<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 17, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NEOMAGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0344424
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3260 JAY STREET
SANTA CLARA, CA 95054
(408) 988-7020
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PRAKASH C. AGARWAL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NEOMAGIC CORPORATION
3260 JAY STREET
SANTA CLARA, CA 95054
(408) 988-7020
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
ARTHUR F. SCHNEIDERMAN JOSHUA L. GREEN
MICHAEL J. DANAHER ROBERT V. W. ZIPP
ROBERT D. SANCHEZ GLEN R. VAN LIGTEN
WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 2800 SAND HILL ROAD
PALO ALTO, CALIFORNIA 94304-1050 MENLO PARK, CA 94025
(415) 493-9300 (415) 854-4488
</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 TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. [_]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [_]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [_]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value $34,500,000 $10,455
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a).
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
---------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued January 17, 1997
Shares
[LOGO]
NEOMAGIC CORPORATION
COMMON STOCK
-----------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $ AND $ . SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS
BEEN MADE TO HAVE THE COMMON STOCK APPROVED FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "NMGC."
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 4 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total (3)................................... $ $ $
</TABLE>
- -----
(1) See "Underwriters" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company and certain stockholders (the "Selling Stockholders") have
granted the Underwriters an option, exercisable within 30 days of the
date hereof, to purchase up to an aggregate of and
additional Shares of Common Stock, respectively, at the price to public
less underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions,
proceeds to Company and proceeds to Selling Stockholders will be
$ , $ , $ , and $ , respectively. See
"Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Venture Law Group, A Professional Corporation, counsel for the Underwriters.
It is expected that delivery of the Shares will be made on or about , 1997
at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in New York funds.
-----------
MORGAN STANLEY & CO.
Incorporated
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
, 1997
<PAGE>
[LOGO OF NEOMAGIC - MOBILIZING MULTIMEDIA]
Neo Magic has pioneered a new approach to providing multimedia semiconductor
solutions for portable PC's that it believes overcomes the limitations of
traditional architectures. The Company believes that it has developed the first
commercially available high performance, low power silicon technology that
integrates large DRAM memory with analog and logic circuitry on a single chip.
NeoMagic's system on a chip is designed to bring desktop multimedia performance
to mobile computers without compromising battery life or system size, weight or
cost.
[PICTURE OF 5 NOTEBOOK PC'S OPENED TO DISPLAY SCREEN]
NeoMagic has achieved design wins with eight of the world's ten largest portable
PC manufacturers. The Company's products are currently used in Notebook PC's
sold by Acer, Compaq, Dell, Digital Equipment, Fujitsu, Hewlett-Packard,
Hitachi, Mitsubishi, NEC, Sharp and Texas Instruments.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 4
The Company............................................................... 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 25
Management................................................................ 36
Certain Transactions...................................................... 44
Principal and Selling Stockholders........................................ 47
Description of Capital Stock.............................................. 50
Shares Eligible for Future Sale........................................... 53
Underwriters.............................................................. 55
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 57
Index to Consolidated Financial Statements................................ F-1
</TABLE>
----------------
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.
----------------
The Company's logo, MagicWare and MagicGraph128 are trademarks of the
Company. All other trademarks or trade names referred to in this Prospectus
are the property of their respective owners.
----------------
Except as otherwise noted herein, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) assumes
the Company's reincorporation in Delaware, and (iii) reflects the conversion
of all of the Company's outstanding shares of Preferred Stock into Common
Stock upon the closing of this offering. See "Underwriters."
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
NeoMagic Corporation ("NeoMagic" or the "Company") designs, develops and
markets multimedia accelerator solutions for sale to notebook PC manufacturers.
The Company believes it has developed the first commercially available high
performance silicon technology that integrates large DRAM memory with analog
and logic circuitry to provide a high performance multimedia solution on a
single chip. The Company's MagicGraph128 family of pin-compatible, multimedia
accelerator products incorporates a 128-bit memory bus. The Company believes
these products enable notebook PC manufacturers to deliver state-of-the-art
multimedia capability while decreasing power consumption, size, weight, system
design complexity and cost. The Company has achieved design wins with eight of
the world's ten largest notebook PC manufacturers, and its MagicGraph128
products are currently used in notebook PCs sold by Acer, Compaq, Dell, Digital
Equipment, Fujitsu, Hewlett-Packard, Hitachi, Mitsubishi, NEC, Sharp and Texas
Instruments.
NeoMagic's MagicGraph128 family of products ranges from accelerators designed
for notebook PCs that target cost-conscious consumers to fully-featured
multimedia systems designed for high-end notebook PCs. The Company introduced
its first MagicGraph128 product in March 1995, is currently in production with
three products and is sampling the fourth generation of its MagicGraph128
product family. NeoMagic has established strategic relationships with
Mitsubishi Electric Corporation and Toshiba Corporation to produce
semiconductor wafers for the Company's products. Pursuant to these strategic
relationships, NeoMagic designs the overall product, including the logic and
analog circuitry, and the manufacturing partner designs the DRAM module,
manufactures the wafers and performs memory testing and repair. NeoMagic is
focused on leveraging its core competencies in logic, analog and memory
integration, graphics/video multimedia technologies, driver and BIOS software,
and power management to continue developing solutions to further facilitate the
mobilization of multimedia applications.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.... shares
Common Stock to be out-
standing after the of-
fering................. shares(1)
Use of proceeds......... For general corporate purposes, including working capital and capital expenditures
Proposed Nasdaq National
Market symbol.......... NMGC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
PERIOD FROM MAY 26, ENDED ENDED
1993 (INCEPTION) JANUARY 31, OCTOBER 31,
THROUGH JANUARY 31, ---------------- ----------------
1994 1995 1996 1995 1996
------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... $ -- $ -- $ 243 $ 72 $24,509
Gross profit............ -- -- 78 26 6,224
Loss from operations.... (773) (4,891) (7,072) (4,455) (2,460)
Net loss................ $(757) $(4,791) $(6,869) $(4,295) $(1,953)
Pro forma net loss per
share(2)............... $ (.32) $ (.09)
Shares used in computing
pro forma net loss
per share(2)........... 21,233 21,715
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1996
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $11,840
Working capital.......................................... 1,996
Total assets............................................. 22,695
Long-term obligations.................................... 1,061
Total stockholders' equity............................... 2,896
</TABLE>
- --------
(1) Based on shares of Common Stock outstanding as of October 31, 1996.
Excludes 1,499,050 shares of Common Stock issuable upon the exercise of
options under the Company's Amended and Restated 1993 Stock Plan (the
"Stock Plan") and 316,743 shares of Common Stock issuable upon the exercise
of warrants outstanding as of October 31, 1996, and 1,509,641 shares
reserved for future grant under the Stock Plan as of October 31, 1996. In
December 1996, subject to stockholder approval, the Board of Directors of
the Company approved a 2,000,000 share increase in the number of shares
reserved for issuance under the Stock Plan and the reservation of 500,000
shares of Common Stock for issuance under the 1997 Employee Stock Purchase
Plan (the "Purchase Plan") concurrently adopted by the Board of Directors.
See "Management--Employee Benefit Plans" and Notes 6 and 10 of Notes to
Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing pro forma net loss per
share.
(3) As adjusted to reflect the conversion of Preferred Stock to Common Stock
which will occur upon the closing of the offering, the sale by the Company
of shares of Common Stock offered hereby and the application of
the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
3
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the following risk factors
as well as those discussed elsewhere in this Prospectus.
Fluctuations in Operating Results. NeoMagic's quarterly and annual results
of operations are affected by a variety of factors that could materially
adversely affect net sales, gross profit and income from operations. These
factors include, among others, demand for the Company's products; changes in
product or customer mix; fluctuations in manufacturing yields; incorrect
forecasting of future revenues; availability and cost of manufacturing
capacity; unanticipated delays or problems in the introduction or performance
of the Company's next generation of products; the Company's ability to
introduce new products in accordance with OEM design requirements and design
cycles; market acceptance of the products of the Company's customers; changes
in the timing of product orders due to unexpected delays in the introduction
of products of the Company's customers or due to the life cycles of such
customers' products ending earlier than anticipated; new product announcements
or product introductions by NeoMagic's competitors; competitive pressures
resulting in lower selling prices; the volume of orders that are received and
can be fulfilled in a quarter; the rescheduling or cancellation of orders by
customers which cannot be replaced with orders from other customers; supply
constraints for the other components incorporated into its customers' notebook
PC products; foreign exchange rate fluctuations; the unanticipated loss of any
strategic relationship; seasonality associated with the tendency of PC sales
to increase in the second half of each calendar year; the level of
expenditures for research and development and sales, general and
administrative functions of the Company; costs associated with future
litigation; and costs associated with protecting the Company's intellectual
property. Any one or more of these factors could result in the Company failing
to achieve its expectations as to future revenues. The Company may be unable
to adjust spending sufficiently in a timely manner to compensate for any
unexpected sales shortfall, which could materially adversely affect quarterly
operating results. Accordingly, the Company believes that period-to-period
comparisons of its operating results should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year. In
certain future quarters, the Company's operating results may be below the
expectations of public market analysts or investors. In such event, the market
price of the Common Stock would be materially adversely affected.
Risks Associated with Notebook PC Market. The Company's products are used
only in notebook PCs. The notebook PC market is characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and significant price competition, resulting in short product
life cycles and regular reductions of average selling prices over the life of
a specific product. Although the notebook PC market has grown substantially in
recent years, there is no assurance that such growth will continue. A
reduction in sales of notebook PCs, or a reduction in the growth rate of such
sales, would likely reduce demand for the Company's products. Moreover, such
changes in demand could be large and sudden. Since PC manufacturers often
build inventories during periods of anticipated growth, they may be left with
excess inventories if growth slows or if they have incorrectly forecast
product transitions. In such cases, the PC manufacturers may abruptly suspend
substantially all purchases of additional inventory from suppliers such as the
Company until the excess inventory has been absorbed. Any reduction in the
demand for notebook PCs generally, or for a particular product that
incorporates the Company's multimedia accelerators, could have a material
adverse impact on the Company's business, financial condition and results of
operations.
The Company's ability to compete in the future will depend on its ability to
identify and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render the Company's products incompatible
with products developed by major hardware manufacturers and software
developers, including Intel Corporation and Microsoft Corporation. The Company
could be required, as a result, to invest significant time and effort to
redesign the Company's products to ensure compliance with relevant standards.
If the Company's products are not in compliance with prevailing industry
standards for a significant period of time,
4
<PAGE>
the Company could miss opportunities to achieve crucial design wins, which
could result in a material adverse change in the Company's business, financial
condition and results of operations. In addition, the Company's products are
designed to afford the notebook PC manufacturer significant advantages with
respect to product performance, power consumption and size. To the extent that
future developments in other notebook PC components or subassemblies
incorporate one or more of the advantages offered by the Company's products,
the market demand for the Company's products may be negatively impacted, which
could result in a material adverse change in the Company's business, financial
condition and results of operations.
Product Concentration; Risks Associated with Multimedia Products. The
Company's revenues are entirely dependent on the market for multimedia
accelerators for notebook PCs and on the Company's ability to compete in that
market. Since the Company has no other product line, the Company's revenues
and results of operations would be materially adversely affected if for any
reason it were unsuccessful in selling multimedia accelerators. The notebook
PC market frequently undergoes transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis.
For example, nearly all of the leading notebook PCs in 1997 are expected to
offer video and advanced graphics capability. If the Company's products are
unable at the beginning of each such transition to support the new feature
sets or performance levels being required by notebook PC manufacturers, the
Company would be likely to lose design wins and, moreover, not have the
opportunity to compete for new design wins until the next product transition
occurred. Thus, a failure to develop products with required feature sets or
performance standards or a delay as short as a few months in bringing a new
product to market could significantly reduce the Company's net sales for a
substantial period, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
The notebook PC multimedia market is characterized by extreme price
competition. Leading-edge products may command higher average selling prices
but prices decline throughout the product life cycle as comparable and more
advanced products are introduced into the market. As a result, the Company's
ability to maintain average selling prices and gross margins depends
substantially on its ability to continue introducing new products. Its ability
to maintain gross margins is also dependent, but to a lesser extent, upon its
ability to reduce product costs throughout a product life cycle by instituting
cost reduction design changes and yield improvements, persuading customers to
adopt cost-reduced versions of its products and successfully managing its
manufacturing and subcontract relationships. The failure of the Company to
continue designing and introducing advanced products in a timely manner or to
continue reducing product costs would have a material adverse effect on the
Company's net sales, gross margins and results of operations.
Customer Concentration. The notebook PC market is highly concentrated, with
the top ten brand name OEMs by revenues accounting for more than 65% of unit
shipments during the third quarter of 1996. For this reason, the Company's
sales are also highly concentrated. In the nine months ended October 31, 1996,
sales to the Company's top five customers accounted for 81.4% of the Company's
total net sales. The Company expects that a small number of customers will
continue to account for a substantial portion of its net sales for the
foreseeable future. As a result, the Company's business, financial condition
and results of operations could be materially adversely affected by the
decision of a single customer to cease using the Company's products or by a
decline in the number of notebook PCs sold by a single customer or by a small
number of customers.
Effects of Changes in DRAM Pricing. The Company's MagicGraph128 products
feature large DRAM memory integrated with analog and logic circuitry on a
single chip, while its competitors provide only the graphics/video analog and
logic circuitry on a separate chip to be used in conjunction with DRAMs
supplied by others. The prices of the Company's products reflect many factors,
including the prices of DRAM chips. As a result, the Company's business,
financial condition and results of operations may be materially adversely
affected by unanticipated changes in the price of DRAMs. Such changes are
typically sudden and dramatic and can extend over a significant period of
time. For example, the average price of 4-Mbit DRAMs declined by more than 80%
in 1996, and this decline affected the average selling prices of the Company's
products. A significant reduction in the price of DRAMs could cause the
Company's products to be less competitively priced, potentially
5
<PAGE>
affecting ongoing product pricing as well as resulting in the loss of design
wins for new notebook PCs. In this
circumstance, competitors without embedded DRAM could be potentially benefited
by DRAM price reductions, and the Company could be forced to respond to
pricing pressures precipitated by changes in the DRAM market by reducing the
average selling prices of its products to current and prospective system
manufacturer customers. Because the Company's product costs cannot be adjusted
as rapidly as changes in average selling prices to system manufacturers, the
Company's net sales and gross profit would be materially and adversely
impacted.
Dependence on Manufacturing Relationships. The Company's products require
wafers manufactured with state-of-the-art fabrication equipment and
techniques. All of the Company's products are currently manufactured by MELCO
in Japan under the terms of a five-year wafer supply agreement. MELCO is
currently producing six-inch wafers for the Company and expects to begin
producing eight-inch wafers utilizing MELCO's next generation of manufacturing
technologies for certain of the Company's new products in calendar 1997. The
Company also has established a strategic relationship with Toshiba in Japan to
commence production of the Company's next generation multimedia accelerator
products and is in the process of negotiating a wafer supply agreement to
formalize this relationship. NeoMagic does not expect that a significant
portion of the Company's wafer requirements will be met by Toshiba before
calendar 1998. The Company expects that, for the foreseeable future, each of
its products will be single source manufactured. Because the lead time needed
to establish a strategic relationship with a new DRAM partner is at least 12
months and the estimated time for MELCO to switch to a new product line is
four to six months, there is no readily available alternative source of supply
for any specific product. A manufacturing disruption experienced by either of
the Company's manufacturing partners would impact the production of the
Company's products for a substantial period of time, which would have a
material adverse effect on the Company's business, financial condition and
result of operations. Furthermore, in the event that the transition to the
next generation of manufacturing technologies at MELCO or the relationship
with Toshiba is unsuccessful or delayed, the Company's business, financial
condition and results of operations would be materially and adversely
affected.
There are many other risks associated with the Company's dependence upon
third party manufacturers, including: reduced control over delivery schedules,
quality assurance, manufacturing yields and cost; the potential lack of
adequate capacity during periods of excess demand; limited warranties on
wafers supplied to the Company; and potential misappropriation of NeoMagic
intellectual property. The Company is dependent on MELCO, and expects in the
future to be dependent upon Toshiba as well, to produce wafers of acceptable
quality and with acceptable manufacturing yields, to deliver those wafers to
the Company and its independent assembly and testing subcontractors on a
timely basis and to allocate to the Company a portion of their manufacturing
capacity sufficient to meet the Company's needs. On occasion, the Company has
experienced some of these difficulties. The Company's wafer requirements
represent a very small portion of the total production of these companies.
Although the Company's products are designed using the process design rules of
the particular manufacturer, there can be no assurance that either MELCO or
Toshiba will be able to achieve or maintain acceptable yields or deliver
sufficient quantities of wafers on a timely basis or at an acceptable cost.
Additionally, there can be no assurance that either MELCO or Toshiba will
continue to devote resources to the production of the Company's products or
continue to advance the process design technologies on which the manufacturing
of the Company's products are based. Any such difficulties would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's products are assembled and tested by third party
subcontractors. The Company does not have long term agreements with any of
these subcontractors. As a result of this reliance on third party
subcontractors to assemble and test its products, the Company cannot directly
control product delivery schedules, which could lead to product shortages or
quality assurance problems that could increase the costs of manufacturing or
assembly of the Company's products. Due to the amount of time normally
required to qualify assembly and test subcontractors, product shipments could
be delayed significantly if the Company is required to find alternative
subcontractors. Any problems associated with the delivery, quality or cost of
the assembly and
6
<PAGE>
test of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.
Inventory Risk. Under its wafer supply agreement with MELCO and the proposed
wafer supply agreement with Toshiba, the Company is obligated to provide a
rolling 12-month forecast of anticipated purchases and to place binding
purchase orders four months prior to shipment. If the Company cancels a
purchase order, it must pay cancellation penalties based on the status of work
in process or the proximity of the cancellation to the delivery date.
Forecasts of monthly purchases may not increase or decrease by more than a
certain percentage from the previous month's forecast without the
manufacturer's consent. Thus, the Company must make forecasts and place
purchase orders for wafers long before it receives purchase orders from its
own customers. This limits the Company's ability to react to fluctuations in
demand for its products, which can be unexpected and dramatic, and from time-
to-time will cause the Company to have an excess or a shortage of wafers for a
particular product. As a result of the long lead time for manufacturing
wafers, semiconductor companies such as the Company from time-to-time must
take charges for excess inventory. For example, the Company booked a $750,000
charge for excess inventory in the nine months ended October 31, 1996.
Significant write-offs of excess inventory could materially adversely affect
the Company's financial condition and results of operations. Conversely,
failure to order sufficient wafers would cause the Company to miss revenue
opportunities and, if significant, could impact sales by the Company's
customers, which could adversely affect the Company's customer relationships
and thereby materially adversely affect the Company's business, financial
condition and results of operations.
Manufacturing Yields. The fabrication of semiconductors is a complex and
precise process. Because NeoMagic's products feature the integration of large
DRAM memory with analog and logic circuitry on a single chip, a manufacturer
must obtain acceptable yields of both the memory and logic portions of such
products, compounding the complexity of the manufacturing process. As a
result, the Company may face greater manufacturing challenges than its
competitors. Minute levels of contaminants in the manufacturing environment,
defects in masks used to print circuits on a wafer, difficulties in the
fabrication process or other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. Many of these problems are difficult to diagnose and time
consuming or expensive to remedy. As a result, semiconductor companies often
experience problems in achieving acceptable wafer manufacturing yields, which
are represented by the number of good die as a proportion of the total number
of die on any particular wafer. The Company purchases wafers, not die, and
pays an agreed price for wafers meeting certain acceptance criteria.
Accordingly, the Company bears the risk of final yield of good die. Poor
yields would materially adversely affect the Company's net sales, gross margin
and results of operations.
Semiconductor manufacturing yields are a function both of product design,
which is developed largely by the Company, and process technology, which is
typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be
analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process, and resolution of yield problems would
require cooperation by and communication between the Company and the
manufacturer. For example, a design error that resulted in lower than expected
yields of finished products caused the Company to take a $1.2 million charge
for the three months ended July 31, 1996. This risk is compounded by the
offshore location of the Company's manufacturers, increasing the effort and
time required to identify, communicate and resolve manufacturing yield
problems. As the Company's relationships with Toshiba and any additional
manufacturing partners develop, yields could be adversely affected due to
difficulties associated with adopting the Company's technology and product
design to the proprietary process technology and design rules of each
manufacturer. Because of the Company's limited access to wafer fabrication
capacity from its manufacturers, any decrease in manufacturing yields could
result in an increase in the Company's per unit costs and force the Company to
allocate its available product supply among its customers, thus potentially
adversely impacting customer relationships as well as revenues and gross
profit. There can be no assurance that the Company's manufacturers will
achieve or maintain acceptable manufacturing yields in the future. The
inability of the Company to achieve planned yields from its manufacturers
could have a material
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adverse effect on the Company's business, financial condition and results of
operations. Furthermore, the Company also faces the risk of product recalls
resulting from design or manufacturing defects which are not discovered during
the manufacturing and testing process. In the event of a significant number of
product returns, the Company's net sales and gross profit could be materially
adversely affected.
Dependence on New Product Development; Rapid Technological Change. The
Company's business, financial condition and results of operations will depend
to a significant extent on its ability to maintain its position in the market
for multimedia accelerator products that integrate large DRAM with analog and
logic circuitry on a single chip. As a result, the Company believes that
significant expenditures for research and development will continue to be
required in the future. The notebook PC market for which the Company's initial
products are designed is intensely competitive and is characterized by rapidly
changing technology, evolving industry standards and declining average selling
prices. Notebook PC manufacturers demand products incorporating rich features
and functionality in order to achieve product differentiation. The Company
must anticipate the features and functionality that the consumer of notebook
PCs will demand, incorporate those features and functionality into products
that meet the exacting design requirements of the notebook PC manufacturers,
price its products competitively, and introduce the products to the market
within the limited window of market demand. The success of new product
introductions is dependent on several factors, including proper new product
definition, timely completion and introduction of new product designs, the
ability of MELCO, Toshiba and any additional strategic manufacturing partners
to effectively design and implement the manufacture of new products, quality
of new products, differentiation of new products from those of the Company's
competitors and market acceptance of NeoMagic's and its customers' products.
There can be no assurance that the products the Company expects to introduce
will incorporate the features and functionality demanded by system
manufacturers and consumers of notebook PCs, will be successfully developed or
will be introduced within the appropriate window of market demand. The failure
of the Company to successfully introduce new products and achieve market
acceptance for such products would have a material adverse effect on the
Company's business, financial condition and results of operations.
The integration of large DRAM memory with analog and logic circuitry on a
single chip is highly complex and is critical to the Company's success.
Because of the complexity of its products, however, NeoMagic has experienced
delays from time to time in completing development and introduction of new
products. In the event that there are delays in the completion of development
of future products, including the products currently expected to be announced
over the next year, the Company's business, financial condition and results of
operations would be materially adversely affected. Although the development
cycles for the memory and logic portions of the Company's products have been
relatively synchronized to date, there can be no assurance that this
synchronization will continue in the future. In addition, there can be no
assurance that fundamental advances in either the memory or logic components
of the Company's products will not significantly increase the complexity
inherent in the design and manufacture of MagicGraph128 products, rendering
the Company's product technologically infeasible or uncompetitive. The
multiple chip solutions offered by the Company's competitors are less complex
to design and manufacture than the Company's integrated MagicGraph128
products. As a result, these competitive solutions may be less expensive,
particularly during periods of depressed DRAM prices. The time required for
competitors to develop and introduce competing products may be shorter and
manufacturing yields may be better than those experienced by the Company.
As the markets for the Company's products continue to develop and
competition increases, NeoMagic anticipates that product life cycles will
shorten and average selling prices will decline. In particular, average
selling prices and, in some cases, gross margin for each of the Company's
products will decline as such products mature. Thus, the Company will need to
introduce new products to maintain average selling prices. There can be no
assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely manner,
that products or technologies developed by others will not render NeoMagic's
products or technologies obsolete or uncompetitive, or that the Company's
products will be selected for design into the products of its targeted
customers. The failure of the Company's new product development efforts would
have a material adverse effect on NeoMagic's business, financial condition and
results of operations.
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Competition. The market for multimedia accelerators for notebook PCs in
which the Company competes is intensely competitive and is characterized by
rapid technological change, evolving industry standards and declining average
selling prices. NeoMagic believes that the principal factors of competition in
this market are performance, price, features, power consumption, size and
software support. The ability of the Company to compete successfully in the
rapidly evolving notebook PC market depends on a number of factors, including
success in designing and subcontracting the manufacture of new products that
implement new technologies, product quality, reliability, price, the
efficiency of production, design wins for NeoMagic's integrated circuits, ramp
up of production of the Company's products for particular system
manufacturers, end-user acceptance of the system manufacturers' products,
market acceptance of competitors' products and general economic conditions.
There can be no assurance that the Company will be able to compete
successfully in the future.
NeoMagic competes with major domestic and international companies, most of
which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. The Company's principal competitors include
Chips & Technologies, Inc. ("Chips & Technologies"), Cirrus Logic, Inc.
("Cirrus Logic"), S3 Incorporated ("S3"), and Trident Microsystems, Inc.
("Trident"). NeoMagic may also face increased competition from new entrants
into the notebook PC multimedia accelerator market including from companies
currently selling products designed for desktop PCs. Furthermore, the Company
expects that many of its competitors will seek to develop and introduce
products that integrate large DRAM with analog and logic circuitry on a single
chip. For example, Chips & Technologies and Trident have recently announced
separate programs to introduce in conjunction with Samsung Electronics Company
Ltd. ("Samsung"), the world's largest DRAM manufacturer, an integrated
multimedia accelerator solution for the notebook PC market that would compete
directly with the Company's products. In addition, Intel or other
semiconductor manufacturers could in the future develop a microprocessor that
is integrated with a multimedia accelerator solution. In either case, the
successful commercial introduction by such entities of such products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Some of the Company's current and potential competitors operate their own
manufacturing facilities. Since the Company does not operate its own
manufacturing facility and must make binding commitments to purchase products,
it may not be able to reduce its costs and cycle time or adjust its production
to meet demand as rapidly as companies that operate their own facilities,
which could have a material adverse effect on its business, financial
condition and results of operations. In addition, the prices of the Company's
products reflect many factors, including the prices of DRAM chips and non-
integrated graphics chips. Therefore, in some cases, the Company's products
may be more expensive than competitive multiple chip solutions. The Company in
the past has lost and in the future may lose design wins due to this price
difference. Furthermore, a significant reduction in the price of DRAMs could
cause the Company's products to be less competitively priced, potentially
affecting ongoing product pricing as well as resulting in the loss of design
wins for new notebook PCs.
History of Operating Losses; Limited History of Operations. The Company was
founded in May 1993 and had losses from operations of $773,000, $4.9 million,
$7.1 million and $2.5 million for the period from inception (May 26, 1993)
through January 31, 1994, and in fiscal years 1995 and 1996 and the nine
months ended October 31, 1996, respectively, and had an accumulated deficit of
approximately $14.4 million as of October 31, 1996. Although the Company first
achieved profitability on a quarterly basis during the three months ended
October 31, 1996, there can be no assurance that the Company will remain
profitable on a quarterly or annual basis, if at all.
Uncertainty Regarding Patents and Protection of Proprietary Rights. The
Company relies in part on patents to protect its intellectual property. In the
United States, the Company has been issued two patents, each covering certain
aspects of the design and architecture of the Company's multimedia
accelerators. In addition, the Company has several patent applications pending
in the United States Patent and Trademark Office (the "PTO"). There can be no
assurance that the Company's pending patent applications or any future
applications will be approved, or that any issued patents will provide the
Company with competitive advantages or will not
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be challenged by third parties, or that the patents of others will not have an
adverse effect on the Company's ability to do business. Furthermore, there can
be no assurance that others will not independently develop similar products,
duplicate the Company's products or design around any patents that may be
issued to the Company.
The Company also relies on a combination of mask work protection, trademarks,
copyrights, trade secret laws, employee and third-party nondisclosure
agreements and licensing arrangements to protect its intellectual property.
Despite these efforts, there can be no assurance that others will not
independently develop substantially equivalent intellectual property or
otherwise gain access to the Company's trade secrets or intellectual property,
or disclose such intellectual property or trade secrets, or that the Company
can meaningfully protect its intellectual property. A failure by the Company to
meaningfully protect its intellectual property could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company in the past has been, and in the future may be, notified that it
may be infringing the intellectual property rights of third parties. For
example, in October 1996 the Company was notified by two of its customers that
they had received a letter from the holder of a United States patent asserting
that the video/graphics subsystem in such customers' notebook PCs, which use
the Company's MagicGraph128 and MagicGraph128V products, infringe certain
claims of the patent. The Company has certain indemnification obligations to
customers with respect to the infringement of third-party intellectual property
rights by its products. There can be no assurance that the Company's obligation
to indemnify such customers will not have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes, based upon advice rendered by its patent counsel, Townsend and
Townsend and Crew LLP, that the Company's MagicGraph128 and MagicGraph128V
products do not infringe any of the claims of the patent. However, there can be
no assurance that the holder of such patent will not file a lawsuit against the
Company or its customers, that the Company or such customers would prevail in
any such litigation, or that such customers will continue to purchase the
Company's products under the threat of potential litigation. Any such
litigation, whether or not determined in the Company's favor or settled by the
Company, would at a minimum be costly and could divert the efforts and
attention of the Company's management and technical personnel from productive
tasks, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
In November 1994, Cirrus Logic filed suit against the Company and certain of
its employees claiming, among other things, breach of fiduciary duty, breach of
and interference with contract and misappropriation of trade secrets. The
Company and Cirrus Logic settled the lawsuit in March 1996, but the Company
incurred an aggregate of $703,000 in expenses in connection with such
litigation during fiscal 1995 and fiscal 1996. There can be no assurance that
infringement claims by third parties or claims for indemnification by other
customers or end users of the Company's products resulting from infringement
claims will not be asserted in the future or that such assertions, if proven to
be true, will not materially adversely affect the Company's business, financial
condition and results of operations. In the event of any adverse ruling in any
such matter, the Company could be required to pay substantial damages, which
could include treble damages, cease the manufacturing, use and sale of
infringing products, discontinue the use of certain processes or to obtain a
license under the intellectual property rights of the third party claiming
infringement. There can be no assurance, however, that a license would be
available on reasonable terms or at all. Any limitations on the Company's
ability to market its products, or delays and costs associated with redesigning
its products or payments of license fees to third parties, or any failure by
the Company to develop or license a substitute technology on commercially
reasonable terms could have a material adverse effect on the Company's
business, financial condition and results of operations.
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Dependence on International Sales and Suppliers. Export sales are a critical
part of the Company's business. Sales to customers located outside the United
States (including sales to foreign operations customers headquartered in the
United States and foreign system manufacturers that sell to United States-
based OEMs) accounted for 100% and 94.8% of the Company's net sales for fiscal
1996 and the nine months ended October 31, 1996, respectively. The Company
expects that net sales derived from international sales will continue to
represent a significant portion of its total net sales. Some of the Company's
international sales are supported by letters of credit issued by its
customers. Because the Company's international sales have to date been
denominated in United States dollars, increases in the value of the United
States dollar could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local currencies.
All of the Company's wafers are and for the foreseeable future will be
produced by foreign manufacturers. In addition, many of the components used by
the Company are procured from international sources. The Company's wafer
supply agreement with MELCO provides for payment in Japanese yen. As a result,
the Company's cost of goods sold are subject to fluctuations in the yen-dollar
exchange rates. The Company has in the past hedged its exposure to
fluctuations in such foreign currency exchange rate by purchasing forward
contracts and may continue to do so in the future. However, there can be no
assurance that such hedging will be successful or that it will not increase
the potential adverse impact to the Company of currency exchange rate
fluctuations. Significant wafer or component price increases, fluctuations in
currency exchange rates or the Company's hedging against currency exchange
rate fluctuations could have a material adverse effect on the Company's
business, financial condition and results of operations.
International sales and manufacturing operations are subject to a variety of
risks, including fluctuations in currency exchange rates, tariffs, import
restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles, potentially adverse
tax consequences and export license requirements. In addition, the Company is
subject to the risks inherent in conducting business internationally including
foreign government regulation, political and economic instability and
unexpected changes in diplomatic and trade relationships. Moreover, the laws
of certain foreign countries in which the Company's products may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's intellectual property rights to the same extent as do the laws of
the United States, thus increasing the possibility of piracy of the Company's
products. There can be no assurance that one or more of these risks will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
Need for Additional Capital. The Company requires substantial working
capital to fund its business, particularly to finance inventories and accounts
receivable and for capital expenditures. The Company believes that the net
proceeds of this offering, together with its existing capital resources, will
be sufficient to meet the Company's capital requirements through the next 12
months, although the Company could be required, or could elect, to seek to
raise additional capital during such period. The Company's future capital
requirements will depend on many factors, including the rate of net sales
growth, the timing and extent of spending to support research and development
programs and expansion of sales and marketing, the timing of introductions of
new products and enhancements to existing products, and market acceptance of
the Company's products. The Company expects that it may need to raise
additional equity or debt financing in the future. There can be no assurance
that additional equity or debt financing, if required, will be available on
acceptable terms or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Management of Expanded Operations. The Company has experienced, and may
continue to experience, periods of rapid growth and expansion, which have
placed, and could continue to place, a significant strain on the Company's
limited personnel and other resources. To manage these expanded operations
effectively, the Company will be required to continue to improve its
operational, financial and management systems. Given its relatively early
stage of development, the Company is dependent upon its ability to
successfully hire, train,
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motivate and manage its employees, especially its management and development
personnel. If the Company's management is unable to manage its expanded
operations effectively, the Company's business, financial condition and
results of operations could be materially adversely affected.
Dependence on Qualified Personnel. The Company's future success depends in
part on the continued service of its key engineering, sales, marketing,
manufacturing, finance and executive personnel, and its ability to identify,
hire and retain additional personnel. There is intense competition for
qualified personnel in the semiconductor industry, and there can be no
assurance that the Company will be able to continue to attract and train
qualified personnel necessary for the development of its business. The
Company's anticipated growth is expected to place increased demands on the
Company's resources and will likely require the addition of new management
personnel and the development of additional expertise by existing management
personnel. Loss of the services of, or failure to recruit in a timely manner,
key technical and management personnel could be significantly detrimental to
the Company's product development programs or otherwise have a material
adverse effect on the Company's business, financial condition and results of
operations.
Absence of Prior Public Market and Possible Volatility of Stock Price. Prior
to this offering, there has been no public market for the Common Stock and
there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price for Common Stock to be sold by
the Company was determined by negotiations among the Company and the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of this offering. See "Underwriting" for
factors considered in determining such offering price. The market price of the
Common Stock could be subject to significant fluctuations in response to
variations in the Company's anticipated or actual operating results,
announcements of new products, technological innovations or setbacks by the
Company or its competitors, conditions in the semiconductor and notebook PC
industries, the commencement of, developments in or outcome of litigation,
changes in estimates of the Company's performance by securities analysts, and
other events or factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of many high technology companies and that have
often been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Common Stock.
Concentration of Ownership. Following this offering, the Company's
directors, executive officers and principal stockholders and certain of their
affiliates will own beneficially approximately % of the outstanding shares
of Common Stock. Accordingly, these stockholders will have the ability to
influence significantly the election of the Company's directors as well as
most other stockholder actions.
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock (including shares issued upon the exercise of outstanding options
and warrants) in the public market following this offering could adversely
affect the market price for the Common Stock. Such sales could also make it
more difficult for the Company to sell its equity or equity-related securities
in the future at a time and price that the Company deems appropriate. The
holders of 20,191,651 shares of Common Stock, including all officers and
directors of the Company, are subject to "lock-up" agreements with the
Representatives of the Underwriters and/or the Company providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of the shares of Common Stock owned by them or that could be
purchased by them through the exercise of options to purchase Common Stock of
the Company for a period of 180 days after the date of this Prospectus without
the prior written consent of Morgan Stanley & Co. Incorporated and/or the
Company, as applicable. The Company has agreed with the Representatives of the
Underwriters not to release any holders from such agreements without the prior
consent of Morgan Stanley & Co. Incorporated. Such lock-up agreements may be
released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of Morgan & Stanley & Co. Incorporated. Of
the 20,191,651 shares of Common Stock that will first become eligible for sale
in the public market 180 days after the date of this Prospectus, approximately
4,634,926 shares will be immediately eligible for sale without restriction
under Rule 144(k) or Rule 701 under the Securities Act of 1933, as amended,
and approximately 15,556,725 shares will be immediately eligible for sale
subject to certain volume
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and other restrictions pursuant to Rule 144. Shortly after the effectiveness of
this offering, the Company intends to register approximately shares of
Common Stock reserved for issuance under its stock option and stock purchase
plans or currently subject to outstanding options. See "Shares Eligible for
Future Sale."
