit royalty ranging from $0.50 to $3.00. The royalties are
included in the cost of sales and amounted to $61,000, $40,000 and
$43,000 in the years ended December 31, 1997, 1998 and 1999,
respectively, and (unaudited) $10,000 and (unaudited) $5,000 in the
periods of three months ended March 31, 1999 and 2000, respectively.
c. COMMISSION COMMITMENTS
Nogatech Israel is committed to pay a consulting company a commission
equal to 3.0% of the initial order of the net sales initiated by that
consulting company and a commission of 1.5% to 2.5% for all subsequent
orders.
F-15
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--COMMITMENTS AND CONTINGENT LIABILITIES: (CONTINUED)
Nogatech Israel is also committed to pay a commission equal to 3.0% of
orders of the net sales initiated by two other companies in sales to the
Far East.
Commissions paid by the Company amounted to $81,000 in the year ended
December 31, 1999 and amounted to (unaudited) $2,500 and (unaudited)
$25,000 in the periods of three months ended March 31, 1999 and 2000,
respectively.
d. LINE OF CREDIT
The Company has obtained a line of credit from an Israeli financial
institution for working capital purposes, in the amount of $2,000,000.
Repayment terms and interest rates are determined at the time of each
request for credit. The Company has pledged all of its assets as
collateral for this credit line. As of March 31, 2000, the financial
institution has provided the Company guarantees in a total amount of
(unaudited) $456,000 in favor of rent facility, a supplier and customs
authorities in Israel, which reduce the available amount of line of
credit to zero.
NOTE 5--REDEEMABLE CONVERTIBLE PREFERRED STOCK:
a. Redeemable convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Series A redeemable convertible preferred stock--$0.43
redemption value plus an accrued amount (see note b(1)
below): authorized 30,000,000 shares; issued and
outstanding--15,906,304 shares at December 31, 1998 and
1999 and at March 31, 2000 (at redemption value).......... $7,816 $8,243 $ 8,408
Series B redeemable convertible preferred stock--$4.18
redemption value: authorized at December 31, 1999 and
March 31, 2000--1,196,172 shares; no shares issued and
outstanding at December 31, 1999, 1,196,172 shares issued
and outstanding at March 31, 2000......................... -- -- 5,000
------ ------ -------
$7,816 $8,243 $13,408
====== ====== =======
</TABLE>
In addition, the Company has authorized 803,828 shares of undesignated
convertible preferred stock.
b. Following are the main terms of the Company's redeemable convertible
preferred stock:
1) Liquidation preference
Holders of preferred stock are entitled to a liquidation preference
of $0.43 and $4.18 for series A and B, respectively, per share plus
an amount equal to 8% of such liquidation price, compounded annually,
for each year (or fraction thereof) after the first two years from
issuance of the stock, plus any declared but unpaid dividends. The
terms of the preferred stock stipulate that certain events (such as a
change in control) shall be considered as a deemed liquidation of the
Company which entitle the holders to redeem the outstanding shares
based on their liquidation amounts.
The excess of the consideration received, net of issuance costs, from
the issuance of the series A convertible preferred stock over its
redemption value, is recorded as additional
F-16
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
paid-in capital at the date of issuance. The annual accretion of the
redemption value, computed using the interest method, is also charged
to additional paid-in capital.
2) Voting rights
As long as an aggregate amount of at least 4,000,000 shares of
series A and series B preferred stock are outstanding, preferred
stockholders are entitled to vote on all matters submitted or
required to be submitted to a vote of the stockholders of the Company
and shall be entitled to the number of votes equal to the number of
full shares of common stock into which such shares of series A and
series B preferred stock could be converted.
3) Election of Directors
So long as at least 4,000,000 shares of series A preferred stock are
outstanding, the authorized number of directors shall be nine and any
change in the number shall be with the consent of the holders of a
majority of the outstanding series A preferred stock. The holders of
the outstanding shares of series A preferred stock, voting as a
single class, are entitled to elect seven directors to the board of
directors. The holders of the outstanding shares of common stock,
voting as a single class, shall be entitled to elect two directors to
the board of directors.
4) Right to convert
At the option of the holder, each share of series A preferred stock
is convertible, at any time after issuance, into common stock based
on the determined conversion price subject to certain antidilution
provisions. According to the determined conversion price, as of
March 31, 2000, 5,765,003 shares of series A preferred stock are
convertible on a basis of two shares of preferred stock for one share
of common stock and 10,141,301 shares are convertible according to a
ratio of 1.7707 share of preferred stock for one share of common
stock.
At the option of the holder, each share of series B preferred stock
is convertible, at any time after issuance, into common stock, based
on the determined conversion price subject to certain antidilution
provisions. The determined conversion price of series B preferred
stock will be equal to the quotient obtained by dividing $4.18 by the
Series B conversion price in effect immediately prior to the time of
such conversion. The "Series B Conversion Price" shall be equal to
$8.36 through February 28, 2000. Thereafter, commencing on
February 29, 2000 though May 31, 2000, the "Series B Conversion
Price" shall be equal to $7.315. Thereafter, commencing on June 1,
2000 through June 30, 2000, the Series B Conversion Price shall be
equal to $6.897. Thereafter, commencing on July 1, 2000 through
July 31, 2000, the "Series B Conversion Price" on any given date
shall be equal to the result obtained by dividing (i) 100,000,000
less the result of multiplying 163,398.69 by the number of days after
February 29, 2000 on which such measurement date occurs, by
(ii) 23,915,417, subject to certain antidilution adjustments.
Commencing on August 1, 2000, the "Series B Conversion Price" shall
be $6.28.
The series A and B preferred stock will be automatically converted
into common stock concurrently with the closing of an underwritten
public offering of common stock resulting in aggregate gross cash
proceeds from the issuance in excess of $10,000,000.
F-17
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
5) Dividends
When and if declared by the board of directors, noncumulative
dividends at the annual rate of $0.0258 per share of series A
preferred stock and $0.1039 per share of series B preferred stock are
payable in cash to the preferred stockholders, in preference to any
declaration or payment on the common stock.
c. On January 13, 2000, the Company issued 1,196,172 shares of series B
redeemable convertible preferred stock to a financial investor for a
total consideration of (unaudited) $5,000,000. These shares of preferred
stock are convertible into common stock as described in note b(4) above.
In connection with this issuance, the Company recorded a beneficial
conversion charge of (unaudited) $4,570,000 in the three months ended
March 31, 2000. This charge is calculated as the difference between the
per share conversion price and the deemed fair value of a share of common
stock at commitment date multiplied by the applicable number of
equivalent shares of common stock. This nonrecurring amount has been
entirely reflected as a decrease of the net income applicable to common
stock, against a corresponding credit to additional paid-in capital.
D. Details regarding issuances of Series A and B redeemable convertible
preferred stock:
<TABLE>
<CAPTION>
NUMBER AMOUNT
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
1. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
Balance at January 1, 1997.................................. 8,962,959 $ 4,488
Preferred shares issued on February 4, 1997................. 859,871 *1,306
Preferred shares issued on August 17, 1997.................. 318,471 *484
---------- -------
Balance at December 31, 1997................................ 10,141,301 6,278
Preferred shares issued on July 15, 1998.................... 5,765,003 *5,641
---------- -------
Balance at December 31, 1998 and at December 31, 1999....... 15,906,304 $11,919
========== =======
2. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
Preferred shares issued in January 13, 2000--balance at
March 31, 2000 (unaudited)................................ 1,196,172 *$4,698
========== =======
</TABLE>
- ------------------------
* Net of issuance costs of $60,000, $355,000 and (unaudited) $302,000 in 1997,
1998 and 2000, respectively. The issuance costs of $302,000 in 2000 are
presented in other asset, which will be deducted from the equity upon
conversion of the Series B preferred stock.
NOTE 6--STOCKHOLDERS' EQUITY
a. REVERSE STOCK SPLIT
On March 5, 2000, the Company's Board of Directors approved a
reorganization of the Company's share capital, whereby each two shares of
common stock of $0.001 par value will be reverse stock split into one
share of common stock of $0.001 par value. All share and per share data
included in these financial statements have been retroactively adjusted
to reflect the abovementioned reverse stock split. In addition, the
conversion ratio of the convertible
F-18
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
preferred stock, the number of options and their exercise price have been
adjusted accordingly.
b. INITIAL PUBLIC OFFERING
On March 5, 2000, the Company's Board of Directors authorized the Company
to file a registration statement with the U.S. Securities and Exchange
Commission for an initial public offering of its common shares.
c. EMPLOYEE STOCK OPTION PLANS
1) Previous stock option plans:
a) U.S. 1993 Stock Option Plan
In February 1993, the Company's Board of Directors approved a
U.S. stock option plan (the U.S. plan), under which options are
to be granted to the Company's employees including officers,
directors and consultants, without consideration. Each option can
be exercised to purchase one common share of the Company. Any
option not exercised within 4 or 5 years, as applicable, from
allotment date will expire, unless extended by the Board of
Directors.
F-19
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
Options granted under the plan may be either incentive stock
options or nonstatutory stock options and may become exercisable
as specified in each option agreement.
Options granted to a holder of more that 10% of the voting stock
of the Company may be granted at not less than 110% of fair value
of the common share on the date of grant. Incentive stock options
granted to employees under the U.S. plan must have exercise
prices not less than 100% of fair value of the common share on
the date of the grant, as determined by the Board of Directors.
b) Israeli 1993 Stock Option Plan
In July 1993, the Company's Board of Directors approved an
Israeli employee option plan (the Israeli plan), under which
options are to be granted to the Company's employees including
officers, directors and consultants without consideration. Each
option can be exercised to purchase one common share of the
Company. Any option not exercised within 7 years from allotment
date will expire, unless extended by the Board of Directors.
c) Options granted to consultants under these plans were excluded
from the summary presented in the tables 4 and 5 below and were
treated as options granted to nonemployees, see note 6(d) below.
2) Existing stock option plan--1999 stock option plan
On December 8, 1999, in connection with the merger (note 1a(1)), the
Company adopted the 1999 stock option plan. All issued and
outstanding options under the 1993 plans were assumed under the 1999
stock option plan. In addition, the Company has the right to issue
new options pursuant to the 1999 plan. The terms of the new options
issued under the 1999 plan are identical to the terms of the options
granted under the 1993 plans.
3) The 2000 Equity Incentive Plan
On March 5, 2000, the Board of Directors adopted the 2000 Equity
Incentive Plan, under which the Company's employees, directors and
consultants are eligible to receive grants of options to purchase
common stock, stock appreciation rights and restricted shares of
common stock. It was further resolved to reserve for issuance under
the plan a maximum amount of 3,500,000 shares plus automatic annual
increases equal to the lesser of 500,000 shares or 5% of the
Company's outstanding shares on the last day of the preceding year.
This plan will become effective after the consummation of the
Company's initial public offering.
The rights of the common stock obtained upon exercise of the options
will be identical to those of the other shares of common stock of the
Company.
F-20
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
4) A summary of the status of the 1999 stock option plan as of
December 31, 1997, 1998, 1999, and as of (unaudited) March 31, 2000
and changes during the periods of three months ended on those dates,
is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------- THREE MONTHS ENDED
1997 1998 1999 MARCH 31, 2000
------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE NUMBER PRICE
-------- -------- --------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period...... 772,720 $0.24 734,470 $0.28 1,248,470 $0.26 1,531,220 $ 0.94
Changes during the period:
Granted.................. 51,750 $0.72 549,000 $0.24 431,000 $2.78 21,000 $11.33
Exercised................ (18,120) $0.14 (6,250) $0.12 (100,875) $0.34 (187,206) $ 1.35
Forfeited................ (71,880) $0.30 (28,750) $0.64 (47,375) $0.72 (13,500) $ 5.22
------- --------- --------- ---------
Options outstanding at
period end............... 734,470 $0.28 1,248,470 $0.26 1,531,220 $0.94 1,351,514 $ 1.08
======= ========= ========= =========
Options exercisable at
period end............... 556,014 $0.26 791,146 $0.28 948,261 $0.72 775,994 $ 0.56
======= ========= ========= =========
Options available for grant
under the stock option
plan..................... 473,823 953,572 3,011,787 3,004,287
======= ========= ========= =========
Weighted average fair value
of options granted during
the period*.............. $0.27 $0.58 $1.34 $ 7.33
</TABLE>
- --------------------------
* The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model, based on the following
weighted average assumptions: dividend yield of 0% for all periods; expected
volatility of 55% for all periods; risk-free interest rates (in dollar
terms): 1997 - 6.1%; 1998 - 5.4%; 1999 - 5.7% and 2000 - 6%; and expected
lives of 4 years in all periods.
F-21
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
5) The following table summarizes information about options outstanding
at March 31. 2000 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------- ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED
CONTRACTUAL AVERAGE WEIGHTED
RANGE OF NUMBER LIFE EXERCISE NUMBER AVERAGE
EXERCISE PRICE OF OPTIONS IN YEARS PRICE OF OPTIONS EXERCISE PRICE
- -------------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.02-$0.20 759,765 2.6 $ 0.08 502,931 $ 0.12
$0.72 297,250 3.4 $ 0.72 195,563 $ 0.72
$3.00 279,500 5.3 $ 3.00 77,500 $ 3.00
$8.00 5,000 6.8 $ 8.00
$15.00 10,000 2.0 $ 15.00
----------- -----------
1,351,515 $ 1.08 775,994 $ 0.56
=========== ===========
</TABLE>
6) Options to employees were granted at exercise prices which were equal
to the fair value of the common stock at dates of grant, except for
381,500 options granted in July 1998, to the Company's Chairman of
the Board of Directors and to its Chief Executive Officer and except
for 40,000 options granted to employees in December 1999 and 5,000
options granted to employees in February 2000 which were granted at
exercise prices lower than the fair value of each share of common
stock at dates of grant. The options granted in 1998 were issued at
an exercise price of $0.02 for each share of common stock, while the
fair value of each share of common stock was $0.72. The fair value of
each of these options granted was $0.71. These options will vest over
a period of three years but shall vest immediately upon the
consummation of an initial public offering or upon the occurrence of
a corporate sale, as defined in the agreement. These options will
expire if not exercised after a certain period. The 40,000 options
granted in 1999 were issued at an exercise price of $3.00 for each
share of common stock, while the fair value of each share of common
stock at the dates of grant, was $8.30. The fair value of each of
these options granted was $5.91. The 5,000 options granted in
February 2000 were issued at an exercise price of $8.00 for each
share of common stock, while the fair value of each share of common
stock at the date of grant, was $14.00. The fair value of each of
these options granted was $6.00.
7) Accounting treatment of the employee stock option plans
As to the accounting treatment with respect to employee stock option
grants, see note 1(l).
In 1998, 1999 and in the three months ended March 31, 2000, the
Company recorded $268,000, $214,000 and (unaudited) $35,000,
respectively, of deferred stock compensation for the excess of the
deemed fair value of a share of common stock over the exercise price
at the date of grant related to certain options granted to employees
and directors. The compensation expense is being amortized over the
vesting period of the options. The compensation costs that have been
charged to the statements of operations, under "general and
administrative expenses", in the years ended December 31, 1998 and
1999
F-22
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
and in the period of three months ended March 31, 2000 are $45,000,
$90,000 and (unaudited) $32,000, respectively.
8) Pro forma disclosure
Had compensation cost for the Company's plans been determined using
the fair value at the grant dates, consistent with the method of
FAS 123, the Company's net loss and loss per share of common stock
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
YEAR ENDED DECEMBER 31, 1999 2000
--------------------------------------------------------------- ------------------- -------------------
1997 1998 1999 UNAUDITED UNAUDITED
------------------- ------------------- ------------------- ------------------- -------------------
AS PRO AS PRO AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss applicable to
common stock--in
thousands............ $(1,762) $(1,766) $(2,206) $(2,225) $(1,523) $(1,668) (929) (987) (5,072) (5,093)
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net loss per share of
common stock--Basic
and diluted.......... $ (5.86) $ (5.87) $ (7.13) $ (7.19) $ (4.50) $ (4.93) (2.97) (3.17) (8.89) (8.93)
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
d. WARRANTS AND OPTIONS TO NONEMPLOYEES
1) In 1998, in order to obtain a credit line, the Company granted a bank
options to purchase 240,208 shares of common stock at an exercise
price of $2.08 per share. These options are exercisable during a
period of three years. According to the agreement, the options will
expire after a certain period, if not exercised. The Company recorded
deferred compensation of $37,000 associated with these options based
on the fair value of these options at the date of grant.
2) In December 1998, the Board of Directors granted 75,000 options to a
consulting company in exchange for marketing services rendered. The
options which were vested in January 1999 and are exercisable for
75,000 shares of common stock at an exercise price of $0.72 per
share. The Company recorded deferred compensation of $16,000
associated with these options based on the fair value of these
options at the date of grant.
3) In connection with the change of ownership in the Company in 1995,
the Board of Directors granted 350,000 options to the Company's
current Chairman of the Board of Directors who did not have an active
role in the Company at the date of grant. The optionee paid $5,000
for this right. Each option can be exercised to purchase one share of
common stock of the Company at an exercise price of $0.125 per share.
The options expire in June 2000. An expense of $10,000 associated
with these options, reflecting the
F-23
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
fair value of the option at date of grant, net of the amount paid for
the option, was charged in the statement of operations for the year
ended December 31, 1995.
4) a) In October 1995, the Company issued 7,500 common stock options
to a consultant at an exercise price of $0.125 per share. These
options were exercised in 1999.
b) In January 1996, the Company issued 10,000 common stock options
to a consultant at an exercise price of $0.14 per share. These
options were exercised in January 2000.
c) In August 1999, the Company issued 20,000 common stock options to
four consultants at an exercise price of $3.00 per share. Two
consultants' options vest ratably over a period of four years and
the options issued to the other consultants are fully vested. The
total deferred expense of $22,000 associated with these options
reflects the fair value of the options at dates of grant.
5) Accounting treatment of options granted to nonemployees.
As to the accounting treatment with respect to options granted to
nonemployees, see Note 1(l).
The fair value of equity instruments issued in exchange for services
received is charged against income over the vesting period.
The following weighted average assumptions were used for estimating
the fair value of the options under Black-Scholes option pricing
model: dividend yield of 0%; and expected volatility of 55% for the
years 1998 and 1999, risk free interest of 5.4% and 5.7% for the
years 1998 and 1999 respectively and average expected life of
4 years for the years 1998 and 1999.
Services costs charged against income in respect of equity
instruments granted to nonemployees were $5,000 and $25,000 in the
years ended December 31, 1998 and 1999, respectively, and (unaudited)
$6,000 and (unaudited) $12,000 in the three month periods ended
March 31, 1999 and 2000, respectively. These costs have been included
in the consolidated statements of operations under "general and
administrative expenses" (except for $16,000 charged to "sales and
marketing expenses" in the year ended December 31, 1999 and
(unaudited) $4,000 for the three months ended March 31, 1999).
e. WARRANTS ISSUED TO SERIES A REDEEMABLE CONVERTIBLE PREFERRED
STOCKHOLDERS
1) In 1997, in connection with the issuance of series A redeemable
convertible preferred stock, the Company issued to the buyers of
those shares options to purchase up to 589,171 shares of common stock
at an exercise price of $3.14 per share. 318,471 of these options
expired in 1999, 111,464 options were exercised in January 2000 and
159,236 options will expire in August 2000.
2) In 1998, in connection with the issuance of series A redeemable
convertible preferred stock, the Company granted the buyers of those
shares options to purchase 432,375 shares of common stock at an
exercise price of $2.08 per share. These options expire in
July 2000.
F-24
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
3) According to the applicable agreements, the options described in 1
and 2 above will expire after a certain agreed period if not
exercised.
f. EMPLOYEE STOCK PURCHASE PLAN
On March 5, 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan which permits eligible employees to purchase shares of the
Company's common stock pursuant to payroll deductions periodically
applied to the purchase of such shares. A total of 350,000 shares of
common stock initially have been reserved for issuance under the Purchase
Plan. The number of shares reserved for issuance will be increased
automatically on the first day of the Company's fiscal year, commencing
in 2001, by an amount equal to the lesser of 500,000 shares or 1% of the
number of outstanding shares on the last trading day of the immediately
preceeding fiscal year.
g. COMMON STOCK RESERVED
As at March 31, 2000 (unaudited), the Company has reserved shares of
common stock for future issuance, as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
-----------
(UNAUDITED)
<S> <C>
Conversion of series A and B redeemable convertible
preferred stock........................................... 9,293,310
Employee stock option plans................................. 7,855,801
Warrants and options to nonemployees........................ 1,276,818
Employee stock purchase plan................................ 350,000
----------
18,775,929
==========
</TABLE>
h. On March 8, 2000, the note receivable from a stockholder was repaid to
the Company, including the interest accrued at the annual rate of 5.5%.
NOTE 7--INCOME TAXES:
A. U.S. INCOME TAXES
As of March 31, 2000, the Company had federal and state net operating loss
carryforwards of approximately (unaudited) $5,160,000 and (unaudited)
$1,673,000, respectively, which expire through 2019 and 2004, respectively.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $5,200,000 and $1,700,000, respectively,
which expire through 2019 and 2004, respectively.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net
operating loss carryforwards before utilization.
F-25
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES: (CONTINUED)
b. ISRAELI INCOME TAXES
Nogatech Israel has been awarded "approved enterprise" status by the Israeli
government, under the Law for the Encouragement of Capital Investments,
1959. Under the approved enterprise status, Nogatech Israel is entitled to a
four-year tax exemption on undistributed earnings commencing in the year in
which it attains taxable income and a reduced corporate tax rate of 10%-15%
for the remaining term of the program on the plan's proportionate share of
income. The period of tax benefits has not yet commenced. In the event of
the distribution of dividends from income which was tax exempt, the amount
distributed will be liable to corporate tax of 10%-15%.
The entitlement to the above benefits is conditional upon the fulfillment of
conditions stipulated by the law, regulations published thereunder and the
instrument of approval for the specific investment in approved enterprises.
In the event of failure to comply with these conditions, the benefits may be
cancelled and Nogatech Israel may be required to refund the amounts of the
benefits in whole or in part with the addition of linkage differences and
interest.
Nogatech Israel's results for tax purposes are measured on a real basis,
adjusted for the increase in the Israeli Consumer Price Index (CPI). As
explained in note 1b, the financial statements of the Israeli subsidiary
included in consolidation are expressed in U.S. dollars. The difference
between the changes in the Israeli CPI and the NIS/U.S. dollar exchange
rate--both on annual and cumulative basis--causes a difference between
taxable income (loss) and income (loss) reflected in Nogatech Israel's
financial statements expressed in dollars.
Israeli taxable income not eligible for "approved enterprise" benefits
mentioned above is taxed at the regular tax rate of 36%.
As of December 31, 1999 and as of March 31, 2000, Nogatech Israel has
Israeli net operating loss carryforwards of approximately $2,300,000 and
(unaudited) $2,000,000, respectively. The Israeli loss carryforwards have no
expiration date. The Company expects that during the period these tax losses
are utilized, most of its income would be tax exempt, and therefore, the
utilization of the net operating losses will generate no tax benefit.
Accordingly, deferred tax assets from such losses have not been included in
the financial statements.
Net loss applicable to the Israeli operations included in the statements of
operations amounted to approximately to $1,000,000, $1,000,000, $500,000 and
(unaudited) $30,000, in the years ended December 31, 1997, 1998 and 1999 and
in the three months ended March 31, 2000, respectively.
F-26
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES: (CONTINUED)
c. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1998 1999 2000
-------- -------- -----------
(IN THOUSANDS) (IN
THOUSANDS)
UNAUDITED
<S> <C> <C> <C>
In respect of the U.S. operating loss
carryforwards............................... $ 1,500 $ 2,000 $2,000
Valuation allowance........................... (1,500) (2,000) (2,000)
------- ------- ------
Net deferred tax assets....................... $ -- $ -- $ --
======= ======= ======
</TABLE>
The valuation allowance increased by $400,000, $300,000, $500,000 and
(unaudited) $0 for the years ended December 31 1997, 1998, 1999 and for the
three months ended March 31, 2000, respectively. These changes in the
valuation allowance were charged to expenses.
FAS 109 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not. Based upon the weight of available
evidence, which includes the Company's historical operating performance and
the reported cumulative net losses in all prior years, management has
determined that the future realization of the tax benefit is not
sufficiently assured. Consequently, a full valuation allowance has been
provided against the net deferred tax assets.
d. ISRAELI TAX ASSESSMENTS
Nogatech Israel has had no final tax assessments since its incorporation in
1993.
NOTE 8--RELATED PARTY TRANSACTIONS
Kenwood Corporation ("Kenwood") is a stockholder in the Company. During
1997, Kenwood subleased premises from the Company for a specific period of
time. Rental income earned by the Company from this sublease was $75,000 for
1997 and at December 31, 1997, Kenwood owed the Company $75,000 pertaining
to this sublease.
Tomen Electronics ("Tomen") is a stockholder in the Company. Sales made to
Tomen were $439,000, $1,324,000 and $1,272,000 in 1997, 1998 and 1999,
respectively, and (unaudited) $152,000 and (unaudited) $242,000 in the three
month periods ended March 31, 1999 and 2000, respectively. As of
December 31, 1998 and 1999, Tomen owed the Company $35,000 and $68,000,
respectively and $11,000 in the three months ended March 31, 2000. The
Company purchases certain products from Tomen. Purchases from Tomen
aggregated $194,000 and $151,000 in 1998 and 1999, respectively and
(unaudited) $60,000 in the three months ended March 31, 1999. As of
December 31, 1998 and 1999, the Company owed Tomen $32,000 and $60,000,
respectively, pertaining to these purchases. Additionally, during 1997, the
Company entered into an engineering agreement with Tomen, whereunder the
Company will receive four payments of $50,000 upon the achievement of
certain milestones, as agreed. The Company recognized $100,000 of revenue
under
F-27
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--RELATED PARTY TRANSACTIONS (CONTINUED)
this agreement for the year ended December 31, 1997. In 1998, the
engineering agreement was canceled and it was agreed between the companies
that there would be no further obligations.
NOTE 9--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
BALANCE SHEETS:
a. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
1) Trade:
Open accounts......................................... $813 $ 951 $1,484
Related party (note 8)................................ 35 68
---- ------ ------
$848 $1,019 $1,484
==== ====== ======
The item is net of--
Allowance for doubtful accounts....................... $(24) $ (150) $ (175)
==== ====== ======
</TABLE>
The change in the allowance for doubtful accounts in the year ended
December 31, 1997 was a decrease of expenses of $23,000. The changes in
the allowance in the years ended December 31, 1998 and 1999 increased the
expenses by $20,000 and $126,000, respectively. The change in the
allowance for doubtful accounts in the three months ended March 31, 1999
was a decrease of expenses of (unaudited) $4,000. The change in the
allowance in the three months ended March 31, 2000 increased the expense
by (unaudited) $25,000.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
2) Other:
Employees............................................. $ 65 $ 89 $ 127
Institutions.......................................... 36 82 77
Other receivables..................................... 39 26 9
---- ------ ------
$140 $ 197 $ 213
==== ====== ======
B. INVENTORIES
Raw materials......................................... $413 $ 843 $ 791
Finished goods........................................ 168 1,266 956
---- ------ ------
$581 $2,109 $1,747
==== ====== ======
C. ACCOUNTS PAYABLE AND ACCRUALS
1) Trade:
Open accounts......................................... $476 $1,907 $ 830
Related party (note 8)................................ 32 60
---- ------ ------
$508 $1,967 $ 830
==== ====== ======
2) Other and accruals:
Payroll and related expenses.......................... $149 $ 90 $ 125
Provision for vacation................................ 95 127 140
Deferred income....................................... 321 56 16
Provision for warranty................................ 65 177 219
Distributors.......................................... 11 244 252
Accrued expenses...................................... 66 197 124
---- ------ ------
$707 $ 891 $ 876
==== ====== ======
</TABLE>
F-28
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION: (CONTINUED)
STATEMENTS OF OPERATIONS:
D. NET LOSS PER SHARE OF COMMON STOCK
The following table sets forth the computation of historical basic and
diluted net loss per share of common stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NUMERATOR--IN THOUSANDS:
Net loss applicable to common
stock--numerator for basic net
loss per share of common
stock.......................... $ (1,762) $ (2,206) $ (1,523) (924) (4,642)
Deemed dividend for beneficial
conversion feature of preferred
stock.......................... -- -- -- -- 4,570
Accretion of redemption value of
series A and B redeemable
convertible preferred stock.... 300 383 427 107 165
---------- ---------- ---------- ---------- ----------
Numerator for diluted net income
(loss) per share of common
stock.......................... $ (1,462) $ (1,823) $ (1,096) (817) 93
========== ========== ========== ========== ==========
DENOMINATOR
Denominator for basic net loss
per share of common
stock--weighted average number
of shares of common stock...... 300,709 309,536 338,295 310,995 570,557
Incremental shares from assumed
conversions:...................
Series A and B redeemable
convertible preferred
stock........................ 5,568,334 7,048,428 8,609,783 8,609,783 9,179,388
Stock options.................. 2,638,257 3,879,996 2,058,358 3,206,664 1,977,721
---------- ---------- ---------- ---------- ----------
Denominator for diluted net loss
per share of common stock--
adjusted weighted average
number of shares............... 8,507,300 11,237,960 11,006,436 12,127,442 11,727,666
========== ========== ========== ========== ==========
</TABLE>
The effect of the inclusion of the redeemable convertible preferred stock
and stock options in the computation of the diluted net loss per share of
common stock in 1997, 1998 and 1999 is anti-dilutive.
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist of non-derivative current
assets and liabilities.
F-29
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
In view of their nature, the fair value of financial instruments included in
working capital of the Company is usually identical or close to their
carrying value.
NOTE 11--SEGMENT INFORMATION
The Company adopted the provisions of FAS 131 which sets out disclosure and
reporting requirements in respect of segments.
Management identifies two reportable operating segments that are
differentiated by the locations of the Company's customers: (1) the United
States and (2) the rest of the world. The Company evaluates performance of
these two operating segments based on sales only. The Company does not
evaluate performance based on segment asset information.
SEGMENT SALES--SALES CLASSIFIED BY GEOGRAPHIC AREA (BASED ON THE LOCATION OF
THE CUSTOMERS):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States--North America.......... $1,230 $1,373 $5,436 $509 $1,462
------ ------ ------ ---- ------
The rest of the world:
Japan............................... 836 1,341 1,314 152 282
Taiwan.............................. 93 59 1440 148 495
Europe.............................. 335 356 617 44 347
Other............................... 57 76 49 17 359
------ ------ ------ ---- ------
1,321 1,832 3,420 361 1,483
------ ------ ------ ---- ------
Total................................. $2,551 $3,205 $8,856 $870 $2,945
====== ====== ====== ==== ======
</TABLE>
COMPANY-WIDE DISCLOSURE REGARDING ITS TOTAL ASSETS, LONG-LIVED ASSETS AND
MAJOR CUSTOMERS:
A. TOTAL ASSETS AND LONG-LIVED ASSETS
The Company's total assets and long-lived assets, net of accumulated
depreciation and amortization, are located in the following geographical
areas:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------- ---------------------
1998 1999 2000
--------------------- --------------------- ---------------------
TOTAL LONG-LIVED TOTAL LONG-LIVED TOTAL LONG-LIVED
ASSETS ASSETS ASSETS ASSETS ASSETS ASSETS
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Israel...................... $1,126 $168 $4,269 $324 $ 4,119 $324
North America............... 4,643 12 2,308 28 7,133 26
------ ---- ------ ---- ------- ----
Total....................... $5,769 $180 $6,577 $352 $11,252 $350
====== ==== ====== ==== ======= ====
</TABLE>
F-30
<PAGE>
NOGATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SEGMENT INFORMATION (CONTINUED)
B. MAJOR CUSTOMERS
In the years ended December 31, 1997, 1998 and 1999, and in the periods
of three months ended March 31, 1999 and 2000, major customers of the
Company represented the following percentages of sales:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31 MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Customer A............................. * * 24% * 31%
Customer B............................. 17% 41% 14% 17% *
Customer C............................. * * 13% * *
Customer D............................. 32% 20% 11% 33% *
Customer E............................. * * * * 12%
Customer F............................. * * * * 11%
</TABLE>
- ------------------------
* Less than 10%.
MAJOR SUPPLIER
In the years ended December 31, 1997, 1998 and 1999, a major supplier of the
Company represented 8%, 10% and 58% of cost of sales, respectively.
In the periods of three months ended March 31, 1999 and 2000, a major
supplier of the company represented 41% and 57% of cost of sales,
respectively.
F-31
<PAGE>
[LOGO]
SHARES OF COMMON STOCK
OpenIPO
WR HAMBRECHT+CO
ING Barings
DLJDIRECT Inc.
Until , 2000 (25 days after the date of this offering), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the expenses to be incurred in connection with
the offering described in this Registration Statement, all of which will be paid
by us. All amounts are estimates, other than the registration fee, the NASD
filing fee, and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration fee........................................ $17,002
NASD Filing fee............................................. 6,940
Nasdaq National Market listing fee.......................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Printing and engraving expenses............................. *
Transfer agent fees and expenses............................ *
Blue sky fees and expenses.................................. 5,000
Miscellaneous fees and expenses............................. *
-------
Total..................................................... $
=======
</TABLE>
- ------------------------
*To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law, or the DGCL, as
amended, allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages for
a breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by us or in our right) by reason of the fact that the person is or was
our director, officer, agent or employee or is or was serving at our request as
a director, officer, agent, or employee of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys'
fees, judgment, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit or proceeding. The
power to indemnify applies (a) if the person is successful on the merits or
otherwise in defense of any action, suit or proceeding, or (b) if the person
acted in good faith and in a manner he or she reasonably believed to be in our
best interest, or not opposed to our best interest, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The power to indemnify applies to actions brought by us or in our
right as well, but only to the extent of defense expenses (including attorneys'
fees but excluding amounts paid in settlement) actually and reasonably incurred
and not to any satisfaction of judgment or settlement of the claim itself, and
with the further limitation that in these actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct in the
performance of his or her duties to us, unless the court believes that in light
of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be
II-1
<PAGE>
held liable for these actions. A director who was either absent when the
unlawful actions were approved or dissented at the time, may avoid liability by
causing his or her dissent to these actions to be entered in the books
containing the minutes of the meetings of the board of directors at the time the
action occurred or immediately after the absent director receives notice of the
unlawful acts.
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, except for liability for:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
- unlawful dividends and stock purchases; or
- any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
- we may indemnify our other employees and agents to the same extent that we
indemnified our officers and directors, unless otherwise determined by our
board of directors; and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.
The indemnification provisions contained in our certificate of incorporation
and bylaws are not exclusive of any other rights to which a person may be
entitled by law, agreement, vote of stockholders or disinterested directors or
otherwise. In addition, we maintain insurance on behalf of our directors and
executive officers insuring them against any liability asserted against them in
their capacities as directors or officers or arising out of this status.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, will provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding arising out of
the person's services as a director or executive officer of us or another entity
at our request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since March 1, 1997, we have sold and issued the following unregistered
securities (the share numbers and per share prices below reflect the one-for-two
reverse stock split of the outstanding common stock to be effected prior to the
completion of this offering:
(1) Between March 1, 1997 and March 31, 2000, we granted stock options under
our 1999 Stock Option Plan to 66 of our officers, employees, directors and
consultants, to purchase an aggregate of 1,162,250 shares of common stock.
During this period, optionees exercised options to purchase an aggregate of
233,330 shares of common stock at various exercise prices.
(2) On August 17, 1997, we issued 318,471 shares of our Series A preferred
stock at $1.57 per share to Corex Israeli Industries Ltd. for an aggregate
cash consideration of $500,000.
(3) On August 17, 1997, we issued a warrant (the "1997 Warrant") to purchase
159,235 shares of our common stock to Corex Israeli Industries Ltd. at an
exercise price of $3.14 per share and an aggregate exercise price of
$500,000.