Anti-Takeover Provisions. Immediately after the closing of this offering, the
Board of Directors will have the authority to issue up to 2,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will
be subject to, and may be adversely affected by, the rights of holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may delay, defer or prevent a change in control of the Company as the
terms of the Preferred Stock that might be issued could potentially prohibit
the Company's consummation of any merger, reorganization, sale of substantially
all of its assets, liquidation or other extraordinary corporate transaction
without the approval of the holders of the outstanding shares of the Preferred
Stock. The Company has no present plans to issue shares of Preferred Stock. In
addition, Section 203 of the Delaware General Corporation Law, to which the
Company is subject, restricts certain business combinations with any
"interested stockholder" as defined by such statute. The statute may delay,
defer or prevent a change in control of the Company.
Dilution. Purchasers of the Common Stock in this offering will suffer
immediate and substantial dilution of $ per share in the net tangible book
value of the Common Stock from the initial public offering price. To the extent
that outstanding options to purchase the Common Stock are exercised, there will
be further dilution.
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THE COMPANY
NeoMagic Corporation ("NeoMagic" or the "Company") designs, develops and
markets multimedia accelerator solutions for sale to notebook PC
manufacturers. The Company believes it has developed the first commercially
available high performance silicon technology that integrates large DRAM
memory with analog and logic circuitry to provide a high performance
multimedia solution on a single chip. The Company's MagicGraph128 family of
pin-compatible, multimedia accelerator products incorporates a 128-bit memory
bus. The Company believes these products enable notebook PC manufacturers to
deliver state-of-the-art multimedia capability while decreasing power
consumption, size, system design complexity and cost. The Company has achieved
design wins with eight of the world's ten largest notebook PC manufacturers,
and its MagicGraph128 products are currently used in notebook PCs sold by
Acer, Compaq, Dell, Digital Equipment, Fujitsu, Hewlett-Packard, Hitachi,
Mitsubishi, NEC, Sharp and Texas Instruments.
Advances in the multimedia capabilities and features of personal computers
and software applications have fueled the demand for personal computers and
enhanced the usefulness of the PC as a platform for work, entertainment,
communication and collaboration. In particular, the effectiveness of
multimedia for many applications, such as on-site presentations and training,
education, video conferencing, e-mail and entertainment, is maximized in a
mobile environment, giving rise to significant demand for multimedia-capable
notebook PCs.
Multimedia accelerators for desktop PCs traditionally use multiple chip
solutions involving separate DRAM and analog/logic chips. However, the non-
integrated multiple chip solution has disadvantages in the notebook PC
environment, where tolerance for power consumption, heat generation and size
is more limited, and has forced notebook PC manufacturers to compromise
multimedia performance in order to satisfy mobile system design requirements.
NeoMagic has recognized a significant opportunity to "mobilize multimedia" by
making desktop quality multimedia acceleration practical in the notebook PC
environment through the integration of large DRAM with analog and logic
circuitry on a single chip.
NeoMagic's MagicGraph128 family of products ranges from accelerators
designed for notebook PCs that target cost-conscious consumers to fully-
featured multimedia systems designed for high-end notebook PCs. The Company
introduced its first MagicGraph128 product in March 1995, is currently in
production with three products and is sampling the fourth generation of its
MagicGraph128 family. NeoMagic is focused on leveraging its core competencies
in logic, analog and memory integration, graphics/video multimedia
technologies, driver and BIOS software, and power management to continue
developing solutions that facilitate the mobilization of multimedia
applications.
NeoMagic has established strategic relationships with two leading DRAM
manufacturers, Mitsubishi Electric Corporation ("MELCO") and Toshiba
Corporation ("Toshiba"), to produce semiconductor wafers for the Company's
products. The Company and MELCO have signed a Wafer Supply Agreement embodying
the terms of their relationship. The Company and Toshiba are negotiating a
similar agreement. Pursuant to these strategic relationships, NeoMagic designs
the overall product, including the logic and analog circuitry, and the
manufacturing partner designs the DRAM module, manufactures the wafers and
performs memory testing and repair. Upon delivery of finished wafers by the
DRAM partner, the Company uses subcontractors to perform assembly, packaging
and final testing of its products. This manufacturing approach enables
NeoMagic to concentrate its resources on product design and development.
To meet customer requirements, NeoMagic's sales and marketing personnel work
closely with customers, business partners and key industry trend setters to
define product features, performance, price, and market timing of new
products. Additionally, the Company employs a highly trained team of
application engineers to assist customers in designing, testing and qualifying
system designs that incorporate NeoMagic products. The Company believes that
the depth and quality of this design support are key to improving customers'
time-to-market, maintaining a high level of customer satisfaction and
encouraging customers to utilize subsequent generations of NeoMagic's
products.
The Company was incorporated in California in May 1993 and will
reincorporate in Delaware prior to the effectiveness of this offering. As used
in this Prospectus, unless the context otherwise requires, the terms
"NeoMagic" and the "Company" refer to NeoMagic Corporation, a Delaware
corporation, its consolidated subsidiaries and its predecessor, NeoMagic
Corporation, a California corporation. The Company's executive offices are
located at 3260 Jay Street, Santa Clara, California 95054, its telephone
number at that location is (408) 988-7020 and its Web site is located at
http:\\\\www.neomagic.com. Information contained in the Company's Web site is
not a part of this Prospectus.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
being offered hereby are estimated to be approximately $ at an estimated
initial public offering price of $ per share (approximately $ if the
Underwriters' over-allotment option is exercised in full). The principal
purposes of this offering are to obtain additional capital, create a public
market for the Company's Common Stock and facilitate future access by the
Company to public equity markets. The Company expects to use the net proceeds
from this offering for general corporate purposes, including working capital
and capital expenditures. A portion of the proceeds may also be used to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies; however, there are no plans,
negotiations or discussions with respect to any such transactions at the
present time. Pending use of the net proceeds for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing,
investment grade obligations. In the event that the Underwriters' over-
allotment option is exercised, the Company will not receive any proceeds from
the sale of Common Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock or other securities. The Company currently anticipates that it will
retain all of its future earnings for use in the expansion and operation of
its business and does not anticipate paying any cash dividends in the
foreseeable future.
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CAPITALIZATION
The following table sets forth current obligations under capital leases and
the total capitalization of the Company (i) as of October 31, 1996, and (ii)
as adjusted to reflect the automatic conversion of all outstanding shares of
Preferred Stock into Common Stock upon the closing of this offering and the
receipt by the Company of the estimated net proceeds from the sale of the
shares of Common Stock offered by the Company (at an estimated initial public
offering price of $ per share) and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
<TABLE>
<CAPTION>
OCTOBER 31, 1996
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current obligations under capital leases................ $ 1,086 $
======== ========
Long-term obligations................................... $ 1,061 $
Stockholders' equity:
Noncumulative Convertible Preferred Stock, $.001 par
value, 12,868,315 shares authorized, 12,259,614 shares
issued and outstanding, actual; 2,000,000 shares
authorized, no shares issued and outstanding, as
adjusted(1)........................................... 12 --
Common Stock, $.001 par value, 25,000,000 shares
authorized, 7,932,037 shares issued and outstanding,
actual; shares issued and outstanding, as
adjusted(1)........................................... 8
Additional paid-in capital............................. 18,091
Notes receivable from stockholders..................... (845)
Accumulated deficit.................................... (14,370)
-------- --------
Total stockholders' equity........................... 2,896
-------- --------
Total capitalization.............................. $ 3,957 $
======== ========
</TABLE>
- --------
(1) Excludes 1,499,050 shares of Common Stock issuable upon the exercise of
options under the Stock Plan and 316,743 shares of Common Stock issuable
upon the exercise of warrants outstanding as of October 31, 1996 and an
additional 1,509,641 shares of Common Stock reserved for future grant
under the Stock Plan as of October 31, 1996. In December 1996, the Board
of Directors of the Company approved, subject to stockholder approval, a
2,000,000 share increase in the number of shares reserved for issuance
under the Stock Plan and the reservation of 500,000 shares of Common Stock
for issuance under the Purchase Plan. See "Management--Employee Benefit
Plans" and Notes 6 and 10 of Notes to Consolidated Financial Statements.
16
<PAGE>
DILUTION
The net tangible book value of the Company as of October 31, 1996 was
$2,896,000 or $.14 per share of Common Stock. Net tangible book value per
share is determined by dividing the tangible book value of the Company (total
tangible assets less total liabilities) by the number of outstanding shares of
Common Stock at that date. After giving effect to the sale by the Company of
the shares of Common Stock offered hereby (based upon an assumed initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company), the Company's net tangible book value at October 31, 1996
would have been $ or $ per share. This represents an immediate increase
in net tangible book value to existing stockholders of $ per share and an
immediate dilution to new public investors of $ per share. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Net tangible book value per share as of October 31, 1996........ $
Increase per share attributable to new public investors.........
-----
Net tangible book value per share after offering.................
-----
Dilution per share to new public investors....................... $
=====
</TABLE>
The following table sets forth on a pro forma basis as of October 31, 1996
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid, and the average price per share paid by
the existing stockholders and by the new public investors (based upon an
assumed initial public offering price of $ per share before deduction of
estimated underwriting discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... % $ % $
New public investors(1)
---------- ----- ----------- -----
Total.................... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The foregoing table assumes no exercise of stock options or warrants.
Excludes 1,499,050 shares of Common Stock issuable upon the exercise of
options under the Stock Plan and 316,743 shares of Common Stock issuable
upon the exercise of warrants outstanding as of October 31, 1996. Such
options and warrants were issued at a weighted average exercise price of
$1.01 per share and $1.32 per share, respectively. In addition, as of
October 31, 1996 an additional 1,509,641 shares of Common Stock reserved
for future grant under the Stock Plan as of October 31, 1996. In December
1996, the Board of Directors of the Company approved, subject to
stockholder approval, a 2,000,000 share increase in the number of shares
reserved for issuance under the Stock Plan and the reservation of 500,000
shares of Common Stock for issuance under the Purchase Plan. To the extent
that any of these options or warrants are exercised, there will be further
dilution to new public investors. See "Capitalization," "Management--
Employee Benefit Plans" and Notes 6 and 10 of Notes Consolidated Financial
Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by reference
to, and should be read in conjunction with, the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The selected balance sheet data as of January 31, 1995 and 1996 and selected
consolidated statement of operations data for the period from May 26, 1993
(inception) through January 31, 1994 and the years ended January 31, 1995 and
1996 have been derived from and should be read in conjunction with the audited
consolidated financial statements of the Company and the notes thereto
included elsewhere in this Prospectus. The selected consolidated balance sheet
data as of January 31, 1994 has been derived from audited consolidated
financial statements and notes thereto not included in this Prospectus. The
consolidated statement of operations data for the nine months ended October
31, 1995 and 1996 and the balance sheet data as of October 31, 1996 have been
derived from unaudited consolidated financial statements that, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of financial position and
results of operations of the Company for the unaudited interim periods.
Operating results for the nine months ended October 31, 1996 are not
necessarily indicative of the results that may be expected for any other
interim or annual period.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 26, 1993 FISCAL YEAR NINE MONTHS
(INCEPTION) ENDED ENDED
THROUGH JANUARY 31, OCTOBER 31,
JANUARY 31, ---------------- -----------------
1994 1995 1996 1995 1996
------------ ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales................... $ -- $ -- $ 243 $ 72 $ 24,509
Cost of sales............... -- -- 165 46 18,285
----- ------- ------- ------- --------
Gross profit................ -- -- 78 26 6,224
Operating expenses:
Research and development... 465 2,423 4,934 3,341 5,833
Sales, general and
administrative............ 308 968 1,606 1,140 4,354
Other operating
expenses(1)............... -- 1,500 610 -- (1,503)
----- ------- ------- ------- --------
Total operating expenses.. 773 4,891 7,150 4,481 8,684
Loss from operations........ (773) (4,891) (7,072) (4,455) (2,460)
Other income, net:
Interest income and other . 16 194 385 277 1,193
Interest expense........... -- (94) (182) (117) (686)
----- ------- ------- ------- --------
Net loss.................. $(757) $(4,791) $(6,869) $(4,295) $ (1,953)
===== ======= ======= ======= ========
Pro forma net loss per share
(2)......................... $ (.32) $ (.09)
======= ========
Shares used in computing pro
forma net loss per share
(2)........................ 21,233 21,715
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
--------------------- OCTOBER 31,
1994 1995 1996 1996
------ ------- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 530 $4, 902 $6,877 $11,840
Working capital............................... 618 2,846 4,069 1,996
Total assets.................................. 1,039 5,956 8,749 22,695
Long-term obligations......................... 185 452 749 1,061
Total stockholders' equity.................... 753 3,313 4,542 2,896
</TABLE>
- -------
(1) Relates to amounts provided by the Company for estimated legal fees
associated with litigation which was settled in the second quarter of
fiscal 1997. The $1.5 million reduction in other operating expenses during
the nine months ended October 31, 1996 was due to the reversal of
previously provided legal fees as a result of such settlement.
(2) See Note 1 of Notes to Consolidated Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
NeoMagic designs, develops and markets multimedia accelerator solutions for
sale to notebook computer manufacturers. The Company has developed the first
commercially available high performance silicon technology that integrates
large DRAM memory with analog and logic circuitry to provide a high
performance multimedia solution on a single chip. The Company's MagicGraph128
family of pin-compatible multimedia accelerators incorporates a 128-bit memory
bus. The Company believes these products enable notebook PC manufacturers to
deliver state-of-the-art multimedia capability while decreasing power
consumption, size, system design complexity and cost.
Since its inception in May 1993 through the end of fiscal 1996, NeoMagic was
primarily engaged in product development, product testing and the
establishment of strategic relationships with customers and suppliers.
Accordingly, the majority of the Company's operating expenses during such
period were related to research and development activities. Since inception,
the Company has incurred losses in each fiscal year and in the nine months
ended October 31, 1996. At October 31, 1996, the Company had an accumulated
deficit of approximately $14.4 million. The Company first recognized revenue
on product sales in the first quarter of fiscal 1996. Operating results to
date in fiscal 1997 have benefited from increased market acceptance of the
Company's products. The Company generally recognizes revenue at the time of
product shipment. Although the Company has made no sales to distributors to
date, the Company's policy is to defer recognition of revenue on shipments to
distributors until the product is sold by such distributors.
All of the Company's net sales in fiscal 1996 and the first nine months of
fiscal 1997 were derived from sales of its multimedia accelerator products,
and the Company expects this trend to continue for the foreseeable future.
Historically, a majority of the Company's sales have been to a limited number
of customers. Sales to the Company's top five customers accounted for 100% and
81.4% of the Company's net sales for fiscal 1996 and the nine months ended
October 31, 1996, respectively. The Company expects that a substantial portion
of sales of its products will continue to be to a limited number of customers
for the foreseeable future. The customers contributing significant amounts of
net sales have varied and will continue to vary depending on the timing and
success of new product introductions by such customers.
Export sales are a critical part of the Company's business. Sales to
customers located outside the United States (including sales to foreign
operations of Customers headquartered in the United States and foreign system
manufacturers who sell to United States-based OEMs) accounted for 100% and
94.8% of the Company's net sales for fiscal 1996 and the nine months ended
October 31, 1996, respectively. The Company expects that the net sales derived
from purchases by international customers will continue to represent a
significant portion of its total net sales. All of the Company's sales are
denominated in United States dollars.
The Company's products require semiconductor wafers manufactured with state-
of-the-art fabrication equipment and technology. NeoMagic has established
strategic relationships with MELCO and Toshiba to produce its semiconductor
wafers and uses other independent contractors to perform assembly, packaging
and testing. The Company's relationship with MELCO was recently formalized in
a five year wafer supply agreement, and the Company is negotiating a similar
agreement with Toshiba. These relationships enable the Company to concentrate
its resources on product design and development, where NeoMagic believes it
has greater competitive advantages, and to eliminate the high cost of owning
and operating a semiconductor wafer fabrication facility. The Company depends
on these suppliers to allocate to the Company a portion of their manufacturing
capacity sufficient to meet the Company's needs, to produce products of
acceptable quality and at acceptable manufacturing yields and to deliver those
products to the Company on a timely basis. The Company purchases wafers, not
die, and pays an agreed price for wafers meeting certain acceptance criteria.
All of the Company's products are assembled and tested by independent vendors.
To date, all of the Company's wafer purchases, which constitute a significant
part of its cost of goods sold, have been denominated in Japanese yen. As a
result, exchange rate fluctuations can affect the Company's gross margin. The
Company has in the past hedged its exposure to fluctuations in the exchange
rate between the Japanese yen and the United States dollar by purchasing
forward contracts and may continue to do so in the future.
19
<PAGE>
Under its wafer supply agreement with MELCO and the proposed wafer supply
agreement with Toshiba, the Company is obligated to provide a rolling 12-month
forecast of anticipated purchases and to place binding purchase orders four
months prior to shipment. If the Company cancels a purchase order, the Company
must pay cancellation penalties based on the status of work in process or the
proximity of the cancellation to the delivery date. Forecasts of monthly
purchases may not increase or decrease by more than a certain percentage from
the previous month's forecast without the manufacturer's consent. Thus, the
Company must make forecasts and place purchase orders for wafers long before
it receives purchase orders from its own customers. This limits the Company's
ability to react to fluctuations in demand for its products, which can be
unexpected and dramatic and from time-to-time will cause the Company to have
an excess or a shortage of wafers for a particular product, which could cause
the Company to take charges for excess inventory or miss revenue
opportunities.
Prior to fiscal 1997, the Company was primarily engaged in research and
development and testing of its products. Accordingly, the majority of its
operating expenses were related to research and development activities. In
fiscal 1997, in connection with the commencement of commercial sales of its
products, the Company accelerated its investment in sales, marketing,
manufacturing and administrative infrastructures. The Company expects to
continue to devote substantial resources to research and development efforts.
All of the Company's research and development costs have been expensed as
incurred.
The Company's fiscal year end is January 31. Any reference herein to a
fiscal year refers to the year ended January 31 of such year.
Because of the Company's significantly different levels and stages of
operations during fiscal 1994, 1995, 1996 and 1997, year-to-year comparisons
are not meaningful. The following discussion summarizes the Company's
quarterly results of operations in fiscal 1997.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the consolidated statements of operations
data, both in absolute dollars and as a percentage of net sales, for each of
the three quarters during the nine months ended October 31, 1996. This
information has been derived from the Company's unaudited consolidated
financial statements. In management's opinion, this unaudited information has
been prepared on the same basis as the audited consolidated financial
statements appearing elsewhere in this Prospectus, and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation thereof. The unaudited quarterly information should be read
in conjunction with the audited consolidated financial statements of NeoMagic
and the notes thereto included elsewhere herein. The growth in net sales and
improvement in operating results experienced by the Company in recent quarters
are not necessarily indicative of future results. In addition, in light of the
significant growth in the recent year, NeoMagic believes that period-to-period
comparisons of its financial results should not be relied upon as an
indication of future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
APRIL 30, JULY 31, OCTOBER 31,
1996 1996 1996
--------- -------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales.................................... $ 3,520 $ 5,954 $15,035
Cost of sales................................ 2,815 5,481 9,989
------- ------- -------
Gross profit................................. 705 473 5,046
Operating expenses:
Research and development.................... 1,989 1,634 2,210
Sales, general and administrative........... 965 1,502 1,887
Other operating expenses.................... -- (1,503) --
------- ------- -------
Total operating expenses................. 2,954 1,633 4,097
Income (loss) from operations................ (2,249) (1,160) 949
Other income, net:
Interest income and other................... 1,076 75 42
Interest expense............................ (160) (210) (316)
------- ------- -------
Net income (loss)........................ $(1,333) $(1,295) $ 675
======= ======= =======
Pro forma net income (loss) per share........ $ (.06) $ (.06) $ .03
======= ======= =======
AS A PERCENTAGE OF NET SALES:
Net sales.................................... 100.0% 100.0% 100.0%
Cost of sales................................ 80.0 92.1 66.4
------- ------- -------
Gross profit................................. 20.0 7.9 33.6
Operating expenses:
Research and development.................... 56.5 27.4 14.7
Sales, general and administrative........... 27.4 25.2 12.6
Other operating expenses.................... -- (25.2) --
------- ------- -------
Total operating expenses................. 83.9 27.4 27.3
------- ------- -------
Income (loss) from operations................ (63.9) (19.5) 6.3
Other income, net:
Interest income and other................... 30.6 1.3 .3
Interest expense............................ (4.6) (3.5) (2.1)
------- ------- -------
Net income (loss)........................ (37.9)% (21.7)% 4.5%
======= ======= =======
</TABLE>
21
<PAGE>
Net Sales. The Company's net sales increased from quarter to quarter during
each of the first three quarters of fiscal 1997 due to a number of factors,
including increased market acceptance of the Company's products, introduction
by the Company of additional products in its MagicGraph128 product family
which expanded the portion of the market addressed by NeoMagic's products, and
the Company's investment in sales and marketing personnel and activities.
Although the Company achieved net sales growth of 153% between the second and
third quarters, the Company does not expect to sustain this rate of sequential
quarterly revenue growth in future periods. The Company expects that the
average selling prices of its products will decline over the respective lives
of such products.
Gross Profit. Gross profit was $705,000, $473,000 and $5.0 million in the
first, second and third quarters of fiscal 1997, respectively. The decrease in
the second quarter was due primarily to charges for anticipated inventory
losses attributable to lower than expected yields of finished products as a
result of a design error. The increase between the second and third quarters
was due primarily to higher sales volumes and to higher yields and lower
material costs on all products during the third quarter. This increase was
offset in part by charges for excess inventory. The Company's future gross
profit will be affected by the overall level of sales, the mix of products
sold in a period, manufacturing yields and the Company's ability to reduce
product costs.
Research and Development. Research and development expenses include
compensation and associated costs relating to development personnel, operating
system software costs, and prototyping costs which are comprised of mask costs
and pre-production wafer costs. The Company's research and development
expenses were $2.0 million, $1.6 million and $2.2 million for the first,
second and third quarters of fiscal 1997, respectively. The higher research
and development costs in the first and third quarters of fiscal 1997 were
primarily the result of timing of prototyping costs. The remainder of the
fluctuations in research and development expenses between the quarters
resulted primarily from additional engineering personnel and associated costs
as the Company continued to devote substantial resources to research and
development efforts. Research and development expenses as a percentage of net
sales declined substantially in each quarter of fiscal 1997 due primarily to
the quarter-to-quarter increases in net sales. The market for the Company's
products is characterized by frequent new product introductions and rapidly
changing technology and industry standards. As a result, the Company's success
will depend to a substantial degree upon its ability to develop and introduce
in a timely fashion new products, and enhancements to its existing products,
that meet changing customer requirements and emerging industry standards.
Accordingly, the Company expects to continue to make substantial investments
in research and development and anticipates that research and development
expenses will increase in absolute dollars in future periods.
Sales, General and Administrative. Sales, general and administrative
expenses were $1.0 million, $1.5 million and $1.9 million for the first,
second and third quarters of fiscal 1997, respectively. These increases were
due to the addition of sales, marketing, finance and administration personnel
and increased commission expenses associated with increased sales levels. The
Company anticipates that sales, general and administrative expenses will
increase substantially in absolute dollars in future periods as a result of
salaries and commissions for additional sales, marketing and finance
personnel, additional expenses associated with sales and marketing programs,
continued expansion of its international operations and additional expenses
related to being a public company.
Other Operating Expenses. The reduction in other operating expenses of $1.5
million in the second quarter of fiscal 1997 was due to the reversal of
previously provided legal fees as a result of the Company's settlement of such
litigation. See Note 8 of Notes to Consolidated Financial Statements.
Other Income, Net. The Company incurs interest expense on lease obligations
used to finance certain equipment and on borrowings under the Company's
working capital line of credit. The Company earns interest on its cash and
short-term investments. Other income, net was $916,000 for the first quarter
of fiscal 1997, and other expense, net was $135,000 and $274,000 for the
second and third quarters of fiscal 1997, respectively. Other income in the
first quarter was primarily attributable to $1.0 million in proceeds from non-
recurring
22
<PAGE>
engineering services performed by NeoMagic. The decrease in other income, net
from the second to the third quarter resulted primarily from higher interest
expense related to the increase in the amounts outstanding under the working
capital line. The Company may issue additional debt in the future to finance
future growth, which would result in increased interest expense. Although the
Company may perform engineering services from time to time on a project basis,
the Company does not anticipate generating income from engineering services on
a regular basis in future periods.
Provision for Income Taxes. The Company recorded no provision for federal or
state income taxes during the first three quarters of fiscal 1997. The Company
expects to record a provision for income taxes in fiscal 1998, the amount of
which will depend on several factors, including the availability of net
operating loss carryforwards, research and development tax credits and the
portion of the Company's business conducted through non-United States
subsidiaries. As of January 31, 1996, the Company had available net operating
loss carryforwards for federal and state tax purposes of approximately $10.8
million and $2.7 million, respectively. The Company's ability to utilize its
net operating losses may be limited in the future due to a deemed change of
control as a result of this offering. See Note 5 of Notes to Consolidated
Financial Statements.
NeoMagic's quarterly and annual results of operations are affected by a
variety of factors that could materially and adversely affect net sales, gross
profit and income from operations. These factors include, among others, demand
for the Company's products; changes in product or customer mix; fluctuations
in manufacturing yields; incorrect forecasting of future revenues;
availability and cost of manufacturing capacity; unanticipated delays or
problems in the introduction or performance of the Company's next generation
of products; the Company's ability to introduce new products in accordance
with OEM design requirements and design cycles; market acceptance of the
products of the Company's customers; changes in the timing of product orders
due to unexpected delays in the introduction of products of the Company's
customers or due to the life cycles of such customers' products ending earlier
than anticipated; new product announcements or product introductions by
NeoMagic's competitors; competitive pressures resulting in lower selling
prices; the volume of orders that are received and can be fulfilled in a
quarter; the rescheduling or cancellation of orders by customers which cannot
be replaced with orders from other customers; supply constraints for the other
components incorporated into its customers' notebook PC products; foreign
exchange rate fluctuations; the unanticipated loss of any strategic
relationship; seasonality associated with the tendency of PC sales to increase
in the second half of each calendar year; the level of expenditures for
research and development and sales, general and administrative functions of
the Company; costs associated with future litigation; and costs associated
with protecting the Company's intellectual property. Any one or more of these
factors could result in the Company failing to achieve its expectations as to
future revenues. The Company may be unable to adjust spending sufficiently in
a timely manner to compensate for any unexpected sales shortfall, which could
materially adversely affect quarterly operating results. Accordingly, the
Company believes that period-to-period comparisons of its operating results
should not be relied upon as an indication of future performance. In addition,
the results of any quarterly period are not indicative of results to be
expected for a full fiscal year. In certain future quarters, the Company's
operating results may be below the expectations of public market analysts or
investors. In such event, the market price of the Common Stock would be
materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of convertible preferred stock (raising net proceeds of
approximately $16.9 million) through borrowings from Mitsubishi International
Corporation ("Mitsubishi International"), under a working capital revolving
credit agreement (the "Credit Agreement") and through equipment leases.
Through October 31, 1996 the Company had purchased a total of approximately
$3.3 million of capital assets primarily through lease lines. The Company
currently has no commitments for significant additional capital expenditures.
As of October 31, 1996, the Company had an accumulated deficit of $14.4
million.
The Company's principal sources of liquidity as of October 31, 1996
consisted of $11.8 million in cash and cash equivalents and the Credit
Agreement. The Credit Agreement is used to finance wafer inventory purchases.
23
<PAGE>
The Credit Agreement provides for 90 day extended credit terms totaling $15.0
million, with a compensating balance requirement for balances in excess of
$12.0 million. As of October 31, 1996, the Company had borrowings of $13.5
million under the Credit Agreement. The interest rate under the Credit
Agreement is based on Mitsubishi International's internal interest rate, which
must be at least 1.0% below the prime rate on the date of the invoice,
generally approximately 30 days after the Company's receipt of the wafers. The
Company also paid a commission of 1.25% to 2.00% of its wafer purchases to
Mitsubishi International, based on the lending level under the Credit
Agreement during the prior calendar quarter. The Company and Mitsubishi
International have agreed to amend the Credit Agreement to provide (i) that
effective January 1, 1997 Mitsubishi International's sole compensation for the
financing of wafer purchases from MELCO will be a commission of 1.75% of such
wafer purchases and (ii) for 60 day extended credit terms. The term of the
Credit Agreement expires on November 20, 1997, subject to automatic extensions
thereafter from year to year unless a notice is given by either party. Under
the terms of the Credit Agreement Mitsubishi International maintains a
security interest in all of the Company's inventory, cash and investments, and
accounts and notes receivable. See Note 3 of Notes to Consolidated Financial
Statements.
Net cash used in operating activities for fiscal 1995 was $2.7 million,
compared with $6.4 million in fiscal 1996. This increase was primarily due to
an increase of approximately $2.0 million in net loss, which resulted
primarily from increased research and development activities, and $1.7 million
changes in operating asset and liability accounts for fiscal 1996. Net cash
used in operating activities for the nine months ended October 31, 1995 and
1996 was approximately $4.3 million and $7.7 million, respectively. The
increase in cash used for the nine months ended October 31, 1996 resulted from
substantial investments in inventories and accounts receivable as sales levels
increased during that period, offset partially by a reduction in net loss.
Net cash provided by financing activities in fiscal 1995 and fiscal 1996 was
$8.0 million and $9.1 million, representing private equity financing of $7.3
million and $8.0 million, respectively, in addition to proceeds from capital
leases. Net cash provided by financing activities for the nine months ended
October 31, 1996 was $14.0 million, representing net funding from the Credit
Agreement of $13.0 million and proceeds from capital leases. See Notes 3 and 4
of Notes to Consolidated Financial Statements.
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company believes that the net proceeds of this offering,
together with its existing capital resources, will be sufficient to meet the
Company's capital requirements through the next 12 months, although the
Company could be required, or could elect, to seek to raise additional capital
during such period. The Company's future capital requirements will depend on
many factors, including the rate of net sales growth, the timing and extent of
spending to support research and development programs and expansion of sales
and marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of the Company's products. The
Company expects that it may need to raise additional equity or debt financing
in the future. There can be no assurance that additional equity or debt
financing, if required, will be available on acceptable terms or at all. See
"Risk Factors--Need for Additional Capital".
24
<PAGE>
BUSINESS
The Company designs, develops and markets multimedia accelerator solutions
for sale to notebook PC manufacturers. The Company believes it has developed
the first commercially available high performance silicon technology that
integrates large DRAM memory with analog and logic circuitry to provide a high
performance multimedia solution on a single chip. The Company's MagicGraph128
family of pin-compatible, multimedia accelerator products incorporates a 128-
bit memory bus. The Company believes these products enable notebook PC
manufacturers to deliver state-of-the-art multimedia capability while
decreasing power consumption, size, weight, system design complexity and cost.
The Company has achieved design wins with eight of the world's ten largest
notebook PC manufacturers, and its MagicGraph128 products are currently used
in notebook PCs sold by Acer, Compaq, Dell, Digital Equipment, Fujitsu,
Hewlett-Packard, Hitachi, Mitsubishi, NEC, Sharp and Texas Instruments.
NeoMagic's MagicGraph128 family of products ranges from accelerators
designed for notebook PCs that target cost-conscious consumers to fully-
featured multimedia systems designed for high-end notebook PCs. The Company
introduced its first MagicGraph128 product in March 1995, is currently in
production with three products and is now sampling the fourth generation of
its MagicGraph128 product family. NeoMagic has established strategic
relationships with MELCO and Toshiba to produce semiconductor wafers for the
Company's products. Pursuant to these strategic relationships, NeoMagic
designs the overall product, including the logic and analog circuitry, and the
manufacturing partner designs the DRAM module, manufactures the wafers and
performs memory testing and repair. NeoMagic is focused on leveraging its core
competencies in logic, analog and memory integration, graphics/video
multimedia technologies, driver and BIOS software, and power management to
continue developing solutions that facilitate the mobilization of multimedia
applications.
INDUSTRY BACKGROUND
Advances in the multimedia capabilities and features of PCs and software
applications over the past decade have fueled the demand for PCs and helped
make the PC an integral part of everyday life. Graphical user interface
technology, which proliferated in the early 1990s with the introduction of the
Microsoft Windows operating system, provided a more intuitive environment for
PC users than traditional character-based interfaces and opened the power of
the PC to a broader audience of users. Improvements in the ability of PCs to
process graphics, video and audio are enabling the production of applications
that deliver compelling multimedia content, enhancing the usefulness of the PC
as a platform for work, entertainment, communication and collaboration. The
effectiveness of multimedia for many applications, such as on-site
presentations and training, education, video conferencing, e-mail and
entertainment, is maximized in a mobile environment, giving rise to
significant demand for multimedia-capable notebook PCs.
Fueled by the continued globalization of businesses, the proliferation of
client/server computing and the Internet, the growing number of mobile
professionals, combined with the pervasive use of multimedia, the notebook PC
market has emerged as a rapidly growing market segment. The benefits of being
able to work, interact, instruct, learn and play "off the desktop" at any time
and any place have increased the demand for notebook computing solutions.
Dataquest estimated in Fall 1996 that approximately 12 million notebook PCs
would be shipped in 1996 and that 23 million units will be shipped in the year
2000.
Multimedia applications require the storage, processing and display of
enormous streams of data. As a result, multimedia PCs have evolved to
incorporate higher capacity storage and system memory, faster microprocessors,
improved specialized multimedia accelerators and higher quality displays.
However, due to the constraints imposed by the mobile form factor--the need
for low power consumption, small size, lower weight, favorable thermal
characteristics and low cost, among others--the multimedia capabilities of
notebook PCs have lagged those of desktop computers. This has limited the
effectiveness of multimedia applications in notebook PCs.
Multimedia Acceleration Technology
A multimedia accelerator for graphics and video is a specialized subsystem
that offloads display and rendering functions from the PC's microprocessor,
enabling the CPU to devote more cycles to running
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applications and improving the system's overall performance. The traditional
approaches to designing a multimedia accelerator subsystem have involved a
multiple chip solution consisting of a logic/analog chip (controller) and
separate DRAM memory chips (frame buffer memory). The performance of the
accelerator depends primarily on the memory bandwidth (measured in megabytes
per second), which is the rate at which data can be transferred between the
controller and the frame buffer memory. Memory bandwidth can be increased by
using a wider data bus between the controller and the frame buffer memory
(i.e., the data is passed in bigger blocks between the chips), and/or a faster
clock speed in the multimedia accelerator. During the last decade, designers
of multimedia accelerators for desktop PCs have increased memory bandwidth
through both of these approaches, widening the memory bus from 8 bits to 128
bits and implementing faster clocks.
Many of the design approaches that have been used to improve multimedia
accelerator performance for desktop PCs are suboptimal for notebook PCs. In a
conventional multimedia accelerator architecture, where memory and logic are
not integrated, the implementation of a wider bus requires the use of more
input/output ("I/O") pins between the controller and the frame buffer memory
chips. Since the transfer of data through I/O pins is a power intensive
process, increasing the number of I/O pins dramatically increases power
consumption and heat generation, which decreases battery life in notebook PCs
and may entail the addition of a costly and bulky heat sink. Increasing the
number of I/O pins also increases both the size of the chip packages and the
size of the board area needed for the interconnections, as well as increasing
system complexity and cost. Similar to the addition of I/O pins, the use of a
faster system clock to increase memory bandwidth results in greater power
consumption, heat generation and a more complex system design. As a
consequence, designers of multimedia accelerators for notebook PCs do not have
the same flexibility as designers for desktop PCs to increase the
accelerator's memory bandwidth through the use of additional I/O pins or a
faster clock.
To fully mobilize multimedia, the Company believes notebook PC manufacturers
require a new approach for developing multimedia accelerators which delivers
higher performance while minimizing power consumption and system size, weight,
complexity and cost.