II-2
<PAGE>
(4) On June 24, 1998, we issued warrants to purchase an aggregate of 288,249
shares of our common stock to Hapoalim Nechasim (Menayot) Ltd. and Be'ery
Investment Bankers at an exercise price of $2.08 per share and an aggregate
exercise price of $600,000.
(5) On July 15, 1998, we issued 5,765,003 shares of our Series A preferred
stock to Docor International BV, Holland Ventures BV, Inventech Ltd., Ophir
Holdings Ltd. and Ronchal Investments NV, at $1.04 per share and an
aggregate cash consideration of $6,000,000.
(6) On July 15, 1998, we issued warrants to purchase 432,375 shares of our
common stock to Docor International BV, Holland Ventures BV, Inventech
Ltd., Ophir Holdings Ltd. and Ronchal Investments NV, at an exercise price
of $2.08 per share and an aggregate exercise price of $900,000.
(7) On July 15, 1998, we amended the 1997 Warrant and two warrants issued on
February 4, 1997 to purchase an aggregate of 111,464 shares of our common
stock to extend the term of the 1997 warrant and the two warrants by one
year.
(8) On September 24, 1999, in connection with our reincorporation into
Delaware, we issued one share of our common stock to one of our executive
officers who was not a U.S. resident for $1.00 per share.
(9) On January 13, 2000, we issued 1,196,172 shares of our Series B preferred
stock to Nomura International plc at $4.18 per share for an aggregate
consideration of $5,000,000.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act of 1933, as amended (the "Act") in reliance on Section
4(2) of the Act, Regulation D promulgated under the Act, Regulation S
promulgated under the Act, or Rule 701 promulgated under Section 3(b) of the
Act. In each such transaction, the recipients of securities represented their
intentions to acquire securities for investment only and not with a view to or
for sale in connection with any distribution thereof, and appropriate legends
were affixed to the securities issued in such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
2.1** Agreement and Plan of Merger, by and between Nogatech, Inc.,
a California corporation and the Registrant, dated as of
December 28, 1999.
3.1** Second Amended and Restated Certificate of Incorporation of
the Registrant.
3.2** Bylaws of the Registrant.
3.3 Amendment to the Second Amended and Restated Certificate of
Incorporation of the Registrant, as filed with the Delaware
Secretary of State on April 14, 2000.
3.4 Amendment to the Second Amended and Restated Certificate of
Incorporation of the Registrant, as filed with the Delaware
Secretary of State on April 17, 2000.
4.1* Specimen common stock certificate.
5.1* Opinion of Bay Venture Counsel, LLP.
10.1.1** Warrant to purchase shares of common stock issued to Corex
Industries.
10.1.2** Warrant to purchase shares of common stock issued to Bank
Hapoalim.
10.1.3 Form of Warrant to purchase shares of common stock issued to
certain investors.
10.1.4** Warrant to purchase shares of common stock issued to Nathan
Hod.
10.2** Form of Indemnification Agreement for officers of the
Registrant.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
10.3** 1999 Stock Option Plan.
10.4 2000 Equity Incentive Plan.
10.5** 2000 Employee Stock Purchase Plan.
10.6** Stock Purchase Agreement, by and among DSP Group, Inc.,
Scitex Corporation, Ltd., and Noga Technology, Inc., dated
as of January 1, 1993.
10.7** Stock Purchase Agreement, by and among DSP Group, Kenwood
Corporation, Tomen Electronics Corporation and Nogatech,
Inc., a California corporation, dated as of June 30, 1995.
10.8** Series A Preferred Stock Purchase Agreement by and between
the Registrant and Arie Heiman, dated February 28, 1996.
10.9** Series A Preferred Stock Purchase Agreement, by and among
Registrant and Nathan Hod, dated January 30, 1996.
10.10** Series B Preferred Stock Purchase Agreement, by and between
the Registrant and Nomura International plc, dated
January 13, 2000.
10.11** Shareholder Agreement, by and among Nomura International
plc., Holland Venture B.V., Ophir Holdings Ltd., Docor
International B.V., Inventech Ltd., Ronchal Investments
N.V., Challenge Fund-Etgar, L.P., and Corex Israeli
Industries Ltd., dated as of January 13, 2000.
10.12** Second Amended and Restated Registration Rights Agreement,
by and among the Registrant and certain security holders,
dated January 13, 2000.
10.13 Debenture Agreement by and between Bank Hapoalim and
Nogatech Ltd., dated June 16, 1998.
10.14**+ Development Agreement, by and between Supertec Electronics
Ltd. and Nogatech, Ltd., dated as of August 1999.
10.15**+ Development Agreement, by and between Supertec Electronics
Ltd. and Nogatech, Ltd., dated as of June 24, 1997.
10.16** Employment Agreement with Arie Heiman.
10.17** Employment Agreement with Yaron Garmazi.
10.18** Employment Agreement with Aryeh Gavrieli.
10.19** Employment Agreement with Liat Hod.
10.20** Series A Preferred Stock Purchase Agreement, by and among
the Registrant and Andrew Schonzeit, dated December 27,
1995.
21.1** Subsidiaries of the Registrant.
23.1 Consent of Kesselman & Kesselman, Independent Accountants.
23.2* Consent of Bay Venture Counsel, LLP (included at Exhibit
5.1).
24.1** Power of Attorney (included in signature pages).
27.1** Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed
+ We have requested confidential treatment from the Commission for selected
portions of this exhibit. The omitted portions have been separately filed
with the Commission.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been informed 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 the 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 pubic policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 5430A and contained
in a form of prospectus filed by the Registrant under 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 of
1933, 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 bonafide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on April 20, 2000.
<TABLE>
<S> <C> <C>
NOGATECH, INC.
By: /s/ ARIE HEIMAN
-----------------------------------------
Arie Heiman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ARIE HEIMAN* President and Chief Executive Officer April 20, 2000
--------------------------------- and Director (Principal Executive
Arie Heiman Officer)
/s/ YARON GARMAZI* Chief Financial Officer and Secretary April 20, 2000
--------------------------------- (Principal Financial and Accounting
Yaron Garmazi Officer)
/s/ NATHAN HOD Chairman of the Board April 20, 2000
---------------------------------
Nathan Hod
/s/ GERALD DOGON* Director April 20, 2000
---------------------------------
Gerald Dogon
/s/ AVRAHAM FISCHER* Director April 20, 2000
---------------------------------
Avraham Fischer
/s/ DAVIDI GILO* Director April 20, 2000
---------------------------------
Davidi Gilo
/s/ MOSHE HAREL* Director April 20, 2000
---------------------------------
Moshe Harel
/s/ YIRMIYAHU KAPLAN* Director April 20, 2000
---------------------------------
Yirmiyahu Kaplan
/s/ YOSSI VINITSKI* Director April 20, 2000
---------------------------------
Yossi Vinitski
/s/ ANDREW SCHONZEIT* Director April 20, 2000
---------------------------------
Andrew Schonzeit
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ARIE HEIMAN
--------------------------------------
Arie Heiman, ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
2.1** Agreement and Plan of Merger, by and between Nogatech, Inc.,
a California corporation and the Registrant, dated as of
December 28, 1999.
3.1** Second Amended and Restated Certificate of Incorporation of
the Registrant.
3.2** Bylaws of the Registrant.
3.3 Amendment to the Second Amended and Restated Certificate of
Incorporation of the Registrant, as filed with the Delaware
Secretary of State on April 14, 2000.
3.4 Amendment to the Second Amended and Restated Certificate of
Incorporation of the Registrant, as filed with the Delaware
Secretary of State on April 17, 2000.
4.1* Specimen common stock certificate.
5.1* Opinion of Bay Venture Counsel, LLP.
10.1.1** Warrant to purchase shares of common stock issued to Corex
Industries.
10.1.2** Warrant to purchase shares of common stock issued to Bank
Hapoalim.
10.1.3 Form of Warrant to purchase shares of common stock issued to
certain investors.
10.1.4** Warrant to purchase shares of common stock issued to Nathan
Hod.
10.2** Form of Indemnification Agreement for officers of the
Registrant.
10.3** 1999 Stock Option Plan.
10.4 2000 Equity Incentive Plan.
10.5** 2000 Employee Stock Purchase Plan.
10.6** Stock Purchase Agreement, by and among DSP Group, Inc.,
Scitex Corporation, Ltd., and Noga Technology, Inc. 1996,
dated as of January 1, 1993.
10.7** Stock Purchase Agreement, by and among DSP Group, Kenwood
Corporation, Tomen Electronics Corporation and Nogatech,
Inc., a California corporation, dated as of June 30, 1995.
10.8** Series A Preferred Stock Purchase Agreement by and between
the Registrant and Arie Heiman, dated February 28, 1996.
10.9** Series A Preferred Stock Purchase Agreement, by and among
Registrant and Nathan Hod, dated January 30, 1996.
10.10** Series B Preferred Stock Purchase Agreement, by and between
the Registrant and Nomura International plc, dated
January 13, 2000.
10.11** Shareholder Agreement, by and among Nomura International
plc., Holland Venture B.V., Ophir Holdings Ltd., Docor
International B.V., Inventech Ltd., Ronchal Investments
N.V., Challenge Fund-Etgar, L.P., and Corex Israeli
Industries Ltd., dated as of January 13, 2000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
10.12** Second Amended and Restated Registration Rights Agreement,
by and among the Registrant and certain security holders,
dated January 13, 2000.
10.13 Debenture Agreement by and between Bank Hapoalim and
Nogatech Ltd., dated June 16, 1998.
10.14**+ Development Agreement, by and between Supertec Electronics
Ltd. and Nogatech, Ltd., dated as of August 1999.
10.15**+ Development Agreement, by and between Supertec Electronics
Ltd. and Nogatech, Ltd., dated as of June 24, 1997.
10.16** Employment Agreement with Arie Heiman.
10.17** Employment Agreement with Yaron Garmazi.
10.18** Employment Agreement with Aryeh Gavrieli.
10.19** Employment Agreement with Liat Hod.
10.20** Series A Preferred Stock Purchase Agreement, by and among
the Registrant and Andrew Schonzeit, dated December 27,
1995.
21.1** Subsidiaries of the Registrant.
23.1 Consent of Kesselman & Kesselman, Independent Accountants.
23.2* Consent of Bay Venture Counsel, LLP (included at Exhibit
5.1).
24.1** Power of Attorney (included in signature pages).
27.1** Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ We have requested confidential treatment from the Commission for selected
portions of this exhibit. The omitted portions have been separately filed
with the Commission.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NOGATECH, INC.
Nogatech, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That acting by unanimous written consent, the Board of
Directors of Nagotech, Inc. duly adopted resolutions setting forth a proposed
amendment of the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and directing that approval of said amendment
be obtained from a majority of the holders of issued and outstanding Common
Stock, Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock of said corporation entitled to vote. The resolutions
setting forth the proposed amendment are as follows:
RESOLVED: That Section F.1.(b). of Article IV be amended in its
entirety to read as follows:
"SERIES B STOCK. Each share of Series B Stock shall be
convertible, at the option of the holder thereof, at any time after
the date of issuance of such share, at the office of this
Corporation or any transfer agent for the shares of Series B Stock
or Common Stock into that number of shares of Common Stock which is
equal to the quotient obtained by dividing Four Dollars and
Eighteen Cents ($4.18) by the Series B Conversion Price (as such
term is hereinafter defined) in effect immediately prior to the
time of such conversion. The "Series B Conversion Price" shall be
equal to Four Dollars and Eighteen Cents ($4.18) through February
28, 2000. Thereafter, commencing on February 29, 2000 through May
31, 2000, the "Series B Conversion Price" shall be equal to Three
Dollars and Sixty Five and 75/100 Cents ($3.6575). Thereafter,
commencing on June 1, 2000 through June 30, 2000, the Series B
Conversion Price shall be equal to Three Dollars and Forty-Four and
85/100 Cents ($3.4485). Thereafter, commencing July 1, 2000 through
July 31, 2000, the "Series B Conversion Price" on any given date
shall be equal to the result obtained by dividing (i) 1000,000,000
less the result of multiplying 163,398.69 by the number of days
after February 29, 2000 on which such measurement date occurs, by
(ii) 23,915,417, subject on any such given date to being
Appropriately Adjusted. Commencing on
1
<PAGE>
August 1, 2000, the "Series B Conversion Price" shall be Three
Dollars and Fourteen Cents ($3.14). Notwithstanding the
foregoing, the Series B Conversion Price shall be Approximately
Adjusted."
SECOND: That thereafter, the stockholders of said corporation
approved said amendment by written consent in lieu of a meeting in accordance
with Section 228 of the General Corporation law of the State of Delaware, and
the necessary number of shares of Common Stock, Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock as required by
statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Nogatech, Inc. has caused this certificate
to be signed by Dr. Arie Heiman, its Chief Executive Officer, this 12th day
of April, 2000.
NOGATECH, INC.
By: /s/ Arie Heiman
-------------------------------
Dr. Arie Heiman
Chief Executive Officer
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NOGATECH, INC.
Nogatech, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That acting by unanimous written consent, the Board of
Directors of Nogatech, Inc. duly adopted resolutions setting forth a proposed
amendment of the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and directing that approval of said amendment
be obtained from a majority of the holders of issued and outstanding Common
Stock, Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock of said corporation entitled to vote. The resolutions setting
forth the proposed amendment are as follows:
RESOLVED: That Section A of Article IV of this corporation's
Second Amended and Restated Certificate of Incorporation be amended
such that a new paragraph shall be inserted immediately following the
first paragraph of Section A of Article IV, which new paragraph shall
read in its entirety as follows:
"Upon the filing of this amendment to the Certificate of
Incorporation with the Secretary of State of the State of
Delaware, each two (2) shares of Common Stock issued and
outstanding immediately prior to the time of such filing shall
automatically be converted into and reconstituted as one (1)
share of Common Stock (the "Reverse Stock Split"). No
fractional shares of Common Stock shall be issued upon the
Reverse Stock Split. In lieu of any fractional shares to which a
holder would otherwise be entitled (after aggregating all such
shares of Common Stock to which such holder is entitled), the
Corporation shall pay in cash to such holder the fair market
value of such shares on the effective date of the Reverse Stock
Split as reasonably determined by the Board of Directors of the
Corporation."
SECOND: That thereafter, the stockholders of said corporation approved
said amendment by written consent in lieu of a meeting in accordance with
Section 228 of the General Corporation law of the State of Delaware, and the
necessary number of shares of
1
<PAGE>
Common Stock, Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Nogatech, Inc. has caused this certificate to
be signed by Dr. Arie Heiman, its Chief Executive Officer, this 12th day of
April, 2000.
NOGATECH, INC.
By: /s/ Arie Heiman
----------------------------
Dr. Arie Heiman,
Chief Executive Officer
<PAGE>
Explanation Notes to Exhibit 10.1.3
The Registrant issued warrants to purchase shares of its common stock as
follows:
WARRANT HOLDER NUMBER OF SHARES
Ophir Holdings Ltd. 216,188
Inventech Ltd. 144,125
Holland Venture B.V. 288,250
Docor International B.V. 144,125
Ronchal Investments N.V. 72,062
<PAGE>
Exhibit 10.1.3
FORM OF WARRANT
NEITHER THIS OPTION, NOR THE SHARES REPRESENTED BY THIS OPTION, HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW
OF ANY STATE, AND THEREFORE THEY MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR ASSIGNED UNLESS REGISTERED UNDER THE APPLICABLE PROVISIONS OF
SUCH ACTS OR UNLESS THE CORPORATION HAS RECEIVED AN OPINION FROM LEGAL COUNSEL
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
RECITALS
A. Effective June 4, 1998, Nogatech, Inc., a California corporation (the
"Corporation") and ____________ ("Optionee") entered into a Series A
Preferred Stock Purchase Agreement (the "Purchase Agreement") for the purchase
by Optionee of Series A Convertible Preferred Stock from the Corporation.
B. In connection with the terms and conditions of the Purchase
Agreement, the Corporation has agreed to issue to Optionee an option to purchase
shares of the Corporation's Common Stock in accordance with the terms and
conditions herein.
OPTION
In exchange for consideration the sufficiency of which is hereby
acknowledged by the parties hereto, the Corporation hereby grants to Optionee
the right to purchase from the Corporation up to ___________ shares of the
Common Stock of the Corporation (the "Option Shares"), subject to the
following terms and conditions:
1. TERM. This Option may be exercised in whole or in part at any time from the
date of issuance of this Option until the earlier to occur of (a) two years from
the date hereof, (b) the IPO Exercise Date (as defined in Section 2.a.) and (c)
the Corporate Sale Exercise Date (as defined in Section 2.b.) (the "Exercise
Period").
2. MATERIAL EVENTS
a. INITIAL PUBLIC OFFERING. In the event that the Corporation
files a registration statement ("the Registration Statement") for the initial
public offering pursuant to the Securities Act of 1933, as amended, of the
Corporation's Common Stock resulting in gross cash proceeds to the Corporation
of at least Ten Million U.S. Dollars ($ 10,000,000) (the "IPO"), the Corporation
shall provide written notice of such filing to Optionee (the "Corporation IPO
Notice"). Within twenty (20) days after Optionee's receipt of the Corporation
IPO Notice (the "IPO Exercise Date"), Optionee must notify the Corporation in
accordance with Section 4 below if Optionee intends to exercise this Option,
which notice may state that such exercise shall be effective contingent upon and
immediately prior to the consummation of the IPO. Thereafter, so long as the
Corporation consummates the IPO within one hundred eighty (180) days after the
filing of its Registration Statement (the "IPO Closing Date"), Optionee shall
have no further rights hereunder and this Option shall be terminated. If the
Corporation fails to consummate such IPO within such time, then to the extent
this Option was not exercised as provided herein or contingent upon the
consummation of the IPO, such option shall remain in effect subject to Sections
1 and 2.b. herein and this Section 2.a. in the event of further filings of
Registration Statements for an IPO, as if such IPO Exercise Date had not
occurred. During the period of time between the IPO Exercise Date and the IPO
Closing Date, Optionee shall be prohibited from further exercising this Option.
b. MERGER, TRANSFER OF ASSETS OR CHANGE OF CONTROL. In the
event of (i) a bona fide transaction whereby the Corporation has received
written terms and an offer for a (A) merger or consolidation in which the
Corporation is not the consolidated or surviving
<PAGE>
2
corporation and the controlling shareholders (or their affiliates) of the
Corporation are not the controlling shareholders of the surviving corporation;
or (B) transfer of all or substantially all of the assets of the Corporation; or
(ii) the officers or directors of the Corporation receive actual knowledge of a
bona fide written offer which would result in a change in the control of the
Corporation from the sale or exchange of more than 51 % of the Corporation's
outstanding voting securities (collectively, the "Corporate Sale"), the
Corporation shall provide Optionee written notice of such information (the
"Corporate Sale Notice"). Within twenty (20) days after Optionee's receipt of
the Corporate Sale Notice (the "Corporate Sale Exercise Date"), Optionee must
notify the Corporation in accordance with Section 4 below if Optionee intends to
exercise this Option, which notice may state that such exercise shall be
effective contingent upon and immediately prior to the consummation of the
Corporate Sale. Thereafter, so long as the Corporation or its shareholders
consummate the Corporate Sale within one hundred eighty (180) days after
furnishing the Corporate Sale Notice to Optionee (the "Corporate Sale Closing
Date"), Optionee shall have no further rights hereunder and this Option shall be
terminated. If the Corporation or its shareholders fail to consummate the
Corporate Sale within such time, then to the extent this Option was not
exercised as provided herein or contingent upon the consummation of the
Corporate Sale, such Option shall remain in effect subject to Sections 1 and
2.a. herein and this Section 2.b. in the event of further Corporate Sales, as if
such Corporate Sale Exercise Date had not occurred. During the period of time
between the Corporate Sale Exercise Date and the Corporate Sale Closing Date,
Optionee shall be prohibited from further exercising this Option.
3. PURCHASE PRICE. The purchase price for each share of the Corporation's Common
Stock purchasable hereunder shall be One and .0407628 U.S. Dollars (U.S.
$1.0407628) (the "Option Exercise Price"). This Option shall only be exercisable
pursuant to Section 4 (below).
4. EXERCISE OF OPTION.
a. EXERCISE FOR CASH. The Optionee may exercise this Option, in
whole or in part, by providing written notice (the "Notice") to the Corporation
of exercise. The Notice shall set forth the Optionee's election to exercise the
Option and the number of shares with respect to which the Option is being
exercised, and shall be signed by the Optionee. The Notice, other than the
notice required under Sections 2.a. and 2.b. herein (collectively, the "Material
Events Notices") or the notice given in connection with Sections 4.b. and 4.c.
(the "Conversion Notices"), shall be accompanied by payment of the appropriate
exercise price in cash or a cash equivalent. The Option shall be deemed
exercised upon the Corporation's receipt of the Notice accompanied by the
appropriate exercise price. Payment for Options exercised in connection with the
Material Events Notices (the 'Material Events Options") shall be delivered to
the Corporation no later than five (5) days following receipt from the
Corporation of notice informing Optionee of the consummation date of the IPO or
Corporate Sale, as applicable. Notwithstanding anything to the contrary herein,
all Material Events Options for which payment has not been received by the
Corporation as set forth above shall be deemed terminated.
b. EXERCISE ON NET ISSUANCE BASIS IN IPO. In lieu of payment to
the Corporation as set forth in subsection 4.a. above, the Optionee may, in
connection with the IPO, convert this Option (the "Conversion Right"), in whole
or in part, into the number of shares of Common Stock of the Corporation
calculated pursuant to the following formula, by surrendering this Option to the
Corporation, accompanied by a written notice of exercise, specifying the number
of shares into which the Holder desires to convert this Option (the "Conversion
Notice"):
Y(A - B)
X = -----------------
A
Where:
X = the number of shares of Common Stock to be issued to the
Optionee;
<PAGE>
3
Y = the number of Option Shares to which the Optionee is
entitled upon exercise of this Option;
A = the fair market value of one share of Common Stock; and
B = the Option Exercise Price
As used herein, the fair market value of one share of Common
Stock shall mean the price to the public in the IPO, less the underwriter's
commission.
c. EXERCISE ON NET ISSUANCE BASIS IN A CORPORATE SALE. In lieu
of payment to the Corporation as set forth in subsection 4.a. above, the
Optionee may, in connection with a Corporate Sale convert this Option (the
"Conversion Right"), in whole or in part, into the number of shares of Common
Stock of the Corporation calculated pursuant to the following formula, by
surrendering this Option to the Corporation, accompanied by a written notice of
exercise, specifying the number of shares of Common Stock into which the
Optionee desires to convert this Option (the "Conversion Notice"):
Y(A - B)
X = -----------------
A
Where:
X = the number of shares of Common Stock to be issued to
the Optionee;
Y = the number of Option Shares to which the Optionee
is entitled upon exercise of this Option;
A = the fair market value of one share of Common Stock;
and
B = the Option Exercise Price
As used herein, the fair market value of one share of Common
Stock shall be as calculated by the auditors of the Corporation, based on the
total consideration to be received by the Corporation from the Corporate Sale,
taking into account the number of shares calculated on a fully diluted basis
(including the Option Shares to be issued pursuant to this Option), and taking
into account the preference rights attached to the Preferred Stock pursuant to
the Articles of Incorporation of the Corporation.
d. Certificates for shares purchased or converted hereunder
shall be delivered to the Optionee within thirty (30) business days after the
date on which this Option shall have been exercised as aforesaid other than the
Material Events Options, but Optionee shall be deemed the record owner of such
Option Shares as of and from the close of business on the date on which the
Notice, together with the payment (if exercised for cash), or the Conversion
Notice is received. Certificates for shares purchased in connection with the
Material Events Options hereunder shall be delivered to the Optionee within
thirty (30) business days after receipt of payment therefor (if exercised for
cash) or the Conversion Notice, but Optionee shall be deemed the record owner of
the related Option Shares as of and from the close of business on the date on
which such payment is received (if exercised for cash).
5. FRACTIONAL INTEREST. The Corporation shall not be required to issue any
fractional shares on the exercise of this Option.
6. OPTION CONFERS NO RIGHTS OF SHAREHOLDER. Optionee shall not have any rights
as a shareholder of the Corporation with regard to the Option Shares prior to
actual exercise resulting in the purchase of the Option Shares.
7. INVESTMENT REPRESENTATION. Neither this Option nor the Option Shares issuable
upon the exercise of this Option have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), or under the California Corporate
Securities Law of 1968. Optionee acknowledges by acceptance of the Option that
(a) it has acquired this Option for investment only and not with a view toward
distribution; (b) it has a pre-existing personal or business relationship with
the
<PAGE>
4
Corporation, or its executive officers, or by reason of its business or
financial experience it has the capacity to protect its own interests in
connection with the transaction; and (c) it is an accredited investor as that
term is defined in Regulation D promulgated under the Securities Act. Optionee
agrees that any Option Shares issuable upon exercise of this Option will be
acquired for investment only and not with a view toward distribution; and
acknowledges that to the extent such Option Shares will not be registered under
the Securities Act and applicable state securities laws, such Option Shares may
have to be held indefinitely unless they are subsequently registered or
qualified under the Securities Act and applicable state securities laws, or,
based on an opinion of counsel reasonably satisfactory to the Corporation, an
exemption from such registration and qualification is available. Optionee, by
acceptance hereof, consents to the placement of the following restrictive
legend, or similar legend, on each certificate to be issued to Optionee by the
Corporation in connection with the issuance of such Option Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY
STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS
COVERING SUCH SECURITIES, OR (B) THE OPTIONEE RECEIVES AN OPINION OF COUNSEL FOR
THE OPTIONEE OF THE SECURITIES SATISFACTORY TO THE CORPORATION, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND ANY FURTHER QUALIFICATION
REQUIREMENTS UNDER APPLICABLE LAW."
8. STOCK FULLY PAID; RESERVATION OF SHARES. All Option Shares that may be issued
upon the exercise of the rights represented by this Option and Common Stock
will, upon issuance, be fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof. The Corporation agrees at
all times during the Exercise Period to have authorized and reserved, for the
exclusive purpose of issuance and delivery upon exercise of this Option, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented hereby.
9. ADJUSTMENT OF OPTION EXERCISE PRICE AND NUMBER OF SHARES. The number and kind
of securities purchasable under the exercise of the Option and the Option Price
shall be subject to adjustment from time to time on the same day as the
occurrence of certain events, as follows:
a. SUBDIVISIONS OR COMBINATIONS OF SHARES. If the Corporation at any
time while this Option remains outstanding and unexpired shall
subdivide or combine its Common Stock, the Option Exercise Price and
the number of Shares issuable upon exercise hereof shall be
proportionately adjusted.
b. STOCK DIVIDENDS. If the Corporation at any time while this Option
is outstanding and unexpired shall pay a dividend payable in shares
of Common Stock (except as a distribution specifically provided for
in the foregoing subsection 9.a.), then the Option Exercise Price
shall be adjusted, from and after the date of determination of
shareholders entitled to receive such dividend or distribution, to
that price determined by multiplying the Option Exercise Price in
effect immediately prior to such date of determination by a fraction
(i) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or
distribution, and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such
dividend or distribution, and the number of Option Shares subject to
this Option shall be proportionately adjusted.
<PAGE>
5
c. NO IMPAIRMENT. The Corporation will not, by amendment of its
Articles of Incorporation or through any dissolution, issue or sale
of securities, or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this
Section 9, and in the taking of all such action as may be necessary
or appropriate in order to protect the rights of Optionee against
impairment.
d. NOTICE OF ADJUSTMENTS. Whenever the Option Exercise Price shall be
adjusted pursuant to the provisions hereof, the Corporation shall
within thirty (30) days after such adjustment deliver a certificate
signed by its Chief Financial Officer to Optionee setting forth, in
reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated,
and the Option Exercise Price, after giving effect to such
adjustment.
10. REPRESENTATIONS AND OPTIONS. This Option is issued and delivered on the
basis of the following:
a. CORPORATE AUTHORIZATION. This Option has been duly authorized and
executed by the Corporation, and when delivered will be the valid and
binding obligation of the Corporation, enforceable in accordance with
the terms hereof.
b. OPTION AUTHORIZATION. The Option has been duly authorized by the
Corporation and, when issued in accordance with the terms hereof,
will be validly issued.
c. ARTICLES OF INCORPORATION. The rights, preferences, privileges and
restrictions granted to or imposed upon the shares of Common Stock
and Optionee are as set forth in the Corporation's Articles of
Incorporation, as amended, a true and complete copy of which has been
delivered to the original Option Optionee.
d. RESERVATION OF SHARES. The shares of Common Stock issuable upon
exercise of this Option have been duly authorized and reserved and,
when issued in accordance with the terms of the Corporation's
Articles of Incorporation, as amended, will be validly issued, fully
paid and nonassessable.
e. DELIVERY. The execution and delivery of this Option are not, and
the issuance of the shares upon exercise of this Option in accordance
with the terms hereof will not be, inconsistent with the
Corporation's Articles of Incorporation or Bylaws; do not and will
not contravene any law, governmental rule or regulation, judgement or
order applicable to the Corporation; and do not and will not
contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the
Corporation is a party, or by which it is bound or requires the
consent or approval of, the giving of notice to, the registration
with or the taking of any action in respect of or by, any federal,
state or local government authority or agency, or other person, other
than qualification with the California Department of Corporations.
11. GOVERNING LAW. This Option shall be governed by and construed in accordance
with the laws of the State of California, applicable to contracts between
California residents entered into and to be performed entirely within the State
of California.
12. SUCCESSORS AND ASSIGNEES. Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
<PAGE>
6
13. DESCRIPTIVE HEADINGS. The headings used herein are descriptive only and for
the convenience of identifying provisions, and are not determinative of the
meaning or effect of any such provisions.
AGREED BY THE UNDERSIGNED AND BINDING ON OPTIONEE THAT THIS OPTION SUPERSEDES
AND REPLACES ANY AND ALL EXISTING OPTIONS OF THE SAME NUMBER OF OPTION SHARES.
Dated: _____________, 1998 NOGATECH, INC.
By__________________
Name________________
Title_______________
<PAGE>
EXHIBIT 10.4
NOGATECH, INC.
2000 EQUITY INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Nogatech, Inc. 2000 Equity
Incentive Plan (the "Plan"). The Plan was adopted by the Board (defined
below) on March 5, 2000 and approved by the stockholders of the Company
(defined below) on ___________, 2000. The purpose of the Plan is to enable
the Company to attract and retain highly qualified personnel who will
contribute to the Company's success and to provide incentives to Participants
(defined below) that are linked directly to increases in stockholder value
and will therefore inure to the benefit of all stockholders of the Company.
The Company wishes the issuance of Awards (defined below) to its employees in
Israel to conform with the requirements of Section 3(9) of the Israeli Income
Tax Ordinance, and for this purpose the appended document Annex A amends this
Plan to so conform.
For purposes of the Plan, the following terms shall be defined
as set forth below:
(a) "ADMINISTRATOR" means the Board, or if and to the extent
the Board does not administer the Plan, the Committee in accordance with
Section 2 below.
(b) "AFFILIATE" means any corporation that directly, or
indirectly through one or more intermediaries, controls or is controlled by,
or is under common control with, another corporation, where "control"
(including the terms "controlled by" and "under common control with") means
the possession, direct or indirect, of the power to cause the direction of
the management and policies of the corporation, whether through the ownership
of voting securities, by contract or otherwise.
(c) "AWARD" means any award under the Plan.
(d) "AWARD AGREEMENT" means, with respect to each Award, the
signed written agreement between the Company and the Participant setting
forth the terms and conditions of the Award.
(e) "BOARD" means the Board of Directors of the Company.
<PAGE>
(f) "CODE" means the Internal Revenue Code of 1986, as
amended from time to time, or any successor thereto.
(g) "COMMITTEE" means any committee the Board may appoint to
administer the Plan. To the extent necessary and desirable, the Committee
shall be composed entirely of individuals who meet the qualifications
referred to in Section 162(m) of the Code and Rule 16b-3 under the Exchange
Act. If at any time or to any extent the Board shall not administer the
Plan, then the functions of the Board specified in the Plan shall be
exercised by the Committee.
(h) "COMMON STOCK" means the common stock, par value $0.001
per share, of the Company.
(i) "COMPANY" means Nogatech, Inc., a Delaware corporation
(or any successor corporation).
(j) "DEFERRED STOCK" means the right to receive Shares at
the end of a specified deferral period granted pursuant to Section 8 below.
(k) "DISABILITY" means the inability of a Participant to
perform substantially his or her duties and responsibilities to the Company
or to any Parent or Subsidiary by reason of a physical or mental disability
or infirmity (i) for a continuous period of six months, or (ii) at such
earlier time as the Participant submits medical evidence satisfactory to the
Administrator that the Participant has a physical or mental disability or
infirmity that will likely prevent the Participant from returning to the
performance of the Participant's work duties for six months or longer. The
date of such Disability shall be the last day of such six-month period or the
day on which the Participant submits such satisfactory medical evidence, as
the case may be.
(l) "ELIGIBLE RECIPIENT" means an officer, director,
employee, consultant or advisor of the Company or of any Parent or Subsidiary.
(m) "EMPLOYEE DIRECTOR" means any director of the Company
who is also an employee of the Company or of any Parent or Subsidiary.
(n) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended from time to time.
(o) "EXERCISE PRICE" means the per share price at which a
holder of an Award may purchase the Shares issuable upon exercise of the
Award.
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(p) "FAIR MARKET VALUE" as of a particular date shall mean
the fair market value of a share of Common Stock as determined by the
Administrator in its sole discretion; PROVIDED, HOWEVER, that (i) if the
Common Stock is admitted to trading on a national securities exchange, fair
market value of a share of Common Stock on any date shall be the closing sale
price reported for such share on such exchange on such date or, if no sale
was reported on such date, on the last date preceding such date on which a
sale was reported, (ii) if the Common Stock is admitted to quotation on the
National Association of Securities Dealers Automated Quotation ("Nasdaq")
System or other comparable quotation system and has been designated as a
National Market System ("NMS") security, fair market value of a share of
Common Stock on any date shall be the closing sale price reported for such
share on such system on such date or, if no sale was reported on such date,
on the last date preceding such date on which a sale was reported, (iii) if
the Common Stock is admitted to quotation on the Nasdaq System but has not
been designated as an NMS security, fair market value of a share of Common
Stock on any date shall be the average of the highest bid and lowest asked
prices of such share on such system on such date or, if no bid and ask prices
were reported on such date, on the last date preceding such date on which
both bid and ask prices were reported; (iv) in the case of a Limited Stock
Appreciation Right, the fair market value of a share of Common Stock shall be
the "Change in Control Price" (as defined in the Award Agreement evidencing
such Limited Stock Appreciation Right) of a share of Common Stock as of the
date of exercise.
(q) "INCENTIVE STOCK OPTION" means any Option intended to be
designated as an "incentive stock option" within the meaning of Section 422
of the Code.
(r) "LIMITED STOCK APPRECIATION RIGHT" means a Stock
Appreciation Right that can be exercised only in the event of a "Change in
Control" (as defined in the Award Agreement evidencing such Limited Stock
Appreciation Right).
(s) "NON-EMPLOYEE DIRECTOR" means a director of the Company
who is not an employee of the Company or of any Parent or Subsidiary.
(t) "NON-QUALIFIED STOCK OPTION" means any Option that is
not an Incentive Stock Option, including any Option that provides (as of the
time such Option is granted) that it will not be treated as an Incentive
Stock Option.
(u) "OPTION" means an option to purchase Shares granted
pursuant to Section 6 below.
(v) "PARENT" means any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company, if each of the
corporations in the chain (other
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than the Company) owns stock possessing 50% or more of the combined voting
power of all classes of stock in one of the other corporations in the chain.
(w) "PARTICIPANT" means (i) any Eligible Recipient selected
by the Administrator, pursuant to the Administrator's authority in Section 2
below, to receive grants of Options, Stock Appreciation Rights, Limited Stock
Appreciation Rights, awards of Restricted Stock, Deferred Stock, or
Performance Shares or any combination of the foregoing, or (ii) any
Non-Employee Director who is eligible to receive grants of Options pursuant
to Section 6(i) below.
(x) "PERFORMANCE SHARES" means Shares that are subject to
restrictions based upon the attainment of specified performance objectives
granted pursuant to Section 8 below.