NEOMAGIC SOLUTION
NeoMagic has pioneered a new technology to provide multimedia semiconductor
solutions for notebook PCs which overcome the limitations of traditional
architectures. This integrated solution, called "MagicWare" (Memory, Analog
and loGIC WARE) is the first commercially available high performance silicon
technology that integrates large DRAM memory with analog and logic circuitry
on a single chip. Using this technology, the Company has developed its first
product line: the MagicGraph128 family of pin-compatible, multimedia
(graphics, text and video) accelerators incorporating a 128-bit memory bus.
These products provide state-of-the-art multimedia capability while decreasing
power consumption, size and system design complexity. The Company introduced
its first MagicGraph128 product in March 1995, is currently in production with
three products and is sampling the fourth generation of its MagicGraph128
product family.
The Company's MagicGraph128 products provide the following important
advantages to notebook PC manufacturers and to end users:
Higher Performance. The Company's MagicGraph128 products provide the widest
commercially available memory bus for notebook PC multimedia accelerators. The
Company's current products use a 128-bit memory bus as compared to
conventional multiple chip solutions which have generally used 32-bit buses
and are migrating to 64-bit buses. The Company's technology enables faster and
smoother output of graphics, video and animation while maintaining high color
depth to increase user productivity and improve the user experience.
Lower Power Consumption. By integrating large DRAM with analog and logic
circuitry on a single chip, MagicGraph128 products eliminate the power-
consuming I/O pins used in conventional architectures for connections between
the logic/analog chip and the DRAM memory chips. The Company believes that, by
eliminating these I/O pins and using other advanced power management
techniques, the MagicGraph128 products consume approximately one-quarter of
the power used by conventional accelerators with equivalent feature sets,
potentially extending battery life.
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Reduced Size and Weight. The MagicGraph128 single chip solution has a
smaller footprint than conventional multiple chip solutions and eliminates the
need for interconnections between chips, enabling the system manufacturer to
reduce board size and, in some cases, to eliminate boards or to add other
features for increased functionality without increasing board size. The
Company believes that MagicGraph128 products also can reduce the size and
weight of the notebook PC by allowing the manufacturer to use fewer or smaller
batteries and, in some cases, by eliminating the need for a heat sink.
Lower Complexity and Improved Reliability of Notebook PC System. The
Company's MagicGraph128 products can reduce design complexity of both the
multimedia system and of the entire notebook PC by reducing the number of
chips and interconnections, creating less heat and reducing electro-magnetic
interference ("EMI"). The Company believes that, as a result, the Company's
products can reduce system design time and simplify the manufacturing process,
and thereby enable notebook PC manufacturers to produce more reliable systems
and reduce time-to-market.
Lower System Cost. The MagicGraph128 products can lower the overall system
cost of notebook PCs by reducing the number of chips required for the
multimedia accelerator system, typically resulting in lower assembly and
printed circuit board costs, and in certain cases eliminating the need for
heat sinks. The decreased number of I/O pins also reduces the number of
soldered connections, which the Company believes can increase system
manufacturing yield. The reduction in power consumption can also save costs by
requiring lower capacity batteries to achieve the desired battery life.
System Upgradability. The Company's technology enables the Company to
provide single chip, pin-compatible products with different amounts of
embedded memory, thereby enabling notebook PC manufacturers to design product
upgrades without redesigning printed circuit boards. By comparison, increasing
the DRAM capacity of conventional multimedia systems typically requires adding
board space, increasing pin count and changing board design. The Company
believes that providing a pin-compatible product family enhances its ability
to achieve design wins through multiple product cycles, lowers system
manufacturers' design and support costs and improves customers' time to
market.
STRATEGY
NeoMagic's goal is to be a leading global supplier of multimedia
semiconductor solutions for the notebook PC market. The Company's strategy for
mobilizing multimedia includes the following elements:
Maintain Leadership in Providing Multimedia Accelerator Solutions for
Notebook PCs. The Company believes that its MagicGraph128 products are the
first commercially available multimedia accelerators that integrate large DRAM
memory with analog and logic circuitry on a single chip. NeoMagic is focused
on leveraging and building its core competencies in logic, analog and memory
integration, graphics/video multimedia technologies, driver and BIOS software,
and power management to continue developing solutions that facilitate the
mobilization of multimedia applications both in the notebook PC market and
eventually in other mobile products market. The Company is currently sampling
its fourth generation MagicGraph128 product.
Cultivate Long Term Relationships with Leading Notebook PC Companies. The
Company seeks to establish close relationships with the world's leading
notebook PC companies. The Company has achieved design wins with eight of the
world's ten largest notebook PC manufacturers, and its MagicGraph128 products
are currently used in notebook PCs sold by Acer, Compaq, Dell, Digital
Equipment, Fujitsu, Hewlett-Packard, Hitachi, Mitsubishi, NEC, Sharp and Texas
Instruments. Long term relationships with its customers and partners enhance
the Company's ability to anticipate the needs of its target markets and
develop products that meet those needs in a timely manner. The Company's
strategy includes adding additional OEM companies to its customer portfolio
and enhancing its record of notebook PC design wins.
Establish Strategic Relationships with World-Class DRAM Partners. The
Company established a strategic relationship with MELCO in early calendar
1994, and MELCO has manufactured all of the wafers for the
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Company's products to date. In January 1997, the Company formalized its
strategic relationship with MELCO in a wafer supply agreement. The Company is
also in the process of formalizing its strategic relationship with Toshiba and
expects that Toshiba will begin manufacturing wafers for one of the Company's
future products in the second half of calendar 1997. The Company's DRAM
partners design the DRAM portions of the products, manufacture the wafers for
the Company's products and perform testing and repairs. These strategic
relationships enable the Company to benefit from its partners' standard DRAM
design rules and manufacturing processes and to accelerate product development
by leveraging its partners' technology expertise.
Extend Core Technology to Address New Market Opportunities. The Company
believes its MagicWare technology may be extended to a variety of other
applications. The Company intends to investigate opportunities to apply its
MagicWare technology to other product applications both inside and outside the
PC market. Potential applications being examined by the Company include mass
storage, communication and consumer devices, such as DVDs and Internet
appliances.
MARKETS AND PRODUCTS
The Company sells its products to notebook PC OEMs as well as to third-party
subsystem manufacturers who design and manufacture notebook PCs on behalf of
the brand name OEMs. The Company has achieved design wins with eight of the
world's ten largest notebook PC manufacturers, and its MagicGraph128 products
are currently used in notebook PCs sold by the following companies:
Acer Hitachi
Compaq Mitsubishi
Dell NEC
Digital Equipment Sharp
Fujitsu Texas Instruments
Hewlett-Packard
The Company sells the MagicGraph128 line of pin-compatible 128-bit
multimedia accelerators for notebook PCs. Each product integrates large DRAM
with analog and logic circuitry on a single 176-pin chip. The MagicGraph128
family of products ranges from accelerators designed for notebook PCs that
target cost-conscious consumers to fully-featured multimedia systems designed
for high-end notebook PCs. The following table sets forth information with
respect to each of the Company's first four products:
<TABLE>
<CAPTION>
MEMORY
PRODUCT PRODUCT STATUS SIZE KEY NEW FEATURES
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
MagicGraph128 Volume production 7Mbits 128-bit multimedia accelerator
Feb 1996 Active and passive LCD panel interface
18 bit RAMDAC
Less than 500mW power dissipation
800x600 resolution with 256 colors
--------------------------------------------------------------------------------------
MagicGraph128V Volume production 9Mbits Video acceleration for MPEG playback
June 1996 24-bit RAMDAC
800x600 resolution with 64,000 colors
--------------------------------------------------------------------------------------
MagicGraph128ZV Volume production 9Mbits Zoom Video port for live video capture
September 1996 TV output support
--------------------------------------------------------------------------------------
MagicGraph128XD Prototypes available 16Mbits Bus master for 3D/video acceleration
November 1996 Spread spectrum EMI suppression
1024x768 resolution with 64,000 colors
</TABLE>
MagicGraph128. The MagicGraph128, the Company's first product, is the
industry's first 128-bit, single-chip graphics accelerator for notebook
computers. The MagicGraph128 provides high performance graphics for
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mainstream business and consumer notebooks while decreasing power consumption,
size, system design complexity and cost. The Company has sold over 450,000
units of this product since volume production commenced in February 1996.
MagicGraph128V. The MagicGraph128V builds on the capabilities of the
MagicGraph128 by adding support for more colors and full-motion video.
Optimized for mobile business professionals who perform multimedia
presentations with sound and motion, the MagicGraph128V provides MPEG playback
with full screen and full motion video at 30 frames per second with true
color.
MagicGraph128ZV. The MagicGraph128ZV adds zoom video capability (for
capturing and displaying TV or video images) and television output capability
to the MagicGraph128V. The MagicGraph128ZV provides a fully-featured
multimedia solution for mid-range and high-end notebook PCs with 800x600 LCD
displays.
MagicGraph128XD. By offering higher display resolutions, a larger number of
displayable colors, and higher performance, the MagicGraph128XD is designed to
provide desktop-replacement capabilities to high-end notebooks. The
MagicGraph128XD is designed to deliver performance enhancements for Microsoft
Direct3D. These enhancements accelerate animation, games and business
applications utilizing 3D in a Windows environment.
TECHNOLOGY
NeoMagic has pioneered MagicWare (Memory, Analog and loGIC WARE) technology
which integrates large DRAM with analog and logic circuitry on a single chip.
This integration represents a challenging problem because DRAM and logic
design and process technologies have evolved along different paths over the
past 15 years. DRAM process technology has been driven primarily by the need
for high density memory storage while logic process technology has been driven
primarily by the need to achieve greater speed and metal interconnect density.
As a result, a typical 16 Mbit DRAM process features densely packed,
relatively slow transistors with two layers of metal interconnect, while the
typical logic process utilizes a less dense configuration of relatively fast
transistors with three or more layers of metal interconnect. In addition,
DRAMs are characterized by a relatively high degree of electrical noise
compared to logic and analog circuits due to the sharp peaks in power demand
from the charging and synchronous discharging of large capacitances associated
with the data lines of DRAM memory cells. High levels of electrical noise tend
to disrupt the behavior and performance of analog circuits that share the same
silicon substrate with the DRAM.
The Company has focused on overcoming the difficulties of integrating large
DRAM with analog and logic circuitry by selecting manufacturing partners with
the most suitable DRAM process technology and by developing proprietary
technology in the following areas:
Performance. NeoMagic's embedded DRAM system architectures are designed to
optimize system performance and to scale performance as memory bandwidth
increases through process and architectural enhancements to the DRAM module
designs. NeoMagic has worked closely with MELCO to modify MELCO's proven 16
Mbit DRAM designs to generate a 128-bit wide, high bandwidth memory bus that
delivers high performance capture and display of multimedia data streams, as
well as 2D and 3D graphics. The Company has developed significant expertise in
matching processing engine data paths, buffer depth and width and arbitration
schemes to the available memory bandwidth, as well as in making system level
(hardware and software) tradeoffs to place hardware in the processing engine
to balance the utilization of system bus and memory bandwidth. The Company
believes that the ability to deliver scalable system performance will become
increasingly important due to the introduction of high bandwidth system buses
for multimedia applications, such as Intel's Accelerated Graphics Port
("AGP"), which is expected to be incorporated into PC architectures in 1997.
Reduced Power Consumption. NeoMagic has implemented numerous system
architecture design techniques to reduce power consumption for its multimedia
solutions. The Company's integrated logic and DRAM products deliver
significant power savings through the elimination of the I/O pads which are
typically utilized in conventional solutions to connect discrete logic and
DRAM components. Power consumption in the
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Company's products is further reduced due to their "granularity," which means
that they integrate no more than the amount of DRAM required for a given
application. For example, the Company's MagicGraph128V and MagicGraph128ZV
products integrate only the 9 Mbits of DRAM needed to accelerate an SVGA
display. In contrast, non-integrated solutions typically utilize 16 Mbits (2
megabytes) of DRAM due to the configuration of commercially available DRAMs.
NeoMagic has also developed additional power management techniques such as
sophisticated processing engine and memory module design to optimize memory
access time, page size, buffer size and processing pipeline stages while
achieving minimal power consumption and logic gate count without performance
degradation. Together with the incorporation of more traditional power
management techniques such as low power logic design, clock management and low
power cell library design, NeoMagic believes that its proprietary
architectures currently deliver the lowest power consumption available on
notebook PCs. The reduction in power consumption improves the battery life and
diminishes heat generation. The Company believes these same architectural
concepts have the potential to be used to achieve similar power savings on
other power-sensitive hardware platforms.
Manufacturing Test. NeoMagic and its DRAM manufacturing partners have
jointly developed cost-effective testing methodologies for products based on
the Company's MagicWare technology. These methodologies are based on the
synergistic combination of established test-and-repair techniques developed
for DRAM manufacturing and built-in self test techniques developed for logic
ICs.
Reduction of Electro-magnetic Interference. The FCC imposes strict limits on
EMI emissions from electronic devices including PCs. The reduction of EMI
often represents a challenging problem for the system designer, particularly
in small form factor mobile applications. All data transfer between logic and
memory occurs on a single chip in the Company's MagicGraph128 products,
inherently eliminating a significant source of EMI. NeoMagic also has
developed proprietary spread spectrum techniques to further reduce EMI in the
transmission of video and graphics data for display on high resolution LCD
panels. The Company believes that its ability to reduce EMI will become
increasingly important as DRAM speeds continue to increase to meet higher
memory bandwidth requirements for portable applications.
Design Methodology. The Company designs its products by utilizing a high-
level design language and a proprietary NeoMagic cell library for logic
synthesis. The Company verifies designs in the high-level language and at the
gate level using software simulators. Each design is further validated at the
system level through hardware emulation prior to committing the design to
silicon. In the physical design of placement and routing, NeoMagic has
developed proprietary layout technology to integrate large DRAM with analog
and logic circuitry on the same substrate while preserving signal integrity,
eliminating cross talk, minimizing clock skew and maximizing clock frequency.
Software Technology. NeoMagic has built a robust and flexible software base
to support Windows 3.1, Windows 95, Windows NT and OS/2 operating systems for
notebook PCs. The Company also provides customer specific control panels and
utilities for intelligent power management and the management of hardware and
software resources. The Company ensures software quality through a
comprehensive quality assurance process developed in consultation with its
customers. NeoMagic is focused on enhancing its software to support new levels
of functionality and performance demanded by more intuitive user interfaces
and more realistic multimedia experiences.
MANUFACTURING
The Company's products require semiconductor wafers manufactured with state-
of-the-art fabrication equipment and technology. NeoMagic has established
strategic relationships with two leading DRAM manufacturers to produce its
semiconductor wafers, and uses other independent contractors to perform
assembly, packaging and testing. This approach enables the Company to
concentrate its resources on product design and development, where NeoMagic
believes it has greater competitive advantages, and to eliminate the high cost
of owning and operating a semiconductor wafer fabrication facility.
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The Company's products are designed to be manufactured in accordance with
the DRAM partners' design rules and manufacturing processes. Each DRAM partner
has a design team dedicated to NeoMagic product development. The DRAM partner
designs the DRAM product modules, and NeoMagic designs the overall product,
including the analog and logic circuitry. The DRAM partner then aids the
Company in design verification prior to production. The DRAM partners
manufacture the wafers, perform memory testing and repair, and sell the
Company finished wafers, with pricing determined on a quarterly basis. The
Company uses subcontractors to perform assembly, packaging and final test. The
Company develops its own software and hardware for product testing.
All of the Company's products are currently supplied by MELCO in Japan.
MELCO is currently producing six-inch wafers for the Company and expects to
begin producing eight-inch wafers for certain of the Company's new products in
calendar 1997. The Company also has established a strategic relationship with
Toshiba to commence production of the Company's next generation multimedia
accelerator products. NeoMagic does not expect that a significant portion of
the Company's wafer requirements will be met by Toshiba before calendar 1998.
The Company expects that, for the foreseeable future, each of its products
will be single source manufactured. Because the lead time needed to establish
a strategic relationship with a new DRAM partner is at least twelve months and
the estimated time for MELCO to switch to a new product line is four to six
months, there is no readily available alternative source of supply for any
specific product. A disruption of manufacturing facilities at one of the
partner's plants would disrupt the Company's production of particular for a
substantial period of time. In the event that the process improvements at
MELCO or the relationship with Toshiba is unsuccessful or delayed beyond the
Company's expectations, the Company's business, financial condition and
results of operation would be materially and adversely affected.
Until recently, MELCO supplied wafers to the Company on a purchase order
basis. In January 1997, the Company and MELCO entered into a five year Wafer
Supply Agreement setting forth the terms of their relationship (the "MELCO
Agreement"). The Company is currently negotiating a similar agreement with
Toshiba. Under the MELCO Agreement, and under the Company's proposed agreement
with Toshiba, the Company is obligated to provide a rolling 12 month forecast
of anticipated purchases and to place binding purchase orders four months
prior to shipment. If the Company cancels a purchase order, it must pay
cancellation penalties based on the status of work-in-process or the proximity
of the cancellation to the shipment date. Forecasts of monthly purchases may
not increase or decrease by more than a certain percentage from the previous
month's forecast without the manufacturer's consent. The MELCO Agreement also
provides that MELCO and the Company will indemnify each other with respect to
certain third party intellectual property claims, and the agreement with
Toshiba is expected to contain similar provisions.
The Company's manufacturing arrangements require it to make forecasts and
place purchase orders for wafers long before it receives purchase orders from
its own customers. This limits the Company's ability to react to fluctuations
in demand for its products, which can be unexpected and dramatic, and often
will cause the Company to have an excess or shortage of wafers for a
particular product. As a result of the long lead time for manufacturing
wafers, semiconductor companies such as the Company from time to time must
take charges for excess inventory. For example, the Company booked a $750,000
charge for excess inventory in the nine months ended October 31, 1996.
Significant write-offs of excess inventory could materially and adversely
affect the Company's financial condition and results of operations.
Conversely, failure to order sufficient wafers would cause the Company to miss
revenue opportunities and, if significant, could impact sales by the Company's
customers, which could adversely affect the Company's customer relationships
and thereby materially adversely affect the Company's business, financial
condition and results of operations.
The Company's products are assembled and tested by third party
subcontractors. The Company does not have long-term agreements with any of
these subcontractors. As a result of this reliance on third party
subcontractors to assemble and test its products, the Company cannot directly
control product delivery schedules, which could lead to product shortages or
quality assurance problems that could increase the costs of manufacture or
assembly of the Company's products. Due to the amount of time normally
required to qualify assembly and test subcontractors, if the Company is
required to find alternative subcontractors, shipments could be delayed
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significantly. Any problems associated with the delivery, quality or cost of
the assembly and test of the Company's products could have a material adverse
effect on the Company's business, financial condition and results of
operations.
SALES AND MARKETING
NeoMagic's sales and marketing strategy is an integral part of the Company's
effort to become a leading supplier of multimedia accelerators to the leading
manufacturers of notebook PCs. To meet customer requirements and achieve design
wins, the Company's sales and marketing personnel work closely with its
customers, business partners and key industry trend setters to define product
features, performance, price, and market timing of new products. The Company
employs a sales force with a high level of technical expertise and product and
industry knowledge to support a lengthy and complex design win process.
Additionally, the Company employs a highly trained team of application
engineers to assist customers in designing, testing and qualifying system
designs that incorporate NeoMagic products. The Company believes that the depth
and quality of this design support are key to improving customers' time-to-
market, maintaining a high level of customer satisfaction and encouraging
customers to utilize subsequent generations of NeoMagic's products.
In many cases, notebook PCs are designed and manufactured by third party
system manufacturers on behalf of the final brand name OEM. NeoMagic focuses on
developing long-term customer relationships with both the system manufacturer
and the brand name OEMs. The Company believes that this approach increases the
likelihood of design wins, improves the overall quality of support and enables
timely release of customer product to market.
In the United States, the Company sells its products to key customers
primarily through direct sales. In Japan, DIA Semicon acts as the Company's
sales representative. In Taiwan, Regulus acts as the Company's sales
representative, with support from the Company's Taiwan country manager. As of
December 31, 1996, NeoMagic employed 18 individuals in its sales, marketing and
support organization and maintained regional sales offices in Austin, Texas and
Taipei, Taiwan.
During fiscal 1996, sales to Quanta, Compal and Hewlett-Packard accounted for
approximately 34.6%, 28.6% and 14.4% of revenues, respectively. For the first
three quarters of fiscal 1997, sales to Sony and Compal accounted for
approximately 35.3% and 18.9% of revenues, respectively. Quanta, Compal and
Sony are system manufacturers for brand name OEMs. No other customers
represented more than 10% of the Company's net sales for either of such
periods. Sales to the Company's top five customers accounted for 81.4% of
revenues in the first three quarters of fiscal 1997 and 100% in fiscal 1996.
Sales to customers located outside the United States accounted for 100% and
94.8% of the Company's revenue for fiscal year 1996 and the first three
quarters of fiscal 1997, respectively.
PROPRIETARY RIGHTS
The Company relies in part on patents to protect its intellectual property.
In the United States, the Company has been issued two patents, each covering
certain aspects of the design and architecture of the Company's multimedia
accelerators. In addition, the Company has several patent applications pending
in the United States Patent and Trademark Office (the "PTO"). There can be no
assurance that the Company's pending patent applications or any future
applications will be approved, or that any issued patents will provide the
Company with competitive advantages or will not be challenged by third parties,
or that the patents of others will not have an adverse effect on the Company's
ability to do business. Furthermore, there can be no assurance that others will
not independently develop similar products, duplicate the Company's products or
design around any patents that may be issued to the Company.
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The Company also relies on a combination of mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its
intellectual property. Despite these efforts, there can be no assurance that
others will not independently develop substantially equivalent intellectual
property or otherwise gain access to the Company's trade secrets or
intellectual property or disclose such intellectual property or trade secrets
or that the Company can meaningfully protect its intellectual property. A
failure by the Company to meaningfully protect its intellectual property could
have material adverse effect on the Company's business, financial condition
and results of operations.
The Company has in the past, and may in the future be, notified that it may
be infringing the intellectual property rights of third parties. For example,
in October 1996 the Company was notified by two of its customers that they had
received a letter from the holder of a United States patent asserting that the
video graphics subsystem in such customers' notebook PCs which use the
Company's MagicGraph128 and MagicGraph128V products, infringe certain claims
of the patent. As is standard in the semiconductor industry, the Company has
certain indemnification obligations to customers with respect to the
infringement of third-party intellectual property rights by its products.
There can be no assurance that the Company's obligation to indemnify such
customers will not have a material adverse effect on the Company's business
financial condition and results of operations. The Company believes, based
upon advice rendered by its patent counsel in this matter, Townsend and
Townsend and Crew, that the Company's MagicGraph128 and MagicGraph128V
products do not infringe any of the claims of the patent. However, there can
be no assurance that the holder of such patent will not file a lawsuit against
the Company or its customers, that the Company or such customers would prevail
in any such litigation, or that such customers will continue to purchase the
Company's products under the threat of potential litigation. Any such
litigation, whether or not determined in the Company's favor or settled by the
Company, would at a minimum be costly and could divert the efforts and
attention of the Company's management and technical personnel from productive
tasks, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. In November 1994, Cirrus Logic filed suit against the Company and
certain of its employees claiming, among other things, breach of fiduciary
duty, breach of and interference with contract and misappropriation of trade
secrets. The Company and Cirrus Logic settled the lawsuit in March 1996, but
the Company incurred an aggregate of $703,000 in expenses in connection with
such litigation during fiscal 1995 and fiscal 1996. There can be no assurance
that infringement claims by third parties or claims for indemnification by
other customers or end users of the Company's products resulting from
infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. In the
event of any adverse ruling in any such matter, the Company could be required
to pay substantial damages, which could include treble damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of
certain processes or to obtain a license under the intellectual property
rights of the third party claiming infringement. There can be no assurance,
however, that a license would be available on reasonable terms or at all. Any
limitations on the Company's ability to market its products, or delays and
costs associated with redesigning its products or payments of license fees to
third parties, or any failure by the Company to develop or license a
substitute technology on commercially reasonable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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COMPETITION
The market for multimedia accelerators for notebook PCs in which the Company
competes is intensely competitive and is characterized by rapid technological
change, evolving industry standards and declining average selling prices.
NeoMagic believes that the principal factors of competition in this market are
performance, price, features, power consumption, size, weight and software
support. The ability of the Company to compete successfully in the rapidly
evolving notebook PC market depends on a number of factors, including success
in designing and subcontracting the manufacture of new products that implement
new technologies, product quality, reliability, price, the efficiency of
production, design wins for NeoMagic's integrated circuits, ramp up of
production of the Company's products for particular system manufacturers, end-
user acceptance of the system manufacturers' products, success of competitors'
products and general economic conditions. There can be no assurance that the
Company will be able to compete successfully in the future.
NeoMagic competes with major domestic and international companies, most of
which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. The Company's principal competitors include
Chips & Technologies, Cirrus Logic, S3 and Trident. NeoMagic may also face
increased competition from new entrants into the notebook PC multimedia
accelerator market including from companies currently selling products
designed for desktop PCs. Furthermore, the Company expects that many of its
competitors will seek to develop and introduce products that integrate large
DRAM with analog and logic circuitry on a single chip. For example, Chips &
Technologies and Trident have recently announced separate programs to
introduce in conjunction with Samsung, the world's largest DRAM manufacturer,
an integrated multimedia acceleration solution for the notebook PC market that
would compete directly with the Company's products. In addition, Intel or
other semiconductor manufacturers of microprocessors such as Intel could in
the future develop a microprocessor that is integrated with a multimedia
accelerator solution. In either case, the successful commercial introduction
by such entities of such products could have a material adverse impact on the
Company's business, financial condition and results of operation. In such
event, the Company's business, financial condition and results of operation
could also be materially adversely affected.
Some of the Company's current and potential competitors operate their own
manufacturing facilities. Since the Company does not operate its own
manufacturing facility and must make binding commitments to purchase products,
it may not be able to reduce its costs and cycle time or adjust its production
to meet demand as rapidly as companies that operate their own facilities,
which could have a material adverse effect on its business, financial
condition and results of operations. Additionally, a significant reduction in
the price of DRAMs could cause the Company's products to be less competitively
priced, potentially affecting ongoing product pricing as well as resulting in
the loss of design wins for new notebook PCs.
BACKLOG
Sales of the Company's products are made pursuant to standard purchase
orders that are cancelable without significant penalties. In addition,
purchase orders are subject to price renegotiations and to changes in
quantities of products and delivery schedules in order to reflect changes in
customers' requirements and manufacturing availability. A large portion of the
Company's sales are made pursuant to short lead time orders. In addition, the
Company's actual shipments depend on the manufacturing capacity of the
Company's suppliers and the availability of products from such suppliers. As a
result of the foregoing factors, the Company does not believe that backlog at
any give time is a meaningful indicator of future sales.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 86 full-time
employees, including 44 in research and development, 8 in customer service and
applications engineering, 10 in sales and marketing, 8 in manufacturing and 16
in finance and administration. The Company also employs, from time to time, a
number
34
<PAGE>
of temporary and part-time employees as well as consultants on a contract
basis. The Company's employees are not represented by a collective bargaining
organization, and the Company believes that its relations with its employees
are good.
FACILITIES
The Company's corporate headquarters, which is also its principal
administrative, selling and marketing, customer service, applications
engineering and product development facility, is located in Santa Clara,
California and consists of approximately 45,000 square feet under a lease
which expires on April 30, 2003. The Company has subleased approximately
12,000 square feet of its office space under a sublease that expires March 31,
1998, and approximately 3,200 square feet of office space under another
sublease that expires May 31, 1997. The Company also leases a small sales
office in Austin, Texas. The Company believes its existing facilities are
adequate for its current needs and that additional space for growth will be
met as the expiration of the current sublease arrangements occur.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of January 16, 1997
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kamran Elahian.......................... 42 Chairman of the Board
Prakash C. Agarwal...................... 43 President, Chief Executive Officer and Director
Dr. Clement Leung....................... 47 Vice President, Engineering
Deepraj Puar............................ 51 Vice President, Technology
Ibrahim Korgav.......................... 48 Vice President, Manufacturing Operations
Ron Jankov.............................. 38 Vice President, Sales
Niall Bartlett.......................... 36 Vice President, Marketing
Merle McClendon......................... 41 Vice President, Finance and Chief Financial Officer
Irwin Federman(1)....................... 61 Director
Michael Moritz(1)....................... 42 Director
James Lally(2).......................... 52 Director
Brian P. Dougherty(2)................... 40 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Kamran Elahian, a co-founder of the Company, has been Chairman of the Board
since the Company's inception in 1993. Mr. Elahian has co-founded several
Silicon Valley companies since 1981, including CAE Systems, Inc., a computer-
aided engineering software company, Cirrus Logic, a semiconductor manufacturer
and Momenta Corporation, a pen-based computer company. In addition to his
duties as Chairman of the Company, Mr. Elahian is the Chairman and Chief
Executive Officer of PlanetWeb, Inc., an Internet software company
("PlanetWeb"). Mr. Elahian holds a BS in Computer Science, a BS in Mathematics
and a Masters of Engineering from the University of Utah.
Prakash C. Agarwal, a co-founder of the Company, has been President, Chief
Executive Officer, and a Director of the Company since its inception in 1993.
Mr. Agarwal has over 19 years of engineering, marketing, and general
management experience in the semiconductor industry. Prior to joining the
Company, he was employed as Vice President and General Manager of Cirrus
Logic's Portable Product Division. Mr. Agarwal holds a BS and a MS degree in
Electrical Engineering from the University of Illinois.
Dr. Clement Leung, a co-founder of the Company, has served as Vice
President, Engineering since the Company's inception in 1993. Dr. Leung has 12
years of engineering and management experience in the semiconductor industry,
primarily in the areas of integrated circuit design and computer-aided design
systems. Prior to joining the Company, he was employed as Director of
Engineering of Cirrus Logic's Portable Product Division. Dr. Leung holds an
SB, an SM and a Ph.D. degree from the Massachusetts Institute of Technology.
Deepraj Puar, a co-founder of the Company, has been Vice President,
Technology since the Company's inception in 1993. Mr. Puar has 26 years of
engineering and management experience in the semiconductor industry, primarily
in the area of memory design and development. Prior to joining the Company,
Mr. Puar was employed by Cirrus Logic as its Director of Memory and Circuits
Engineering. Mr. Puar holds a B.TECH degree from the Indian Institute of
Technology (India) and a MSEE degree from Michigan State University.
Ibrahim Korgav joined the Company in 1994 as Vice President, Manufacturing
Operations. Mr. Korgav has 20 years of experience in manufacturing management
in the semiconductor industry. Prior to joining the Company, Mr. Korgav was
the Vice President of Operations and a co-founder of Micro Linear Corporation,
a semiconductor manufacturer. Mr. Korgav holds a MS degree in Mechanical
Engineering from the University of Tulsa.
36
<PAGE>
Ron Jankov joined the Company in October 1995 as Vice President, Sales. Mr.
Jankov has 15 years of engineering, operations and sale management experience
in the semiconductor industry. From 1994 to 1995 he was employed by Cyrix
Corporation, a microprocessor manufacturer, as its Vice President of Asia
Operations. From 1990 to 1994, he served as General Manager of Accell, a
Taiwan-based semiconductor engineering and sales company. Mr. Jankov holds a
BS degree in Physics from Arizona State University.
Niall Bartlett joined the Company in November 1995 as Vice President,
Marketing. Mr. Bartlett has 12 years of marketing and engineering experience
in display and multimedia systems. From 1994 to 1995, he was employed as
Multimedia Business Unit Director at Integrated Circuit Systems, Inc., a
semiconductor manufacturer. From 1991 to 1994, Mr. Bartlett was Director of
Marketing and Development of the semiconductor division of Media Vision, Inc.,
a multimedia company. Mr. Bartlett holds a BS degree in Electronic Engineering
from the University of Southampton (England).
Merle McClendon joined the Company in January 1997 as its Vice President,
Finance and Chief Financial Officer. Ms. McClendon has 18 years of finance
experience. From 1993 through 1996, Ms. McClendon was Vice President and
Corporate Controller at S3 Incorporated, a semiconductor company. From 1980 to
1993, Ms. McClendon was employed by Deloitte and Touche, most recently as a
Senior Manager. Ms. McClendon is a Certified Public Accountant and holds a BS
degree in Business Administration from San Jose State University.
Irwin Federman has served as a Director of the Company since March 1994. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture
capital firm, since 1990. Mr. Federman serves on the Boards of Directors of
TelCom Semiconductor, Inc., a semiconductor products company, SanDisk
Corporation, a semiconductor company, Western Digital Corporation, a disk
drive manufacturer, Komag Incorporated, a thin film media manufacturer and
CheckPoint Software Technologies, Ltd, a network security software company. He
received a BS degree in Accounting from Brooklyn College and holds an honorary
Doctorate of Engineering Science from Santa Clara University.
Michael Moritz has served as a Director of the Company since July 1993. Mr.
Moritz joined Sequoia Capital, a venture capital firm, in 1986. He also serves
on the Board of Directors of Visigenic Software, Inc., a software company,
Yahoo! Inc., an Internet directory company and Flextronics International,
Inc., a contract electronics manufacturer. Mr. Moritz received an MBA from the
Wharton School in 1978 and an MA in History at Oxford University in 1976.
Jim Lally has served as a Director of the Company since July 1993. Mr. Lally
has been a general partner of Kleiner Perkins Caufield & Byers, a venture
capital firm, since 1981. He currently serves on the boards of NetFRAME
Systems, a network server company, Visioneer Communications, Inc., a computer
peripherals manufacturer, and Ascend Communications, Inc., a networking
company. He holds a BS degree in Electrical Engineering from Villanova
University.
Brian P. Dougherty joined the Company as a Director in January 1997. Mr.
Dougherty is a founder and serves as Chairman of Wink Communications, a
developer of interactive television software. From its inception in 1983
through 1994, Mr. Dougherty served as Chief Executive Officer of Geoworks, a
consumer computing device operating system manufacturer, and continues to
serve as its Chairman. Mr. Dougherty holds a BS degree in Electrical
Engineering from the University of California at Berkeley.
Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors. There are no family relationships between any of the directors or
executive officers of the Company.
37
<PAGE>
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee, which is comprised of Messrs. Dougherty and Lally,
administers the Stock Plan, the Purchase Plan and all matters concerning
executive compensation. The Audit Committee, which is comprised of Messrs.
Federman and Moritz, approves the Company's independent auditors, reviews the
results and scope of annual audits and other accounting related services, and
evaluates the Company's internal audit and control functions. These committees
were established in January 1997.
DIRECTOR COMPENSATION
The Company does not pay any compensation to directors for serving in that
capacity, nor does it reimburse directors for expenses incurred in attending
board meetings. However, the Chairman is compensated for certain services
provided to the Company. See "Certain Transactions-Arrangements with
Chairman."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during its fiscal 1997.
During fiscal 1997, all decisions regarding executive compensation were made
by the full Board of Directors. No interlocking relationship exists between
the Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other Company, nor has any such
interlocking relationship existed in the past.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
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 for liability (i)
for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
agents and other agents to the fullest extent permitted by law. The Company
believes that indemnification under its Bylaws covers at least negligence and
gross negligence on the part of indemnified parties. The Company's Bylaws also
permit the Company to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the Bylaws would permit indemnification.
The Company has entered into agreements to indemnify its directors and
officers, in addition to indemnification provided for in the Company's Bylaws.
These agreements, among other things, indemnify the Company's directors and
officers for certain expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by any such person in any action or
proceeding, including any action by or in the right of the Company, arising
out of such person's services as a director or officer of the Company, any
subsidiary of the Company or any other Company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
38
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the fiscal year ended January 28, 1996 to the Company's
Chief Executive Officer and each of the Company's other most highly
compensated executive officers who earned in excess of $100,000 during such
fiscal year (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($)(1) COMPENSATION(2)
--------------------------- ------------ ---------------
<S> <C> <C>
Prakash C. Agarwal
President and Chief Executive Officer............. $127,500 $5,936
Dr. Clement Leung
Vice President, Engineering....................... 117,981 4,092
Deepraj Puar
Vice President, Technology........................ 117,981 5,986
Ibrahim Korgav
Vice President, Manufacturing..................... 104,327 6,486
</TABLE>
- --------
(1) No options were issued to the Named Officers during the fiscal year ended
January 28, 1996. However, options to purchase in the aggregate of
1,187,500 shares have been granted to named officers during fiscal year
1997. See "Option Grants in Last Fiscal Year" below.
(2) Consists of premiums paid on health and term life insurance.
39
<PAGE>
OPTION GRANTS IN FISCAL 1997
No options were granted to Named Officers during 1996. The following table
provides information concerning grants of options to purchase the Company's
Common Stock have been made to each of the Named Officers during fiscal 1997.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED
NUMBER ANNUAL RATES OF STOCK
OF SECURITIES % OF PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS EXERCISE OPTION TERM(3)
OPTIONS GRANTED TO PRICE PER EXPIRATION -----------------------
NAME GRANTED EMPLOYEES SHARE(2) DATE 5% 10%
---- ------------- ------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Prakash C. Agarwal...... 500,000(4) 16.4% $ .80 03/07/06 $ 251,558 $ 637,497
Prakash C. Agarwal...... 150,000(5) 4.9% 7.50 12/12/06 707,506 1,792,960
Dr. Clement Leung....... 175,000(4) 5.7% .80 03/07/06 88,045 223,124
Dr. Clement Leung....... 50,000(5) 1.6% 7.50 12/12/06 235,835 597,653
Deepraj Puar............ 175,000(4) 5.7% .80 03/07/06 88,045 223,124
Deepraj Puar............ 50,000(5) 1.6% 7.50 12/12/06 235,835 597,653
Ibrahim Korgav.......... 37,500(6) 1.2% .80 03/07/06 18,867 63,750
Ibrahim Korgav.......... 50,000(7) 1.6% 7.50 12/12/06 235,835 597,653
</TABLE>
- --------
(1) All options granted during the fiscal year were granted under the Stock
Plan. Each option becomes exercisable according to a vesting schedule,
subject to the employee's continued employment with the Company. Options
granted under the Stock Plan may be exercised immediately upon grant and
prior to full vesting, subject to the optionee's entering a restricted
stock purchase agreement with the Company with respect to any unvested
shares. Under such agreement, the optionee grants the Company an option to
repurchase any unvested shares at their original purchase price in the
event the optionee's employment relationship with the Company should
terminate. The Company's right of repurchase will lapse and the purchaser
will vest in the balance of the shares in a series of equal quarterly or
annual installments in accordance with the vesting schedule of the
exercised options. The exercise price for these options may be paid in
cash, check, promissory note, shares of the Company's Common Stock,
through a cashless exercise procedure involving same-day sale of the
purchased shares or any combination of such methods. The Board has
discretion, subject to plan limits, to modify the terms of outstanding
options and to reprice the options.
(2) The exercise price per share of options granted represented the fair
market value of the underlying shares of Common Stock on the dates the
respective options were granted as determined by the Board. The Company's
Common Stock was not traded publicly at the time of the option grants to
the Named Officers.
(3) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation based upon the deemed fair market value are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future common stock price. Actual
gains, if any, on stock option exercises are dependent on the future
financial performance of the Company, overall market conditions and the
option holders' continued employment through the vesting period. This
table does not take into account any appreciation in the deemed fair
market value of the Common Stock from the date of grant to the date of
this Prospectus, other than the columns reflecting assumed rates of
appreciation of 5% and 10%.
(4) This option was granted by the Board on March 7, 1996, with vesting to
commence on July 1, 1997. This option will vest ratably on a monthly basis
for a period of 30 months beginning on the last day of each month
beginning with the month of the vesting commencement date.
(5) This option was granted by the Board on December 12, 1996, with vesting to
commence on January 1, 2000. This option will vest ratably on a monthly
basis for a period of 12 months beginning on the last day of each month
beginning with the month of the vesting commencement date.
(6) This option was granted by the Board on March 7, 1996, with vesting to
commence on July 1, 1998. This option will vest ratably on a monthly basis
for a period of 18 months beginning on the last day of each month
beginning with the month of the vesting commencement date.
(7) This option was granted by the Board on December 12, 1996, with vesting to
commence on January 1, 1999. This option will vest ratably on a monthly
basis for a period of 24 months beginning on the last day of each month
beginning with the month of the vesting commencement date.
40
<PAGE>
OPTION EXERCISES AND HOLDINGS
There were no option exercises by the Named Officers during fiscal 1996. The
following table sets forth for each of the Named Officers certain information
concerning the number of shares subject to both exercisable and unexercisable
stock options at December 31, 1996. Also reported are values for "in-the-
money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and the fair market value of the
Company's Common Stock as of December 31, 1996, as determined by the Board of
Directors.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL 1997 VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(2) DECEMBER 31, 1996(1)(2)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(2) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Prakash C. Agarwal...... 500,000 $-- 150,000 -- $ -- --
Dr. Clement Leung....... -- -- 225,000 -- 1,172,500 --
Deepraj Puar............ -- -- 225,000 -- 1,172,500 --
Ibrahim Korgav.......... -- -- 87,500 -- 251,250 --
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1996 ($7.50 per
share, as determined by the Board of Directors) and the exercise price of
the options.
(2) Options granted under the Stock Plan may be exercised immediately upon
grant and prior to full vesting, subject to the optionee's entering a
restricted stock purchase agreement with the Company with respect to any
unvested shares. Under such agreement, the optionee grants the Company an
option to repurchase any unvested shares at their original purchase price
in the event the optionee's employment relationship with the Company
should terminate. The Company's right of repurchase will lapse and the
purchaser will vest in the balance of the shares in a series of equal
quarterly or annual installments in accordance with the vesting schedule
of the exercised options.
EMPLOYEE BENEFIT PLANS
AMENDED AND RESTATED 1993 STOCK PLAN
The Company's Amended and Restated 1993 Stock Plan provides for the granting
to employees of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"),
and for the granting to employees, directors and consultants of nonstatutory
stock options and stock purchase rights ("SPRs"). The original plan was
approved initially by the Board of Directors and the stockholders in July
1993. The Stock Plan was approved by the Board of Directors in December 1996
and the Company plans to obtain approval for the Stock Plan from stockholders
prior to the effectiveness of this offering. Unless terminated sooner, the
Stock Plan will terminate automatically in December 2003. A total of 7,775,000
shares of Common Stock are currently authorized for issuance pursuant to the
Stock Plan, of which 1,509,641 were available for issuance at October 31,
1996. As of December 31, 1996, 3,421,487 shares had been issued upon the
exercise of stock options or stock purchase rights granted under the Stock
Plan, 2,135,750 shares were subject to outstanding options and 2,751,408
shares remained available for future grant (which includes the 2,000,000 share
increase in the number of shares reserved for future issuance under the Stock
Plan that was approved by the Company's Board of Directors in December 1996).
The Stock Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code.
The Committee has the power to determine the terms of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR, the exercisability thereof, and the form of consideration
payable upon such exercise. In addition, the Committee has the authority to
amend, suspend or terminate the Stock Plan, provided that no such action may
affect any share of Common Stock previously issued and sold or any option
previously granted under the Stock Plan.
41
<PAGE>
Options and SPRs granted under the Plan are not generally transferable by
the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the Stock Plan must
generally be exercised within three months of the end of optionee's status as
an employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term. In the case of SPRs, unless the
Committee determines otherwise, the Restricted Stock Purchase Agreement shall
grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with the Company for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall
lapse at a rate determined by the Committee. The exercise price of all
incentive stock options granted under the Stock Plan must be at least equal to
the fair market value of the Common Stock on the date of grant. The exercise
price of nonstatutory stock options and SPRs granted under the Stock Plan is
determined by the Committee, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must at least
be equal to the fair market value of the Common Stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110%
of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options granted
under the Stock Plan may not exceed ten years.
The Stock Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted for as described in the
preceding sentence, the Optionee shall fully vest in and have the right to
exercise the option or SPR as to all of the optioned stock, including shares
as to which it would not otherwise have been vested and be exercisable. In the
event that an option or SPR becomes exercisable in full in the event of a
merger or sale of assets, the Committee shall notify the optionee that the
option or SPR shall be fully vested and exercisable for a period of fifteen
(15) days from the date of such notice, and the option or SPR will terminate
upon the expiration of such period.
1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in December 1996 and the Company plans to
obtain approval for the Stock Plan from stockholders in January 1997. A total
of 500,000 shares of Common Stock has been reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section
423 of the Internal Revenue Code, is implemented by consecutive and
overlapping twenty-four month offering periods that begin every six months.
Each twenty-four month offering period includes four six-month purchase
periods, during which payroll deductions are accumulated and at the end of
which, shares of Common Stock are purchased with a participant's accumulated
payroll deductions, except for the first such offering period which commences
on the first trading day on or after the effective date of this Offering and
ends on the last trading day on or before March 1, 1999. The Purchase Plan is
administered by the Board of Directors or by a committee appointed by the
Board. Employees are eligible to participate if they are customarily employed
by the Company or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions of up
to 10% of an employee's compensation (excluding commissions, overtime and
other bonuses and incentive compensation), subject to the limitations of
Section 423(b)(8) of the Internal Revenue Code. The price of stock purchased
under the Purchase Plan is 85% of the lower of the fair market value of the
Common Stock at the beginning of the offering period or at the end of the
relevant purchase period. Employees may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with the
Company.
42
<PAGE>
Rights granted under the Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the Purchase Plan. The Purchase Plan provides that, in the
event of a merger of the Company with or into another corporation or a sale of
substantially all of the Company's assets, the Board of Directors shall
shorten the offering period then in progress (so that employees' rights to
purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets). The Purchase Plan will terminate in December 2007. The Board
of Directors has the authority to amend or terminate the Purchase Plan, except
that no such action may adversely affect any outstanding rights to purchase
stock under the Purchase Plan.
43
<PAGE>
CERTAIN TRANSACTIONS
On July 20, 1993 and September 16, 1993, the Company sold in the aggregate
3,050,200 shares of Series A Preferred Stock at a price per share of $.50. On
February 11, 1994, the Company issued 10,250 shares of Series A Preferred in
exchange for shares of Common Stock held by certain employees of the Company
and Kamran Elahian at an exchange ratio of 500 shares of Common Stock for each
share of Series A Preferred. On March 10, 1994, the Company issued 2,539,999
shares of Series B Preferred Stock at a price per share of $.625 pursuant to
the exercise of warrants issued on July 20, 1993 and September 16, 1993. On
July 6, 1994 and August 30, 1994, the Company sold in the aggregate 3,839,165
shares of Series C Preferred Stock at a price per share of $1.50. On June 30,
1995 and August 10, 1995, the Company sold in the aggregate 2,820,000 shares
of Series D Preferred Stock at a price per share of $2.85. Simultaneously with
the consummation of this offering, all shares of Preferred Stock will be
converted into an aggregate of 12,259,614 shares of Common Stock.
Listed below are those directors, executive officers and five percent
stockholders who have made equity investments in the Company during the last
three fiscal years. The Company believes that the shares issued in these
transactions were sold at the then fair market value and that the terms of
these transactions were no less favorable than the Company could have obtained
from unaffiliated third parties.
<TABLE>
<CAPTION>
AGGREGATE
SERIES A SERIES B SERIES C SERIES D CASH
STOCKHOLDER PREFERRED PREFERRED PREFERRED PREFERRED CONSIDERATION
----------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Japan Associated Finance
Co., Ltd................ -- -- 200,000 35,088 $ 400,001
JAFCO G-5 Investment
Enterprise Partnership.. -- -- 338,654 59,413 677,308
JAFCO R-1(A) Investment
Enterprise Partnership.. -- -- 158,223 27,758 316,445
JAFCO R-1(B) Investment
Enterprise Partnership.. -- -- 158,223 27,758 316,445
JAFCO R-2 Investment
Enterprise Partnership.. -- -- 144,900 25,421 289,800
U.S. Information
Technology Investment
Enterprise Partnership.. -- -- -- 175,439 500,001
Kleiner Perkins Caufield
& Byers VI.............. 1,300,500 722,500 725,000 304,211 3,056,314
KPCB VI Founders Fund.... 199,500 110,833 108,333 46,666 464,518
Sequoia Capital VI....... 1,365,000 758,333 758,333 319,298 3,203,957
Sequoia Technology
Partners VI............. 75,000 41,667 41,667 17,544 176,043
Sequoia XXIII............ 60,000 33,333 -- -- 50,833
Sequoia XXIV............. -- -- 33,333 14,035 89,999
U.S. Venture Partners IV,
L.P..................... -- 733,333 733,333 370,527 2,614,335
USVP Entrepreneur
Partners II, L.P........ -- 16,667 16,667 8,421 59,417
Second Ventures II, L.P.. -- 83,333 83,333 42,105 297,082
</TABLE>
The Company has entered into an Indemnification Agreement with each of its
executive officers and directors.
The Company has granted options to certain of its executive officers. See
"Management--Option Grants in Last Fiscal Year."
44
<PAGE>
Holders of Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock--Registration Rights."
Kamran Elahian, Chairman of the Board of the Company, receives an annual
salary in the amount of $70,000 for services rendered to the Company, which
include participation in the establishment and management of key customer and
manufacturing relationships. In addition, on March 7, 1996 Mr. Elahian was
granted an option to purchase 125,000 shares of the Company's Common Stock at
an exercise price of $.80 per share, subject to vesting, and on December 12,
1996 was granted an option to purchase 30,000 shares of the Company's Common
Stock at an exercise price of $7.50 per share, subject to vesting. Both
options were granted pursuant to the 1993 Stock Plan.
In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Prakash Agarwal, the President,
Chief Executive Officer, and a director of the Company, in the principal
amount of $34,925 at an annual interest rate of 4.01%, pursuant to a
promissory note secured by a pledge of 1,397,000 shares of Common Stock held
by Mr. Agarwal. In April 1996, in connection with the exercise of an option to
purchase 500,000 shares of Common Stock, the Company provided a loan to Mr.
Agarwal in the aggregate principal amount of $400,000 at an annual interest
rate of 5.88% pursuant to two promissory notes secured by a pledge of an
aggregate of 500,000 shares of Common Stock held by Mr. Agarwal. As of
December 31, 1996, an aggregate amount of $454,573 remained outstanding on the
three promissory notes, which is the largest aggregate amount of indebtedness
outstanding as of such date under such note.
In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Dr. Clement Leung, the Vice
President, Engineering of the Company in the principal amount of $22,450 at an
annual interest rate of 4.01%, pursuant to a promissory note secured by a
pledge of 898,000 shares of Common Stock held by Dr. Leung. As of December 31,
1996, an aggregate amount of $25,001 remained outstanding on the promissory
note, which is the largest aggregate amount of indebtedness outstanding under
such note.
In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Deepraj Puar, the Vice President,
Technology of the Company in the principal amount of $22,450 at an annual
interest rate of 4.01%, pursuant to a promissory note secured by a pledge of
898,000 shares of Common Stock held by Mr. Puar. As of December 31, 1996, an
aggregate amount of $25,001 remained outstanding on the promissory note, which
is the largest aggregate amount of indebtedness outstanding under such note.
In June 1994, in connection with the purchase of restricted shares of Common
Stock, the Company provided a loan in the principal amount of $15,000 to
Ibrahim Korgav, Vice President of Manufacturing, at an annual interest rate of
6.80% pursuant to a promissory note secured by a pledge of 300,000 shares of
Common Stock held by Mr. Korgav. As of December 22, 1996, an aggregate amount
of $16,573 remained outstanding on the promissory note, which is the largest
aggregate amount of indebtedness outstanding as of such date under such note.
In July 1994, in connection with his offer of employment with the Company, the
Company provided a loan to Mr. Korgav in the principal amount of $63,956.93 at
an annual interest rate of 5.63%, pursuant to a promissory note. The loan was
used to repay certain obligations owed by Mr. Korgav to his former employer
and to exercise certain options to purchase shares of such employer. Mr.
Korgav repaid to the Company $14,000 of the principal and accrued interest in
July 1995 and paid the remaining balance of principal and accrued interest in
December 1995. The largest aggregate indebtedness outstanding under such notes
in the last three fiscal years was $83,662.71.
In December 1995, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Ron Jankov, the Vice President,
Sales of the Company in the principal amount of $76,950 at an annual interest
rate of 5.91% pursuant to a promissory note secured by a pledge of 270,000
shares held by
45
<PAGE>
Mr. Jankov. In April 1996, in connection with the exercise of option to
purchase 50,000 shares of Common Stock, the Company provided a loan to Mr.
Jankov in the principal amount of $40,000 at an interest rate of 5.88%
pursuant to a promissory note secured by a pledge of 50,000 shares of Common
Stock held by Mr. Jankov. As of December 31, 1996, an aggregate amount of
$123,066 remained outstanding on the two promissory notes, which is the
largest aggregate amount of indebtedness outstanding under such notes.
In December 1995, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Niall Bartlett, Vice President,
Marketing of the Company in the principal amount of $57,000 at an annual
interest rate of 5.91% pursuant to a promissory note secured by a pledge of
200,000 shares held by Mr. Bartlett. As of December 31, 1996, an aggregate
amount of $60,369 remained outstanding on this promissory note, which is the
largest aggregate amount of indebtedness outstanding under such notes.
In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Chet Bassetti, the Flat-Panel
Technology Manager, in the principal amount of $22,450 at an annual interest
rate of 4.01% pursuant to a promissory note secured by a pledge of 898,000
shares of Common Stock held by Mr. Bassetti. On December 26, 1996, Mr.
Bassetti repaid the remaining $25,000 in principal and interest. The largest
aggregate amount of indebtedness outstanding during the last three years was
$25,000.
In March 1994, in connection with the purchase of restricted shares of
Common Stock, the Company provided a loan to Kamran Elahian, the Chairman of
the Board, in the principal amount of $22,450 at an annual interest rate of
4.01% pursuant to a promissory note secured by a pledge of 898,000 shares of
Common Stock held by Mr. Elahian. In April 1996, in connection with the
exercise of an option to purchase 125,000 shares of Common Stock, the Company
provided a loan to Mr. Elahian in the principal amount of $100,000 at an
annual interest rate of 5.88% pursuant to a promissory note secured by a
pledge of the Common Stock so acquired. As of December 31, 1996, and aggregate
amount of $128,921 remained outstanding on the two promissory notes, which is
the largest aggregate amount of indebtedness outstanding under such notes.
In September 1996, in connection with the resignation of the Company's then
current Chief Financial Officer, Lori Holland, the Company agreed to pay Ms.
Holland $12,500 per month through February 28, 1997. In addition, the Company
released 97,500 shares of Common Stock held by Ms. Holland from a right of
repurchase in favor of the Company set forth in the agreement pursuant to
which Ms. Holland purchased such shares from the Company.
In June 1996, the Company entered into a Sublease Agreement with PlanetWeb.
Kamran Elahian, a co-founder of the Company and its Chairman, is the founder
of PlanetWeb and is its Chairman and Chief Executive Officer. The Sublease
Agreement provides for a sublease of 3,166 square feet of office space at the
Company's principal office for a term beginning on May 28, 1996 through and
including May 31, 1997. Pursuant to the Sublease Agreement, PlanetWeb is
obligated to pay $300 per month for janitorial services and rent according to
the following schedule: $1.00 per square foot during months one through three,
$1.50 per square foot during months four through six and $1.75 per square foot
during months seven through 12.
The Company believes that all related-party transactions described above
were on terms no less favorable than could have been otherwise obtained from
unrelated third parties. All future transactions between the Company and its
principal officers, directors and affiliates will be approved by a majority of
the independent and disinterested members of the Board of Directors and will
be on terms no less favorable that could be obtained from unrelated third
parties. In addition, the Board of Directors has voted that any loans or
guarantees in the future by the Company for its officers, directors or
affiliates will be approved by a majority of the independent and disinterested
members of the Board on the basis that such loans or guarantees will be made
only for bona fide business purposes.
46
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of the Company's Common Stock as of October 31, 1996 and as adjusted
to reflect the sale of Common Stock offered hereby for (i) each person who is
known by the Company to beneficially own more than 5% of the Common Stock, (ii)
each of the Company's directors, (iii) each of the Named Officers and (iv) all
directors and officers as a group and (v) each selling stockholder.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED(2)(3)
------------ -----------------
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with KPCB VI Associates (4). 3,517,543 17.3%
2750 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with Sequoia Partners (O)
(5)............................................ 3,517,543 17.3
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Entities affiliated with U.S. Venture Partners
IV, L.P. (6)................................... 2,087,719 10.3
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Japan Associated Finance Co., Inc. (7).......... 1,350,877 6.7
Tekko Building
1-8-2, Marunouchi, Chiyoda-Ku
Tokyo, Japan 100
Kamran Elahian(8)............................... 1,054,800 5.2
Irwin Federman(6)............................... 2,087,719 16.3
Michael Moritz(5)............................... 3,517,543 17.3
James Lally(4).................................. 3,517,543 17.3
Chet Bassetti(9)................................ 927,800 4.6
Prakash C. Agarwal(10).......................... 1,449,800 7.1
Dr. Clement Leung(11)........................... 1,124,800 5.5
Deepraj Puar(12)................................ 524,800 2.6
Ron Jankov(13).................................. 370,000 1.8
Ibrahim Korgav(14).............................. 387,500 1.9
Niall Bartlett(15).............................. 290,000 1.4
All directors and officers as
a group(4), (5), (6), (8), (10)-(15)........... 14,324,505 67.7
</TABLE>
- --------
(1) Assumes no exercise of the Underwriter's over-allotment option. Except
pursuant to applicable community property laws or as indicated in the
footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Percent of the outstanding shares of Common Stock, treating as outstanding
all shares of Common Stock issuable on exercise of options held by the
particular beneficial owner that are included in the first column.
(3) This column assumes no exercise of the Underwriter's over-allotment
option. If, however, the Underwriters' over-allotment option is exercised
in full, certain stockholders will sell an aggregate of shares of
Common Stock. Specifically, in such event, in addition to those share
amounts set forth in the table above, (i) Kamran Elahian will sell an
aggregate of shares and will beneficially
47
<PAGE>
own shares, which is % of the Company's outstanding Common Stock,
after completion of this Offering, (ii) Chet Bassetti will sell an
aggregate of shares and will beneficially own shares, which is
% of the Company's outstanding Common Stock, after completion of the
Offering, (iii) Prakash Agarwal will sell an aggregate of shares and
will beneficially own shares, which is % of the Company's
outstanding Common Stock, after completion of the Offering, (iv) Dr.
Clement Leung will sell an aggregate of shares and will beneficially
own shares, which is % of the Company's outstanding Common Stock,
after completion of the Offering, (v) Deepraj Puar will sell an aggregate
of shares and will beneficially own shares, which is % of the
Company's outstanding Common Stock, after completion of the Offering, (vi)
Ibrahim Korgav will sell an aggregate of shares and will beneficially
own shares, which is % of the Company's outstanding Common Stock,
after completion of the Offering, (vii) Niall Bartlett will sell an
aggregate of shares and will beneficially own shares, which is
% of the Company's outstanding Common Stock, after completion of the
Offering, and (viii) other shareholders, each of whom owns less than
1% of the Company's outstanding stock, will sell an aggregate shares
and will beneficially own shares, which is % of the Company's
outstanding Common Stock, after completion of the Offering.
(4) Includes 3,052,211 shares held by Kleiner Perkins Caufield & Byers VI and
465,332 shares held by KPCB VI Founders Fund. KPCB VI Associates is the
general partner of Kleiner Perkins Caufield & Byers VI and KPCB VI
Founders Fund. KPCB VI Associates has seven general partners. Each of
these general partners shares vesting and investment power over the
shares held by KPCB VI Associates. James Lally, a director of the
Company, is a general partner of KPCB VI Associates. Mr. Lally disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate interest therein.
(5) Includes 3,200,964 shares held by Sequoia Capital VI, 175,878 shares held
by Sequoia Technology Partners VI, 93,333 shares held by Sequoia XXIII
and 47,368 shares held by Sequoia XXIV. Sequoia Partners (O) is the
general partner of Sequoia Capital VI. Sequoia Partners (O) has eight
general partners, who are also the general partners of Sequoia Technology
Partners VI. Each of these general partners shares voting and investment
power over the shares held by Sequoia Partners (O). Michael Moritz, a
director of the Company, is a general partner of Sequoia Partners (O).
Mr. Moritz disclaims beneficial ownership of the shares held by such
entities except to the extent of his proportionate interest therein.
(6) Includes 1,837,193 shares held by U.S. Venture Partners IV, L.P., 41,755
shares held by USVP Entrepreneur Partner II, L.P. and 208,771 shares held
by Second Ventures II, L.P. Presidio Management Group IV, L.P.
("Presidio") is the general partner of each of these entities. Presidio
has five general partners. Each of these general partners shares voting
and investment power over the shares Presidio. Irwin Federman, a director
of the Company, is a general partner of Presidio. Mr. Federman disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate interest therein.
(7) Includes 235,088 shares held by Japan Associated Finance Co., Ltd.,
398,067 shares held by JAFCO G-5 Investment Enterprise Partnership,
185,981 shares held by JAFCO R-1(A) Investment Enterprise Partnership,
185, 981 shares held by JAFCO R-1(B) Investment Enterprise Partnership,
170,321 shares held by JAFCO R-2 Investment Enterprise Partnership. Japan
Associated Finance Co., Inc. is the general partner of each of these
entities. Also includes 175,439 shares held by U.S. Information
Technology Investment Enterprise Partnership. Japan Associated Finance
Co., Inc. and JAFCO America Ventures, Inc. are the general partners of
U.S. Information Technology Investment Enterprise Partnership.
(8) Includes an option to purchase 30,000 shares, exercisable within 60 days
of January 17, 1997.
(9) Includes an option to purchase 28,000 shares, exercisable within 60 days
of January 17, 1997.
(10) Includes an option to purchase 150,000 shares, exercisable within 60 days
of January 17, 1997.
(11) Includes 15,000 shares registered in the name of Lau Sek Lan, 15,000
shares registered in the name of Yim Lai Ting, 10,000 shares registered
in the name of Elizabeth T. Lau, 10,000 shares registered in the name of
Kin Mun Leung, 10,000 shares registered in the name of Christopher K.
Leung, and 10,000 shares registered in the name of Chung Ki Wong Leung.
Each such person is a family member of Dr. Leung.
48
<PAGE>
Dr. Leung disclaims beneficial ownership of such shares. Includes an option
to purchase 225,000 shares exercisable within 60 days of January 17, 1997.
(12) Includes 20,000 shares registered in the name of Yuvraj Singh Puar, Mr.
Puar's brother, and 20,000 shares registered in the name of Nandita Puar,
Mr. Puar's sister-in-law. Mr. Puar disclaims beneficial ownership of such
shares. Includes 20,000 shares registered in the name of Dhruv Raj Puar
and 20,000 shares registered in the name of Rahul Raj Puar, who are Mr.
Puar's children. Includes an option to purchase 225,000 shares,
exercisable within 60 days of January 17, 1997.
(13) Includes an option to purchase 50,000 shares, exercisable within 60 days
of January 17, 1997.
(14) Includes 20,000 shares registered in the name of Kirk Steven Hayes, as
Trustee of the Ibrahim Korgav and Sandra Lee Korgav 1989 Irrevocable
Trust dated 10/2/89. Mr. Korgav may be deemed the beneficial owner of
such shares. Includes an option to purchase 87,500 shares, exercisable
within 60 days of January 17, 1997.
(15) Includes an option to purchase 90,000 shares, exercisable within 60 days
of January 17, 1997.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company consists of 25,000,000 shares of Common Stock, $.001 par value, and
2,000,000 shares of Preferred Stock, $.001 par value.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Certificate of
Incorporation which is included as an exhibit to the Registration Statement of
which this Prospectus is a part and by the provisions of applicable law.
COMMON STOCK
As of October 31, 1996, there were 20,191,651 shares of Common Stock
outstanding (assuming no exercise of outstanding options or warrants) before
giving effect to the sale of Common Stock offered hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for the payment of dividends. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares
of Preferred Stock. Holders of Common Stock have no preemptive rights or
rights to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Company's Restated Certificate of Incorporation, the Board
of Directors has the authority, without further action by the stockholders, to
issue up to 2,000,000 shares of Preferred Stock in one or more series and to
fix the designations, powers, preferences, privileges, and relative
participating, optional or special rights and the qualifications, limitations
or restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences any or all of which
may be greater than the rights of the Common Stock. The Board of Directors,
without stockholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control
of the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of
the holders of Common Stock. At present, there are no shares of Preferred
Stock outstanding and the Company has no plans to issue any of the Preferred
Stock.
COMMON STOCK WARRANTS
As of the date of this Prospectus, the Company has warrants outstanding
exercisable to purchase an aggregate of 316,743 shares of Common Stock.
In connection with a software lease entered into in November 1993, the
Company issued to the lessor a warrant to purchase up to an aggregate of
120,000 shares of the Company's Series A Preferred Stock and, upon the closing
of this Offering, such warrant will become a warrant exercisable to purchase
the same number of shares of Common Stock with an exercise price of $.50 per
share and a term of ten years from the date of execution of such warrant.
50
<PAGE>
In connection with an equipment lease, the Company issued two warrants to
purchase up to an aggregate of 91,200 shares of the Company's Series B
Preferred Stock. Upon the consummation of this Offering, one of such warrants,
exercisable for up to 48,000 shares of Series B Preferred, will become
exercisable to purchase the same number of shares of Common Stock with an
exercise price of $.625 per share and a term of ten years from the date of
execution of such warrant or five years from the effective date of the
Company's initial public offering, whichever is longer. The second of such
warrants, exercisable for up to 43,200 shares of Series B Preferred, will
become exercisable to purchase the same number of shares of Common Stock with
an exercise price of $.625 per share and a term of seven years from the date
of execution of such warrant or five years from the effective date of the
Company's initial public offering, whichever is longer.
In connection with a combined software and equipment lease entered into in
July 1994, the Company issued to the lessor a warrant to purchase 36,666
shares of the Company's Series C Preferred Stock and, upon the closing of this
Offering, such warrant will become exercisable to purchase the same number of
shares of Common Stock with an exercise price of $1.50 per share. At the same
time, the Company issued to the lessor a warrant to purchase 15,789 shares of
the Company's Series D Preferred Stock and, upon the of this Offering, such
warrant will become exercisable to purchase the same number of shares of
Common Stock with an exercise price of $2.85 per share. Each of these warrants
is exercisable for a period of seven years from August 1, 1994 or five years
from the effective date of the Company's initial underwritten public offering,
whichever is longer.
In connection with a capital equipment lease entered into in July 1995, the
Company issued to the lessor a warrant to purchase 35,088 shares of the
Company's Series D Preferred Stock and, upon the closing of this Offering,
such warrant will become exercisable to purchase the same number of shares of
Common Stock with an exercise price of $2.85 per share. Each of these warrants
is exercisable until December 31, 2001.
In connection with a combined mask, software and equipment lease entered
into in June 1996, the Company issued to the lessor a warrant to purchase
18,000 shares of the Company's Series D Preferred Stock and, upon the closing
of this Offering, such warrant will become exercisable to purchase the same
number of shares of Common Stock with an exercise price of $5.70 per share.
Each of these warrants is exercisable until December 31, 2001.
REGISTRATION RIGHTS
The holders of an aggregate of 12,576,357 shares of Common Stock will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of certain registration rights
agreements, holders of Common Stock benefitting from these rights may require
the Company to file a registration statement under the Securities Act at its
expense with respect to their shares of Common Stock, and the Company is
required to use its best efforts to effect such registration, subject to
certain conditions and limitations. The rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering subject to the registration to limit the number of shares included in
such registration. In addition, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include such
shares of Common Stock in the registration. Furthermore, such holders may
require the Company to file additional registration statements on Form S-3
subject to certain conditions and limitations.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
Upon the completion of the Company's reincorporation in the State of
Delaware prior to closing of this offering, the Company will be subject to
Section 203 of the Delaware General Corporation Law ("Section 203"), which,
subject to certain exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at
51
<PAGE>
the time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentiality whether shares
held subject to the plan will be tendered in a tender or exchange offer; or
(iii) on or subsequent to such date, the business combination is approved by
the Board of Directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
The Company's Certificate of Incorporation continues to entitle stockholders
to use cumulative voting in the election of directors and to take action by
written consent.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe. Its address is 150 Royall Street, Canton, Massachusetts, 02021, and
its telephone number is 617-575-2000.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol NMGC. The Company has not applied to list its
Common Stock on any other exchange or quotation system. See "Risk Factors--
Absence of Public Market and Possible Volatility of Stock Price."
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Therefore, future sales of substantial amounts of Common Stock in the
public market could adversely affect the prevailing market price from time to
time. Furthermore, because only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options
under the Stock Plan. Of these outstanding shares of Common Stock, the
shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 20,191,651 shares of Common Stock outstanding upon completion of
this offering and held by existing stockholders will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares").
The holders of 20,191,651 shares of Restricted Shares, including all
officers and directors of the Company, are subject to "lock-up" agreements
with the Representatives of the Underwriters and/or the Company providing that
they will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of the shares of Common Stock owned by them or that could be
purchased by them through the exercise of options to purchase Common Stock of
the Company for a period of 180 days after the date of this Prospectus without
the prior written consent of Morgan Stanley & Co. Incorporated and/or the
Company, as applicable. The Company has agreed with the Representatives of the
Underwriters not to release any holders from such agreements without the prior
consent of Morgan Stanley & Co. Incorporated. Such lock-up agreements may be
released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of Morgan & Stanley & Co. Incorporated. Of
the 20,191,651 Restricted Shares that will first become eligible for sale in
the public market 180 days after the date of this Prospectus, approximately
4,634,926 shares will be immediately eligible for sale without restriction
under Rule 144(k) or Rule 701, approximately 15,556,726 shares will be
immediately eligible for sale subject to certain volume and other restrictions
pursuant to Rule 144. shares will be eligible for sale pursuant to Rule
144 upon the expiration of applicable two-year holding periods, which will
expire between and .
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years, including
persons who may be deemed to be "affiliates" of the Company, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
as reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned for at least three years the Restricted Shares
proposed to be sold (including the holding period of any prior owner except an
affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144.
Subject to certain limitations on the aggregate offering price of a
transaction and certain other conditions, Rule 701 permits resales of shares
issued prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
53
<PAGE>
requirements of the Exchange Act, in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirements, contained in Rule 144. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Exchange Act, along with the shares acquired upon exercise of such
options (including exercises after the date of this Prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this Prospectus, may be sold by persons other than affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its two-year minimum holding period requirements.
The Company has also agreed not to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or enter into any swap or similar agreement
that transfers, in whole or in part, the economic risk of ownership of the
Common Stock, for a period of 180 days after the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated,
subject to certain limited exceptions.
The Company intends to file a registration statement under the Securities
Act covering approximately 3,509,641 shares of Common Stock subject to
outstanding options or reserved for issuance under the Stock Plan (which
includes a 2,000,000 share increase in the number of shares reserved for
future issuances under the Stock Plan that was approved by the Company's Board
of Directors in December 1996) and 500,000 shares of Common Stock reserved for
issuance under the Purchase Plan. See "Management--Employee Benefit Plans."
Such registration statement is expected to be filed simultaneously with the
effectiveness of the registration statement covering the shares of Common
Stock offered in this offering and will automatically become effective upon
filing. Accordingly, shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates and the
lapsing of the Company's repurchase options, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
54
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Montgomery Securities and Robertson, Stephens &
Company LLC are serving as Representatives, have severally agreed to purchase,
and the Company and the Selling Stockholders have agreed to sell to them,
severally, the respective numbers of shares of Common Stock set forth opposite
their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Montgomery Securities..............................................
Robertson, Stephens & Company LLC..................................
---------
Total..........................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and
pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken.
The Underwriters propose to offer a portion of the shares of Common Stock
offered hereby directly to the public at the public offering price set forth
on the cover page hereof and a portion to certain dealers at a price that
represents a concession not in excess of $ per share under the initial
public offering price. The Underwriters may allow, and such dealers may re-
allow, a concession not in excess of $ per share to other Underwriters or to
certain other dealers.