(y) "REGISTRATION STATEMENT" means the registration
statement on Form S-1 filed with the Securities and Exchange Commission for
the initial underwritten public offering of the Common Stock.
(z) "RESTRICTED STOCK" means Shares subject to certain
restrictions granted pursuant to Section 8 below.
(aa) "SHARES" means shares of Common Stock reserved for
issuance under the Plan, as adjusted pursuant to Sections 3 and 4, and any
successor security.
(bb) "STOCK APPRECIATION RIGHT" means the right pursuant to
an Award granted under Section 7 below to receive an amount equal to the
excess, if any, of (i) the Fair Market Value, as of the date such Stock
Appreciation Right or portion thereof is surrendered, of the Shares covered
by such right or such portion thereof, over (ii) the aggregate Exercise Price
of such right or such portion thereof.
(cc) "SUBSIDIARY" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company, if
each of the corporations (other than the last corporation) in the unbroken
chain owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered in accordance with the
requirements of Section 162(m) of the Code (but only to the extent necessary
and desirable to maintain qualification of Awards under the Plan under
Section 162(m) of the Code) and, to the extent applicable, Rule 16b-3 under
the Exchange Act ("Rule 16b-3"), by the Board or, at the Board's sole
discretion, by
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the Committee, which shall be appointed by the Board, and which shall serve
at the pleasure of the Board.
Pursuant to the terms of the Plan, the Administrator shall have
the power and authority to grant to Eligible Recipients Options, Stock
Appreciation Rights or Limited Stock Appreciation Rights, Awards of
Restricted Stock, Deferred Stock or Performance Shares or any combination of
the foregoing; PROVIDED, HOWEVER, that automatic, nondiscretionary grants of
Options shall be made to Non-Employee Directors pursuant to and in accordance
with the terms of Section 6(i) below. Except as otherwise provided in
Section 6(i) below, the Administrator shall have the authority:
(a) to select those Eligible Recipients who shall be
Participants;
(b) to determine whether and to what extent Options, Stock
Appreciation Rights, Limited Stock Appreciation Rights, Awards of Restricted
Stock, Deferred Stock or Performance Shares or a combination of any of the
foregoing, are to be granted hereunder to Participants;
(c) to determine the number of Shares to be covered by each
Award granted hereunder;
(d) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of each Award granted hereunder (including, but
not limited to, (x) the restrictions applicable to Awards of Restricted Stock
or Deferred Stock and the conditions under which restrictions applicable to
such Awards of Restricted Stock or Deferred Stock shall lapse, and (ii) the
performance goals and periods applicable to Awards of Performance Shares);
(e) to determine the terms and conditions, not inconsistent
with the terms of the Plan, which shall govern all written instruments
evidencing Options, Stock Appreciation Rights, Limited Stock Appreciation
Rights, Awards of Restricted Stock, Deferred Stock or Performance Shares or
any combination of the foregoing granted hereunder;
(f) to reduce the Exercise Price of any Option to the then
current Fair Market Value if the Fair Market Value of the Shares covered by
such Option has declined since the date such Option was granted; and
(g) the Committee may, at any time or from time to time,
authorize the Company, with the consent of the respective Participants, to
issue new Awards in exchange for the surrender and cancellation of any or all
outstanding Awards. The Committee may at any time buy from a Participant an
Award previously granted with payment in cash, Shares
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(including Restricted Stock) or other consideration, based on such terms and
conditions as the Committee and the Participant shall agree.
The Administrator shall have the authority, in its sole
discretion, to adopt, alter and repeal such administrative rules, guidelines
and practices governing the Plan as it shall from time to time deem
advisable; to interpret the terms and provisions of the Plan and any Award
issued under the Plan (and any Award Agreement relating thereto); and to
otherwise supervise the administration of the Plan.
All decisions made by the Administrator pursuant to the
provisions of the Plan shall be final, conclusive and binding on all persons,
including the Company and the Participants.
SECTION 3. SHARES SUBJECT TO PLAN.
The total number of shares of Common Stock reserved and
available for issuance under the Plan shall be [3,500,000 [assumes
contemplated one-for-two reverse stock split] shares], plus an annual increase
to be added on the first day of the Company's fiscal year (beginning 2001)
equal to the lesser of (i) [500,000 [assumes contemplated one-for-two reverse
stock split]] shares or (ii) five percent (5%) of the number of outstanding
shares of Common Stock on the last day of the immediately preceding fiscal
year. Such shares may consist, in whole or in part, of authorized and
unissued shares or treasury shares. The aggregate number of Shares as to
which Options, Stock Appreciation Rights, and Awards of Restricted Stock,
Deferred Stock and Performance Shares may be granted to any Participant
during any calendar year may not, subject to adjustment as provided in this
Section 3, exceed 80% of the Shares reserved for the purposes of the Plan.
Consistent with the provisions of Section 162(m) of the Code,
as from time to time applicable, to the extent that (i) an Option expires or
is otherwise terminated without being exercised, or (ii) any Shares subject
to any Award of Restricted Stock, Deferred Stock or Performance Shares
granted hereunder are forfeited, such Shares shall again be available for
issuance in connection with future Awards granted under the Plan. If any
Shares have been pledged as collateral for indebtedness incurred by a
Participant in connection with the exercise of an Option and such Shares are
returned to the Company in satisfaction of such indebtedness, such Shares
shall again be available for issuance in connection with future Awards
granted under the Plan.
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In the event of any stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
an equitable substitution or proportionate adjustment shall be made in (i)
the aggregate number of Shares reserved for issuance under the Plan, (ii) the
kind, number and Exercise Prices of Shares subject to outstanding Options,
and (iii) the kind, number and Exercise Prices of Shares subject to
outstanding Awards of Restricted Stock, Deferred Stock and Performance
Shares, in each case as may be determined by the Administrator, in its sole
discretion, subject to any required action by the Board or the stockholders
of the Company and in compliance with applicable securities laws; PROVIDED,
HOWEVER, that fractions of a Share shall not be issued but shall either be
paid in cash at Fair Market Value or shall be rounded up to the nearest whole
share, as determined by the Committee. An adjusted Exercise Price shall also
be used to determine the amount payable by the Company upon the exercise of
any Stock Appreciation Right or Limited Stock Appreciation Right related to
any Option.
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SECTION 4. CORPORATE TRANSACTIONS
(a) ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR. In
the event of (i) a merger or consolidation in which the Company is not the
surviving corporation (other than a merger or consolidation with a
wholly-owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial change in
the stockholders of the Company and the Awards granted under the Plan are
assumed or replaced by the successor corporation, which assumption shall be
binding on all Participants); (ii) a dissolution or liquidation of the
Company; (iii) the sale of substantially all of the assets of the Company; or
(iv) any other transaction which qualifies as a "corporate transaction" under
Section 424(a) of the Code wherein the stockholders of the Company give up
all of their equity interest in the Company (EXCEPT for the acquisition, sale
or transfer of all or substantially all of the outstanding shares of the
Company), any or all outstanding Awards may be assumed or replaced by the
successor corporation (if any) or Parent thereof, which assumption or
replacement shall be binding on all Participants. In the alternative, the
successor corporation or Parent thereof may substitute equivalent awards or
provide substantially similar consideration to Participants as was provided
to stockholders of the Company (after taking into account the existing
provisions of the Awards). The successor corporation or Parent thereof may
also issue, in place of outstanding shares of the Company held by the
Participant, substantially similar shares or other property subject to
repurchase restrictions no less favorable to the Participant. In the event
such successor corporation (if any) or Parent thereof does not assume or
substitute awards, as provided above, pursuant to a transaction described in
this Section 4(a), such Awards shall automatically become fully vested and
exercisable and be released from any restrictions on transfer and repurchase
or forfeiture rights, immediately prior to the specified effective date of
such transaction, for all the Shares at the time represented by such Awards.
In such event, effective upon the consummation of the transaction, or at such
other time and on such conditions as the Board shall determine, all
outstanding Awards under the Plan shall terminate and cease to remain
outstanding, except to the extent assumed by the successor corporation or its
Parent.
(b) OTHER TREATMENT OF AWARDS. Subject to any greater
rights granted to Participants under the foregoing provisions of this Section
4, in the event of the occurrence of any transaction described in Section
4(a), any outstanding Awards shall be treated as provided in the applicable
Award Agreement or plan of merger, consolidation, dissolution, liquidation,
sale of assets or other "corporate transaction."
(c) ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from
time to time, also may substitute or assume outstanding awards granted by
another company, whether in connection with an acquisition of such other
company or otherwise, by either (i) granting an Award under the Plan in
substitution of such other company's award; or (ii) assuming such award as if
it had been granted under the Plan if the terms of such assumed award could
be applied to an
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award granted under the Plan. Such substitution or assumption shall be
permissible if the holder of the substituted or assumed award would have been
eligible to be granted an Award under the Plan if the other company had
applied the rules of the Plan to such grant. In the event the Company
assumes an award granted by another company, the terms and conditions of such
award shall remain unchanged (EXCEPT that the exercise price and the number
and nature of Shares issuable upon exercise of any such option will be
adjusted approximately pursuant to Section 424(a) of the Code). In the event
the Company elects to grant a new Option rather than assuming an existing
option, such new Option may be granted with a similarly adjusted Exercise
Price.
SECTION 5. ELIGIBILITY.
Eligible Recipients shall be eligible to be granted Options,
Stock Appreciation Rights, Limited Stock Appreciation Rights, Awards of
Restricted Stock, Deferred Stock or Performance Shares or any combination of
the foregoing hereunder. The Participants under the Plan shall be selected
from time to time by the Administrator, in its sole discretion, from among
the Eligible Recipients, and the Administrator shall determine, in its sole
discretion, the number of Shares covered by each such Award.
SECTION 6. OPTIONS.
Options may be granted alone or in addition to other Awards
granted under the Plan. Any Option granted under the Plan shall be in such
form as the Administrator may from time to time approve, and the provisions
of each Option need not be the same with respect to each Participant.
Participants who are granted Options shall enter into an Award Agreement with
the Company, in such form as the Administrator shall determine, which Award
Agreement shall set forth, among other things, the Exercise Price of the
Option, the term of the Option and provisions regarding exercisability of the
Option granted thereunder.
The Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.
The Administrator shall have the authority to grant to any
officer or employee of the Company or of any Parent or Subsidiary (including
directors who are also officers of the Company) Incentive Stock Options,
Non-Qualified Stock Options, or both types of Options (in each case with or
without Stock Appreciation Rights or Limited Stock Appreciation Rights).
Directors who are not also officers of the Company or of any Parent or
Subsidiary, consultants or advisors to the Company or to any Parent or
Subsidiary may only be granted Non-Qualified Stock Options (with or without
Stock Appreciation Rights or Limited Stock Appreciation Rights). To the
extent that any Option does not qualify as an Incentive Stock Option, it
shall
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constitute a separate Non-Qualified Stock Option. More than one Option may
be granted to the same Participant and be outstanding concurrently hereunder.
Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Administrator
shall deem desirable:
(a) OPTION EXERCISE PRICE. The per share Exercise Price of
Shares purchasable under an Option shall be determined by the Administrator
in its sole discretion at the time of grant but shall not, (i) in the case of
Incentive Stock Options, be less than 100% of the Fair Market Value of the
Common Stock on such date, (ii) in the case of Non-Qualified Stock Options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, be less than 100% of the Fair Market Value of the
Common Stock on such date and (iii) in any event, be less than the par value
(if any) of the Common Stock. If a Participant owns or is deemed to own (by
reason of the attribution rules applicable under Section 424(d) of the Code)
more than 10% of the combined voting power of all classes of stock of the
Company or of any Parent or Subsidiary and an Incentive Stock Option is
granted to such Participant, the per share Exercise Price of such Incentive
Stock Option (to the extent required at the time of grant by the Code shall
be no less than 110% of the Fair Market Value of the Common Stock on the date
such Incentive Stock Option is granted.
(b) OPTION TERM. The term of each Option shall be fixed by
the Administrator, but no Option shall be exercisable more than ten years
after the date such Option is granted; PROVIDED, HOWEVER, that if an employee
owns or is deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10% of the combined voting power of all classes
of stock of the Company or of any Parent or Subsidiary and an Incentive Stock
Option is granted to such employee, the term of such Incentive Stock Option
(to the extent required by the Code at the time of grant) shall be no more
than five years from the date of grant.
(c) EXERCISABILITY. Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined
by the Administrator at or after the time of grant. The Administrator may
provide at the time of grant, in its sole discretion, that any Option shall
be exercisable only in installments, and the Administrator may waive such
installment exercise provisions at any time, in whole or in part, based on
such factors as the Administrator may determine, in its sole discretion,
including but not limited to in connection with any "change in control" of
the Company (as defined in the Award Agreement evidencing such Option).
(d) METHOD OF EXERCISE. Subject to Section 6(c), Options
may be exercised in whole or in part at any time during the Option period, by
giving written notice of exercise to the
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Company specifying the number of Shares to be purchased, accompanied by
payment in full of the aggregate Exercise Price of the Shares so purchased in
cash or its equivalent, as determined by the Administrator. In addition,
payment for Shares purchased pursuant to the Plan may be made, where
expressly approved for the Participant by the Committee and where permitted
by law:
(i) by cancellation of indebtedness of the
Company to the Participant;
(ii) by surrender of shares of Common Stock that
either (1) have been owned by Participant for more than six (6)
months and have been paid for within the meaning of SEC Rule 144
(and, if such shares were purchased from the Company by use of a
promissory note, such note has been fully paid with respect to
such Shares); or (2) were obtained by Participant in the public
market;
(iii) by waiver of compensation due or accrued to
Participant for services rendered;
(iv) by tender of property;
(v) with respect only to purchases upon exercise
of an Option, and provided that a public market for the Common
Stock exists: (i) through a "same day sale" commitment from
Participant and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby the
Participant irrevocably elects to exercise the Option and to sell
a portion of the Shares so purchased to pay for the aggregate
Exercise Price of the Shares so purchased, and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares to forward
such Exercise Price directly to the Company; or (ii) through a
"margin" commitment from Participant and an NASD Dealer whereby
Participant irrevocably elects to exercise the Option and to
pledge the Shares so purchased to the NASD Dealer in a margin
account as security for a loan from the NASD Dealer in the amount
of the aggregate Exercise Price of the Shares so purchased, and
whereby the NASD Dealer irrevocably commits upon receipt of such
Shares to forward such Exercise Price directly to the Company;
(vi) in the case of the exercise of a Non-Qualified
Stock Option, in the form of Restricted Stock or Performance Shares
subject to an Award hereunder (based, in each case, on the Fair Market
Value of the Common Stock on the date the Option is exercised);
PROVIDED, HOWEVER, that in the case of an Incentive Stock Option, the
right to make payment in the form of already owned
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shares of Common Stock may be authorized only at the time of grant.
If payment of the Exercise Price of a Non-Qualified Stock Option is
made in whole or in part in the form of Restricted Stock or
Performance Shares, the Shares received upon the exercise of such
Option shall be restricted in accordance with the original terms of
the Restricted Stock Award or Performance Shares Award in question,
except that the Administrator may direct that such restrictions shall
apply only to that number of Shares equal to the number of shares
surrendered upon the exercise of such Option.
(vii) by any combination of the foregoing or
(viii) by any other form of consideration permitted
by applicable law.
A Participant shall generally have the rights to dividends and
any other rights of a stockholder with respect to the Shares subject to the
Option only after the Participant has given written notice of exercise, has
paid in full for such Shares, and, if requested, has given the representation
described in Section 11(b).
The Administrator may require the surrender of all or a portion
of any Option granted under the Plan as a condition precedent to the grant of
a new Option. Subject to the provisions of the Plan, such new Option shall
be exercisable at the Exercise Price, during such period and on such other
terms and conditions as are specified by the Administrator at the time the
new Option is granted. Consistent with the provisions of Section 162(m), to
the extent applicable, upon their surrender, Options shall be canceled and
the Shares previously subject to such canceled Options shall again be
available for future grants of Options and other Awards hereunder.
(e) LOANS. The Company or any Parent or Subsidiary may make
loans available to Option holders in connection with the exercise of
outstanding Options, as the Administrator, in its sole discretion, may
determine. Such loans shall (i) be evidenced by promissory notes entered
into by the Option holders in favor of the Company or any Parent or
Subsidiary, (ii) be subject to the terms and conditions set forth in this
Section 6(e) and such other terms and conditions, not inconsistent with the
Plan, as the Administrator shall determine, (iii) bear interest at the
applicable Federal interest rate or such other rate as the Administrator
shall determine, and (iv) be subject to Board approval (or to approval by the
Administrator to the extent the Board may delegate such authority). In no
event may the principal amount of any such loan exceed the sum of (x) the
aggregate Exercise Price less the par value (if any) of the Shares covered by
the Option, or portion thereof, exercised by the holder, and (y) any Federal,
state, and local income tax attributable to such exercise. The initial term
of the loan, the schedule of payments of
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principal and interest under the loan, the extent to which the loan is to be
with or without recourse against the holder with respect to principal and/or
interest and the conditions upon which the loan will become payable in the
event of the holder's termination of service to the Company or to any Parent
or Subsidiary shall be determined by the Administrator. Unless the
Administrator determines otherwise, when a loan is made, Shares having an
aggregate Fair Market Value at least equal to the principal amount of the
loan shall be pledged by the holder to the Company as security for payment of
the unpaid balance of the loan, and such pledge shall be evidenced by a
pledge agreement, the terms of which shall be determined by the
Administrator, in its sole discretion; PROVIDED, HOWEVER, that each loan
shall comply with all applicable laws, regulations and rules of the Board of
Governors of the Federal Reserve System and any other governmental agency
having jurisdiction.
(f) NON-TRANSFERABILITY OF OPTIONS. Except under the laws
of descent and distribution, the Participant shall not be permitted to sell,
transfer, pledge or assign any Option, and all Options shall be exercisable,
during the Participant's lifetime, only by the Participant; PROVIDED,
HOWEVER, that the Participant shall be permitted to transfer one or more
Non-Qualified Stock Options to a trust controlled by the Participant during
the Participant's lifetime for estate planning purposes.