Pursuant to the Underwriting Agreement, the Company and the Selling
Stockholders have granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional
shares of Common Stock at the initial public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The
Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriters' name in the preceding table bears to the
total number of shares of Common Stock offered hereby.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales in excess of five percent of the
number of shares of Common Stock offered hereby to accounts over which they
exercise discretionary authority.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all Selling Stockholders, officers, directors and
certain other stockholders and option holders of the Company have agreed not
to sell or otherwise dispose of Common Stock or convertible securities of the
Company for up to 180 days after the effective date of the offering, without
the prior consent of Morgan Stanley & Co. Incorporated. The
55
<PAGE>
Company has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior consent of Morgan Stanley & Co. Incorporated,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, for a
period of 180 days after the date of this Prospectus.
PRICING OF THE OFFERING
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company, representatives of the Selling Stockholders and the
Representatives of the Underwriters. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
the Company and its industry in general, sales, earnings and certain other
financial and operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Preliminary Prospectus is subject to
change as a result of market conditions and other factors.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company and
the Selling Stockholders by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California. Arthur F. Schneiderman, a member of Wilson Sonsini Goodrich &
Rosati, is Secretary of the Company. Certain legal matters in connection with
this offering will be passed upon for the Underwriters by Venture Law Group, A
Professional Corporation, Menlo Park, California. A director of Venture Law
Group and an investment partnership of which certain directors of Venture Law
Group are general partners beneficially own an aggregate of 40,000 shares of
the Company's Common Stock.
EXPERTS
The consolidated financial statements and financial statement schedule of
NeoMagic Corporation at January 31, 1995 and 1996 and for the period from May
26, 1993 (inception) through January 31, 1994 and for each of the two years in
the period ended January 31, 1996 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
The statements in this Prospectus as set forth under the captions "Risk
Factors--Uncertainty Regarding Patents and Protection of Proprietary Rights"
and "Business--Proprietary Rights," insofar as they relate to patent matters,
have been passed upon by Townsend and Townsend and Crew LLP, Palo Alto,
California, patent counsel to the Company, as experts on such matters.
56
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the commission's Regional Offices at 75 Park Place, Room
1400, New York, New York 10007 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and its
principal reference facilities in New York, New York and Chicago, Illinois, at
a prescribed rate. 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.
57
<PAGE>
NEOMAGIC CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors ......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations ..................................... F-4
Consolidated Statements of Stockholders' Equity ........................... F-5
Consolidated Statements of Cash Flows ..................................... F-6
Notes to Consolidated Financial Statements ................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NeoMagic Corporation
We have audited the accompanying consolidated balance sheets of NeoMagic
Corporation as of January 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from May 26, 1993 (inception) through January 31, 1994, and the years ended
January 31, 1995 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NeoMagic
Corporation at January 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for the period from May 26, 1993 (inception)
through January 31, 1994, and the years ended January 31, 1995 and 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
February 12, 1996
F-2
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
JANUARY 31, STOCKHOLDERS'
----------------- EQUITY
OCTOBER 31, OCTOBER 31,
1995 1996 1996 1996
------- -------- ----------- ------------- ---
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 4,902 $ 6,877 $ 11,840
Accounts receivable, less
allowance for doubtful
accounts of $0 at January
31, 1995 and 1996, and $57
at October 31, 1996......... -- 138 5,278
Inventory.................... -- 331 3,312
Other current assets......... 135 181 304
------- -------- --------
Total current assets...... 5,037 7,527 20,734
Property, plant and equipment,
net.......................... 903 1,103 1,805
Other assets.................. 16 119 156
------- -------- --------
Total assets.............. $ 5,956 $ 8,749 $ 22,695
======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Working capital line of
credit...................... $ -- $ 414 $ 13,450
Accounts payable............. 255 569 3,176
Accrued expenses............. 1,491 1,723 1,026
Current obligations under
capital leases.............. 445 752 1,086
------- -------- --------
Total current liabilities. 2,191 3,458 18,738
Noncurrent obligations under
capital leases............... 452 749 1,035
Other long-term liabilities... -- -- 26
------- -------- --------
Total liabilities......... 2,643 4,207 19,799
Commitments and contingencies
Stockholders' equity:
Noncumulative convertible
preferred stock, $.001 par
value:
Authorized shares--
12,868,315 (2,000,000 pro
forma) (aggregate
liquidation preference
$16,913 at October 31,
1996)
Issued and outstanding
shares--9,439,614 at
January 31, 1995, and
12,259,614 at January 31,
1996 and October 31, 1996
(pro forma--no shares
outstanding)............... 9 12 12 $ --
Common stock, $.001 par
value:
Authorized shares--
25,000,000
Issued and outstanding
shares--6,183,030 at
January 31, 1995, 6,922,633
at January 31, 1996, and
7,932,037 at October 31,
1996 (pro forma--
20,191,651)................ 6 7 8 20
Additional paid-in capital... 9,008 17,302 18,091 18,091
Notes receivable from
stockholders................ (162) (362) (845) (845)
Accumulated deficit.......... (5,548) (12,417) (14,370) (14,370)
------- -------- -------- --------
Total stockholders'
equity................... 3,313 4,542 2,896 $ 2,896
======= ======== ======== ========
Total liabilities and
stockholders' equity..... $ 5,956 $ 8,749 $ 22,695
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 26, 1993
(INCEPTION) YEAR ENDED NINE MONTHS
THROUGH JANUARY 31, ENDED OCTOBER 31,
JANUARY 31, -------------------- --------------------
1994 1995 1996 1995 1996
------------ ------- ----------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $ -- $ -- $ 243 $ 72 $ 24,509
Cost of sales........... -- -- 165 46 18,285
----- ------- ----------- ------- -----------
Gross profit............ -- -- 78 26 6,224
Operating expenses:
Research and
development........... 465 2,423 4,934 3,341 5,833
Sales, general, and
administrative........ 308 968 1,606 1,140 4,354
Other operating
expenses.............. -- 1,500 610 -- (1,503)
----- ------- ----------- ------- -----------
Total operating
expenses........... 773 4,891 7,150 4,481 8,684
----- ------- ----------- ------- -----------
Loss from operations.... (773) (4,891) (7,072) (4,455) (2,460)
Other income, net:
Interest income and
other................. 16 194 385 277 1,193
Interest expense....... -- (94) (182) (117) (686)
----- ------- ----------- ------- -----------
Net loss............ $(757) $(4,791) $ (6,869) $(4,295) $ (1,953)
===== ======= =========== ======= ===========
Pro forma net loss per
share.................. $ (.32) $ (.09)
=========== ===========
Shares used in computing
pro forma net loss per
share.................. 21,233,293 21,714,982
</TABLE>
See accompanying notes.
F-4
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTES TOTAL
----------------- ------------------ PAID-IN RECEIVABLE FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY
---------- ------ ---------- ------ ---------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock.................. -- $-- 5,225,000 $ 5 $ -- $ -- $ -- $ 5
Issuance of Series A
preferred stock, net of
issuance costs of $20.. 3,050,000 3 -- -- 1,502 -- -- 1,505
Net loss............... (757) (757)
---------- --- ---------- --- ------- ----- -------- ------
Balance at January 31,
1994................... 3,050,000 3 5,225,000 5 1,502 -- (757) 753
Conversion of
outstanding common
stock into Series A
preferred stock....... 10,450 -- (5,225,000) (5) 5 -- -- --
Issuance of common
stock in exchange for
promissory notes...... -- -- 5,213,550 5 126 (131) -- --
Issuance of common
stock under stock
option plan in
exchange for
promissory notes...... -- -- 625,000 1 30 (31) -- --
Issuance of common
stock under stock
option plan........... -- -- 344,480 -- 14 -- -- 14
Exercise of Series B
preferred stock
warrants.............. 2,539,999 3 -- -- 1,595 -- -- 1,598
Issuance of Series C
preferred stock, net
of issuance costs of
$20................... 3,839,165 3 -- -- 5,736 -- -- 5,739
Net loss............... -- -- -- -- -- -- (4,791) (4,791)
---------- --- ---------- --- ------- ----- -------- ------
Balance at January 31,
1995................... 9,439,614 9 6,183,030 6 9,008 (162) (5,548) 3,313
Issuance of Series D
preferred stock, net
of issuance costs of
$18................... 2,820,000 3 -- -- 8,044 -- -- 8,047
Issuance of common
stock under stock
option plan........... -- -- 1,008,257 1 262 (219) -- 44
Repurchase of common
stock at cost and
payments on promissory
notes................. -- -- (268,654) -- (12) 19 -- 7
Net loss............... -- -- -- -- -- -- (6,869) (6,869)
---------- --- ---------- --- ------- ----- -------- ------
Balance at January 31,
1996................... 12,259,614 12 6,922,633 7 17,302 (362) (12,417) 4,542
Issuance of common
stock under stock
option plan
(unaudited)........... -- -- 1,305,550 1 875 (592) -- 284
Repurchase of common
stock at cost and
payments on promissory
notes (unaudited)..... -- -- (296,146) -- (86) 109 -- 23
Net loss (unaudited)... -- -- -- -- -- -- (1,953) (1,953)
---------- --- ---------- --- ------- ----- -------- ------
Balance at October 31,
1996 (unaudited)....... 12,259,614 $12 7,932,037 $ 8 $18,091 $(845) $(14,370) $2,896
========== === ========== === ======= ===== ======== ======
</TABLE>
See accompanying notes.
F-5
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 26, 1993
(INCEPTION) YEAR ENDED NINE MONTHS
THROUGH JANUARY 31, ENDED OCTOBER 31,
JANUARY 31, ---------------- ------------------
1994 1995 1996 1995 1996
------------ ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................... $(757) $(4,791) $(6,869) $ (4,295) $ (1,953)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 19 308 528 380 608
Changes in operating
assets and liabilities:
Accounts receivable...... -- -- (138) (12) (5,140)
Inventory................ -- -- (331) (6) (2,981)
Other current assets..... (189) 54 (46) (70) (123)
Other assets............. (26) 10 (103) (108) (37)
Accounts payable......... 20 235 314 114 2,607
Accrued expenses......... 20 1,471 232 (266) (671)
----- ------- ------- -------- --------
Net cash used in operating
activities................. (913) (2,713) (6,413) (4,263) (7,690)
----- ------- ------- -------- --------
INVESTING ACTIVITIES
Purchases of property,
plant, and equipment...... (313) (917) (728) (611) (1,310)
Purchase of short-term
investments............... (98) -- -- -- --
Sales and maturities of
short-term investments.... 98 -- -- -- --
----- ------- ------- -------- --------
Net cash used in investing
activities................ (313) (917) (728) (611) (1,310)
----- ------- ------- -------- --------
FINANCING ACTIVITIES
Proceeds from sale
leaseback liability....... 246 929 1,243 738 1,337
Payments on lease
liability................. -- (278) (639) (421) (717)
Proceeds from working
capital line of credit.... -- -- 414 -- 18,017
Payments on working
capital line of credit.... -- -- -- -- (4,981)
Net proceeds from
issuances of
noncumulative convertible
preferred stock........... 1,505 7,337 8,047 8,022 --
Proceeds from issuance of
common stock.............. 5 14 51 46 307
----- ------- ------- -------- --------
Net cash provided by
financing activities...... 1,756 8,002 9,116 8,385 13,963
----- ------- ------- -------- --------
Net increase in cash and
cash equivalents.......... 530 4,372 1,975 3,511 4,963
Cash and cash equivalents at
beginning of period........ -- 530 4,902 4,902 6,877
----- ------- ------- -------- --------
Cash and cash equivalents at
end of period.............. $ 530 $ 4,902 $ 6,877 $ 8,413 $ 11,840
===== ======= ======= ======== ========
Supplemental schedules of
cash flow information
Cash paid during the year
for:
Interest................ $ -- $ 81 $ 153 $ 67 $ 660
Supplemental schedule of
noncash investing and
financing activities
Conversion of common stock
to Series A preferred
stock..................... $ -- $ 5 $ -- $ -- $ --
Issuance of common stock
in exchange for
promissory notes.......... $ -- $ 162 $ 219 $ 131 $ 592
</TABLE>
See accompanying notes.
F-6
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
NeoMagic Corporation (the "Company") was incorporated on May 26, 1993 in
California and will be reincorporated in Delaware prior to the consummation of
the initial public offering ("IPO"). The Company designs, develops and markets
multimedia accelerator solutions for sale to notebook PC manufacturers. The
Company's MagicWare technology integrates large DRAM memory with analog and
logic circuitry to provide a high performance multimedia solution on a single
chip.
Basis of Presentation
As of January 1996, the Company adopted a fiscal reporting period consisting
of a fifty-two week period ending on the Sunday closest to the January month
end. Fiscal years 1994, 1995, and 1996 ended on January 31, 31, and 28,
respectively, and the unaudited interim financial statements for the nine-
month periods ended on October 31, 1995 and October 27, 1996. For convenience,
the accompanying financial statements have been shown as ending on the last
day of the calendar month.
Principals of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, NeoMagic Japan (KK) and NeoMagic
International. All significant intercompany balances and transactions have
been eliminated.
Interim Financial Information
The consolidated financial statements as of October 31, 1996 and for the
nine months ended October 31, 1995 and 1996 are unaudited and include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of financial
position, results of operations, and cash flows for the interim periods.
Operating results for the nine months ended October 31, 1996 are not
necessarily indicative of the results that may be expected for any future
periods.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
All of the Company's products are supplied by a manufacturer in Japan under
the terms of a wafer supply agreement. The Company has established a
relationship with another company in Japan that would provide another source
of wafer supply by calendar 1998 and is currently negotiating an agreement to
formalize this relationship. A manufacturing disruption would impact the
production of the Company's products for a period of time, and the time
required to locate and qualify other suppliers could cause a delay in
manufacturing that may be financially disruptive to the Company.
Under the wafer supply agreement with the Company's sole supplier, the
Company must provide a rolling twelve month forecast of anticipated purchase
orders and the first four months of each forecast constitutes a
F-7
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
binding commitment. This limits the Company's ability to react to fluctuations
in demand for its products, which can be unexpected and dramatic. To the
extent the Company cannot accurately forecast the number of wafers required,
it may have either a shortage or an excess supply of wafers, which could have
an adverse effect on the Company's financial condition and results of
operations.
Foreign Currency Transactions
Foreign operations are measured using the U.S. dollar as the functional
currency. Accordingly, monetary accounts are measured using the foreign
exchange rate at the balance sheet date. Operating accounts and nonmonetary
balance sheet accounts are remeasured at the rate in effect at the date of
transaction. The effects of foreign currency remeasurement are reported in
current operations and have not been material to date.
Derivative Financial Instruments
The Company's wafer inventory purchases are denominated in yen. The Company
enters into foreign currency forward contracts to minimize foreign currency
fluctuation exposures related to these firm purchase commitments. The Company
does not use derivative financial instruments for speculative or trading
purposes. The Company's accounting policies for these instruments are based on
the Company's designation of such instruments as hedging transactions. The
criteria the Company uses for designating an instrument as a hedge include its
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. The settlement dates of the forward
contracts are no more than two months from the date of contract. As of October
31, 1996, the notional amount of outstanding forward contracts totaled
$6,500,000, expiring in December 1996. There were no significant gains or
losses related to foreign currency transactions or the currency forward
contracts for fiscal 1994, 1995, and 1996 and for the nine months ended
October 31, 1995 and 1996. The fair value of currency forward contracts at
October 31, 1996 is insignificant.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid financial instruments, consisting
of investments in money market funds, certificates of deposit, commercial
paper, and municipal bonds with original maturities of 90 days or less at the
time of acquisition.
Effective as of the beginning of fiscal 1995, the Company adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115"). Under FAS 115, management
classifies investments as available-for-sale or held-to maturity at the time
of purchase and periodically reevaluates such designations. Investments in
marketable equity securities and debt securities are classified as held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost with corresponding premiums or discounts amortized to interest income
over the life of the investment. Debt securities not classified as held-to-
maturity are classified as available-for-sale and are reported at fair value.
Unrecognized gains or losses on available-for-sale securities are included,
net of tax, in stockholders' equity until their disposition. Realized gains
and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income or expense. The
cost of securities sold is based on the specific identification method.
F-8
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
While the Company's intent is to hold debt securities to maturity, they are
classified as available-for-sale because the sale of such securities may be
required prior to maturity. All are stated at cost, which approximates fair
market value as of January 31, 1995 and 1996, and October 31, 1996, and
consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, OCTOBER 31,
1995 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash equivalents:
Money market funds........................ $ 255 $ 61 $1,427
Certificate of deposit.................... -- -- 325
Commercial paper.......................... 4,630 6,479 6,795
Municipal bonds........................... -- -- 500
------ ------ ------
Total................................... $4,885 $6,540 $9,047
====== ====== ======
</TABLE>
Unrealized holding gains and losses on available-for-sale securities at
January 31, 1995 and 1996 and October 31, 1996 and gross realized gains and
losses on sales of available-for-sale securities during the years ended
January 31, 1995 and 1996 and the nine months ended October 31, 1995 and 1996
were immaterial.
Inventory
Inventories are stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided on a
straight-line basis over the estimated useful life of the respective assets,
generally three to five years or, in the case of property under capital
leases, over the lesser of the useful life of the assets or lease term.
Revenue Recognition
Revenue from product sales is recognized upon shipment, net of estimated
returns. Although the Company has made no sales to distributors to date, the
Company's policy is that revenue on shipment to distributors are deferred
until the products are sold by the distributor.
Concentration of Credit Risk
The Company sells its products primarily to third-party subsystem
manufacturers in the computer industry. The Company performs continuing credit
evaluations of its customers and, generally, does not require collateral.
Letters of credit may be required from its customers in certain circumstances.
Research and Development Expenses
Expenditures for research and development are expensed as incurred. In
connection with the Company's product development efforts, it develops
software (none of which is separately sold) that enable the Company's
multimedia accelerator products to work with various personal computer
operating systems. The development of such software generally occurs in
parallel with the related accelerator product development and, accordingly, is
expensed as incurred.
F-9
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The Company will be required to adopt FAS 123 in
fiscal 1997. It is the Company's intention to account for employee stock
options in accordance with Accounting Principles Board Opinion No. 25, and to
adopt the "disclosure only" alternative described in FAS 123.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in
effect when the differences are expected to reverse.
Net Loss Per Share and Pro Forma Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from convertible preferred stock (using the as-if-converted method) and from
stock options and warrants (using the treasury stock method) have been
excluded from the computation because their inclusion would be anti-dilutive,
except that pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins, common and common equivalent shares issued by the
Company at prices below the initial public offering price during the twelve-
month period prior to the initial public offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the estimated initial public offering price). Per
share information calculated on this basis is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MAY 26, 1993
(INCEPTION) YEAR ENDED JANUARY NINE MONTHS ENDED
THROUGH 31, OCTOBER 31,
JANUARY 31, -------------------- --------------------
1994 1995 1996 1995 1996
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net loss per share...... $ (.10) $ (.60) $ (.77) $ (.48) $ (.21)
========= ========= ========= ========= =========
Shares used in computing
net loss per share..... 7,823,644 8,036,552 8,973,679 8,861,255 9,455,368
</TABLE>
The pro forma calculation of net loss per share presented in the
consolidated statements of operations is computed as described above and also
gives effect to the conversion of all outstanding shares of convertible
preferred stock into common stock upon the closing of the Company's initial
public offering using the as-if-converted method.
Unaudited Pro Forma Stockholders' Equity
The Company's unaudited pro forma stockholders' equity as of October 31,
1996 gives effect to the conversion of all convertible preferred stock
outstanding into an aggregate of 12,259,614 shares of common stock, effective
upon the closing of the Company's initial public offering.
F-10
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
2. SUMMARIZED BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
JANUARY 31,
---------------------- OCTOBER 31,
1995 1996 1996
---------- ---------- -----------
<S> <C> <C> <C>
Inventory:
Raw materials.......................... $ -- $ 7,000 $2,029,000
Work in process........................ -- 296,000 489,000
Finished goods......................... -- 28,000 794,000
---------- ---------- ----------
Total................................... $ -- $ 331,000 $3,312,000
========== ========== ==========
Property, plant, and equipment:
Computer equipment and software........ $1,067,000 $1,677,000 $2,664,000
Furniture and fixtures................. 78,000 143,000 349,000
Machinery and equipment................ 85,000 138,000 255,000
---------- ---------- ----------
Total................................... 1,230,000 1,958,000 3,268,000
Less accumulated depreciation and
amortization.......................... (327,000) (855,000) (1,463,000)
---------- ---------- ----------
Property, plant, and equipment, net..... $ 903,000 $1,103,000 $1,805,000
========== ========== ==========
Accrued Expenses:
Legal accrual.......................... $1,433,000 $1,500,000 $ --
Compensation and related benefits...... 50,000 156,000 677,000
Deferred rent.......................... -- -- 194,000
Other accruals......................... 8,000 67,000 155,000
---------- ---------- ----------
Total................................... $1,491,000 $1,723,000 $1,026,000
========== ========== ==========
</TABLE>
3. WORKING CAPITAL LINE OF CREDIT
The Company maintains a revolving credit agreement ("Credit Agreement") with
Mitsubishi International. The Credit Agreement is used to provide 90 day
extended credit terms to finance wafer inventory purchases. Borrowings of up
to $15,000,000 under the Credit Agreement are permitted, with a compensating
balance requirement that the Company, unless otherwise notified by Mitsubishi
International, place amounts drawn in excess of $12,000,000 into an escrow
account accessible only with Mitsubishi International's approval. As of
October 31, 1996, no amounts were held in escrow. The interest rate under the
agreement is based on the lender's internal interest rate which must be at
least 1.5% below the prime rate, on the date of invoice, approximately thirty
days after receipt of the inventory. The Company also pays a commission of
1.25% to 2% to the lender, based on the lending level during the prior
calendar quarter. The Company and Mitsubishi International have agreed to
amend the Credit Agreement to provide (i) that effective January 1, 1997,
Mitsubishi International's sole compensation under the Credit Agreement is a
commission of 1.75% of wafer purchases and (ii) for 60 day extended credit
terms. The term of the Credit Agreement expires on November 20, 1997, subject
to automatic extensions thereafter from year to year unless a termination
notice is given by either party. Under the terms of the Credit Agreement,
Mitsubishi International maintains a security interest in all inventory, cash
and investments, and all accounts and notes receivable of the Company. The
Credit Agreement contains standard events of default which if triggered can
permit Mitsubishi International to declare all amounts outstanding under the
Credit Agreement immediately due and payable. Such events of default include
failure to comply with the terms of the Credit Agreement, bankruptcy and
default and acceleration of any other indebtedness of the Company.
F-11
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
4. OBLIGATIONS UNDER CAPITAL LEASES
The Company enters into various capital leases, including sale and leaseback
transactions to finance purchases of property, plant and equipment, software
and masks. As of October 31, 1996, under various lease lines of credit, the
Company had $1,475,000 available for future purchases of property, plant and
equipment, software and masks that expire through June 30, 1997. Obligations
under capital leases represent the present value of future payments under the
equipment lease agreements. Under the terms of the lease agreements, warrants
to purchase the Company's preferred stock have been granted as described in
Note 6. Property, plant and equipment includes the following amounts for
leases that have been capitalized:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------- OCTOBER
1995 1996 31, 1996
---------- ---------- ----------
<S> <C> <C> <C>
Property, plant and equipment under
capital leases......................... $1,018,000 $1,710,000 $2,501,000
Accumulated amortization................ (283,000) (744,000) (1,247,000)
---------- ---------- ----------
Net property, plant and equipment under
capital leases......................... $ 735,000 $ 966,000 $1,254,000
========== ========== ==========
</TABLE>
Future minimum payments under capital leases consist of the following at
October 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending January 31:
1997 (remaining three months)................................... $ 320,000
1998............................................................ 1,162,000
1999............................................................ 548,000
2000............................................................ 475,000
2001............................................................ 8,000
----------
Total minimum lease payments..................................... 2,513,000
Amount representing interest..................................... (392,000)
----------
Present value of net minimum lease payments...................... 2,121,000
Less current portion............................................. 1,086,000
----------
Long-term portion................................................ $1,035,000
==========
</TABLE>
5. INCOME TAXES
As of January 31, 1995 and 1996, the Company had federal net operating loss
carryforwards of approximately $3,900,000 and $10,800,000, respectively. As of
January 31, 1995 and 1996 the Company also had state net operating loss
carryforwards of approximately $900,000 and $2,700,000, respectively. The
Company had federal research and development tax credit carryforwards of
approximately $100,000 and $200,000 at January 31, 1995 and 1996,
respectively. The net operating loss and credit carryforwards will expire
beginning in 1999 through 2011, if not utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change provision of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before
utilization.
F-12
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
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 and liabilities for federal and state
income taxes are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $1,400,000 $3,800,000
Research credit carryforwards...................... 100,000 300,000
Capitalized research and development............... 130,000 200,000
Litigation reserve................................. 550,000 550,000
Other.............................................. 20,000 150,000
---------- ----------
Total deferred tax assets........................ 2,200,000 5,000,000
Valuation allowance.................................. (2,200,000) (5,000,000)
---------- ----------
Net deferred tax assets.............................. $ -- $ --
========== ==========
</TABLE>
The net valuation allowance increased by $300,000, $1,900,000, and
$2,800,000 during the period from May 26, 1993 (inception) through January 31,
1994, and the years ended January 31, 1995 and 1996, respectively.
6. STOCKHOLDERS' EQUITY
Noncumulative Convertible Preferred Stock
Preferred stock consists of the following:
<TABLE>
<CAPTION>
SHARES DESIGNATED SHARES ISSUED AND OUTSTANDING
-------------------------------- --------------------------------
JANUARY 31, JANUARY 31,
-------------------- OCTOBER 31, -------------------- OCTOBER 31,
1995 1996 1996 1995 1996 1996
--------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A.. 3,180,450 3,180,450 3,180,450 3,060,450 3,060,450 3,060,450
Series B.. 2,631,199 2,631,199 2,631,199 2,539,999 2,539,999 2,539,999
Series C.. 4,166,666 4,166,666 4,166,666 3,839,165 3,839,165 3,839,165
Series D.. -- 2,890,000 2,890,000 -- 2,820,000 2,820,000
--------- ---------- ---------- --------- ---------- ----------
9,978,315 12,868,315 12,868,315 9,439,614 12,259,614 12,259,614
</TABLE>
The holder of each share of Series A, B, C, and D preferred stock is
entitled to receive, when and as declared by the Board of Directors,
noncumulative dividends at an annual rate equal to $.04, $.05, $.12, and $.228
per share, respectively. No dividends have been declared to date.
Each share of Series A, B, C, and D preferred stock is convertible, at the
holders' option, into common stock on a one-for-one basis, subject to certain
antidilution adjustments. Each share of preferred stock shall automatically be
converted into common stock immediately upon the closing of an underwritten
initial public offering of the Company's common stock for an aggregate
offering price of at least $15,000,000 and at a per share offering price of
not less that $4.25 per share. The preferred stockholders are entitled to one
vote for each share of common stock into which such shares can be converted.
F-13
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
The Series A, B, C, and D preferred stockholders are entitled to liquidation
preferences of $0.50, $0.625, $1.50, and $2.85 per share, respectively,
adjusted for any combinations, consolidations, or stock splits with respect to
such shares and, in addition, an amount equal to all declared but unpaid
dividends for each share of Series A, B, C, and D preferred stock then held.
If the assets and funds distributed among the holders of the Series A, B, C,
and D preferred shares is insufficient to permit the payment to such holders
of the full preferential amount, the entire assets and funds of the Company
legally available for distribution shall be distributed to the holders of the
Series A, B, C, and D preferred shares in proportion to the full preferential
amount each such holder is otherwise entitled to receive. After payment of
these liquidation preferences, the remaining assets will be distributed to the
holders of common stock and the preferred stock on a pro rata basis as if the
Series A, B, C, and D preferred stock were converted into common stock until
the holders of the Series D preferred stock have received an aggregate amount
equal to $3.28 per share, the holders of Series C preferred stock have
received an aggregate amount equal to $1.80 per share, and the holders of
Series A and B preferred stock have received an aggregate amount equal to $.81
per share. Any remaining amounts will be distributed to the holders of common
stock.
Warrants
The Company periodically grants warrants in connection with certain leases
arrangements. The Company had the following warrants outstanding at October
31, 1996 to purchase shares of preferred stock:
<TABLE>
<CAPTION>
NUMBER OF PREFERRED EXERICSE PRICE DATE
SHARES STOCK SERIES PER SHARE ISSUED EXPIRATION OF WARRANTS
--------- ------------ -------------- ------ -------------------------------
<C> <C> <C> <C> <S>
120,000 A $0.50 11/93 November 2003
Later of November 2003 or five
48,000 B $0.625 11/93 years after IPO
Later of May 2001 or five years
43,200 B $0.625 5/94 after IPO
Later of August 2001 or five
36,666 C $1.50 7/94 years after IPO
Later of August 2001 or five
15,789 D $2.85 8/95 years after IPO
35,088 D $2.85 8/95 December 2001
18,000 D $5.70 6/96 December 2001
-------
316,743
</TABLE>
All of the outstanding warrants will become exercisable for common stock if
the Company completes an initial public offering of its common stock.
Stock Plan
In July 1993, the Company adopted the 1993 Stock Plan (the "Plan") whereby
the Board of Directors may grant incentive stock options, nonstatutory stock
options and stock purchase rights to employees, consultants, and directors.
When the Plan was established, the Company reserved 1,775,000 shares of common
stock for issuance. In December 1995 and February 1996, an additional
1,500,000 and 2,500,000 shares of common stock, respectively, were reserved
for issuance under the Plan.
Vesting provisions for stock purchase rights and options granted under the
Plan are determined by the Board of Directors. Stock options expire no later
than ten years from the date of the grant. Stock purchase rights and options
are issued at fair market value on the date of the grant. In the event of
voluntary or involuntary termination of employment with the Company for any
reason, with or without cause, all options are forfeited and all vested
options must be exercised within a sixty-day period; otherwise the options are
forfeited. Options and stock purchase rights are immediately exercisable, and
unvested (but issued) common shares are subject to
F-14
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
repurchase by the Company if the holder is no longer employed by the Company.
As of October 31, 1996, 2,758,272 shares of common stock were subject to this
repurchase provision.
Stock option data is as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER
(OPTIONS) SHARE
---------- --------------
<S> <C> <C>
Balance at January 31, 1994 -- $ --
Granted......................................... 1,317,000 0.025 - 0.15
Exercised....................................... (969,480) 0.025 - 0.15
Canceled........................................ (30,000) 0.05
---------- --------------
Balance at January 31, 1995...................... 317,520 0.025 - 0.15
Granted......................................... 1,448,100 0.15 - 0.285
Exercised....................................... (1,008,257) 0.15 - 0.285
Canceled........................................ (182,863) 0.05 - 0.285
---------- --------------
Balance at January 31, 1996...................... 574,500 0.025 - 0.285
Granted......................................... 2,273,600 0.285 - 3.50
Exercised....................................... (1,305,550) 0.025 - 3.50
Canceled........................................ (43,500) 0.15 - 1.00
---------- --------------
Balance at October 31, 1996...................... 1,499,050 $ 0.15 - 3.50
========== ==============
</TABLE>
At October 31, 1996, options to purchase 83,133 shares of common stock were
vested at prices ranging from $.15 to $.80 and 1,509,641 shares of common stock
were available for future grants under the Plan.
7. SAVINGS PLAN
The Company maintains a savings plan under Section 401 (k) of the Internal
Revenue Code. Under the plan, employees may contribute up to 20% of their pre-
tax salaries per year, but not more than the statutory limits. The Company does
not contribute to the plan.
8. COMMITMENTS AND CONTINGENCIES
Commitments
In May 1996 the Company moved its principal headquarters to a new facility in
Santa Clara, California, under a noncancellable operating lease that expires in
April 2003. The Company also leases a sales office under an operating lease
that expires in February 1997. Future minimum lease payments under operating
leases at October 31, 1996 are as follows:
<TABLE>
<S> <C>
Fiscal year ending January 31:
1997 (remaining three months).................................... $ 148,000
1998............................................................. 779,000
1999............................................................. 830,000
2000............................................................. 857,000
2001............................................................. 884,000
2002............................................................. 911,000
Thereafter....................................................... 1,175,000
---------
Total minimum lease payments...................................... 5,584,000
=========
</TABLE>
F-15
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
Rental expense under operating leases was $22,000, $70,000 and $97,000, for
the period from May 26, 1993 (inception) through January 31, 1994, and for the
years ended January 31, 1995 and 1996, respectively, and $72,000 and $440,000
for the nine months ended October 31, 1995 and 1996, respectively.
In fiscal 1997, the Company began subletting a portion of its main operating
facility under operating leases expiring through March 1998. As of October 31,
1996, future minimum rentals to be received under noncancelable subleases
totaled $75,000, $268,000 and $42,000, for the three months ending January 31,
1997, and the years ending January 31, 1998 and 1999, respectively. Rental
income for the nine months ended October 31, 1996 was $100,000.
Contingencies
In November 1994, one of the Company's competitors (the "plaintiff") filed
an action against the Company, five of its employees, and its Chairman of the
Board of Directors. The plaintiff alleged that the Company interfered with
employment agreements, and misappropriated certain of the plaintiff's trade
secrets. In March 1996, the litigation was settled and no amounts were
required to be paid by the Company. In fiscal 1995 and 1996, the Company
recorded charges to operations totaling $1,500,000 and $610,000, respectively,
for estimated legal costs related to the litigation. In the second quarter of
fiscal 1997, due to settlement of the litigation, other operating expenses was
reduced by $1,503,000 due to the reversal of previously estimated legal fees.
In October 1996 the Company was notified by two of its customers that they
had received a letter from the holder of a United States patent asserting that
the video graphics subsystem in such customers' notebook PCs, which use the
Company's products, infringe certain claims of the patent. The Company
believes that these claims are without merit.
9. SIGNIFICANT CUSTOMERS AND EXPORT SALES
For the year ended January 31, 1996, three customers accounted for 35%, 29%
and 14%, respectively, of net sales. During the nine months ended October 31,
1996, two customers accounted for 35% and 19%, respectively, of net sales. Net
sales to customers in Asia-Pacific, Japan, and the United States totaled 82%,
8% and 10%, respectively, of net sales for the year ended January 31, 1996 and
58%, 37% and 5%, respectively, of net sales for the nine months ended October
31, 1996.
10. SUBSEQUENT EVENTS (UNAUDITED)
Proposed Public Offering of Common Stock
On October 10, 1996, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock in an
initial public offering. If the initial public offering is consummated as
presently anticipated, all of the currently outstanding preferred stock will
automatically convert into 12,259,614 shares of common stock. Unaudited pro
forma stockholders' equity at October 31, 1996 gives effect to the conversion
of 12,259,614 shares of convertible preferred stock into shares of common
stock upon the closing of the Company's initial public offering.
F-16
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF OCTOBER 31, 1996 AND FOR
THE NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 IS UNAUDITED)
1993 Stock Plan
The Company's Amended and Restated 1993 Stock Plan (the "Amended 1993 Plan")
provides for the granting to employees of incentive stock options and for the
granting to employees, directors and consultants of nonstatutory stock options
and stock purchase rights. The original plan was approved initially by the
Board of Directors and the stockholders in July 1993. The Amended 1993 Plan
was approved by the Board of Directors in December 1996, subject to
stockholder approval. Unless terminated sooner, the Amended 1993 Plan will
terminate automatically in December 2003. Pursuant to the Amended 1993 Plan,
the authorized shares of common stock available for issuance was increased
from 5,775,000 shares to 7,775,000 shares.
Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors in December 1996, subject to stockholder
approval. A total of 500,000 shares of common stock has been reserved for
issuance under the 1997 Purchase Plan. The 1997 Purchase Plan, which is
intended to qualify under Section 423 of the Internal Revenue Code, is
implemented by consecutive and overlapping twenty-four month offering periods
that begin every six months, commencing after the completion of the initial
public offering. Each twenty-four month offering period includes four six-
month purchase periods, during which payroll deductions are accumulated and at
the end of which, shares of common stock are purchased with a participant's
accumulated payroll deductions, except for the first such offering period
which commences on the first trading day on or after the effective date of the
initial public offering. The 1997 Purchase Plan permits eligible employees to
purchase common stock through payroll deductions of up to 10% of an employee's
compensation. The price of common stock to be purchased under the 1997
Purchase Plan will be 85% of the lower of the fair market value of the common
stock at the beginning of the offering period or at the end of the relevant
purchase period.