(g) TERMINATION OF EMPLOYMENT OR SERVICE. If a
Participant's employment with or service as a director, consultant or advisor
to the Company or to any Parent or Subsidiary terminates by reason of his or
her death, Disability or for any other reason, the Option may thereafter be
exercised to the extent provided in the Award Agreement evidencing such
Option, or as otherwise determined by the Administrator.
(h) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent
that the aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of Shares with respect to which Incentive Stock
Options granted to a Participant under this Plan and all other option plans
of the Company or of any Parent or Subsidiary become exercisable for the
first time by the Participant during any calendar year exceeds $100,000 (as
determined in accordance with Section 422(d) of the Code), the portion of
such Incentive Stock Options in excess of $100,000 shall be treated as
Non-Qualified Stock Options.
(i) AUTOMATIC GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS.
The Company shall grant Non-Qualified Stock Options to Non-Employee Directors
pursuant to this Section 6(i), which grants shall be automatic and
nondiscretionary and otherwise subject to the terms and conditions set forth
in this subsection (i) and the terms of the Plan (the "Automatic Non-Employee
Director Options"). Each Non-Employee Director who first becomes a director
of the Company following the Effective Date (as defined in Section 12) shall
be automatically granted a Non-Qualified Stock Option to purchase
20,000 [assumes contemplated one-for-two reverse stock split] Shares (an
"Initial Option"). Each
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Non-Employee Director shall be automatically granted a Non-Qualified Stock
Option to purchase [5,000 [assumes contemplated one-for-two reverse stock
split]] Shares (the "Annual Options") on the date immediately following
the Company's annual meeting of stockholders; PROVIDED, HOWEVER, that he or
she is then a director of the Company and, PROVIDED, FURTHER, that as of such
date, such director shall have served on the Board for at least the preceding
six (6) months.
The term of each Automatic Non-Employee Director Option shall
be ten (10) years, and the Exercise Price purchasable under an Automatic
Non-Employee Director Option shall be no less than 100% of the Fair Market
Value of the Common Stock on the date of grant, PROVIDED, HOWEVER, in no
event shall the Exercise Price purchasable under an Automatic Non-Employee
Director Option be less than the par value (if any) of the Common Stock. The
Initial Options shall vest and become exercisable in four equal annual
installments on each of the first four anniversaries of the date of grant.
The Annual Options shall be 100% vested and fully exercisable as of the date
of grant.
In the event that the number of Shares available for grant
under the Plan is not sufficient to accommodate the Automatic Non-Employee
Director Options, then the remaining Shares available for Automatic
Non-Employee Director Options shall be granted to Non-Employee Directors on a
pro-rata basis. No further grants shall be made until such time, if any, as
additional Shares become available for grant under the Plan through action of
the Board and/or the stockholders of the Company to increase the number of
Shares that may be issued under the Plan or through cancellation or
expiration of Awards previously granted hereunder.
SECTION 7. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
Stock Appreciation Rights and Limited Stock Appreciation Rights
may be granted either alone ("Free Standing Rights") or in conjunction with
all or part of any Option granted under the Plan ("Related Rights"). In the
case of a Non-Qualified Stock Option, Related Rights may be granted either at
or after the time of the grant of such Option. In the case of an Incentive
Stock Option, Related Rights may be granted only at the time of the grant of
the Incentive Stock Option. The Administrator shall determine the Eligible
Recipients to whom, and the time or times at which, grants of Stock
Appreciation Rights or Limited Stock Appreciation Rights shall be made; the
number of Shares to be awarded, the Exercise Price (or, in the case of a
Limited Stock Appreciation Right, the "Change in Control" price), and all
other conditions of Stock Appreciation Rights and Limited Stock Appreciation
Rights. The provisions of Stock Appreciation Rights and Limited Stock
Appreciation Rights need not be the same with respect to each Participant.
Stock Appreciation Rights and Limited Stock Appreciation Rights
granted under the Plan shall be subject to the following terms and conditions
and shall contain such additional
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terms and conditions, not inconsistent with the terms of the Plan, as the
Administrator shall deem desirable:
(a) AWARDS. The prospective recipient of a Stock
Appreciation Right or Limited Stock Appreciation Right shall not have any
rights with respect to such Award, unless and until such recipient has
executed an Award Agreement evidencing the Award (a "Stock Appreciation Right
Agreement" or "Limited Stock Appreciation Right Agreement," as appropriate)
and delivered a fully executed copy thereof to the Company, within a period
of sixty days (or such other period as the Administrator may specify) after
the award date. Participants who are granted Stock Appreciation Rights or
Limited Stock Appreciation Rights shall have no rights as stockholders of the
Company with respect to the grant or exercise of such rights.
(b) EXERCISABILITY.
(i) Stock Appreciation Rights that are Free
Standing Rights ("Free Standing Stock Appreciation Rights") shall
be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Administrator at or after
grant; PROVIDED, HOWEVER, that no Free Standing Stock Appreciation
Right shall be exercisable during the first six months of its
term, except that this additional limitation shall not apply in
the event of a Participant's death or Disability prior to the
expiration of such six-month period.
(ii) Stock Appreciation Rights that are Related
Rights ("Related Stock Appreciation Rights") shall be exercisable
only at such time or times and to the extent that the Options to
which they relate shall be exercisable in accordance with the
provisions of Section 6 above and this Section 7 of the Plan;
PROVIDED, HOWEVER, that a Related Stock Appreciation Right granted
in connection with an Incentive Stock Option shall be exercisable
only if and when the Fair Market Value of the Common Stock subject
to the Incentive Stock Option exceeds the Exercise Price of such
Option; PROVIDED, FURTHER, that no Related Stock Appreciation
Right shall be exercisable during the first six months of its
term, except that this additional limitation shall not apply in
the event of a Participant's death or Disability prior to the
expiration of such six-month period.
(iii) Limited Stock Appreciation Rights shall only
be exercised within the 30-day period following a "Change in
Control" (as defined by the Administrator in the Limited Stock
Appreciation Right Agreement evidencing such right) and, with
respect to Limited Stock Appreciation Rights that are Related
Rights ("Related Limited Stock Appreciation Rights"), only to the
extent
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<PAGE>
that the Options to which they relate shall be exercisable in
accordance with the provisions of Section 6 above and this Section 7
of the Plan.
(c) PAYMENT UPON EXERCISE.
(i) Upon the exercise of a Free Standing Stock
Appreciation Right, the Participant shall be entitled to receive
up to, but not more than, an amount in cash or that number of
Shares (or any combination of cash and Shares) equal in value to
the excess of the Fair Market Value as of the date of exercise
over the per share Exercise Price specified in the Free Standing
Stock Appreciation Right (which Exercise Price shall be no less
than 100% of the Fair Market Value of the Common Stock on the date
of grant) multiplied by the number of Shares in respect of which
the Free Standing Stock Appreciation Right is being exercised,
with the Administrator having the right to determine the form of
payment.
(ii) A Related Right may be exercised by a
Participant by surrendering the applicable portion of the related
Option. Upon such exercise and surrender, the Participant shall
be entitled to receive up to, but not more than, an amount in cash
or that number of Shares (or any combination of cash and Shares)
equal in value to the excess of the Fair Market Value as of the
date of exercise over the per share Exercise Price specified in
the related Option multiplied by the number of Shares in respect
of which the Related Stock Appreciation Right is being exercised,
with the Administrator having the right to determine the form of
payment. Options which have been so surrendered, in whole or in
part, shall no longer be exercisable to the extent the Related
Rights have been so exercised.
(iii) Upon the exercise of a Limited Stock
Appreciation Right, the Participant shall be entitled to receive
an amount in cash equal in value to the excess of the "Change in
Control Price" (as defined in the Award Agreement evidencing such
Limited Stock Appreciation Right) of a share of Common Stock Share
as of the date of exercise over (A) the per share Exercise Price
specified in the related Option, or (B) in the case of a Limited
Stock Appreciation Right which is a Free Standing Stock
Appreciation Right, the per share Exercise Price specified in the
Free Standing Stock Appreciation Right, such excess to be
multiplied by the number of Shares in respect of which the Limited
Stock Appreciation Right shall have been exercised.
(a) NON-TRANSFERABILITY.
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<PAGE>
(i) Free Standing Stock Appreciation Rights shall
be transferable only when and to the extent that an Option would
be transferable under Section 6(f) of the Plan.
(ii) Related Stock Appreciation Rights shall be
transferable only when and to the extent that the underlying
Option would be transferable under Section 6(f) of the Plan.
(iii) Limited Stock Appreciation Rights shall be
transferable only when and to the extent that an Option would be
transferable under Section 6(f) of the Plan.
(b) TERMINATION OF EMPLOYMENT OR SERVICE
(i) In the event of the termination of employment
or service of a Participant who has been granted one or more Free
Standing Stock Appreciation Rights, such rights shall be
exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Administrator at or after
grant.
(ii) In the event of the termination of employment
or service of a Participant who has been granted one or more
Related Stock Appreciation Rights, such rights shall be
exercisable at such time or times and subject to such terms and
conditions as set forth in the related Options.
(iii) In the event of the termination of employment
or service of a Participant who has been granted one or more
Limited Stock Appreciation Rights, such rights shall be
exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Administrator at or after
grant.
(c) TERM.
(i) The term of each Free Standing Stock
Appreciation Right shall be fixed by the Administrator, but no
Free Standing Stock Appreciation Right shall be exercisable more
than ten years after the date such right is granted.
(ii) The term of each Related Stock Appreciation
Right shall be the term of the Option to which it relates, but no
Related Stock Appreciation Right shall be exercisable more than
ten years after the date such right is granted.
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<PAGE>
(iii) The term of each Limited Stock Appreciation
Right shall be fixed by the Administrator, but no Limited Stock
Appreciation Right shall be exercisable more than ten years after
the date such right is granted.
SECTION 8 RESTRICTED STOCK, DEFERRED STOCK AND PERFORMANCE SHARES.
Awards of Restricted Stock, Deferred Stock or Performance
Shares may be issued either alone or in addition to other Awards granted
under the Plan. The Administrator shall determine the Eligible Recipients to
whom, and the time or times at which, Awards of Restricted Stock, Deferred
Stock or Performance Shares shall be made; the number of Shares to be
awarded; the Exercise Price, if any, to be paid by the Participant for the
acquisition of Restricted Stock, Deferred Stock or Performance Shares; the
Restricted Period (as defined in Section 8(b)) applicable to Awards of
Restricted Stock or Deferred Stock; the performance objectives applicable to
Awards of Deferred Stock or Performance Shares; and all other conditions of
the Awards of Restricted Stock, Deferred Stock and Performance Shares.
Subject to the requirements of Section 162(m) of the Code, as applicable, the
Administrator may also condition the grant of the Award of Restricted Stock,
Deferred Stock or Performance Shares upon the exercise of Options, or upon
such other criteria as the Administrator may determine, in its sole
discretion. The provisions of the Awards of Restricted Stock, Deferred Stock
or Performance Shares need not be the same with respect to each Participant.
In the sole discretion of the Administrator, loans may be made to
Participants in connection with the purchase of Restricted Stock under
substantially the same terms and conditions as provided in Section 6(e) of
the Plan with respect to the exercise of Options.
(a) AWARDS AND CERTIFICATES. The prospective recipient of
Awards of Restricted Stock, Deferred Stock or Performance Shares shall not
have any rights with respect to any such Award, unless and until such
recipient has executed an Award Agreement evidencing the Award (a "Restricted
Stock Award Agreement," "Deferred Stock Award Agreement" or "Performance
Shares Award Agreement," as appropriate) and delivered a fully executed copy
thereof to the Company, within a period of sixty days (or such other period
as the Administrator may specify) after the award date. Except as otherwise
provided below in Section 8(b), (i) each Participant who is granted an Award
of Restricted Stock or Performance Shares shall be issued a stock certificate
in respect of such shares of Restricted Stock or Performance Shares; and (ii)
such certificate shall be registered in the name of the Participant, and
shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to any such Award.
The Company may require that the stock certificates evidencing
Restricted Stock or Performance Shares granted hereunder be held in the
custody of the Company until the restrictions thereon shall have lapsed, and
that, as a condition of any Award of Restricted Stock
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<PAGE>
or Performance Shares, the Participant shall have delivered a stock power,
endorsed in blank, relating to the Shares covered by such Award.
With respect to Awards of Deferred Stock, at the expiration of
the Restricted Period, stock certificates in respect of such Shares of
Deferred Stock shall be delivered to the Participant, or his legal
representative, in a number equal to the number of Shares covered by the
Deferred Stock Award.
(b) RESTRICTIONS AND CONDITIONS. The Awards of Restricted
Stock, Deferred Stock and Performance Shares granted pursuant to this Section
8 shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the
Restricted Stock Award Agreement, Deferred Stock Award Agreement
or Performance Shares Award Agreement, as appropriate, governing
any such Award, during such period as may be set by the
Administrator commencing on the date of grant (the "Restricted
Period"), the Participant shall not be permitted to sell,
transfer, pledge or assign shares of Restricted Stock, Deferred
Stock or Performance Shares awarded under the Plan; PROVIDED,
HOWEVER, that the Administrator may, in its sole discretion,
provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions in whole or in part based on
such factors and such circumstances as the Administrator may
determine, in its sole discretion, including, but not limited to,
the attainment of certain performance related goals, the
Participant's termination of employment or service as a director,
consultant or advisor to the Company or any Parent or Subsidiary,
the Participant's death or Disability or the occurrence of a
"change in control" as defined in the Restricted Stock Award
Agreement, Deferred Stock Award Agreement or Performance Shares
Award Agreement, as appropriate, evidencing such Award.
(ii) Except as provided in Section 8(c)(i), the
Participant shall generally have the rights of a stockholder of
the Company with respect to Restricted Stock or Performance Shares
during the Restricted Period. The Participant shall generally not
have the rights of a stockholder with respect to Shares subject to
Awards of Deferred Stock during the Restricted Period; PROVIDED,
HOWEVER, that dividends declared during the Restricted Period with
respect to the number of Shares covered by Awards of Deferred
Stock shall be paid to the Participant. Certificates for
unrestricted Shares shall be delivered to the Participant promptly
after, and only after, the Restricted Period shall expire without
forfeiture in respect of such Awards of Restricted Stock,
Deferred Stock
19
<PAGE>
or Performance Shares except as the Administrator, in its sole
discretion, shall otherwise determine.
(iii) The rights of Participants granted Awards of
Restricted Stock, Deferred Stock or Performance Shares upon
termination of employment or service as a director, consultant or
advisor to the Company or to any Parent or Subsidiary terminates
for any reason during the Restricted Period shall be set forth in
the Restricted Stock Award Agreement, Deferred Stock Award
Agreement or Performance Shares Award Agreement, as appropriate,
governing such Awards.
SECTION 9 AMENDMENT AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made that would impair the
rights of a Participant under any Award theretofore granted without such
Participant's consent, or that, without the approval of the stockholders (as
described below), would:
(a) except as provided in Section 3 of the Plan, increase
the total number of Shares reserved for issuance under the Plan;
(b) change the class of officers, directors, employees,
consultants and advisors eligible to participate in the Plan; or
(c) extend the maximum Option period under Section 6(b) of
the Plan.
Notwithstanding the foregoing, stockholder approval under this
Section 9 shall only be required at such time and under such circumstances as
stockholder approval would be required under Section 162(m) of the Code or
other applicable law, rule or regulation with respect to any material
amendment to an employee benefit plan of the Company.
The Administrator may amend the terms of any Award theretofore
granted, prospectively or retroactively, but, subject to Section 3 of Plan,
no such amendment shall impair the rights of any Participant without his or
her consent.
SECTION 10 UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for
incentive compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained
20
<PAGE>
herein shall give any such Participant any rights that are greater than those
of a general creditor of the Company.
SECTION 11 GENERAL PROVISIONS.
(a) Shares shall not be issued pursuant to the exercise of
any Award granted hereunder unless the exercise of such Award and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
of 1933, as amended, the Exchange Act and the requirements of any stock
exchange upon which the Common Stock may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) The Administrator may require each person acquiring
Shares to represent to and agree with the Company in writing that such person
is acquiring the Shares without a view to distribution thereof. The
certificates for such Shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.
All certificates for Shares delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange
upon which the Common Stock is then listed, and any applicable Federal or
state securities law, and the Administrator may cause a legend or legends to
be placed on any such certificates to make appropriate reference to such
restrictions.
(c) Nothing contained in the Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
stockholder approval, if such approval is required; and such arrangements may
be either generally applicable or applicable only in specific cases. The
adoption of the Plan shall not confer upon any Eligible Recipient any right
to continued employment or service with the Company or any Parent or
Subsidiary, as the case may be, nor shall it interfere in any way with the
right of the Company or any Parent or Subsidiary to terminate the employment
or service of any of its Eligible Recipients at any time.
(d) Each Participant shall, no later than the date as of
which the value of an Award first becomes includable in the gross income of
the Participant for Federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Administrator regarding payment of, any
Federal, state, or local taxes of any kind required by law to be withheld
with respect to such Award. The obligations of the Company under the Plan
shall be conditional on the making of such payments or arrangements, and the
Company shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment of any kind otherwise due to the Participant.
21
<PAGE>
(e) No member of the Board or the Administrator, nor any
officer or employee of the Company acting on behalf of the Board or the
Administrator, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Administrator and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted
by law, be fully indemnified and protected by the Company in respect of any
such action, determination or interpretation.
SECTION 12 STOCKHOLDER APPROVAL; EFFECTIVE DATE OF PLAN; EFFECTIVE DATE OF
AMENDMENTS.
(a) The grant of any Award hereunder shall be contingent
upon stockholder approval of the Plan being obtained within 12 months before
or after the date the Board adopts the Plan.
(b) Subject to the approval of the Plan by the stockholders
of the Company within twelve (12) months before or after the date the Plan is
adopted by the Board, the Plan shall be effective as of ___________, 2000.
(c) Subject to the approval of the Amendments by the
stockholders of the Company within twelve (12) months before or after the
date the Amendments are adopted by the Board, the Amendments to the Plan
shall be effective as of the first trading day on or after the date on which
the Securities and Exchange Commission declares the Company's Registration
Statement effective (the "Effective Date").