Preferred Stock
On December 12, 1997, the Board of Directors approved, subject to
stockholder approval, an amendment to the Certificate of Incorporation to
allow, upon the completion of the initial public offering, the issuance of up
to 2,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights of those
shares without any further vote or action by the stockholders.
F-17
<PAGE>
[LOGO OF NEOMAGIC-MOBILIZING MULTIMEDIA]
Traditional multimedia accelerator solution Single chip NeoMagic multimedia
with external DRAM (64-bit memory bus) accelerator with integrated
DRAM (128-bit memory bus)
[PICTURE OF TRADITIONAL MULTIPLE CHIP MULTIMEDIA ACCELERATOR PRODUCT]
By combining memory and logic on a single chip, NeoMagic provides 128-bit
multimedia accelerator solutions designed to offer the following advantages over
traditional architectures:
. Higher performance
. Lower power consumption
. Reduced size and weight
. Lower complexity
. Improved system reliability
. Lower system cost
[SCHEMATIC PICTURE OF NEOMAGIC 128-BIT MULTIMEDIA ACCELERATOR PRODUCT]
<PAGE>
[COMPANY LOGO]
DIFFERENTIATION THROUGH INTEGRATION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
-------
<S> <C>
Registration Fee....................................................... $10,455
NASD Fee............................................................... $ 3,950
Nasdaq Listing Fee..................................................... *
Legal Fees and Expenses................................................ *
Accounting Fees and Expenses........................................... *
Blue Sky Fees and Expenses............................................. *
Transfer Agent Fees.................................................... *
Miscellaneous.......................................................... *
-------
Total................................................................ $ *
=======
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach or
alleged breach of their duty of care. In addition, as permitted by Section 145
of the Delaware General Corporation Law, the Bylaws of the Registrant provide
that: (i) the Registrant is required to indemnify its directors and executive
officers and persons serving in such capacities in other business enterprises
(including, for example, subsidiaries of the Registrant) at the Registrant's
request, to the fullest extent permitted by Delaware law, including in those
circumstances in which indemnification would otherwise be discretionary; (ii)
the Registrant may, in its discretion, indemnify employees and agents in those
circumstances where indemnification is not required bylaw; (iii) the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers in connection with defending a proceeding (except that it
is not required to advance expenses to a person against whom the Registrant
brings a claim for breach of the duty of loyalty, failure to act in good
faith, intentional misconduct, knowing violation of law or deriving an
improper personal benefit; (iv) the rights conferred in the Bylaws are not
exclusive, and the Registrant is authorized to enter into indemnification
agreements with its directors, executive officers and employees; and (v) the
Registrant may not retroactively amend the Bylaw provisions in a way that it
adverse to such directors, executive officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum
indemnity allowed to directors and executive officers by Section 145 of the
Delaware General Corporation Law and the Bylaws, as well as certain additional
procedural protections. In addition, such indemnity agreements provide that
directors and executive officers will be indemnified to the fullest possible
extent not prohibited by law against all expenses (including attorney's fees)
and settlement amounts paid or incurred by them in any action or proceeding,
including any derivative action by or in the right of the Registrant, on
account of their services as directors or executive officers of the Registrant
or as directors or officers of any other Company or enterprise when they are
serving in such capacities at the request of the Registrant. The Company will
not be obligated pursuant to the indemnity agreements to indemnify or advance
expenses to an indemnified party with respect to proceedings or claims
initiated by the indemnified party and not
II-1
<PAGE>
by way of defense, except with respect to proceedings specifically authorized
by the Board of Directors or brought to enforce a right to indemnification
under the indemnity agreement, the Company's Bylaw/s or any statute or law.
Under the agreements, the Company is not obligated to indemnify the
indemnified party (i) for any expenses incurred by the indemnified party with
respect to any proceeding instituted by the indemnified party to enforce or
interpret the agreement, if a court of competent jurisdiction determines that
each of the material assertions made by the indemnified party in such
proceeding was not made in good faith or was frivolous; (ii) for any amounts
paid in settlement of a proceeding unless the Company consents to such
settlement; (iii) with respect to any proceeding brought by the Company
against the indemnified party for willful misconduct, unless a court
determines that each of such claims was not made in good faith or was
frivolous; (iv) on account of any suit in which judgment is rendered against
the indemnified party for an accounting of profits made from the purchase or
sale by the indemnified party of securities of the Company pursuant to the
provisions of (S) 16(b) of the Exchange Act and related laws; (v) on account
of the indemnified party's conduct which is finally adjudged to have been
knowingly fraudulent or deliberately dishonest, or to constitute willful
misconduct or a knowing violation of the law; (vi) an account of any conduct
from which the indemnified party derived an improper personal benefit; (vii)
on account of conduct the indemnified party believed to be contrary to the
best interests of the Company or its stockholders; (vii) on account of conduct
that constituted a breach of the indemnified party's duty of loyalty to the
Company or its stockholders; or (ix) if a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
The indemnification provision in the Bylaws and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities arising under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January, 1994, the Registrant has issued and sold the following
securities:
1. From January 5, 1994 to January 14, 1997, the Registrant has issued
and sold 3,438,987 shares of Common Stock to directors, employees and
consultants at prices ranging from $.025 to $3.50 per share upon exercise
of stock options and restricted stock purchase rights pursuant to the
Registrant's 1993 Stock Plan. Such issuances were made in reliance upon the
exemption from registration set forth in Rule 701 promulgated under the
Securities Act or Section 4(2) of the Securities Act.
2. On July 20, 1993 and September 16, 1993, the Company sold in the
aggregate 3,060,450 shares of Series A Preferred Stock at a price per share
of $.50 for aggregate cash consideration of $1,530,225 and warrants to
purchase in the aggregate 2,539,999 shares of Series B Preferred Stock at a
purchase price of $.0001 per warrant for aggregate cash consideration of
$254 and an exercise price of $.625 per warrant. Such issuances were made
in reliance upon the exemption contained in Section 4(2) of the Securities
Act.
3. On February 11, 1994, the Company issued an aggregate of 10,250 shares
of Series A Preferred Stock to employees of the Company and Kamran Elahian
in exchange for an aggregate of 5,125,000 shares of Common Stock held by
such persons. Such issuances were made in reliance upon the exemption
contained in Section 4(2) of the Securities Act.
4. On March 4, 1994, the Company sold in the aggregate 4,989,000 shares
of Common Stock at a price per share of $.025 to five executive officers of
the Company in consideration of execution and delivery of promissory notes
to the Company in the aggregate principal amount of $124,725. Such
issuances were made in reliance upon the exemption contained in Section
4(2) of the Securities Act.
5. On March 10, 1994, the Company issued 2,539,999 shares of Series B
Preferred Stock, at a price per share of $.625 for aggregate cash
consideration of $1,587,499 pursuant to the exercise of warrants issued on
July 20, 1993 and September 16, 1993. Such issuances were made in reliance
upon the exemption contained in Section 4(2) of the Securities Act.
6. On July 15, 1994, the Company sold in the aggregate 300,000 shares of
Common Stock at a purchase price of $.05 per share to an executive officer
of the Company in consideration of execution and
II-2
<PAGE>
delivery of promissory notes to the Company in the aggregate principal
amount of $124,725. Such issuance was made in reliance upon the exemption
from registration set forth in Rule 701 promulgated under the Securities
Act or Section 4(2) of the Securities Act.
7. On July 6, 1994 and August 30, 1994, the Company sold in the aggregate
3,839,165 shares of Series C Preferred Stock at a price per share of $1.50
to certain institutional and other accredited investors for aggregate cash
consideration of $5,758,747.50. Such issuances were made in reliance upon
the exemption contained in Section 4(2) of the Securities Act.
8. On June 30, 1995 and August 10, 1995, the Company sold in the
aggregate 2,820,000 shares of Series D Preferred at a price per share of
$2.85 to certain institutional and other accredited investors for aggregate
cash consideration of $8,037,000. Such issuances were made in reliance upon
the exemption contained in Section 4(2) of the Securities Act.
9. On November 9, 1995, the Company sold in the aggregate 470,000 shares
of Common Stock of the Company to two employees of the Company at a price
per share of $.285 in consideration of execution and delivery of promissory
notes to the Company in the aggregate principal amount of $133,450. Such
issuances were made in reliance upon the exemption from registration set
forth in Rule 701 promulgated under the Securities Act or Section 4(2) of
the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation of Registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of Registrant
to be filed upon the closing of the Offering made under the
Registration Statement.
3.3* Bylaws of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
4.2 Second Amended Rights Agreement, dated as of June 30, 1995, between
Registrant and the parties indicated therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers.
10.2* Amended and Restated 1993 Stock Plan and related agreements.
10.3 Second Amended and Restated Rights Agreement, dated as of June 30,
1995, between Registrant and the parties indicated therein (included in
Exhibit 4.2).
10.4** Wafer Supply Agreement, dated as of January , 1997, between
Registrant and Mitsubishi Electric Corporation.
10.5* Form of promissory note.
10.6* Lease Agreement, dated as of February 5, 1996, between Registrant and
A&P Family Investments, as landlord.
10.7* Sublease Agreement, dated as of June 25, 1996, between Registrant and
PlanetWeb, Inc.
10.8* Master Lease Agreement, as amended, dated as of November 24, 1996,
between Registrant and Comdisco, Inc., and related agreements.
10.9* Master Lease Agreement, as amended, dated 1995 and 1996, between
Registrant and Western Technology, and related agreement.
10.10 Agreement, dated as of November 20, 1995, between Registrant and
Mitsubishi International Corporation as amended.
10.11 General Security Agreement, dated November 15, 1995, between Registrant
and Mitsubishi International Corporation.
10.12 Escrow Agreement, dated September 27, 1996, between Registrant and
Mitsubishi International Corporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.13* 1997 Employee Stock Purchase Plan
11.1 Statement of computation of Net Loss Per Share and Pro Forma Net Loss Per Share.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors (See page II-7).
23.3 Consent of Townsend and Townsend and Crew (See page II-8).
24.1 Power of Attorney (See page II-5).
27 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission. To be supplied by amendment.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than 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 hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 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,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PALO ALTO, STATE OF
CALIFORNIA, ON THIS 17TH DAY OF JANUARY, 1997
Neomagic Corporation
/s/ Prakash C. Agarwal
By___________________________________
PRAKASH C. AGARWAL PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints, jointly and severally, Prakash C. Agarwal, and
Merle McClendon and each one of them, his true and lawful attorney-in-fact and
agents, each with full power of substitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and to file the
same, with all exhibits thereto and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done or by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Kamran Elahian Chairman of the January 17, 1997
- ------------------------------------- Board
KAMRAN ELAHIAN
/s/ Prakash C. Agarwal President and Chief January 17, 1997
- ------------------------------------- Executive Officer
PRAKASH C. AGARWAL (Principal
Executive Officer)
/s/ Merle McClendon Vice President of January 17, 1997
- ------------------------------------- Finance and
MERLE MCCLENDON Administration,
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
II-5
<PAGE>
SIGNATURES TITLE DATE
/s/ Brian Dougherty Director January 17,
- ------------------------------------- 1997
BRIAN DOUGHERTY
/s/ Irwin Federman Director January 17,
- ------------------------------------- 1997
IRWIN FEDERMAN
/s/ James Lally Director January 17,
- ------------------------------------- 1997
JAMES LALLY
/s/ Michael Moritz Director January 17,
- ------------------------------------- 1997
MICHAEL MORITZ
II-6
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 12, 1996, in the Registration Statement
(Form S-1) and related Prospectus of NeoMagic Corporation for the registration
of shares of its common Stock.
/s/ Ernst & Young LLP
San Jose, California
January 16, 1997
II-7
<PAGE>
EXHIBIT 23.3
CONSENT OF TOWNSEND AND TOWNSEND AND CREW
We consent to the reference to our firm under the captions "Experts," "Risk
Factors--Uncertainty Regarding Patents and Protection of Proprietary Rights"
and "Business--Proprietary Rights" in the Registration Statement on Form S-1
and related Prospectus of NeoMagic Corporation.
Townsend and Townsend and Crew
/s/ Paul C. Haughey
By___________________________________
PAUL C. HAUGHEY, PARTNER
Palo Alto, California
January 16, 1997
II-8
<PAGE>
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of NeoMagic
Corporation as of January 31, 1995 and 1996 and for the period from May 26,
1993 (inception) through January 31, 1994, and the years ended January 31,
1995 and 1996, and have issued our report thereon dated February 12, 1996
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/Ernst & Young LLP
San Jose, California
February 12, 1996
S-1
<PAGE>
SCHEDULE II
NEOMAGIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO
BEGINNING COST AND ACCOUNTS BALANCE AT
OF YEAR EXPENSE WRITTEN-OFF END OF PERIOD
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
For the period from May 26,
1993 (inception) through
January 31, 1994............ -- -- -- --
Year ended January 31, 1995.. -- -- -- --
Year ended January 31, 1996.. -- -- -- --
Nine months ended October 31,
1996 (unaudited)............ -- 57 -- 57
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
------- ------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation of Registrant.
3.2* Form of Amended and Restated Certificate of
Incorporation of Registrant to be filed upon the
closing of the Offering made under the Registration
Statement.
3.3* Bylaws of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
4.2 Second Amended Rights Agreement, dated as of June 30,
1995, between Registrant and the parties indicated
therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
10.1* Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers.
10.2* Amended and Restated 1993 Stock Plan and related
agreements.
10.3 Second Amended and Restated Rights Agreement, dated as
of June 30, 1995, between Registrant and the parties
indicated therein (included in Exhibit 4.2).
10.4** Wafer Supply Agreement, dated as of January , 1997,
between Registrant and Mitsubishi Electric
Corporation.
10.5* Form of promissory note.
10.6* Lease Agreement, dated as of February 5, 1996, between
Registrant and A&P Family Investments, as landlord.
10.7* Sublease Agreement, dated as of June 25, 1996, between
Registrant and PlanetWeb, Inc.
10.8* Master Lease Agreement, as amended, dated as of
November 24, 1996, between Registrant and Comdisco,
Inc., and related agreements.
10.9* Master Lease Agreement, as amended, dated 1995 and
1996, between Registrant at Western Technology, and
related agreement.
10.10 Agreement, dated as of November 20, 1995, between
Registrant and Mitsubishi International Corporation,
as amended.
10.11 General Security Agreement, dated November 15, 1995,
between Registrant and Mitsubishi International
Corporation.
10.12 Escrow Agreement, dated September 27, 1996, between
Registrant and Mitsubishi International Corporation.
10.13* 1997 Employee Stock Purchase Plan
11.1 Statement of Computation of Net Loss Per Share and Pro
Forma Net Loss Per Share.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors
(See page II-7).
23.3 Consent of Townsend and Townsend and Crew (See page
II-8).
24.1 Power of Attorney (See page II-5).
27 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission. To be supplied by amendment.
<PAGE>
EXHIBIT 1.1
NEOMAGIC CORPORATION
COMMON STOCK, PAR VALUE $0.01 PER SHARE
UNDERWRITING AGREEMENT
February __, 1997
<PAGE>
February , 1997
--
Morgan Stanley & Co. Incorporated
Montgomery Securities
Robertson, Stephens & Company LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
NeoMagic Corporation, a Delaware corporation (the "Company"), proposes to
issue and sell to the several Underwriters named in Schedule II hereto (the
"Underwriters") an aggregate of __________ shares of the common stock, par value
$0.001 per share, of the Company (the "Firm Shares").
The Company and certain stockholders of the Company (the "Selling
Stockholders") named in Schedule I hereto severally propose to issue and sell to
the several Underwriters not more than an additional __________ shares of its
common stock, par value $0.001 per share (the "Additional Shares") if and to the
extent that you, as managers of the offering, shall have determined to exercise,
on behalf of the Underwriters, the right to purchase such shares of common
stock, par value $0.001 per share, granted to the Underwriters in Section 3
hereof. Of the Additional Shares, the Company will issue and sell __________
shares and the Selling Stockholders will sell __________ shares, each Selling
Stockholder selling the amount set forth opposite such Selling Stockholder's
name in Schedule I hereto. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares." The shares of common
stock, par value $0.001 per share, of the Company to be outstanding after giving
effect to the sales contemplated hereby are hereinafter referred to as the
"Common Stock." The Company and the Selling Stockholders are hereinafter
sometimes collectively referred to as the "Sellers."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b)
<PAGE>
under the Securities Act (the "Rule 462 Registration Statement"), then any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462 Registration Statement.
As part of the offering contemplated by this Agreement, Morgan Stanley &
Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares set
forth opposite its name on Schedule II to this Agreement, up to _____________
shares, for sale to the Company's employees, officers, directors and other
parties associated with the Company (collectively, "Participants"), as set forth
in the Prospectus under the heading "Underwriting" (the "Directed Share
Program"). The Shares to be sold by Morgan Stanley pursuant to the Directed
Share Program (the "Directed Shares") will be sold by Morgan Stanley pursuant to
this Agreement at the public offering price. Any Directed Shares not orally
confirmed for purchase by any Participants by the end of the first business day
after the date on which this Agreement is executed will be offered to the public
by Morgan Stanley as set forth in the Prospectus.
1. Representations and Warranties of the Company and the Selling Founders.
----------------------------------------------------------------------
The Company and each of stockholders listed on Schedule III hereto
(collectively, the "Selling Founders") hereby jointly and severally represent
and warrant to and agree with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph 1(b)
do not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
Subsidiaries, taken as a whole.
-3-
<PAGE>
(d) NeoMagic International and NeoMagic Japan K.K. (individually, a
"Subsidiary" and collectively, the "Subsidiaries") are the only Subsidiaries of
the Company. Each Subsidiary has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
Subsidiaries, taken as a whole; all of the issued shares of capital stock of
each Subsidiary of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned directly by the Company, free
and clear of all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and delivered by
the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold by the
Selling Stockholders) outstanding prior to the issuance of the Shares to be sold
by the Company have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this Agreement,
will be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or by-laws of
the Company or any agreement or other instrument binding upon the Company or any
of its Subsidiaries that is material to the Company and its Subsidiaries, taken
as a whole, or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any Subsidiary, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of the
Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its Subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
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<PAGE>
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and its
Subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock other than ordinary and customary dividends; and
(3) there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its Subsidiaries, except in each
case as described in or contemplated by the Prospectus.
(l) The Company and its Subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its Subsidiaries; and
any real property and buildings held under lease by the Company and its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries, in each case except as describe in or contemplated by the
Prospectus.
(m) The Company and its Subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them, and except as disclosed in
the Prospectus, neither the Company nor any of its Subsidiaries has received any
notice of infringement of or conflict with asserted rights of others with
respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its Subsidiaries, taken as a
whole.
(n) No material labor dispute with the employees of the Company or any
of its Subsidiaries exists, except as described in or contemplated by the
Prospectus, or, to the knowledge of the Company, is imminent; and the Company is
not aware of any existing, threatened or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or contractors that
could result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and its
Subsidiaries, taken as a whole.
(o) The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not
-5-
<PAGE>
materially and adversely affect the condition, financial or otherwise, or the
earnings, business or operations of the Company and its Subsidiaries, taken as a
whole, except as described in or contemplated by the Prospectus.
(p) The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(q) The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that
(1) transactions are executed in accordance with management's general or
specific authorizations; (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (3) access to assets
is permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(r) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its Subsidiaries is a party or to
which any of the properties of the Company or any of its Subsidiaries is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(s) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(t) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(u) The Company and its Subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive
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<PAGE>
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not, singly or
in the aggregate, have a material adverse effect on the Company and its
Subsidiaries, taken as a whole.
(v) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) which would, singly
or in the aggregate, have a material adverse effect on the Company and its
Subsidiaries, taken as a whole.
(w) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company or to require
the Company to include such securities with the Shares registered pursuant to
the Registration Statement.
(x) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
(y) The Company has not offered, or caused the Underwriters to offer,
Shares to any person pursuant to the Directed Share Program with the specific
intent to unlawfully influence (i) a customer or supplier of the Company or of
any Subsidiary to alter the customer's or supplier's level or type of business
with the Company or of any Subsidiary, or (ii) a trade journalist or publication
to write or publish favorable information about the Company or its products.
Furthermore, the Company represents and warrants to Morgan Stanley
that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, is distributed in connection with the Directed Share Program, and
that (ii) no authorization, approval, consent, license, order, registration or
qualification of or with any government, governmental instrumentality or court,
other than such as have been obtained, is necessary under the securities laws
and regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
2. Representations and Warranties of the Selling Stockholders. Each of
----------------------------------------------------------
the Selling Stockholders, and as to 2(g) below, each Selling Stockholder other
than the Selling Founders, hereby severally, and not jointly, represent and
warrant to and agree with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder.
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<PAGE>
(b) The execution and delivery by such Selling Stockholder of, and the
performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement signed by such Selling Stockholder and Boston
Equiserve, as Custodian, relating to the deposit of the Shares to be sold by
such Selling Stockholder (the "Custody Agreement") and the Power of Attorney
appointing certain individuals as such Selling Stockholder's attorneys-in-fact
to the extent set forth therein, relating to the transactions contemplated
hereby and by the Registration Statement (the "Power of Attorney") will not
contravene any provision of applicable law, or the certificate of incorporation
or by-laws of such Selling Stockholder (if such Selling Stockholder is a
corporation), or any agreement or other instrument binding upon such Selling
Stockholder or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over such Selling Stockholder, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by such Selling Stockholder of
its obligations under this Agreement or the Custody Agreement or Power of
Attorney of such Selling Stockholder, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the offer
and sale of the Shares.
(c) Such Selling Stockholder has, and on the Closing Date will have,
valid title to the Shares to be sold by such Selling Stockholder and the legal
right and power, and all authorization and approval required by law, to enter
into this Agreement, the Custody Agreement and the Power of Attorney and to
sell, transfer and deliver the Shares to be sold by such Selling Stockholder.
(d) The Shares to be sold by such Selling Stockholder pursuant to this
Agreement have been duly authorized and are validly issued, fully paid and non-
assessable.
(e) The Custody Agreement and the Power of Attorney have been duly
authorized, executed and delivered by such Selling Stockholder and are valid and
binding agreements of such Selling Stockholder.
(f) Delivery of the Shares to be sold by such Selling Stockholder
pursuant to this Agreement will pass title to such Shares free and clear of any
security interests, claims, liens, equities and other encumbrances.
(g) All information furnished by or on behalf of such Selling
Stockholder for use in the Registration Statement or the Prospectus is, and on
the Closing Date will be, true, correct, and complete, and does not, and on the
Closing Date will not, contain any untrue statement of a material fact or omit
to state any material fact necessary to make such information not misleading.
3. Agreements to Sell and Purchase. Each Seller, severally and not
-------------------------------
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $______ a share (the "Purchase
Price") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by
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<PAGE>
such Seller as the number of Firm Shares set forth in Schedule II hereto
opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters up to __________ of the Additional Shares and each of the
Selling Stockholders agree, severally and not jointly, to sell to the
Underwriters such number of Additional Shares as is set forth by such Selling
Stockholder's name on Schedule I hereto (with the aggregate number of Additional
Shares to be sold by the Selling Stockholders to be __________ of the Additional
Shares) and the Underwriters shall have a one-time right to purchase, severally
and not jointly, up to __________ Additional Shares at the Purchase Price. If
you, on behalf of the Underwriters, elect to exercise such option, you shall so
notify the Company in writing not later than 30 days after the date of this
Agreement, which notice shall specify the number of Additional Shares to be
purchased by the Underwriters and the date on which such shares are to be
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section
5 hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Additional Shares to be purchased as the number of Firm Shares set forth in
Schedule II hereto opposite the name of such Underwriter bears to the total
number of Firm Shares. If less than all of the Additional Shares are to be
purchased, such Additional Shares shall be purchased first from the Company and
second from each applicable Selling Stockholder pro rata in proportion to the
number of Additional Shares set forth opposite such Selling Shareholder's name
on Schedule I bears to the aggregate number of Additional Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
such shares of Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to
(A) the Shares to be sold hereunder or (B) the issuance by the Company of shares
of Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof of which the Underwriters have been
advised in writing.
Each Selling Stockholder shall enter into a "lock-up" agreement in
substantially the form of Exhibit A hereto prior to the Closing Date.
---------
4. Terms of Public Offering. The Sellers are advised by you that the
------------------------
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the
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<PAGE>
Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Sellers are further advised by you that the Shares
are to be offered to the public initially at $_____________ a share (the "Public
Offering Price") and to certain dealers selected by you at a price that
represents a concession not in excess of $______ a share under the Public
Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $_____ a share, to any Underwriter or to
certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be sold by each
--------------------
Seller shall be made to such Seller in Federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 A.M., New York City
time, on February ___, 1997, or at such other time on the same or such other
date, not later than February ___, 1997, as shall be designated in writing by
you. The time and date of such payment are hereinafter referred to as the
"Closing Date."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on the date specified in the
notice described in Section 3 or at such other time on the same or on such other
date, in any event not later than _____________, 1997, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The obligations of the
-------------------------------------------
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [__________] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any review
for a possible change that does not indicate the direction of the possible
change, in the rating accorded any of the
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<PAGE>
Company's securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2) under the
Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise, or in
the earnings, business or operations of the Company and its Subsidiaries, taken
as a whole, from that set forth in the Prospectus (exclusive of any amendments
or supplements thereto subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in clause (a)(i) above and to the effect that
the representations and warranties of the Company contained in this Agreement
are true and correct as of the Closing Date and that the Company has complied
with all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, P.C. ("WSG&R"), outside counsel for
the Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
Subsidiaries, taken as a whole;
(ii) each Subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its Subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
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<PAGE>
(iv) the shares of Common Stock (including the Shares to be sold by
the Selling Stockholders) outstanding prior to the issuance of the Shares to be
sold by the Company have been duly authorized and are validly issued, fully paid
and non-assessable;
(v) all of the issued shares of capital stock of each Subsidiary of
the Company have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims;
(vi) the Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this Agreement,
will be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will not
contravene any provision of applicable law or the certificate of incorporation
or by-laws of the Company or, to the best of such counsel's knowledge, any
agreement or other instrument binding upon the Company or any of its
Subsidiaries that is material to the Company and its Subsidiaries, taken as a
whole, or, to the best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having jurisdiction over the
Company or any Subsidiary, and no consent, approval, authorization or order of,
or qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such
as may be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
(ix) the statements (A) in the Prospectus under the captions
"Business," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Management," "Certain Transactions,"
"Description of Capital Stock" and "Underwriters" and (B) in the Registration
Statement in Items 14 and 15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters referred to therein;
(x) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or any of
its Subsidiaries is a party or to which any of the properties of the Company or
any of its Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required;
(xi) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not
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be an "investment company" as such term is defined in the Investment Company Act
of 1940, as amended;
(xii) the Company and its Subsidiaries (A) are in compliance
with any and all applicable Environmental Laws, (B) have received all permits,
licenses or other approvals required of them under applicable Environmental Laws
to conduct their respective businesses and (C) are in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, singly or in the aggregate,
have a material adverse effect on the Company and its Subsidiaries, taken as a
whole; and
(xiii) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules and
other financial and statistical data included therein as to which such counsel
need not express any opinion) comply as to form in all material respects with
the Securities Act and the applicable rules and regulations of the Commission
thereunder, (B) has no reason to believe that (except for financial statements
and schedules and other financial and statistical data as to which such counsel
need not express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading and (C) has no reason to believe that (except for financial
statements and schedules and other financial and statistical data as to which
such counsel need not express any belief) the Prospectus contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of WSG&R, counsel for the Selling Stockholders, dated the Closing Date,
to the effect that:
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Stockholders;
(ii) the execution and delivery by each Selling Stockholder
of, and the performance by such Selling Stockholder of its obligations under,
this Agreement and the Custody Agreement and Powers of Attorney of such Selling
Stockholder will not contravene any provision of applicable law, or the
certificate of incorporation or by-laws of such Selling Stockholder (if such
Selling Stockholder is a corporation), or, to the best of such counsel's
knowledge, any agreement or other instrument binding upon such Selling
Stockholder or, to the best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having jurisdiction over such
Selling Stockholder, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by such Selling Stockholder of its obligations under this Agreement
or the Custody Agreement or Power of Attorney of such Selling Stockholder,
except such as may be required by the securities or Blue Sky laws of the various
states in connection with offer and sale of the Shares;
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(iii) each of the Selling Stockholders has valid title to the Shares
to be sold by such Selling Stockholder and the legal right and power, and all
authorization and approval required by law, to enter into this Agreement and the
Custody Agreement and Power of Attorney of such Selling Stockholder and to sell,
transfer and deliver the Shares to be sold by such Selling Stockholder;
(iv) the Custody Agreement and the Power of Attorney of each Selling
Stockholder have been duly authorized, executed and delivered by such Selling
Stockholder and are valid and binding agreements of such Selling Stockholder;
(v) delivery of the Shares to be sold by each Selling Stockholder
pursuant to this Agreement will pass title to such Shares free and clear of any
security interests, claims, liens, equities and other encumbrances; and
(vi) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules and
other financial and statistical data included therein as to which such counsel
need not express any opinion) comply as to form in all material respects with
the Securities Act and the applicable rules and regulations of the Commission
thereunder, (B) has no reason to believe that (except for financial statements
and schedules and other financial and statistical data as to which such counsel
need not express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading and (C) has no reason to believe that (except for financial
statements and schedules and other financial and statistical data as to which
such counsel need not express any belief) the Prospectus contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(e) The Underwriters shall have received on the Closing Date an opinion of
Venture Law Group, A Professional Corporation ("VLG"), counsel for the
Underwriters, dated the Closing Date, covering the matters referred to in
subparagraphs (vi), (vii), (ix) (but only as to the statements in the Prospectus
under "Description of Capital Stock" and "Underwriters") and (xiii) of paragraph
(c) above.
With respect to subparagraph (xiii) of paragraph (c) above, WSG&R and
VLG and with respect to subparagraph (vi) of paragraph (d) above, WSG&R, may
state that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification, except as specified. With respect to
paragraph (d) above, WSG&R may rely upon an opinion or opinions of counsel for
any Selling Stockholders and, with respect to factual matters and to the extent
such counsel deems appropriate, upon the representations of each Selling
Stockholder contained herein and in the Custody Agreement and Power of Attorney
of such Selling Stockholder and in other documents and instruments; provided
--------
that (A) each such counsel for the Selling Stockholders is satisfactory to your
counsel, (B) a copy of each opinion so relied upon is
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<PAGE>
delivered to you and shall be in form and substance satisfactory to your counsel
and (D) WSG&R shall state in their opinion that they are justified in relying on
each such other opinion.
The opinions of WSG&R described in paragraphs (c) and (d) above
(and any opinions of counsel for any Selling Stockholder referred to in the
immediately preceding paragraph) shall be rendered to the Underwriters at the
request of the Company or one or more of the Selling Stockholders, as the case
may be, and shall so state therein.
(f) The Underwriters shall have received on the Closing Date an
opinion of Townsend and Townsend and Crew, special patent counsel to the
Company, dated the Closing Date, in form and substance reasonably satisfactory
to the Underwriters and counsel to the Underwriters.
(g) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, from Ernst
& Young LLP, independent auditors, containing statements and information of the
type ordinarily included in auditors' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus; provided that the letter
--------
delivered on the Closing Date shall use a "cut-off date" not earlier than the
date hereof.
(h) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain stockholders, officers and directors
- ---------
of the Company relating to sales and certain other dispositions of shares of
Common Stock or certain other securities, delivered to you on or before the date
hereof, shall be in full force and effect on the Closing Date.
(i) The Underwriters shall have received on the Closing Date a letter
dated the Closing Date from Stuart Auvinen in form and substance satisfactory to
the Underwriters and counsel to the Underwriters.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
7. Covenants of the Company. In further consideration of the agreements
------------------------
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four (4) signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge, prior
to 5:00 p.m. New York City time on the business day next
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<PAGE>
succeeding the date of this Agreement and during the period mentioned in
paragraph (c) below, as many copies of the Prospectus and any supplements and
amendments thereto or to the Registration Statement as you may reasonably
request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to which
you reasonably object, and to file with the Commission within the applicable
period specified in Rule 424(b) under the Securities Act any prospectus required
to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the Prospectus
is required by law to be delivered in connection with sales by an Underwriter or
dealer, any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to comply
with applicable law, forthwith to prepare, file with the Commission and furnish,
at its own expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to the Company) to which Shares may have been sold by
you on behalf of the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-month
period ending [April 30, 1998] that satisfies the provisions of Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder.
(f) That in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of the effectiveness of the Registration
Statement. Morgan Stanley will notify the Company as to which Participants will
need to be so restricted. At the request of Morgan Stanley, the Company will
direct the Company's transfer agent to place stop transfer restrictions upon
such securities for such period of time.
(g) To pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program.
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<PAGE>
(h) Without the prior written consent of Morgan Stanley, the Company
shall not release any holder of Common Stock or any holder of any option, right
or warrant to purchase Common Stock (each, a "Company Security") from the market
stand-off provisions contained in (i) any such Company Security, (ii) any
agreement or agreements pursuant to which any such holder acquired the Company
Securities held by such holder, or (iii) any other agreement between any such
holder and the Company.
Furthermore, the Company covenants with Morgan Stanley that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
8. Expenses. Whether or not the transactions contemplated in this
--------
Agreement are consummated or this Agreement is terminated, the Company agrees to
pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Stockholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities herein above specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of the
offering of the Shares by the NASD, (v) all fees and expenses in connection with
the preparation and filing of the registration statement on Form 8-A relating to
the Common Stock and all costs and expenses incident to listing the Shares on
the Nasdaq National Market, (vi) the cost of printing certificates representing
the Shares, (vii) the costs and charges of any transfer agent, registrar or
depository, (viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show, and (ix) all
other costs and expenses incident to the performance of the obligations of the
Company hereunder for which provision is not otherwise made in this Section. It
is understood, however, that except as provided in this Section, Section 9
entitled "Indemnity and Contribution", and the last paragraph of Section 11
below, the Underwriters will pay all of their costs and expenses, including fees
and disbursements of their counsel, stock
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<PAGE>
transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect any
agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.
9. Indemnity and Contribution.
--------------------------
(a) The Company and the Selling Founders, jointly and severally, agree
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(b) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act
("Morgan Stanley Entities"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in the prospectus wrapper material
prepared by or with the consent of the Company for distribution in foreign
jurisdictions in connection with the Directed Share Program attached to the
Prospectus or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein, when considered in conjunction with the
Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused
by the failure of any Participant to pay for and accept delivery of the shares
which immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii) related to,
arising out of, or in connection with the Directed Share Program, provided that,
the Company shall not be responsible under this subparagraph (iii) for any
losses, claim, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Morgan Stanley Entities.
(c) Each Selling Stockholder, other than the Selling Founders, agree,
severally and not jointly, to indemnify and hold harmless the Company, its
directors, its officers who sign the Registration Statement and each person, if
any, who controls the Company within the
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<PAGE>
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but only
with reference to information relating to such Selling Stockholder furnished in
writing by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
(d) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Selling Stockholders, the directors of the
Company, the officers of the Company who sign the Registration Statement and
each person, if any, who controls the Company or any Selling Stockholder within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
(e) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to paragraph (a), (b), (c) or (d) of this Section 9, such person
(the "indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (i) the fees and expenses of more than one separate firm (in
addition to
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<PAGE>
any local counsel) for all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, (ii) the fees and expenses of more than one
separate firm (in addition to any local counsel) for the Company, its directors,
its officers who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either such Section and (iii) the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all Selling Stockholders and all persons, if any, who control any
Selling Stockholder within the meaning of either such Section, and that all such
fees and expenses shall be reimbursed as they are incurred. In the case of any
such separate firm for the Underwriters and such control persons of any
Underwriters, such firm shall be designated in writing by Morgan Stanley. In the
case of any such separate firm for the Company, and such directors, officers and
control persons of the Company, such firm shall be designated in writing by the
Company. In the case of any such separate firm for the Selling Stockholders and
such control persons of any Selling Stockholders, such firm shall be designated
in writing by the persons named as attorneys-in-fact for the Selling
Stockholders under the Powers of Attorney. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding. Notwithstanding anything contained herein to the contrary,
if indemnity may be sought pursuant to Section 9(b) hereof in respect of such
action of proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local counsel)
for Morgan Stanley for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control Morgan Stanley within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act.