SECTION 13 TERM OF PLAN.
No Option, Stock Appreciation Right, Limited Stock Appreciation
Right, or Awards of Restricted Stock, Deferred Stock or Performance Shares
shall be granted pursuant to the Plan on or after ___________, 2010, but
Awards theretofore granted may extend beyond that date.
22
<PAGE>
ANNEX A TO
NOGATECH, INC. 2000 EQUITY INCENTIVE PLAN
ISRAELI 2000 SECTION 3(9) EQUITY INCENTIVE PLAN
1. DESIGNATION AND PURPOSE OF THE ISRAELI PLAN
This Annex A to the Nogatech, Inc. 2000 Equity Incentive Plan (the
"General Plan"), is the Israeli 2000 Section 3(9) Equity Incentive Plan
for key employees (including directors who are employees) and
consultants of Nogatech Ltd. ("Nogatech Ltd."), a wholly-owned Israeli
subsidiary of Nogatech, Inc. (the "Company") in accordance with the
terms and conditions set forth below. For the purposes of this Annex A,
the Israeli 2000 Section 3(9) Equity Incentive Plan shall be referred
to as such, or as the "Israeli Plan."
The Israeli Plan is being instituted in order to ensure that all
issuances of options, shares or other rights by the Company to
employees, officers and consultants of Nogatech Ltd. conform with the
provisions of Section 3(9) of the Israeli Income Tax Ordinance [New
Version], 1961, the rules and regulations promulgated thereunder, from
time to time ("Section 3(9)").
2. GENERAL PLAN INCORPORATED BY REFERENCE
The provisions of the General Plan shall apply to the Israeli Plan,
MUTATIS MUTANDIS, except that the General Plan shall be deemed amended
to incorporate the provisions herein and shall be interpreted in such a
way as to ensure conformity with Section 3(9). Any provisions of the
General Plan which are in violation of Section 3(9) shall not apply to
the Israeli Plan. In the event of any conflicting provisions between
the law applicable to the General Plan and the Israeli law which is
applicable to this Israeli Plan, the provisions of the Israeli law
shall prevail. In respect of issuances of Options under the Israeli
Plan (as annexed to the General Plan), the Committee need not determine
whether the issuances hereunder are "Incentive Stock Options" within
the meaning of the US Federal Income Tax Code or "Non-Qualified Stock
Options".
In the event of any conflict between the Israeli Plan and the General
Plan, then the provisions of the Israeli Plan shall prevail. Subject to
the provisions of this Israeli Plan, the provisions of the General Plan
shall continue to be in full force and effect.
All capitalized terms used in the Israeli Plan shall have the meanings
designated in the General Plan, unless otherwise defined in the Israeli
Plan.
3. ELIGIBILITY
Awards may be granted only to employees (including directors who are
employees) and consultants of Nogatech Ltd.
<PAGE>
2
4. DEFINITIONS
The following definitions shall be applicable to the terms used in the
Israeli Plan:
4.1. "Trust Agreement" means the agreement between the Company,
Nogatech Ltd. and the Trustee as may be in effect from time to
time specifying the duties and authority of the Trustee.
4.2. "Trust Assets" means the Awards held by the Trustee under the
Trust Agreement for the benefit of the Participants pursuant
to the Israeli Plan and the Trust Agreement.
4.3. "Trustee" means the Trustee (and any successor Trustee)
appointed by the Board of Directors of the Company to hold the
Trust Assets.
4.4. "Award" means Award as defined in the General Plan, as well as
Shares with respect to which an Option has been exercised.
5. GRANT OF AWARDS
Each Award granted for the benefit of a Participant under the Israeli
Plan shall be evidenced by an Award Agreement, to be entered into by
and between the Company, Nogatech Ltd. and such Participant, in form
and substance as may be from time to time approved by the Committee,
which shall incorporate the provisions of the General Plan, as amended
hereby, and the Trust Agreement by reference. In the event of any
conflict between the terms and conditions of an Award Agreement and the
terms hereof, the terms hereof shall control.
6. GRANT OF AWARDS TO BE HELD BY TRUSTEE; DIVIDEND AND VOTING RIGHTS
6.1. GRANT OF AWARDS TO BE HELD BY TRUSTEE
6.1.1. Each Award shall be issued, or transferred, to the
Trustee to be held in trust for the benefit of the
Participant. All certificates representing Awards
shall be issued in the name of the Trustee under the
Israeli Plan, shall be deposited with the Trustee,
and shall be held by the Trustee until such time that
such Award is released.
6.1.2. Subject to the terms hereof and to the terms in the
Award Agreement, each Participant may, where
applicable, after exercising the Awards or any part
thereof, require the Company to cause the Trustee to
release the shares issued pursuant to the exercise of
such Awards, provided that no Award shall be
exercised by the Participant, and no Award shall
otherwise be released by the Trustee to the
Participant, unless and until such Participant shall
have deposited with the Trustee an amount of money
which, in the
<PAGE>
3
Trustee's sole judgment, is sufficient and necessary
to satisfy Israeli withholding tax requirements. In
any case, the Participant will be responsible for
payment of Participant's tax liability in full and
shall indemnify the Company or Trustee in respect of
any liability thereof.
6.2 DIVIDEND AND VOTING RIGHTS. No Participant shall have any of
the rights of a shareholder of the Company with respect to any
Options, Shares which are to derive from the exercise of any
Options, or any other Awards which do not automatically grant
voting or dividend rights to the holder thereof, until such
time as the applicable Shares are issued to the Trustee or the
Participant, or such other time as set forth in the Award
Agreement. After Shares are issued hereunder to the Trustee,
the relevant Participant shall be entitled to receive, subject
to the terms of the Award Agreement, (i) a proxy from the
Trustee to vote the Shares that the Trustee holds for
Participant's benefit and (ii) any cash dividends paid with
respect to such Shares.
7. MAINTENANCE OF ASSETS BY TRUSTEE
The Trustee shall maintain records of the Awards held for the benefit
of each Participant.
8. METHOD OF EXERCISE OF AWARD; TAXATION
Subject to the terms of the General Plan and the terms in the Award
Agreement, an Award shall be exercisable, in whole or in part, during
the applicable period, upon delivery by the Participant to each of the
Trustee and the Company of a duly executed copy of the relevant notice
of exercise in the prescribed form, specifying the number of Shares or
other consideration as to which such Award is being exercised. The
notice to the Company shall be accompanied by full payment of the Award
exercise price thereof (the "Award Exercise Price") in NIS or in such
currency as may be required by the Company. If the exercise price is
paid in any currency other than United States Dollars, the exchange
rate shall be that reasonably specified by the Company at the time of
exercise. The shares or other consideration issued pursuant to exercise
of the Awards shall be delivered by the Company to the Trustee pursuant
to the provisions of Paragraph 6.1 above, or upon the Trustee's
confirmation that the Trustee has received an amount sufficient to pay
the full withholding tax liability in accordance with Paragraph 6
above, the Company shall deliver the shares or other consideration
directly to the Participant, or the Participant's nominee.
9. ADMINISTRATION, AMENDMENT AND TERMINATION OF THE ISRAELI PLAN
The Board and the Committee shall have all power and authority with
respect to the administration, amendment and termination of the Israeli
Plan as they hold in respect of the
<PAGE>
4
General Plan, except that no discretion or authority is hereby granted
to the Board or the Committee so as to disqualify the Israeli Plan
under Section 3(9).
10. GOVERNING LAW
The Israeli Plan, and any dispute, controversy or claim arising out of,
or relating to, any tax issue regarding the General Plan which might
arise between (i) the Company, Nogatech Ltd., or the Trustee, and (ii)
a Participant who was granted an Option pursuant to the Israeli Plan,
shall be governed and interpreted in accordance with the laws of the
State of Israel.
<PAGE>
DEBENTURE
ENTERED INTO AND SIGNED ON JUNE 16, 1998
WHEREAS I, THE UNDERSIGNED, NOGATECH LTD. (51-164409-8)
(hereinafter: the "Mortgagor")
OF 11, BEN GURION ST., GIVAT SHMUEL 54017
have received and will receive from time to time credit, documentary credit,
various loans, overdrafts in a checking account, a debit account or another
account, a letter of indemnification and guarantees for the Mortgagor or for
others pursuant to the Mortgagor's request, discount of notes, extensions and
miscellaneous banking relief and other various banking services (hereinafter,
jointly and severally - the "Banking Services") from Bank Hapoalim B.M.
(hereinafter: the "Bank"), under terms agreed upon and/or to be agreed upon
from time to time with respect to each such Banking Service;
THEREFORE, it has been agreed that the Mortgagor shall guarantee the
repayment of various amounts of money which the Mortgagor owes and/or shall
owe to the Bank in connection with the rendering of the Banking Services
and/or in connection with other obligations other than the Banking Services
and/or otherwise, all in accordance with the following terms:
NATURE OF THE DEBENTURE
1. This debenture is entered into in order to guarantee the full and
accurate payment of all the amounts due and to be due to the Bank from
the Mortgagor in connection with the rendering of the Banking Services
by the Bank to the Mortgagor and/or in connection with other
obligations other than the Banking Services and/or in any other manner,
whether due from the Mortgagor alone or jointly with others, whether
the Mortgagor has already undertaken or shall undertake the same in the
future, whether as a debtor and/or as a guarantor and/or as an endorser
or otherwise, due and/or which shall be due in future, due prior to the
exercise of the guarantees received as of the date hereof or at a later
date, due absolutely or contingently, due directly or indirectly, THE
AMOUNT THEREOF BEING UNLIMITED, in addition to interest, commissions,
various expenses, including foreclosure costs, legal fees, insurance
fees, stamping and other payments pursuant to this debenture and in
addition to differences of indexation of any kind due and to be due
from the Mortgagor and/or from the guarantee to the Bank in any form or
manner for linked principal and interest (all of the foregoing amounts,
jointly and severally, shall be referred to hereinafter as the
"Guaranteed Sums").
<PAGE>
2
THE SECURITY INTEREST
2. For the assurance of the full and accurate repayment of the Guaranteed
Sums, the Mortgagor hereby awards to the Bank and to the substitutes
thereof a senior security interest to the assets and the proceeds
thereof, as specified hereunder (hereinafter: the "Assets Subject to
the Security Interest"):
a. All the assets, moneys, property and rights of any kind,
without exception, which the Mortgagor has at present and
shall have in the future at any time, in any form or manner;
b. All the current property, without exception, which the
Mortgagor has at present and shall have in the future at any
time, in any form or manner, the current property meaning all
assets, moneys, property and rights of any kind save for real
estate, buildings and fixed equipment;
c. All the fixed property which the Mortgagor has at present and
shall have in the future, such property including, INTER ALIA,
real estate, buildings and fixed equipment;
d. All the securities and other documents in the possession of
the Bank and which shall be in the possession thereof from
time to time;
e. All the rights to real estate and/or all contractual rights
pursuant to agreements between the Mortgagor and the Israel
Land Administration and/or the Israel Development Authority
and/or the Jewish National Fund, existing at present and which
shall exist at any time in the future.
3. As an additional collateral for the full and accurate repayment of all
the Guaranteed Sums, the Mortgagor hereby mortgages and awards a senior
fixed security interest in favor of the Bank and the substitutes
thereof, to the Mortgagor's share capital not yet called and/or called
and not yet paid-up and the goodwill thereof, as being at present and
as being at any time (hereinafter, jointly and severally - the "Pledged
Assets").
4. As an additional collateral for the full and accurate repayment of the
Guaranteed Sums, the Mortgagor hereby mortgages and awards a security
interest in favor of the Bank to all the securities, documents, others'
notes, which the Mortgagor has delivered or will deliver from time to
time to the Bank, whether for collection, safekeeping or otherwise
(hereinafter: the "Pledged Documents"), and upon delivery thereof they
shall be and shall be deemed to be mortgaged and pledged to the Bank as
collateral and as a senior fixed security interest pursuant to the
terms of this debenture, and the provisions hereof shall apply to the
pledge and encumbrance thereof, MUTATIS MUTANDIS. The Bank shall not be
required to take any act in connection with the Pledged Documents and
shall not be liable for any damage caused in
<PAGE>
3
connection therewith, and the Mortgagor undertakes to indemnify the
Bank in any event in which the Bank shall be sued for such damage by
others. The Mortgagor hereby waives any claim of prescription in
advance.
5. The Assets Subject to the Security Interest, the Pledged Assets and the
Pledged Documents shall be referred to hereinafter as the "Pledged
Property".
THE MORTGAGOR'S DECLARATIONS
6. The Mortgagor hereby declares that:
a. The Pledged Property is not pledged, mortgaged or attached in
favor of others;
b. All of the Pledged Property is exclusively owned and possessed
thereby or by the Bank;
c. No lawful or contractual limitation or condition apply to the
transfer or pledge of the Pledged Property;
d. It is entitled to give a security interest in the Pledged
Property;
e. No assignment of right or any other act derogating from the
value of the Pledged Property has been made.
THE MORTGAGOR'S UNDERTAKINGS
7. The Mortgagor hereby undertakes as follows:
a. To hold the Pledged Property in accordance with the
instructions of the Bank alone;
b. To use and to tend to the Pledged Property with extreme
caution and to inform the Bank of any incident of damage or
defect thereto and to repair any damage, defect or malfunction
occurring to the Pledged Property due to the use thereof or
for any other reason, and to be liable to the Bank for any
incident of such breakage, damage, defect or malfunction;
c. To enable the representative of the Bank to visit and to
inspect the condition of the Pledged Property at any time at
the location thereof;
d. In any event in which the Bank shall make the Guaranteed Sums
payable immediately, as set forth in Section 18 hereunder, to
deliver the Pledged Assets and/or the Pledged Documents to the
Bank or to a guard on its behalf, at the Bank's first demand.
In the event that the Mortgagor shall refuse to comply with
the provisions of this subsection, the Bank may, without need
for the Mortgagor's consent,
<PAGE>
4
remove the Pledged Assets and/or the Pledged Documents from
the Mortgagor's possession and hold the same or deliver the
same to a guard on its behalf at the Mortgagor's expense.
In the event that the Pledged Assets and/or the Pledged
Documents shall have been delivered to a guard as aforesaid,
the Bank shall not be liable for any damage caused to the
Pledged Assets and/or to the Pledged Documents for any reason;
e. Not to sell, not to transfer, not to lease for a long term,
not to lease and not to deliver the Assets Subject to the
Security Interest or any part thereof and not to allow any use
thereof in any way - save for sales and transfers made in the
ordinary course of the Mortgagor's business - without the
Bank's prior written consent thereto;
f. To immediately notify the Bank of any attachment placed on the
Pledged Property, to immediately notify the attacher of the
security interest in favor of the Bank and to immediately
take, at its expense and without delay, all measures required
for the removal of the attachment;
g. To give no security interest and not to mortgage the Pledged
Property with rights equal, prior or later to or than the
Bank's rights in any form or manner and not to assign any of
the Mortgagor's rights to the Pledged Property without the
Bank's prior written consent;
h. To be liable for the truthfulness and veracity of all the
signatures, endorsements and details of notes, documents and
securities given or to be given to the Bank as collateral;
i. To timely pay all taxes and obligatory payments imposed on the
Pledged Property under any law and to provide the Bank, at the
demand thereof, with the invoices for all such payments; in
the event that the Mortgagor shall fail to pay such payments
on time, the Bank shall be entitled to pay the same at the
Mortgagor's expense and to charge it with the payment thereof,
in addition to expenses and Interest at the Highest Rate. Such
payments are guaranteed by this debenture;
j. To maintain books of account and to allow the Bank or a
representative thereof to inspect the books at any time. The
Mortgagor undertakes to assist the Bank or the attorneys
thereof, and to deliver balance sheets, documents and any
information required by them to them at their first demand,
including explanations relating to the financial and
operational condition of the Mortgagor and/or the business
thereof. Not to sell, not to transfer, not to lease for a long
term, not to lease, not to deliver, not to remove from the
possession thereof, not to forgo and not to waive, whether
fully or partially, any asset, claim or right which the
Mortgagor has or shall have from time to time, other than
within the framework of a transaction made in the ordinary
course of the
<PAGE>
5
Mortgagor's business and against full consideration, without
the Bank's prior written consent;
k. Not to lend to the Mortgagor's shareholders and not to pay
existing or future loans of the Mortgagor's shareholders in
any year, so long as the Mortgagor shall not have repaid to
the Bank the payments due therefrom to the Bank for the
Guaranteed Sums in that year, without the Bank's prior written
consent. The Mortgagor undertakes to cause the shareholders
thereof to undertake to the Bank not to demand or require
payment of such loans, save for the payment of existing loans
and subject to the aforesaid;
l. Not to institute any proceedings in connection with the
Guaranteed Sums which would potentially injure the Bank's
ability to exercise this debenture.
8. The Mortgagor undertakes to notify the Bank immediately:
a. of any event in which a right shall be claimed for any
collateral given or to be given to the Bank pursuant to this
debenture and/or of any proceedings for the execution or other
foreclosure of such collateral;
b. of any act listed in Section 18 hereunder;
c. of the devaluation of any collateral given and/or to be given
thereby;
d. of any application to be filed for the winding-up of the
Mortgagor or for receivership of the assets thereof and of any
resolution with respect to a Change of the Mortgagor's
Structure or of any intention of so doing;
e. of a change of address.
INSURANCE
9. The Mortgagor hereby undertakes to keep all of the Pledged Property
insured at all times for the full value thereof against all common
risks which the Bank shall name from time to time, as commonly
practiced in the Mortgagor's line of business, with such insurance
companies and under such terms as the Bank shall agree, and to transfer
to the Bank, up to the amount of this debenture, the rights deriving
from the insurance certificates, according to a form to be approved by
the Bank, to timely pay all the insurance fees and to deliver to the
Bank all the insurance certificates and the receipts for the payment of
the insurance fees.
10. Without derogating from the aforesaid, and in addition thereto, the
Mortgagor hereby undertakes to provide the insurance company, through
which the Pledged Property was guaranteed, with the following
provisions:
<PAGE>
6
a. An irrevocable determination of the Bank as a beneficiary
under the insurance contract (the insurance policy) and a
provision including the Bank in the actual insurance contract,
without the Bank being required to pay any premiums.
b. Payment of the insurance proceeds for the Pledged Asset,
whenever the insurance company shall be liable for the payment
of such compensation pursuant to the insurance contract or any
law, directly to the Bank.
c. Provision of a copy of the insurance contract to the Bank,
after naming it as a beneficiary as aforesaid.
All of the aforesaid shall apply without the need for any
additional consent on behalf of the Mortgagor or on behalf of
the substitutes and/or successors thereof.
The Mortgagor further undertakes to provide the Bank with a
confirmation from the insurance company and with an
undertaking on its part to act in accordance with the
foregoing provisions and to notify the Bank of any revocation
or expiration of the insurance contract, at least 30 (thirty)
days prior to such revocation or expiration - despite and
notwithstanding any provision to the contrary in the Insurance
Contract Law, 5741-1981, such notice constituting a condition
precedent to the revocation or expiration of the insurance
contract.
11. In each of the cases listed hereunder, the Bank shall be entitled, at
the sole discretion thereof, to insure the Pledged Property in the
Bank's name and to charge the Mortgagor's account for the expenses and
fees of the insurance:
a. The Mortgagor shall fail to insure the Pledged Property as set
out in the foregoing provisions of this debenture;
b. The Mortgagor shall fail to provide to the Bank, within 14
days from the date of signing of this debenture, insurance
certificates for the Pledged Property under such terms and for
such period as the Bank shall deem satisfactory at the sole
discretion thereof, in accordance with the provisions of this
debenture;
c. 30 days prior to the expiration of the insurance of the
Pledged Property, the Mortgagor shall fail to provide to the
Bank certificates of insurance for the Pledged Property under
such terms and for such period as the Bank shall deem
satisfactory at the sole discretion thereof, in accordance
with the provisions of this debenture;
In the event that the insurance shall be arranged by the Bank
as aforesaid, the Bank shall not be liable for any defect or
fault to be
<PAGE>
7
found in connection with the insurance. Amounts to be paid as
expenses and fees of such insurance are guaranteed by this
debenture.
12. In any event in which the Bank shall make the Guaranteed Sums payable
immediately as set forth in Section 18 hereunder in connection with the
insurance of the Pledged Property, the Mortgagor hereby appoints the
Bank as the sole attorney thereof, and confers thereon the exclusive
rights to negotiate in the name of the Mortgagor, to file claims, to
agree to arrangements, to settle, to waive, to receive moneys from
insurance companies and to credit the same against repayment of the
Guaranteed Sums. The above power of attorney is irrevocable, since the
rights of the Bank and the rights of a third party are contingent
thereon. The Mortgagor shall entertain no claim in connection with
arrangements, waivers and settlements which the Bank shall make with
insurance companies.
13. All of the Mortgagor's rights deriving from the insurance of the
Pledged Property, including rights pursuant to the Property Tax and
Compensation Fund Law, 5721-1961, as in effect at any time and pursuant
to any other law, whether or not transferred to the Bank as aforesaid,
are hereby pledged to the Bank as a senior fixed security interest and
encumbrance.
14. The Mortgagor hereby undertakes to sign all of the certificates and
necessary documents for the performance of this chapter's undertakings,
at the Bank's first demand. In addition, the Mortgagor undertakes not
to revoke or modify in any form any condition or conditions of said
insurance, without the Bank's prior written consent.
INTEREST
15. a. The Bank shall be entitled to calculate interest on the
Guaranteed Sums according to a rate agreed upon or to be
agreed upon from time to time between it and the Mortgagor. In
cases in which the interest rate shall not have been agreed
upon, the Bank shall be entitled to determine the rate of
interest and to notify the Mortgagor thereof. The Mortgagor
shall be liable for such interest rates and the Bank may add
them to the principal at the end of each month or of any other
period, as the Bank may determine;
b. Upon any delay in the payment of the Guaranteed Sums or any
part thereof, the Guaranteed Sums shall bear arrears interest
at a rate agreed upon in the agreement for the rendering of
the Banking Services. In the lack of determination with
respect to arrears interest, the Guaranteed Sums shall be
subject to Interest at the Highest Rate.
c. Whenever the Bank shall be entitled to foreclose the
collateral pursuant to this debenture, the Bank shall be
entitled to raise the rates of interest on the Guaranteed Sums
up to the Interest at the Highest Rate charged by the Bank at
the time being, or by (sic) irregular interest in debit
<PAGE>
8
accounts or checking account interest (hereinafter: "Interest
at the Highest Rate").
DATES OF PAYMENT
16. The Mortgagor hereby undertakes to accurately repay the Guaranteed Sums
and any part thereof to the Bank on the date of repayment thereof, as
determined and as to be determined from time to time.
17. The Mortgagor shall be entitled to make early payment of the Guaranteed
Sums or any part thereof prior to the due date thereof, subject to that
the Mortgagor shall pay the Bank all the amounts which the Bank would
have received from the Mortgagor on account of the Guaranteed Sums, if
early payment of such amount would not have been made, and any expense
resulting from the early payment, if any.
18. Without derogating from the generality of the provisions of this
debenture, the Bank shall be entitled, in each of the following cases,
to make the Guaranteed Sums payable immediately and to charge such
amount to any of the Mortgagor's accounts, and the Mortgagor undertakes
to pay all of the Guaranteed Sums, and the Bank may take any means it
shall deem fit in order to collect the Guaranteed Sums, and in
particular, to foreclose the collateral in any manner lawfully
permissible, at the Mortgagor's expense:
a. The Mortgagor shall breach or shall fail to fulfill any
condition hereof, or the Mortgagor shall breach other
undertakings assumed or to be assumed by the Mortgagor towards
the Bank, or any of the Mortgagor's declarations herein or any
other declaration given or to be given to the Bank by the
Mortgagor in connection with the Guaranteed Sums shall
transpire to be incorrect or inaccurate;
b. The Mortgagor shall resolve to wind-up voluntarily and/or a
winding-up order shall be issued against it and/or a temporary
liquidator or a special manager shall be appointed for each of
them (sic) and/or the Mortgagor's name shall be erased from
any register maintained by law, or shall be scheduled to be
erased;
c. A receiver shall be appointed for all or part of the
Mortgagor's property, or a receivership order shall be issued;
d. An attachment shall be placed or a similar execution act
instituted with respect to a material part of the Mortgagor's
property or to any of the collateral given by the Mortgagor;
e. The Mortgagor shall cease to pay its debts or to conduct its
business;
f. All or a substantial part of the work conducted at the
Mortgagor's shall be suspended for a period of two months or
more;
<PAGE>
9
g. The Bank, at the sole discretion thereof, shall deem that a
material event shall have occurred, which may considerably
undermine the Mortgagor's financial ability;
h. The Mortgagor shall fail to pay any of the Guaranteed Sums for
more than 21 days;
i. The Pledged Property or any part thereof shall have been
destroyed, burnt, devaluated or lost.
j. The number of stockholders of the Mortgagor and/or the number
of members constituting the Mortgagor shall fall below the
minimal number required by law;
k. The Mortgagor shall have died or shall have become
incapacitated, bankrupt or incarcerated or shall have departed
the country, or upon the occurrence of death, incapacitation,
bankruptcy, winding-up, incarceration or departure from the
country or breach of an undertaking by any party to the notes,
documents and securities given or to be given to the Bank as
collateral;
l. The value of the collateral given in order to assure repayment
of the Guaranteed Sums or the repayment ability of the
Mortgagor's guarantors shall, at the Bank's sole discretion
and according to the exclusive estimate thereof, have been
adversely modified, including death, bankruptcy or departure
of the guarantor from the country;
m. The Mortgagor shall be required to make early repayment of
debts owed by the Mortgagor to other creditors;
n. One of the foregoing events listed in this Section shall have
occurred to any guarantor for the repayment of the Guaranteed
Sums, MUTATIS MUTANDIS.
THE BANK'S RIGHTS
19. The Bank is entitled to the rights of possession, lien, offset and
security interest to all of the amounts, assets and rights, including
securities, coins, gold, bank notes, documents of commodities,
insurance policies, notes, assignments, obligations, deposits,
collateral and the consideration therefor, to be found at the Bank at
any time in the Mortgagor's credit or therefor, including those
delivered for collection, security, safekeeping or otherwise. The Bank
may withhold such assets pending repayment in full of the Guaranteed
Sums or sell them and use the consideration, in full or in part, in
order to repay the Guaranteed Sums. In the event that the amounts
set-off are deposited in foreign currency, the Mortgagor hereby
authorizes the Bank and instructs it in advance to sell the credit
balance of the foreign currency at the
<PAGE>
10
rate obtainable by the Bank therefor at such time, and to offset the
sale consideration against the Guaranteed Sums.
20. The Bank may at any time charge any of the Mortgagor's accounts for any
amount due therefrom and to be due therefrom in any manner, and to
credit any amount received therefrom or therefor to such account as it
shall deem fit, and to transfer any amount to his credit to any other
account as it shall deem fit.
21. The Mortgagor confirms that the books and accounts of the Bank are
reliable in its eyes, shall be deemed correct and shall serve as PRIMA
FACIA evidence against it in all details thereof, INTER ALIA, in all
matters pertaining to the calculation of the Guaranteed Sums, the
details of the bills, guarantees and other collateral and any other
matter related to this debenture.
22. The Bank shall be entitled, at the sole discretion thereof, to accept
or to decline to accept any order or notice given thereto verbally,
over the telephone or in any manner other than in a clear and legible
writing. In the event that the Bank shall agree to act pursuant to the
Mortgagor's instructions given other than by a written instruction in
the acceptable manner, the Mortgagor assumes responsibility for all
errors, misunderstandings or discrepancies and for damage and/or loss
and/or breach to be caused due to the rendering of such instructions.
23. Without derogating from the other provisions of this debenture, any
waiver, extension, discount, reticence, non-action (hereinafter:
"Waiver") on the part of the Bank with respect to the non-fulfillment
or partial or incorrect fulfillment of any of the Mortgagor's
undertakings under this debenture and/or any other undertakings of the
guarantee, shall not be deemed as a Waiver on the part of the Bank of
any right, but as a limited consent for the special circumstances in
which it was made. No Waiver given by the Bank to any party to a note
to be held by the Bank for the assurance of the Guaranteed Sums shall
in any way affect the Mortgagor's undertaking.
24. a. In each of the cases listed in Section 18 above, the Bank
shall be entitled to take all measures it shall deem fit in
order to collect the Guaranteed Sums and to exercise all of
the rights thereof pursuant to this debenture, including
foreclosing the Pledged Property, in whole or in part, and
using the proceeds in order to repay the Guaranteed Sums,
without the Bank being required to exercise any other
guarantee or collateral, if any shall be held by the Bank;
b. In the event that the Bank shall decide to realize securities,
notes or other negotiable instruments - an advance notice of
three days with respect to the measures about to be taken by
the Bank shall be deemed as a reasonable period of time for
the purpose of Article 19 of the Pledge Law, 5727-1967 or any
other statutory provision replacing it.
<PAGE>
11
c. As the Mortgagor's attorney, and for the purposes of this
Section the Mortgagor irrevocably appoints the Bank as its
attorney, the Bank may sell the Pledged Property subject to
the terms of this debenture or any part thereof, by auction or
otherwise, either itself or through others, in consideration
for cash, installments or otherwise, for such price and under
such conditions as the Bank shall determine at the sole
discretion thereof; the Bank may further foreclose the Pledged
Property or any other property, either itself, through the
Courts or through an Execution Office by, INTER ALIA,
appointing a receiver or a receiver and manager on behalf of
the Bank who shall be entitled, among his other authorities:
1) To gain possession of all or part of the Pledged
Property;
2) To manage the Mortgagor's business or take part in the
management thereof, as he shall deem fit;
3) To sell or agree to the sale of the Pledged Property,
in whole or in part, to transfer the same or agree to
the transfer thereof in any other manner, under such
conditions as he shall deem fit;
4) To make any other arrangement with respect to the
Pledged Property and/or any part thereof, as he shall
deem fit.
d. Any revenue to be received by the receiver or by the receiver
and manager from the Pledged Property, and any proceeds to be
received by the Bank and/or by the receiver or the receiver
and manager from the sale of the Pledged Property or any part
thereof shall be applied as follows:
1) First, for the payment of the expenses incurred and
which shall be incurred with respect to the collection
of the Guaranteed Sums, including the costs of the
receiver or the receiver and manager and the fees
thereof, at a rate to be determined by the Bank or
approved by the Courts or an Execution Office.
2) Second, for the payment of the additional amounts due
to the Bank pursuant to the provisions for indexation,
interest, damages, commissions and expenses due and to
be due to the Bank pursuant to this debenture.
3) Third, for the payment of the principal of the
Guaranteed Sums.
Or in any other order of application to be determined
by the Bank.
25. In the event that the Guaranteed Sums or any part thereof shall not yet
have become due at the time of sale of the Pledged Property, or that
the Guaranteed
<PAGE>
12
Sums shall be received by the Bank only contingently, the Bank shall
be entitled to collect the amount sufficient to cover the Guaranteed
Sums from the proceeds of the sale, and the amount collected shall be
pledged to the Bank for the assurance thereof and shall remain in the
Bank's possession until payment thereof.
NATURE OF THE COLLATERAL
26. The collateral given to the Bank pursuant to this debenture are of a
permanent nature and shall remain in effect until the Bank shall
approve in writing that this debenture is void.
27. In the event that other collateral or guarantees were given or shall be
given to the Bank for the payment of the Guaranteed Sums, all such
collateral and guarantees shall be independent of each other.
28. In the event that the Bank shall compromise or shall grant the
Mortgagor an extension or a relief, or shall change the Mortgagor's
undertakings in connection with the Guaranteed Sums, shall release or
shall waive other collateral or guarantees - such acts shall not change
the nature of the collateral created pursuant to this debenture and all
of the collateral and the Mortgagor's undertakings pursuant to the
debenture shall remain in full force and effect.
RIGHT OF TRANSFER
29. The Bank may at any time, at the discretion thereof, and without
requiring the Mortgagor's consent, transfer this debenture and its
rights hereunder, including the collateral, in whole or in part, and
the transferee too shall be entitled to transfer such right to another
without the need for any additional consent from the Mortgagor. The
transfer may be made by an endorsement on the margins of or on this
debenture, or in any other manner deemed fit by the Bank or the
transferee.
30. The Bank may deposit the collateral given or to be given pursuant to
this debenture, or part thereof, with a guard, according to its
discretion and at the Mortgagor's expense, and may replace the guard
from time to time; the Bank shall further be entitled to register such
collateral, in whole or in part, with any competent authority pursuant
to any law and/or in any public registry.
NOTICE OF PROTESTS
31. The Mortgagor undertakes to notify the Bank in writing of any protest
or objection it may have, if any, in connection with any account,
account summary, confirmation or notice it shall receive from the Bank.
If the Mortgagor shall fail to protest or object within 21 days from
the date of dispatch of the said account, account summary, confirmation
or notice, the Bank shall be entitled to deem it as having approved the
correctness thereof.
<PAGE>
13
EXPENSES
32. All of the expenses incurred in connection with the preparation of this
debenture, the stamping and registration thereof, foreclosure of the
collateral and institution of collection proceedings (including the
issuance of warning letters, search of address, investigations and the
legal fees of the Bank's attorney), insurance, guarding, maintenance
and repair of the Pledged Property - shall be paid by the Mortgagor to
the Bank at the first demand thereof, in addition to Interest at the
Highest Rate. Pending payment thereof in full, all of the said expenses
shall be guaranteed by this debenture.
INTERPRETATION
35. In this debenture - (a) the singular shall import the plural, and vice
versa; (b) the masculine form shall import the feminine form, and vice
versa; (c) the "Bank" shall mean Bank Hapoalim B.M. and each and every
one of the branches thereof existing on the date hereof and/or to be
opened at any location in the future, the transferees and substitutes
thereof and others acting on behalf of the Bank; (d) "Notes" shall mean
promissory notes, notes of exchange, checks, undertakings, guarantees,
collateral, assignments, bills of lading, bills of deposit and any
other negotiable document; (e) "Interest at the Highest Rate" shall
mean interest at the highest rate charged by the Bank at the time being
and from time to time for overdrafts and arrears in debit accounts or
in checking accounts, whichever is the higher; (f) "Change of
Structure" shall mean, with respect to the Mortgagor - a merger or a
spin-off (as these terms are defined in Section E2 of the Income Tax
Ordinance or any other statutory provision replacing it), and the
transfer of assets in consideration for shares, whether pursuant to the
said Section E2 or otherwise; (g) the headings of the sections are
inserted for the sake of orientation only and shall not be used for the
interpretation of this debenture; (h) the preamble to this debenture
constitutes an integral part hereof.
NOTICES AND WARNINGS
34. Any notice mailed by the Bank to the Mortgagor in a registered or
ordinary letter at the address entered after the name thereof, or at
the address of the Mortgagor's registered office or at another address
of which the Mortgagor shall notify the Bank in writing, shall be
deemed as a lawful notice received by the Mortgagor 48 hours from the
time at which the letter containing the notice shall have been sent.
A written declaration by the Bank shall serve as evidence with respect
to the time of dispatch of the notice. Any notice to be given to the
Mortgagor in any manner of written notice (sic) shall be deemed to have
been received thereby at the time of issuance or publication thereof.
VENUE
<PAGE>
14
35. The venue for the purposes of this debenture is hereby determined as
the competent court closest to the place of signing of this debenture,
or the competent court in any one of the following cities:
Jerusalem, Tel Aviv Jaffa, Haifa, Beer Sheva or Nazareth.
IN WITNESS WHEREOF, I HAVE HERETO SET MY HAND:
(-) (-)
---------------------------------
NOGATECH LTD.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement (Number 333-32372) on Form S-1 of our report dated
February 25, 2000, except for Note 6 the date of which is March 8, 2000,
relating to the financial statements of Nogatech, Inc., which appear in such
Prospectus.
We also consent to the references to our firm under the caption "Experts".
<TABLE>
<S> <C>
Tel Aviv, Israel Kesselman & Kesselman
April 20, 2000 Certified Public Accountants (Israel)
</TABLE>