(g) To the extent the indemnification provided for in paragraph (a),
(b), (c), (d) or (e) of this Section 9 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party or parties on the other
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<PAGE>
hand from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the indemnifying party or parties on the
one hand and of the indemnified party or parties on the other hand in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Sellers on the one hand and the Underwriters
on the other hand in connection with the offering of the Shares shall be deemed
to be in the same respective proportions as the net proceeds from the offering
of the Shares (before deducting expenses) received by each Seller and the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the Sellers
on the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Sellers or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Underwriters' respective
obligations to contribute pursuant to this Section 9 are several in proportion
to the respective number of Shares they have purchased hereunder, and not joint.
(h) The Sellers and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 9 were determined by pro
---
rata allocation (even if the Underwriters were treated as one entity for such
- ----
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (f) of this Section 9. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 9 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(i) The aggregate liability of each Selling Stockholder, other than
the Selling Founders, under the representations and warranties contained in
Section 2 hereof and under the indemnity, contribution and reimbursement
agreements contained in this Section 9 shall be limited to an amount equal to
the proceeds received by such Selling Stockholder (net of the underwriting
discount) from the Underwriters in the offering.
(j) The aggregate liability of each Selling Founder under the
representations and warranties contained in Sections 1 and 2 hereof and under
the indemnity, contribution and
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<PAGE>
reimbursement agreements contained in this Section 9 shall be limited to an
amount equal to the proceeds received by such Selling Founder (net of the
underwriting discount) from the Underwriters in the offering. Notwithstanding
the foregoing, no Selling Founder shall be required to provide indemnification
under this Section 9 with respect to a breach of the representations and
warranties contained in Section 1 hereof, (not including a breach by a Selling
Founder of Section 1(b) hereof as a result of any information furnished by or on
behalf of such Selling Founder expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or supplements
thereto having contained an untrue statement or having failed to state a
material fact necessary to make such information not misleading) unless (i) the
Underwriter seeking indemnification shall have first made a written demand for
payment on the Company with respect to any losses, claims, damages or
liabilities arising out of such breach and the Company shall have failed to make
such demanded payment (a) within thirty (30) days after receipt of a written
demand for fees and expenses of counsel and other litigation costs and (b)
within ninety (90) days after receipt of a written demand for all other losses,
claims, damages or liabilities, including, without limitation, any final
settlements or judgments. In no event shall the Selling Founders have any
obligation with respect to any indemnity claim under this Agreement with respect
to any losses, claims, damages or liabilities except to the extent set forth in
this Section 9.
(k) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of the
Company and the Selling Stockholders contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter, any Selling Stockholder or any person
controlling any Selling Stockholder, or the Company, its officers or directors
or any person controlling the Company and (iii) acceptance of and payment for
any of the Shares.
10. Termination. This Agreement shall be subject to termination by notice
-----------
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall become
--------------------------------------
effective upon the execution and delivery hereof by the parties hereto.
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<PAGE>
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule II bears to
the aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
--------
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 11 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased, and arrangements satisfactory
to you, the Company and the Selling Stockholders for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Stockholders. In any such case either you or the
relevant Sellers shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if any, in
the Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter
or Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to
(i) terminate their obligation hereunder to purchase Additional Shares or
(ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of any Seller to comply with
the terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of New York.
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14. Headings. The headings of the sections of this Agreement have been
--------
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
NEOMAGIC CORPORATION
By:___________________________________
Name:
Title:
The Selling Stockholders
named in Schedule I hereto,
acting severally
By:___________________________________
Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Montgomery Securities
Robertson, Stephens & Company LLC
Acting severally on behalf
of themselves and the
several Underwriters named
herein.
By Morgan Stanley & Co. Incorporated
By:_________________________________
Name:
Title:
<PAGE>
Exhibit 4.2
NEOMAGIC CORPORATION
______________________________________________________________________________
SECOND AMENDED AND RESTATED RIGHTS AGREEMENT
June 30, 1995
______________________________________________________________________________
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
- ----
<C> <S> <C>
Section 1 - Restrictions on Transferability; Registration Rights .................. 1
1.1 Certain Definitions.................................................... 1
1.2 Restrictions........................................................... 3
1.3 Restrictive Legend..................................................... 3
1.4 Notice of Proposed Transfers........................................... 3
1.5 Requested Registration................................................. 4
1.6 Company Registration................................................... 6
1.7 Registration on Form S-3............................................... 7
1.8 Limitations on Subsequent Registration Rights.......................... 8
1.9 Expenses of Registration............................................... 8
1.10 Registration Procedures................................................ 8
1.11 Indemnification........................................................ 9
1.12 Information by Holder.................................................. 10
1.13 Rule 144 Reporting..................................................... 10
1.14 Transfer of Registration Rights........................................ 11
1.15 Standoff Agreement..................................................... 11
1.16 Termination of Rights.................................................. 11
Section 2 - Rights of First Refusal and Participation.............................. 12
2.1 Investor's Right of Participation...................................... 12
2.2 Company's Right of First Refusal....................................... 13
2.3 Termination of Participation and Rights of First Refusal............... 14
SECTION 3 - Affirmative Covenants of the Company................................... 15
3.1 Financial Information.................................................. 15
3.2 Additional Information................................................. 15
3.3 Transfer of Information Rights......................................... 16
3.4 Termination of Covenants............................................... 16
Section 4 - Miscellaneous.......................................................... 17
4.1 Assignment............................................................. 17
4.2 Third Parties.......................................................... 17
4.3 Governing Law.......................................................... 17
4.4 Counterparts........................................................... 17
4.5 Notices................................................................ 17
4.6 Severability........................................................... 17
4.7 Amendment and Waiver................................................... 17
4.8 Effect of Amendment or Waiver.......................................... 17
4.9 Rights of Holders...................................................... 18
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
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Page
----
<S> <C> <C>
4.10 Delays or Omissions.................................................... 18
4.11 Aggregation of Stock................................................... 18
-ii-
</TABLE>
<PAGE>
SECOND AMENDED AND RESTATED RIGHTS AGREEMENT
--------------------------------------------
THIS SECOND AMENDED AND RESTATED RIGHTS AGREEMENT is entered into as of the
30th day of June, 1995, by and among NeoMagic Corporation, a California
corporation (the "Company"), persons holding at least a majority of the
Registrable Securities under the Amended and Restated Rights Agreement dated
July 6, 1994 (the "Existing Rights Agreement") (as "Registrable Securities" is
defined under the Existing Rights Agreement) and the Purchasers under the Series
D Preferred Stock Purchase Agreement (the "Series D Agreement") of even date
herewith (the "Series D Purchasers"). As used in this Agreement, the term
"Investors" shall refer to all holders of Registrable Securities listed on
Exhibit A to this Agreement as such Exhibit A may be amended from time to time.
RECITALS
WHEREAS, the Company wishes to raise additional capital by issuing Series D
Preferred Stock with the rights, privileges and preferences set forth in the
Amended and Restated Articles of Incorporation attached as Exhibit B to the
Series D Agreement;
WHEREAS, pursuant to Section 4.7 of the Existing Rights Agreement, the
Existing Rights Agreement may be amended by written consent of the holders of a
majority in interest of the then outstanding Registrable Securities and the
Company; and
WHEREAS, the Company wishes to amend the Existing Rights Agreement in order
to give the Series D Purchasers registration and other rights that are parallel
to and pooled with those of the currently outstanding Registrable Securities;
NOW, THEREFORE, the parties hereby agree that the Existing Rights Agreement
is amended and restated in its entirety as follows:
SECTION 1
Restrictions on Transferability;
--------------------------------
Registration Rights
-------------------
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Conversion Shares" means the Common Stock issued or issuable upon
-----------------
conversion of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock of the Company.
<PAGE>
"Exercise Shares" means the Series A Preferred Stock, Series B
---------------
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock issued or
issuable upon exercise of warrants issued to equipment lessors or other entities
with which the Company has a commercial relationship.
"Holder" shall mean any Investor holding Registrable Securities and
------
any person holding Registrable Securities to whom the rights under this
Agreement have been transferred in accordance with Section 1.14 hereof.
"Initiating Holders" shall mean any Investors or transferees of
------------------
Investors under Section 1.14 hereof who in the aggregate are Holders of not less
than forty percent (40%) of the Registrable Securities.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"Registrable Securities" means (i) the Conversion Shares and (ii) any
----------------------
Common Stock of the Company issued or issuable in respect of the Conversion
Shares or other securities issued or issuable with respect to the Conversion
Shares upon any stock split, stock dividend, recapitalization or similar event,
or any Common Stock otherwise issued or issuable with respect to the Conversion
Shares; provided, however, that shares of Common Stock or other securities shall
-------- -------
only be treated as Registrable Securities if and so long as they have not been
(A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act under Section 4(1) thereof so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the consummation of
such sale.
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legend set forth in Section 1.3 of this Agreement.
"Securities" shall mean the Series A Preferred Stock, Series B
----------
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and warrants
to purchase Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock.
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
-2-
<PAGE>
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (except as
provided by Section 1.9).
1.2 Restrictions. The Securities, the Exercise Shares and the Conversion
------------
Shares shall not be sold, assigned, transferred or pledged except upon the
conditions specified in this Agreement, which conditions are intended to ensure
compliance with the provisions of the Securities Act. The Investors will cause
any proposed purchaser, assignee, transferee or pledgee of the Securities, the
Exercise Shares and the Conversion Shares to agree to take and hold such
securities subject to the provisions and upon the conditions specified in this
Agreement.
1.3 Restrictive Legend. Each certificate representing (i) the
------------------
Securities, (ii) the Exercise Shares; (iii) the Conversion Shares and (iv) any
other securities issued in respect of the securities referenced in clauses (i),
(ii) and (iii) upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 1.4 below) be stamped or otherwise imprinted with legends
in substantially the following form (in addition to any legend required under
applicable state securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH
MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT
SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SAID ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY."
Each Investor and Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Restricted
Securities in order to implement the restrictions on transfer established in
this Section 1.
1.4 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (i) an unqualified written
opinion of legal counsel who shall, and whose legal opinion shall be, reasonably
satisfactory to
-3-
<PAGE>
the Company, addressed to the Company, to the effect that the proposed transfer
of the Restricted Securities may be effected without registration under the
Securities Act, or (ii) a "no action" letter from the Commission to the effect
that the transfer of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with respect
thereto, whereupon the holder of such Restricted Securities shall be entitled to
transfer such Restricted Securities in accordance with the terms of the notice
delivered by the holder to the Company. The Company will not require such a
legal opinion or "no action" letter (a) in any transaction in compliance with
Rule 144, (b) in any transaction in which an Investor which is a corporation
distributes Restricted Securities after six (6) months after the purchase
thereof solely to its majority-owned subsidiaries or affiliates for no
consideration, or (c) in any transaction in which an Investor which is a
partnership distributes Restricted Securities after six (6) months after the
purchase thereof solely to partners thereof for no consideration, provided that
each transferee agrees in writing to be subject to the terms of this Section
1.4. Each certificate evidencing the Restricted Securities transferred as above
provided shall bear, except if such transfer is made pursuant to Rule 144, the
appropriate restrictive legend set forth in Section 1.3 above, except that such
certificate shall not bear such restrictive legend if, in the opinion of counsel
for such holder and the Company, such legend is not required in order to
establish compliance with any provisions of the Securities Act.
1.5 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive
------------------------
from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to the Registrable
Securities, the anticipated aggregate offering price, net of underwriting
discounts and commissions, which would exceed $5,000,000, the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect
such registration, qualification or compliance (including, without limitation,
the execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of such written notice from
the Company; provided, however, that the Company shall not be obligated to take
-------- -------
any action to effect any such registration, qualification or compliance pursuant
to this Section 1.5:
(1) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration,
-4-
<PAGE>
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act;
(2) Prior to the earlier of June 30, 1998 or six (6)
months following the initial public offering of the Company's Common Stock;
(3) During the period starting with the date sixty (60)
days prior to the Company's estimated date of filing of, and ending on the date
six (6) months immediately following the effective date of, any registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective and
that the Company's estimate of the date of filing such registration statement is
made in good faith;
(4) After the Company has effected two (2) such
registrations pursuant to this subparagraph 1.5(a), such registrations have been
declared or ordered effective and the securities offered pursuant to such
registrations have been sold; or
(5) If the Company shall furnish to such Holders a
certificate, signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 1.5 shall be deferred for a single period
not to exceed one hundred-twenty (120) days from the date of receipt of written
request from the Initiating Holders.
Subject to the foregoing clauses (1) through (5), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) Underwriting. In the event that a registration pursuant to
------------
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to Section
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Section 1.5 and the inclusion of such Holder's
Registrable Securities in the underwriting, to the extent requested, to the
extent provided in this Agreement.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders (which managing underwriter shall
be reasonably acceptable to the Company). Notwithstanding any other provision
of this Section 1.5, if the managing underwriter advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Company shall so advise all Holders of Registrable
Securities and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Holders thereof in proportion, as nearly as practicable,
-5-
<PAGE>
to the respective amounts of Registrable Securities held by such Holders at the
time of filing the registration statement; provided, however, that the number of
shares of Registrable Securities to be included in such underwriting shall not
be reduced unless all other securities are first entirely excluded from the
underwriting. No Registrable Securities excluded from the underwriting by reason
of the underwriter's marketing limitation shall be included in such
registration. To facilitate the allocation of shares in accordance with the
above provisions, the Company or the underwriters may round the number of shares
allocated to any Holder to the nearest one hundred (100) shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of such registration.
1.6 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time,
----------------------
the Company shall determine to register any of its securities, either for its
own account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved in such registration, all the Registrable Securities specified in a
written request or requests made within twenty (20) days after receipt of such
written notice from the Company by any Holder.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration). Notwithstanding any other
provision of this Section 1.6, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be included in such registration to a minimum of twenty-five percent (25%) of
the offering or exclude them entirely in the case of the Company's initial
public offering. The Company shall so advise all Holders and the other holders
distributing their securities through such underwriting pursuant to piggyback
registration rights similar to this Section 1.6, and the number of shares of
-6-
<PAGE>
Registrable Securities and other securities that may be included in the
registration and underwriting shall be allocated among all Holders and other
holders in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities held by such Holders and other securities held by other
holders at the time of filing the registration statement. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder or other
holder to the nearest one hundred (100) shares. If any Holder or other holder
disapproves of the terms of any such underwriting, he or she may elect to
withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and shall not be transferred in a public
distribution prior to one hundred eighty (180) days after the effective date of
the registration statement relating thereto.
(c) Right to Terminate Registration. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 1.6 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.
1.7 Registration on Form S-3.
------------------------
(a) In case the Company shall receive from a Holder or Holders a
written request that the Company file a registration statement on Form S-3 (or
any successor form to Form S-3) for a public offering of shares of the
Registrable Securities, the reasonably anticipated aggregate price to the public
of which, net of underwriting discounts and commissions, would exceed $250,000,
and the Company is a registrant entitled to use Form S-3 to register the
Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered for the offering
on such form; provided, however, that the Company shall not be required to
--------- --------
effect more than two registrations pursuant to this Section 1.7 in any twelve
(12) month period. The Company will (i) promptly give written notice of the
proposed registration to all other Holders, and (ii) as soon as practicable, use
its best efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of such written notice from
the Company. The substantive provisions of Section 1.5(b) shall be applicable
to each registration initiated under this Section 1.7.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such
-7-
<PAGE>
jurisdiction and except as may be required by the Securities Act, (ii) during
the period starting with the date sixty (60) days prior to the filing of, and
ending on a date six (6) months following the effective date of, a registration
statement (other than with respect to a registration statement relating to a
Rule 145 transaction, an offering solely to employees or any other registration
which is not appropriate for the registration of Registrable Securities),
provided that the Company is actively employing in good faith all reasonable
efforts to cause such registration statement to become effective, or (iii) if
the Company shall furnish to such Holder a certificate signed by the president
of the Company stating that, in the good faith judgment of the Board of
Directors, it would be seriously detrimental to the Company or its shareholders
for registration statements to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a single period not to exceed one hundred twenty (120) days from
the receipt of the request to file such registration by such Holder or Holders.
1.8 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not enter into any agreement granting
any holder or prospective holder of any securities of the Company registration
rights with respect to such securities unless (i) such new registration rights,
including standoff obligations, are on a pari passu basis with those rights of
the Holders under this Agreement, or (ii) such new registration rights,
including standoff obligations, are subordinate to the registration rights
granted Holders under this Agreement; provided, however, that new holders of
Conversion Shares or Exercise Shares may be added to Exhibit A as Investors from
time to time.
1.9 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration pursuant to Sections 1.5, 1.6 and 1.7 and the
reasonable cost of one special legal counsel to represent all of the Holders
together in any such registration shall be borne by the Company, provided that
the Company shall not be required to pay the Registration Expenses of any
registration proceeding begun pursuant to Section 1.5, the request of which has
been subsequently withdrawn by the Initiating Holders. In such case, the
Holders of Registrable Securities to have been registered shall bear all such
Registration Expenses pro rata on the basis of the number of shares to have been
registered. Notwithstanding the foregoing, however, if at the time of the
withdrawal, the Holders have learned of a material adverse change in the
condition, business or prospects of the Company from that known to the Holders
at the time of their request, of which the Company had knowledge at the time of
the request, then the Holders shall not be required to pay any of said
Registration Expenses. Unless otherwise stated, all other Selling Expenses
relating to securities registered on behalf of the Holders shall be borne by the
Holders of the registered securities included in such registration pro rata on
the basis of the number of shares so registered.
1.10 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and
-8-
<PAGE>
remain effective for at least one hundred eighty (180) days or until the
distribution described in the registration statement has been completed; and
(b) Furnish to the Holders participating in such registration and
to the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
1.11 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers
and directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses as reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling each such other Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements
-9-
<PAGE>
therein not misleading, and, out of the proceeds received by such Holder from
the offering of the securities covered by such a registration statement, will
reimburse the Company, such Holders, such directors, officers, persons,
underwriters or control persons for any legal or any other expenses as
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein. In
no event shall any indemnity under this Section 1.11(b) exceed the gross
proceeds from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 1.11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action.
No settlement of any such claim, loss, damage, liability or action shall be made
by the Indemnified Party without the prior consent of the Indemnifying Party.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
1.12 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
1.13 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act");
-10-
<PAGE>
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and
(c) So long as an Investor owns any Restricted Securities, to
furnish to the Investor forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company and other information in the possession of or
reasonably obtainable by the Company as an Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing an Investor
to sell any such securities without registration.
1.14 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Investors under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by an
Investor (together with any affiliate); provided, that (a) such transfer may
--------
otherwise be effected in accordance with applicable securities laws, (b) notice
of such assignment is given to the Company, and (c) such transferee or assignee
(i) is a wholly-owned subsidiary or constituent partner (including limited
partners) of such Investor, or (ii) acquires from such Investor the lesser of
(a) 250,000 or more shares of Restricted Securities (as appropriately adjusted
for stock splits and the like) or (b) all of the Restricted Securities then
owned by such Investor.
1.15 Standoff Agreement. Each Holder agrees in connection with any
------------------
registration of the Company's securities that, upon request of the Company or
the underwriters managing any underwritten offering of the Company's securities,
not to sell, make any short sale of, loan, grant any option for the purchase of,
or otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days from the effective date of such registration) as may
be requested by the Company or such managing underwriters; provided, that the
--------
officers and directors of the Company who own stock of the Company also agree to
such restrictions.
1.16 Termination of Rights. The rights of any particular Holder to cause
---------------------
the Company to register securities under Sections 1.5, 1.6 and 1.7 shall
terminate with respect to such Holder five (5) years following a bona fide firm
underwritten public offering of shares of the Company's Common Stock registered
under the Securities Act (provided the aggregate offering price, net of
underwriting discounts and commissions, exceeds ten million dollars
($15,000,000) and the public offering price per share exceeds $4.25 (as adjusted
for stock splits, recombinations, recapitalizations and the like)) or at such
time as such Holder is able to dispose of all its Registrable Securities in one
three-month period pursuant to the provisions of Rule 144;
-11-
<PAGE>
provided, that such Holder holds Registrable Securities constituting less than
- --------
1% of the outstanding voting stock of the Company.
SECTION 2
Rights of First Refusal and Participation
-----------------------------------------
2.1 Investor's Right of Participation.
---------------------------------
(a) Right of Participation. Subject to the terms and conditions
----------------------
contained in this Section 2.1, the Company hereby grants to each Investor who
holds at least 250,000 shares of Restricted Securities the right of first
refusal to purchase its Pro Rata Portion of any New Securities (as defined in
subsection 2.1(b)) which the Company may, from time to time, propose to sell and
issue. An Investor's "Pro Rata Portion" for purposes of this Section 2.1 is the
ratio that (x) the sum of the number of shares of the Company's Common Stock
then held by such Investor and the number of shares of the Company's Common
Stock issuable upon conversion of the Preferred Stock then held by such Investor
bears to (y) the sum of the total number of shares of the Company's Common Stock
then outstanding and the number of shares of the Company's Common Stock issuable
upon conversion of the then outstanding Preferred Stock.
(b) Definition of New Securities. Except as set forth below, "New
----------------------------
Securities" shall mean any shares of capital stock of the Company, including
Common Stock and Preferred Stock, whether authorized or not, and rights, options
or warrants to purchase said shares of Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become, convertible into said
shares of Common Stock or Preferred Stock. Notwithstanding the foregoing, "New
Securities" does not include (i) the Securities, the Exercise Shares or the
Conversion Shares, (ii) securities offered to the public generally pursuant to a
registration statement under the Securities Act, (iii) securities issued
pursuant to the acquisition of another corporation by the Company by merger,
purchase of substantially all of the assets or shares or other reorganization
whereby the Company or its shareholders own not less than a majority of the
voting power of the surviving or successor corporation, (iv) shares of the
Company's Common Stock or related options convertible into or exercisable for
such Common Stock issued to employees, officers and directors of, and
consultants, customers, and vendors to, the Company, pursuant to any arrangement
approved by the Board of Directors of the Company, (v) shares of the Company's
Common Stock or related options convertible into or exercisable for such Common
Stock issued to banks, commercial lenders, lessors and other financial
institutions in connection with the borrowing of money or the leasing of
equipment by the Company pursuant to agreements approved by the Board of
Directors, (vi) stock issued pursuant to any rights or agreements, including,
without limitation, convertible securities, options and warrants, provided that
the Company shall have complied with the rights of participation established by
this Section 2.1 with respect to the initial sale or grant by the Company of
such rights or agreements, or (vii) stock issued in connection with any stock
split, stock dividend or recapitalization by the Company.
(c) Notice of Right. In the event the Company proposes to
---------------
undertake an issuance of New Securities, it shall give each Investor written
notice of its intention, describing
-12-
<PAGE>
the type of New Securities and the price and terms upon which the Company
proposes to issue the same. The Investors shall have fifteen (15) days from the
date of receipt of any such notice to agree to purchase shares of such New
Securities (up to the amount referred to in subsection 2.1(a)), for the price
and upon the terms specified in the notice, by giving written notice to the
Company and stating therein the quantity of New Securities to be purchased. The
Company shall promptly, in writing, inform each Investor which purchases all the
shares of such New Securities available to it ("Fully-Exercising Investor") of
any other Investor's failure to do likewise. During the ten-day period
commencing after such information is given, each Fully-Exercising Investor shall
be entitled to obtain that portion of the shares of such New Securities for
which Investors were entitled to subscribe but which were not subscribed for by
the Investors which is equal to the proportion that the number of shares of
Common Stock issued and held, or issuable upon conversion of the Preferred Stock
then held by such Fully-Exercising Investor bears to the total number of shares
of Common Stock issued and held or issuable upon conversion of the Preferred
Stock then held by all Fully-Exercising Investors who wish to purchase some of
the unsubscribed shares.
(d) Exercise of Right. If any Investor exercises its right of
-----------------
first refusal under this Agreement, the closing of the purchase of the New
Securities with respect to which such right has been exercised shall take place
within ninety (90) calendar days after the Investor gives notice of such
exercise, which period of time shall be extended in order to comply with
applicable laws and regulations. Upon exercise of such right of first refusal,
the Company and the Investor shall be legally obligated to consummate the
purchase contemplated thereby and shall use their best efforts to secure any
approvals required in connection therewith.
(e) Lapse and Reinstatement of Right. In the event an Investor
--------------------------------
fails to exercise the right of first refusal provided in this Section 2.1 within
the period specified in Section 2.1(c), the Company shall have ninety (90) days
thereafter to sell or enter into an agreement (pursuant to which the sale of New
Securities covered thereby shall be closed, if at all, within sixty (60) days
from the date of said agreement) to sell the New Securities not elected to be
purchased by such Investor at the price and upon the terms no more favorable to
the purchasers of such securities than specified in the Company's notice. In the
event the Company has not sold the New Securities or entered into an agreement
to sell the New Securities within said ninety (90) day period (or sold and
issued New Securities in accordance with the foregoing within sixty (60) days
from the date of said agreement), the Company shall not thereafter issue or sell
any New Securities without first offering such securities to the Investors in
the manner provided above.
(f) Assignment. The right of the Investors to purchase any part of
----------
the New Securities may be assigned in whole or in part to any partner,
subsidiary, affiliate or shareholder of an Investor, or other persons or
organizations who acquire the lesser of (i) 250,000 or more shares of Restricted
Securities (as adjusted for stock splits and the like) or (ii) all of the
Restricted Securities then owned by such Investor.
2.2 Company's Right of First Refusal.
--------------------------------
-13-
<PAGE>
(a) Right of First Refusal. Should an Investor desire to sell or
----------------------
transfer any of the Restricted Securities held by such Investor, other than
sales or transfers to a partner, affiliate or wholly-owned subsidiary of such
Investor, the Investor shall give the Company the opportunity to purchase such
Restricted Securities in accordance with this Section 2.2.
(b) Notice of Right. The Investor shall give notice (the "Transfer
---------------
Notice") to the Company in writing of such intention, specifying the amount of
Restricted Securities proposed to be sold or transferred, the proposed price per
share therefor (the "Transfer Price") and the other material terms upon which
such disposition is proposed to be made. The Company shall have fifteen (15)
days from the date of receipt of the Transfer Notice to agree to purchase such
shares at the Transfer Price and upon the terms specified in the Transfer Notice
by giving written notice to the Investor and stating therein the quantity of
shares to be purchased.
(c) Exercise of Right. If the Company exercises its right of first
-----------------
refusal under this Agreement, the closing of the purchase of the shares with
respect to which such right has been exercised shall take place within ninety
(90) calendar days after the Company gives notice of such exercise, which period
of time shall be extended in order to comply with applicable laws and
regulations. Upon exercise of its right of first refusal, the Company and the
Investor shall be legally obligated to consummate the purchase contemplated
thereby and shall use their best efforts to secure any approvals required in
connection therewith.
(d) Lapse and Reinstatement of Right. In the event the Company
--------------------------------
fails to exercise the right of first refusal within said fifteen (15) day
period, the Investor shall have ninety (90) days thereafter to sell or enter
into an agreement (pursuant to which the sale of shares covered thereby shall be
closed, if at all, within sixty (60) days from the date of said agreement) to
sell the shares not elected to be purchased by the Company at the price and upon
the terms no more favorable to the purchasers of such securities than specified
in the Transfer Notice. In the event the Investor has not sold the shares or
entered into an agreement to sell the shares within said ninety (90) day period
(or sold the shares in accordance with the foregoing within sixty (60) days from
the date of said agreement), the Investor shall not thereafter sell or transfer
any Restricted Securities without first offering such securities to the Company
in the manner provided above.
(e) Assignment. The right of the Company to purchase any part of
----------
the Restricted Securities may be assigned in whole or in part to any shareholder
or shareholders of the Company or other persons or organizations.
2.3 Termination of Participation and Rights of First Refusal. The rights
--------------------------------------------------------
of participation and first refusal granted under Sections 2.1 and 2.2 of this
Agreement shall terminate on and be of no further force or effect upon the
earlier of (i) the consummation of the Company's sale of its Common Stock in an
underwritten public offering pursuant to an effective registration statement
filed under the Securities Act (provided the aggregate offering price, net of
underwriting discounts and commissions, exceeds ten million dollars
($15,000,000) and the public offering price per share exceeds $4.25 (as adjusted
for stock splits, recombinations, recapitalizations and the like)) immediately
subsequent to which the Company shall be obligated
-14-
<PAGE>
to file annual and quarterly reports with the Commission pursuant to Section 13
or 15(d) of the Exchange Act or (ii) the registration by the Company of a class
of its equity securities under Section 12(b) or 12(g) of the Exchange Act.
SECTION 3
Affirmative Covenants of the Company
------------------------------------
The Company hereby covenants and agrees as follows:
3.1 Financial Information. The Company will mail the following reports to
---------------------
each Holder for so long as such Holder is a holder of any Securities, Exercise
Shares or Conversion Shares:
(a) As soon as practicable after the end of each fiscal year, and in
any event within ninety (90) days thereafter, consolidated balance sheets of the
Company and its subsidiaries, if any, as of the end of such fiscal year, and
consolidated statements of income, consolidated statements of changes in
financial position and consolidated statements of shareholders' equity of the
Company and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles and setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail and audited by independent public accountants of national standing
selected by the Company.
(b) Contemporaneously with delivery to holders of Common Stock, a copy
of each report of the Company delivered to holders of the Company's Common
Stock.
3.2 Additional Information. As long as a Holder (together with any
----------------------
affiliate of such Holder) holds not less than 575,000 Securities, Exercise
Shares or Conversion Shares (or any combination thereof), as adjusted for
recapitalizations, stock splits, stock dividends and the like, the Company will
mail the following reports to such Holder:
(a) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Company and in any
event within forty-five (45) days thereafter, an unaudited consolidated balance
sheet of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and unaudited consolidated statements of income, unaudited
consolidated statements of cash flow and unaudited consolidated statements of
shareholders' equity of the Company and its subsidiaries, if any, for such
period and for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles (other than for accompanying notes and
subject to normal year-end audit adjustments), all in reasonable detail.
(b) As soon as practicable after the end of each fiscal month, and in
any event within thirty (30) days thereafter, an unaudited consolidated balance
sheet of the Company and its subsidiaries, if any, as at the end of such month,
and unaudited consolidated statements of income, unaudited consolidated
statements of cash flow and unaudited consolidated statements of shareholders'
equity of the Company and its subsidiaries, if any, for such month and for the
-15-
<PAGE>
current fiscal year to date. Such financial statements shall be prepared in
accordance with generally accepted accounting principles consistently applied
(other than for accompanying notes and subject to normal year-end audit
adjustments), all in reasonable detail.
(c) For so long as a Holder is eligible to receive reports under this
Section 3.2, it shall also have the right, at its expense, to discuss the
affairs, finances and accounts of the Company with the Company's officers, all
at such reasonable times and as often as may be reasonably requested; provided,
however, that the Company shall not be obligated to provide any information that
it reasonably considers to be a trade secret or to contain confidential
information.
(d) As soon as practicable, but in any event prior to the end of each
fiscal year, a budget for the next fiscal year, prepared on a monthly basis,
including balance sheets and sources and applications of funds statements for
such months and, as soon as prepared, any other budgets or revised budgets
prepared by the Company.
(e) For so long as entities affiliated with JAFCO America Ventures,
Inc. hold in the aggregate not less than 1,000,000 shares of Series C Preferred
Stock of the Company, a representative of JAFCO America Ventures, Inc. shall be
entitled to attend all regular and special meetings of the Board of Directors of
the Company (other than sessions of such meetings at which all persons other
than directors or legal counsel are excluded), and to receive advance notice and
copies of all materials provided to members of the Board of Directors at the
same time and on the same basis as the members of the Board of Directors. The
representative of JAFCO America Ventures, Inc. shall also be entitled to visit
and inspect any of the properties of the Company and to discuss its affairs,
finances and accounts with its officers, all at such reasonable times and as
often as may reasonably be requested.
3.3 Transfer of Information Rights. The information rights set forth in
------------------------------
Sections 3.1 and 3.2 may be transferred in any nonpublic transfer of Securities,
Exercise Shares or Conversion Shares, provided that the Company is given written
notice of such transfer, and provided further that the right to receive the
information set forth in Section 3.2 may only be transferred to a holder of, or
affiliated holders who in the aggregate hold, at least 575,000 Securities,
Exercise Shares or Conversion Shares (or any combination thereof), as
appropriately adjusted for recapitalizations, stock splits, stock dividends and
the like. In the event that the Company reasonably determines that provision of
information to a transferee pursuant to this Section 3.3 would materially
adversely affect its proprietary position, such information may be edited in the
manner necessary to avoid such effect.
3.4 Termination of Covenants. The covenants set forth in this Section 3
------------------------
shall terminate on and be of no further force or effect upon the earlier of (i)
the consummation of the Company's sale of shares of its Common Stock in an
underwritten public offering pursuant to an effective registration statement
filed under the Securities Act, immediately subsequent to which the Company
shall be obligated to file annual and quarterly reports with the Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") or
-16-
<PAGE>
(ii) the registration by the Company of a class of its equity securities under
Section 12(b) or 12(g) of the Exchange Act.
SECTION 4
Miscellaneous
-------------
4.1 Assignment. Except as otherwise provided in this Agreement, the terms
----------
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties to this Agreement.
4.2 Third Parties. Nothing in this Agreement, express or implied, is
-------------
intended to confer upon any party, other than the parties to this Agreement, and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
4.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California in the United States of America.
4.4 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
4.5 Notices. Any notice required or permitted by this Agreement shall be
-------
in writing and shall be sent by prepaid registered or certified mail, return
receipt requested, or otherwise delivered by hand or by messenger addressed to
the other party at the address shown below or at such other address for which
such party gives notice under this Agreement. Such notice shall be deemed to
have been given when delivered if delivered personally, or, if sent by mail, at
the earlier of its receipt or three (3) days after deposit in the mail.
4.6 Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
4.7 Amendment and Waiver. Any provision of this Agreement may be amended
--------------------
or waived with the written consent of the Company and the Holders of at least a
majority of the outstanding shares of the Registrable Securities. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon each
Holder of Registrable Securities and the Company. In addition, the Company may
waive performance of any obligation owing to it, as to some or all of the
Holders of Registrable Securities, or agree to accept alternatives to such
performance, without obtaining the consent of any Holder of Registrable
Securities. In the event that an underwriting agreement is entered into between
the Company and any Holder, and such underwriting agreement contains terms
differing from this Agreement, as to any such Holder the terms of such
underwriting agreement shall govern.
-17-
<PAGE>
4.8 Effect of Amendment or Waiver. The Investors and their successors and
-----------------------------
assigns acknowledge that by the operation of Section 4.7 of this Agreement the
holders of a majority of the outstanding Registrable Securities, acting in
conjunction with the Company, will have the right and power to diminish or
eliminate any or all rights or increase any or all obligations pursuant to this
Agreement.
4.9 Rights of Holders. Each holder of Registrable Securities shall have
-----------------
the absolute right to exercise or refrain from exercising any right or rights
that such holder may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such holder shall not incur any liability to any other
holder of any securities of the Company as a result of exercising or refraining
from exercising any such right or rights.
4.10 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
4.11 Aggregation of Stock. All shares of the Preferred Stock held or
--------------------
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMPANY:
NEOMAGIC CORPORATION
a California corporation
By:
---------------------------
Title:
------------------------
Address:
2710 Walsh Avenue
Santa Clara, CA 95051
INVESTORS:
- ------------------------------
Prakash Agarwal
Address:
- ------------------------------
- ------------------------------
- ------------------------------
Bhupendra Kumar Ahuja
Address:
- ------------------------------
- ------------------------------
-19-
<PAGE>
- -------------------------------------
Chet Basseti
Address:
- -------------------------------------
- -------------------------------------
- -------------------------------------
Jack Busch
Address:
Busch International
One First Street
Suite 6
Los Altos, CA 94022
- -------------------------------------
Steven M. Costella, Trustee, or the
Successor Trustee, under the Steven M.
Costella Trust dated May 8, 1989
Address:
- -------------------------------------
- -------------------------------------
- -------------------------------------
Michael S. Dell
Address:
5309 Valburn Circle
Austin, TX 78731
-20-
<PAGE>
- -------------------------------------
Kamran Elahian
Address:
- -------------------------------------
- -------------------------------------
INTEGRAL CAPITAL PARTNERS II, L.P.
By: Integral Capital Management II, L.P.,
its General Partner
By:
----------------------------------,
its General Partner
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
INTEGRAL CAPITAL PARTNERS INTERNATIONAL II C.V.
By: Integral Capital Management II, L.P.,
its Investment General Partner
By:
----------------------------------,
its General Partner
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
-21-
<PAGE>
JAFCO G-5 INVESTMENT ENTERPRISE PARTNERSHIP
By:
----------------------------------
Masaki Yoshida, President
Japan Associated Finance Co., Ltd.
Its Executive Partner
Address:
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-ku,
Tokyo, Japan 105
JAFCO R-1(A) INVESTMENT ENTERPRISE PARTNERSHIP
By:
----------------------------------
Masaki Yoshida, President
Japan Associated Finance Co., Ltd.
Its Executive Partner
Address:
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-Ku,
Tokyo, Japan 105
JAFCO R-1(B) INVESTMENT ENTERPRISE PARTNERSHIP
By:
----------------------------------
Masaki Yoshida, President
Japan Associated Finance Co., Ltd.
Its Executive Partner
Address:
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-Ku,
Tokyo, Japan 105
-22-
<PAGE>
JAFCO R-2 INVESTMENT ENTERPRISE PARTNERSHIP
By:
----------------------------------
Masaki Yoshida, President
Japan Associated Finance Co., Ltd.
Its Executive Partner
Address:
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-Ku,
Tokyo, Japan 105
JAPAN ASSOCIATED FINANCE CO., LTD.
By:
----------------------------------
Masaki Yoshida, President
Japan Associated Finance Co., Ltd.
Address:
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-Ku,
Tokyo, Japan 105
- -------------------------------------
William E. Kirsch
Address:
- -------------------------------------
- -------------------------------------
-23-
<PAGE>
KLEINER PERKINS CAUFIELD & BYERS VI
By:
--------------------------------
Title:
-----------------------------
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VI FOUNDERS FUND
By:
--------------------------------
Title:
-----------------------------
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
- ------------------------------------
Clement Leung
Address:
- ------------------------------------
- ------------------------------------
LOR, Inc.
By:
---------------------------------
Title:
------------------------------
Address:
c/o Chris Allen
2170 Piedmont Road
Atlanta, GA 30325
-24-
<PAGE>
MARITIME CAPITAL PARTNERS
By:
---------------------------------
Title:
------------------------------
Address:
c/o Andy Evans
15032 Woodfern Drive, SE
Mill Creek, WA 98012
- ------------------------------------
Glen McLaughlin
Address:
- ------------------------------------
- ------------------------------------
MITSUBISHI CORPORATION
By:
---------------------------------
Title:
------------------------------
Address:
6-3 Marunouchi, 2-chome
Chiyoda-ku, Tokyo Japan 100-86
-25-
<PAGE>
MITSUBISHI INTERNATIONAL CORPORATION
By:
------------------------------
Title:
---------------------------
Address:
520 Madison Avenue
New York, NY 10022
- ---------------------------------
Ranganathan Parameswaraiyer
Address:
- ---------------------------------
- ---------------------------------
- ---------------------------------
Deepraj S. Puar
Address:
- ---------------------------------
- ---------------------------------
- ---------------------------------
R. Randolph Scott
Address:
315 Wildflower Park Lane
Mountain View, CA 94043
-26-
<PAGE>
SECOND VENTURES II, L.P.
By: Presidio Management Group IV, L.P.
Its General Partner
By:
------------------------------------
Title: General Partner
Address:
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
SEQUOIA CAPITAL VI
SEQUOIA TECHNOLOGY PARTNERS VI
SEQUOIA XXIII
SEQUOIA XXIV
By:
------------------------------------
Title:
---------------------------------
Address:
3000 Sand Hill Road
Suite 280, Building 4
Menlo Park, CA 94025
-27-
<PAGE>
- ------------------------------------
Michael Stark
Address:
- ------------------------------------
- ------------------------------------
U.S. VENTURE PARTNERS IV, L.P.
By Presidio Management Group IV, L.P.
Its General Partner
By:
---------------------------------
Title: General Partner
Address:
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
USVP ENTREPENEUR PARTNERS II, L.P.,
A Delaware Limited Partnership
By Presidio Management Group IV, L.P.
Its General Partner
By:
-----------------------------------
Title: General Partner
Address:
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
-28-
<PAGE>
USVP III
By:
---------------------------------
Title:
------------------------------
Address:
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
VENTURE LENDING & LEASING, INC.
By:
---------------------------------
Title:
------------------------------
Address:
- ------------------------------------
- ------------------------------------
- ------------------------------------
VLG INVESTMENTS 1993
By:
---------------------------------
Title:
------------------------------
Address:
2800 Sand Hill Road
Menlo Park, CA 94025
-29-
<PAGE>
U.S. INFORMATION TECHNOLOGY
INVESTMENT ENTERPRISE PARTNERSHIP
By:
-----------------------------------
Masaki Yoshida, President
Japan Associated Finance Co., Ltd.
Address:
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-Ku,
Tokyo, Japan 105
-30-
<PAGE>
- -----------------------------------
Ray Chen
Address: Compal Electronics, Inc.
7th Floor
319 Pateh Road
Sec. 4, Taipei (105) Taiwan R.D.C.
CYGNUS INVESTMENT S.A.
By:
--------------------------------
Title
-----------------------------
Address: c/o Brian Worth, Deputy Manager
Barclays Bank, Plc.
Road Town, Tortola
British Virgin Islands
PAUL E. DERBY TRUST U/T/D 3/30/88
By:
-------------------------------
Paul E. Derby
Title: Trustee
Address: 525 Fairview
Arcadia, CA 91007
REMOLA A. DERBY TRUST U/T/D 3/30/88
By:
-------------------------------
Remola A. Derby
Title: Trustee
Address: 525 Fairview
Arcadia, CA 91007
-31-
<PAGE>
- ---------------------------------------
Clark Gerhardt
Address: Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
- ----------------------------------------
Chung Moon Lee
Address: c/o Charles W. Ott
Pillsbury, Madison & Sutro
2700 Sand Hill Road
Menlo Park, CA 94025
- ----------------------------------------
Derrick Lemke-Von Amonn
Address: Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
- ----------------------------------------
Paul S. Madera
Address: Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
-32-
<PAGE>
- --------------------------------------
Thomas Thornhill
Address: Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
- --------------------------------------
Otto Tschudi
Address: Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
WK TECHNOLOGY FUND
By:
-----------------------------------
Title:
--------------------------------
Address: 10th Floor, 115, Sec 3
Ming Sheng East Road
Taipei, Taiwan, R.O.C.
- -------------------------------------
Tak Yamamoto
Address: 1-11-45 Mita
Minato-Icu, Tokyo
Japan 108
-33-
<PAGE>
- ------------------------------------
Arif Maskatia
Address: 1039 Whitcomb Court
Milpitas, CA 95035
-34-
<PAGE>
WK TECHNOLOGY FUND II
By:
---------------------------------
Title:
------------------------------
Address: 10th Floor, 115, Sec 3
Ming Sheng East Road
Taipei, Taiwan, R.O.C.
WK TECHNOLOGY FUND III
By:
---------------------------------
Title:
------------------------------
Address: 10th Floor, 115, Sec 3
Ming Sheng East Road
Taipei, Taiwan, R.O.C.
-35-
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Name and Address of Investor Preferred Preferred Preferred Preferred
- ---------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Prakash Agarwal 2,800
c/o NeoMagic
Corporation
2710 Walsh Avenue
Santa Clara, CA 95051
Bhupendra Kumar Ahuja 200
c/o NeoMagic
Corporation
2710 Walsh Avenue
Santa Clara, CA 95051
Chet Bassetti 1,800
c/o NeoMagic
Corporation
2710 Walsh Avenue
Santa Clara, CA 95051
Jack Busch 5,833
Busch International
One First Street
Suite 6
Los Altos, CA 94022
Comdisco, Inc. 91,200* 16,667* 15,789*
Comdisco Venture Group
770 Tamalpais Drive
Suite 300
Corte Madera, CA 94925
Steven M. Costella 10,000*
- -------------------
- -------------------
Cygnus Investment S.A. 17,544
c/o Brian Worth,
Deputy Manager
Barclays Bank, Plc.
Road Town, Tortola
British Virgin Islands
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Name and Address of Investor Preferred Preferred Preferred Preferred
- ---------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Michael S. Dell 263,158
5309 Valburn Circle
Austin, TX 78731
Paul E. Derby, 17,500
Trustee of the Paul
E. Derby Trust
U/T/D 3/30/88
525 Fairview
Arcadia, CA 91007
Remola K. Derby, 1,750
Trustee of the Remola K. Derby Trust
U/T/D 3/30/88
525 Fairview
Arcadia, CA 91007
Kamran Elahian 1,800
c/o NeoMagic Corporation
2710 Walsh Avenue
Santa Clara, CA 95051
Clark L. Gerhardt, Jr. 17,544
Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
Integral Capital Partners II, L.P. 120,933 315,022
2740 Sand Hill Road
Menlo Park, CA 94025
Integral Capital Partners International 45,733 123,575
II, L.P.
2740 Sand Hill Road
Menlo Park, CA 94025
JAFCO G-5 Investment Enterprise 338,654 59,413
Partnership
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-ku
Tokyo, Japan 105
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Name and Address of Investor Preferred Preferred Preferred Preferred
- ---------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
JAFCO R-1(A) Investment Enterprise 158,223 27,758
Partnership
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-ku
Tokyo, Japan 105
JAFCO R-1(B) Investment Enterprise 158,223 27,758
Partnership
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-ku
Tokyo, Japan 105
JAFCO R-2 Investment Enterprise 144,900 25,421
Partnership
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-ku
Tokyo, Japan 105
Japan Associated Finance Co., Ltd. 200,000 35,088
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-ku
Tokyo, Japan 105
Craig Johnson 8,000
c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
William E. Kirsch 10,000*
- -------------------
- -------------------
Kleiner, Perkins, Caufield 1,300,500 722,500 725,000 304,211
& Byers VI
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VI Founders Fund 199,500 110,833 108,333 46,666
2750 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Name and Address of Investor Preferred Preferred Preferred Preferred
- ---------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Chung Moon Lee 52,632
c/o Charles W. Ott
Pillsbury Madison & Sutro
2700 Sand Hill Road
Menlo Park, CA 94025
Derrick Lemke-Von Ammon 3,509
Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
Clement Leung 1,800
c/o NeoMagic Corporation
2710 Walsh Avenue
Santa Clara, CA 95051
LOR, Inc. 87,719
c/o Chris Allen
2170 Piedmont Road
Atlanta, GA 30324
Paul S. Madera 3,509
Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
Maritime Capital Partners 263,158
c/o Andy Evans
15302 Woodfern Drive, SE
Mill Creek, WA 98012
Arif Maskatia 8,772
1039 Whitcomb Court
Milpitas, CA 95035
Glen McLaughlin 100,000*
- -------------------
- -------------------
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Name and Address of Investor Preferred Preferred Preferred Preferred
- ---------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Mitsubishi Corporation 83,333
6-3 Marunouchi, 2-chome
Chiyoda-ku
Tokyo, Japan 100-86
Mitsubishi International Corporation 83,334
520 Madison Avenue
New York, NY 10022
Gene Norrett 3,029
c/o NeoMagic Corporation
2710 Walsh Avenue
Santa Clara, CA 95051
Ranganathan Parameswaraiyer 250
c/o NeoMagic Corporation
2710 Walsh Avenue
Santa Clara, CA 95051
Deepraj Puar 1,800
c/o NeoMagic Corporation
2710 Walsh Avenue
Santa Clara, CA 95051
R. Randolph Scott 30,000
315 Wildflower Park Lane
Mountain View, CA 94042
Second Ventures II, L.P. 83,333 83,333 42,105
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Sequoia Capital VI 1,365,000 758,333 758,333 319,298
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Sequoia Technology Partners VI 75,000 41,667 41,667 17,544
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Name and Address of Investor Preferred Preferred Preferred Preferred
- ---------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Sequoia XXIII 60,000 33,333
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Sequoia XXIV 33,333 14,035
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Michael Stark 20,000
- ------------------
- ------------------
Thomas Thornhill 8,772
Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
Yvonne L.E. Tschudi and Otto V. 8,772
Tschudi, Trustees of the Otto V. and
Yvonne L.E. Tschudi Revocable Living
Trust dated September 1988
c/o Paul S. Madera
Montgomery Securities
600 Montgomery Street
22nd Floor
San Francisco, CA 94111
U.S. Information Technology 175,439
Investment Enterprise Partnership
10F, Toshiba Bldg.
1-1-1 Shibaura, Minato-ku
Tokyo, Japan 105
U.S. Venture Partners IV, L.P. 733,333 733,333 370,527
2180 Sand Hill Road
Menlo Park, CA 94025
USVP Entrepreneur 16,667 16,667 8,421
Partners II, L.P.
2180 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Name and Address of Investor Preferred Preferred Preferred Preferred
- ---------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
VLG Investments 1993 32,000
c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
WK Technology Fund 40,000
Attn: Herbert Chang
10th Floor, 115, Sec. 3
Ming Sheng East Road
Taipei, Taiwan, R.O.C.
WK Technology Fund II 29,000
Attn: Herbert Chang
10th Floor, 115, Sec. 3
Ming Sheng East Road
Taipei, Taiwan, R.O.C.
WK Technology Fund III 71,351
Attn: Herbert Chang
10th Floor, 115, Sec. 3
Ming Sheng East Road
Taipei, Taiwan, R.O.C.
Tak Yamamoto 10,000
1-11-45 Mita
Minato-Icu, Tokyo
Japan 108
</TABLE>
- -----------------------
* Shares are issuable upon exercise of warrants.
-7-
<PAGE>
EXHIBIT 10.4
------------
WAFER SUPPLY AGREEMENT
This Wafer Supply Agreement (the "Agreement") is made and entered into
as of January 14, 1997 (the "Effective Date"), by and between Mitsubishi
Electric Corporation, a Japanese corporation having its principal place of
business at 2-2-3, Marunouchi, Chiyoda-Ku, Tokyo 100 Japan ("MELCO"), and
NeoMagic Japan K.K., a Japanese corporation with offices at 8-12, Minamicho 2-
chome, Kokubunji-shi, Tokyo, Japan ("NeoMagic-J"), acting as the agent of
NeoMagic International Corporation, a Cayman corporation.
RECITALS
--------
WHEREAS, NeoMagic-J and ITS affiliated companies (NeoMagic
International Corporation and NeoMagic Corporation, hereinafter referred to as
"Associated Companies") are in the business of designing and selling integrated
circuits.
WHEREAS, MELCO is in the business of, among other things, developing,
manufacturing and selling integrated circuits, a corporation organized under
the laws of Japan, wishes to manufacture for NeoMagic-J integrated circuits
designed by NeoMagic, INTO WHICH dynamic random access memory ("DRAM") MODULES
designed by MELCO ARE INCORPORATED.
NOW, THEREFORE, in consideration of the mutual promises and
obligations herein, the parties agree as follows:
1. DEFINITIONS
-----------
1.1 "Process" shall mean the MELCO wafer manufacturing process
identified on Appendix A to this Agreement. Any additional MELCO wafer
manufacturing processes to be included within the scope of this Agreement shall
be specifically agreed to in writing by the parties and added to Appendix A.
1.2 "Device" shall mean each integrated circuit device on a Wafer
which SHALL BE MANUFACTURED BY MELCO AND purchased by NeoMagic-J under this
Agreement. The first of A SERIES OF SUCH DEVICES is designated by NeoMagic-J as
"NM-2070".
1.3 "DRAM Memory Module" shall mean each DRAM memory array MELCO
shall design for NeoMagic-J or its Associated Companies and incorporated in one
or more Devices.
[*] Confidential Treatment Requested
<PAGE>
1.4 "Mitsubishi Proprietary Technology" shall mean any existing
technology, know-how, process (whether or not equivalent to the Process) and
materials owned or CONTROLLED by MELCO as of the Effective Date, and all ideas,
inventions, creations, works, processes, designs, methods, technology, know-how
and materials (whether or not patentable, copyrightable, registrable as a mask
work or protectable as a trade secret or trademark) which are developed and
discovered by MELCO DURING the work performed under this Agreement.
1.5 "NeoMagic-J Proprietary Technology" shall mean any existing
technology, know-how, process, design, schematic and materials owned or
CONTROLLED by NeoMagic-J or its Associated Companies as of the Effective Date,
and all ideas, inventions, creations, works, processes, designs, methods,
technology, know-how and materials (whether or not patentable copyrightable,
registrable as a mask work or protectable as a trade secret or trademark) which
are developed or discovered by NeoMagic-J or its Associated Companies DURING the
work performed under this Agreement.
1.6 "Confidential Information" shall mean any information, including
but not limited to technical information, data base, specifications and
supporting documents, transferred by one party to the other party, either
visually, orally, in writing or in machine-readable format, as well as all masks
or reticules generated by or on behalf of one party for the other party;
provided that all such information is identified "Confidential" or
"Proprietary," or, if visual or oral, is identified as confidential or
proprietary at the time of disclosure and confirmed in writing within seven (7)
days thereafter. CONFIDENTIAL Information also shall include such information
disclosed to or by the Associated Companies. CONFIDENTIAL Information does not
include information generally available to the public, information which is
independently developed or known by the receiving party or an affiliated company
without reference to another party's PROPRIETARY INFORMATION, information
rightfully received from a third party without violation of any confidentiality
obligations under this Agreement, information which is authorized in writing for
release by the disclosing party or information which is released pursuant to
court of governmental order.
1.7 "Purchase Order" shall have the meaning given in Section 4.1 of
this Agreement.
1.8 "Wafer" shall mean a silicon wafer which embodies Devices.
1.9 "Wafer Lot" shall mean 25 Wafers; provided that, this number may
be changed by written Agreement of the parties.
1.10 "Yield" shall mean electrically good DRAM Memory Modules in dice
divided by the number of full die locations on the Wafer (i.e., excluding
locations which are not complete due to the curved edge of the Wafer).
<PAGE>
2. TERM
----
The term of this Agreement shall commence as of the Effective Date and
shall continue for five (5) years. Such term may be extended on a year-to-year
basis if the parties specifically agree in writing at least nine (9) months
prior to the expiration of the then-current term.
3. FORECASTS
---------
3.1 Twelve-Month Rolling Forecasts. By the 15th day of each month,
------------------------------
NeoMagic-J shall provide to MELCO, in a method agreed on by both parties a
rolling forecast ("Forecast") of the number of Wafers which NeoMagic-J intends
to purchase during the next twelve (12) months. The Forecast shall show
deliveries of wafer quantity, deliveries expected to be made by MELCO each
month. The parties shall meet quarterly to review matters related to Forecasts
and capacity under this Agreement. At each quarterly meeting, the parties shall
agree in writing on the Forecasts of the number of Wafers NeoMagic-J intends to
purchase and MELCO intends to sell during the next six (6) months commencing the
first day of the calendar quarter following such quarterly meeting.
Notwithstanding anything to the contrary in this Agreement, no Forecast, or any
part thereof, shall be binding on MELCO or NeoMagic-J except that MELCO agrees
to supply to NeoMagic-J the number of Wafers specified in each Forecast for the
two quarters following such Forecast.
3.2 Required Orders. Purchases for month four (4) of a Forecast
---------------
shall be confirmed by firm purchase orders placed by NeoMagic-J no later than
the last week of the fifth (5th) preceding month. For example, if NeoMagic-J
submits a Forecast on April 15, 1996, for Wafer quantities which have been
agreed to by MELCO, then a purchase order shall be placed before May 1, 1996 for
shipments to be started 15 actual workweeks after the placement of the purchase
order.
3.3 Limited Quantity Adjustments.
----------------------------
(a) Order quantities for the first four (4) months of any purchase
order are not subject to adjustment without MELCO's prior written consent.
(b) NeoMagic-J may increase or decrease Forecast quantities for the
fifth and sixth calendar months of a Forecast, as compared to quantities in the
prior Forecast for the same three calendar months, by no more than minus ten
percent (-10%) or plus fifteen percent (+15%). In the event NeoMagic-J
increases or decreases Forecast quantities in the manner described in the
previous sentence, it will place a purchase order, according to Section 3.2, for
adjusted quantities to be delivered during the fifth month.
<PAGE>
For example, if NeoMagic-J submits a Forecast in December 1995
estimating Product purchases of 3,000 Wafers in each of April, May and June of
1996, which quantities have been agreed to by MELCO, then the Forecast submitted
in January 1996 may increase estimated Product purchases for May and June up to
quantity of 3,450 Wafers (i.e., 115% of 3,000) or down to a quantity of 2,700
Wafers (i.e., 90% of 3,000). In such event, NeoMagic-J shall place purchase
orders no later than January 5, 1996 for Wafers to be shipped in May, and the
number of Wafers subject to such purchase orders shall not be less than 2,700
nor more than 3,450.
(c) NeoMagic-J may increase or decrease the forecasted quantities for
the seventh, eighth and ninth calendar months of a Forecast, as compared to
quantities in the prior Forecast for the same three (3) calendar months, by up
to thirty percent (30%).
For example, if NeoMagic-J submits a Forecast in December 1995
estimating Product purchases of 3,000 Wafers in each of July, August and
September of 1996, which quantities have been agreed to by MELCO, then the
Forecast submitted in January 1996 may increase estimated purchases for each of
July, August and September to as much as 3,900 (130% of 3,000) but to not less
than 2,100 (70% of 3,000).
(d) Forecasted quantities for the tenth, eleventh and twelfth months
following the date of a Forecast shall be based on NeoMagic-J's best estimate
made in good faith and may be revised up or down in the following monthly
Forecast.
(e) MELCO shall arrange for MELCO to make commercially reasonable
efforts to allocate and reserve Wafer production capacity sufficient to supply
the adjustments to the agreed-upon Forecast quantities as described in this
Section 3.3(BCD).
4. PURCHASE ORDERS
---------------
4.1 Definition. "Purchase Order" shall mean the purchase order OF
----------
NeoMagic-J (including A PURCHASE ORDER ISSUED BY a third party approved by
NeoMagic-J and MELCO ON BEHALF OF NEOMAGIC-J), whether provided in writing or
sent by electronic means, and any documents incorporated therein by reference.
4.2 Printed Terms. Each individual Purchase Order shall be subject
-------------
to the terms of this Agreement. The parties acknowledge that any printed terms
and conditions on Purchase Order or MELCO's Customer Acknowledgment shall be
null and void, and neither party shall be bound by such terms and conditions.
4.3 Minimum Information. All Purchase Orders shall at a minimum
-------------------
contain the following information: (i) reference to this Agreement; (ii)
identification of each Device by proper name, Wafer quantities and price; (iii)
shipping instructions and destination; (iv) requested shipment date; and (v) the
method of payment described in Section 6.2 of this Agreement.
<PAGE>
4.4 Order Acceptance. Subject to Section 6.2 of this Agreement,
----------------
MELCO shall accept all Purchase Orders which are consistent in quantities with
Forecasts issued and agreed upon by MELCO under this Agreement. MELCO shall
deliver a written acknowledgment of each Purchase Order (or acceptance or
rejection, if the quantity is not consistent with the applicable Forecast or the
Purchase Order is not consistent with the terms of this Agreement) within four
(4) working days after receipt of the Purchase Order.
4.5 Delivery Information. MELCO will provide NeoMagic-J with a
--------------------
monthly shipment plan, specifying shipments for each week in the month, for the
coming two (2) months, and another monthly shipment plan, for the coming
three/four (3/4) months, at the beginning of each month.
5. ORDER CANCELLATION.
------------------
Purchase orders accepted by MELCO may be canceled only if NeoMagic-J
agrees to pay MELCO, subject to all the terms of this Section 5, the cost of
work-in-progress for the Wafers which are the subject of the cancellation,
according to the following schedule:
(a) Ten percent (10%) of the Wafer purchase price if the notice of
cancellation is received by MELCO during the period from MELCO's acceptance of
the purchase Order until the commencement of the field process of the
manufacturing; provided, however, that there will be no cancellation fee if
NeoMagic-J substitutes another product using the same Process or MELCO can find
another purchaser (internal demand or external demand) of a similar amount of
wafers to be fabricated using the same Process. MELCO agrees to use its best
efforts to find such a purchaser;
(b) Forty percent (40%) of the Wafer purchase price if the notice of
cancellation is received by MELCO during the period after the commencement of
the field process until commencement of the channel doping process;
(c) Seventy percent (70%) of the Wafer purchase price if the notice of
cancellation is received by MELCO during the period from commencement of the
channel doping process until commencement of the Metal 1 process;
(d) Ninety percent (90%) of the Wafer purchase price if the notice of
cancellation is received by MELCO following the commencement of Metal 1 process
and before Wafer testing; and
(e) One hundred percent (100%) of the Wafer purchase price if the
notice of cancellation is received by MELCO following the commencement of Wafer
testing.
MELCO will invoice NeoMagic-J for such amount, and NeoMagic-J shall pay such
invoices within 60 days from the date of receipt. In all events, however,
certain Wafer quantity adjustments (delays in the delivery date and increase of
quantity) may be discussed between the parties on a case-by-case
<PAGE>
basis, but such adjustments shall only be made if agreed to in writing by MELCO,
which Agreement shall not be withheld unreasonably.
MELCO will provide work-in-progress ("WIP") reports, that include
mutually agreed upon information on a periodic basis that the parties agree to
negotiate in good faith but that is consistent with reported cycle times.
Cancellation charges will be based on the latest WIP report with movement
updates to the date of the cancellation notice.
6. PRICING AND PAYMENT
-------------------
6.1 Price Calculation Generally. Wafer purchase prices shall be
---------------------------
determined and calculated in Japanese yen. The parties shall meet quarterly to
set the prices to be charged in the next quarter.
6.2 Payment Obligations. NeoMagic-J will provide for mutually
-------------------
acceptable credit terms.
6.3 Payment Terms. MELCO shall invoice a mutually agreed upon
-------------
creditor ("Creditor") upon delivery of the Wafers to the specified FOB location.
The Creditor shall then pay MELCO the net purchase price for Wafers in Japanese
yen within seventy (70) days after the delivery of the Wafers. Past due
invoices of MELCO shall bear interest at the rate of 0.75% per month, but not in
excess of the maximum lawful rate, until paid in full. If the due date of an
invoice is not a business day, the Creditor shall pay MELCO on the next business
day following such due date.
7. MASKS AND RELATED CHARGES
-------------------------
7.1 Generally. NeoMagic-J shall supply MELCO at NeoMagic-J's
---------
expense, with set(s) of masks for the manufacture of each Device. NeoMagic-J or
its Associated Companies retains sole ownership of all mask work rights, any
other intellectual property related to such masks, and the masks themselves, and
MELCO shall utilize each mask set provided or created pursuant to this Agreement
solely to manufacture the Wafers for NeoMagic-J or its Associated Companies.
7.2 Charges for Additional Masks. Mask charges in addition to those
----------------------------
described in Section 7.1 of this Agreement, if any, will be paid to Dai Nippon
Corporation or a mutually agreed upon alternate source as follows:
(a) In the event of Yield problems related to the Process or DRAM
Memory Module's design, MELCO shall pay the charges.
(b) In the event of problems related to layout or Device logic design,
excluding the DRAM Memory Module, NeoMagic-J shall pay charges.
<PAGE>
(c) In the event of indeterminable Yield problems or Yield problems
attributable to both DRAM Memory Module and Device design, MELCO and NeoMagic-J
shall each pay half of the additional mask charges.
(d) When the Yield problem is discovered, the party responsible for
the problem as set forth above shall pay the mask charges.
8. QUALITY
-------
8.1 Cooperation. The parties shall work together to improve Yield,
-----------
quality and reliability of the Wafers.
8.2 Destroy all non-conforming Chips. NeoMagic-J shall ensure that,
--------------------------------
promptly following dicing, NeoMagic-J or its assembler shall destroy all non-
confirming Chips. Upon MELCO's request from time to time, NeoMagic-J shall
certify as to its compliance with the foregoing sentence, and MELCO shall have
the right to audit such compliance.
8.3 Quarterly Reports. In the event that WAFERS are manufactured on
-----------------
a standard DRAM processing line, MELCO will provide NeoMagic-J at regular
intervals with MELCO's standard quarterly reports concerning quality and
reliability data of its 16M commodity DRAM products. In the event that
NeoMagic-J's DRAM products are the only DRAM products being manufactured on a
particular processing line, MELCO will provide NeoMagic-J at regular intervals
with SPC data.
8.4 Assistance by MELCO. MELCO shall provide assistance reasonably
-------------------
requested by NeoMagic-J in connection with failures detected in testing as well
as corrections to prevent such failures.
8.5 Notice of Process Changes. MELCO will not to implement material
-------------------------
Process changes which affect the quality, reliability, cost or Yield of the
Devices without reasonable advance notice to NEOMAGIC-J.
8.6 Manufacturing Audits. MELCO will provide reasonable assistance
--------------------
for NeoMagic-J's quality personnel to audit MELCO's manufacturing facilities.
8.7 P.C.M. Data. MELCO will provide Process Control Monitor (P.C.M.)
-----------
data on the first fifty (50) lots of each new product. Thereafter such data
will be provided upon request.
<PAGE>
9. WARRANTY
--------
9.1 Warranty. MELCO warrants to NeoMagic-J that, after delivery of
---------
Wafers to NeoMagic-J until the end of the acceptance inspection, the DRAM Memory
Module shall conform to the specifications set forth in Appendix A hereto. In
the event within one year from shipment, if the DEVICE, INCLUDING BUT NOT
LIMITED TO THE DRAM MEMORY MODULE, were found defective, Wafers may be returned
provided that MELCO shall agree that any asserted defects or failures were
caused by MELCO's material, and workmanship and not by NeoMagic-J during further
processing at assembly, test and handling. After such AGREEMENT by MELCO, Wafers
may be returned according to Section 9.4 and MELCO's liability will be limited
to the replacement of such defective Wafers under the provision that necessary
equipment to Process the Wafers are still available. If not available, MELCO and
NeoMagic-J shall negotiate in good faith.
9.2 Inspection. NeoMagic-J shall be responsible for inspection of
----------
the Wafers upon delivery under Section 10.3 of this Agreement. Such inspections
shall be carried out at NeoMagic-J's expense within 30 days of such delivery.
Such inspections shall be carried out in accordance with the Inspection
Specifications set forth in Appendix F hereto.
9.3 Notice. If NeoMagic-J claims that any portion of the DRAM Memory
------
Module does not conform to the specifications set forth in Appendix D or E,
respectively, as a result of the inspection, NeoMagic-J shall immediately give
MELCO notice of such non-conformance. Failure to inspect or provide MELCO with
notice of non-conformance within the thirty (30) day inspection period shall
constitute a waiver of NeoMagic-J's right to reject the Devices and Wafers.
9.4 Remedies. Upon request by MELCO, NeoMagic-J shall return all
--------
alleged non-conforming Wafers to MELCO. MELCO shall HAVE A RIGHT TO determine
whether such Wafers are non-conforming. MELCO's warranty shall not cover,
extend to or apply to defects, damage or deterioration to the Wafers caused by
NeoMagic-J or any third party. In the event MELCO determines that any non-
conformance of the Wafers is its responsibility, it shall supply replacements or
cancel the Purchase Order concerned, as agreed to by the parties in each case.
All freight charges and charges associated with the return of non-conforming
Wafers to MELCO from NeoMagic-J's facility and the shipment of replacement items
therefor to NeoMagic-J from MELCO shall be borne by MELCO. If, however, MELCO
determines that such returned Wafers are conforming, NeoMagic-J shall bear all
such freight charges, export and import duties (if any) and costs incurred by
MELCO for obtaining and returning such Wafers.
<PAGE>
9.5 Disclaimers. THE DRAM MEMORY MODULE AND PROCESS QUALITY
-----------
WARRANTIES SET FORTH ABOVE ARE EXCLUSIVE AND NO OTHER PRODUCT QUALITY WARRANTY,
WHETHER WRITTEN OR ORAL, IS EXPRESSED OR IMPLIED. MELCO SPECIFICALLY DISCLAIMS
THE IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
THE REMEDIES PROVIDED UNDER THIS ARTICLE 9. SHALL BE THE PARTIES' SOLE AND
EXCLUSIVE REMEDIES WITH RESPECT TO PRODUCT QUALITY. IN NO EVENT SHALL MELCO BE
LIABLE TO NEOMAGIC-J FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR
CONSEQUENTIAL DAMAGES DUE TO ANY CAUSE.
10. DELIVERY AND SHIPMENT
---------------------
10.1 Shipment Upon Fabrication. MELCO shall arrange to ship Wafers
-------------------------
upon completion of fabrication cycle times or on the requested shipment date,
provided, however, that the parties shall negotiate with each other in good
faith, if delay in delivery occurs.
10.2 Delivery Instructions. MELCO shall arrange to deliver the Wafers
---------------------
in accordance with reasonable instructions contained in NeoMagic-J's accepted
Purchase Orders.
10.3 DELIVERY Terms. All DELIVERIES shall be MADE AT F.O.B. specified
--------------
point in, Japan. Title and risk of loss to the Wafers shall pass to NeoMagic-J
upon delivery of the Wafers to the carrier at the F.O.B. point.
10.4 Yield Requirement. MELCO shall not ship Wafer Lots with a Yield
-----------------
rate lower than [*] for the DRAM Memory Module unless the parties agree
otherwise in writing. MELCO's shipments of Wafers in any calendar quarter may
vary in quantity within the range of a Wafer Lot.
10.5 Fabrication Cycles. MELCO shall use commercially reasonable
------------------
efforts to manufacture Wafers within a fifteen (15) week fabrication cycle time
including four (4) week metalization cycle time for two (2) metal products.
Fabrication cycles will be deemed to commence upon the wafer start and end on
the date of first delivery of the order quantity to the F.O.B. point.
Metalization cycle time shall be deemed to commence upon the beginning of the
first aluminum process and end on the SHIPMENT from the plant. However,
fabrication cycle times and metalization cycle times will be based on actual
workdays. MELCO shall use commercially reasonable efforts to shorten the cycle
times.
10.6 Lead Time. Unless otherwise agreed in writing by the parties,
---------
the lead time for all orders based on Section 3.2 shall be fifteen (15) actual
workweeks.
[*] Confidential Treatment Requested
<PAGE>
11. CONTINGENCIES
-------------
Neither party shall be liable to the other party for any damage, delay
or failure to perform due to any cause beyond its reasonable control, including
but not limited to act of God, government restriction, war, riot, embargo, labor
stoppage, act of civil or military authority, fire, flood, earthquake or
accident; provided that a party shall have the right to terminate this Agreement
upon at least sixty (60) days prior notice if the other party's delay or default
due to such a cause continues for a period of at least six (6) months. No such
cause shall excuse any payment obligation of a party for amounts which are due
and payable or which become due and payable during any such cause.
12. CONFIDENTIAL INFORMATION; PROPRIETARY RIGHTS
--------------------------------------------
12.1 MELCO and NeoMagic-J are parties to a Confidentiality Agreement
dated October 20, 1993, a copy of which is attached hereto as Appendix G.
Confidential Information received from the other party with respect to this
Agreement shall be used solely for the purpose of this Agreement, and such
Confidential Information shall not be disclosed to any third party without the
prior written permission of the disclosing party for a period of five (5) years
after termination or expiration of this Agreement.
12.2 All Confidential Information and any copies thereof are and shall
remain the property of disclosing party. MELCO shall own and, subject to the
express terms and conditions of this Agreement, shall retain all right, title
and interest in and to the Mitsubishi Proprietary Technology and NeoMagic-J or
its Associated Companies shall own and, subject to the express terms and
conditions of this Agreement, shall retain all right, title and interest in and
to the NeoMagic-J Proprietary Technology. Notwithstanding anything to the
contrary herein, NeoMagic-J or its Associated Companies shall solely own all
right, title and interest in and to any and all intellectual property covering
the Devices, subject only to Mitsubishi's ownership of intellectual property
covering the Process and the DRAM Memory Module.
13. INTELLECTUAL PROPERTY INDEMNITY
-------------------------------
13.1 Indemnification by NeoMagic. NeoMagic-J and/or its Associated
---------------------------
Companies shall defend AND INDEMNIFY MELCO against or settle any third-party
actions or claims based upon the use or incorporation of technical information
provided by NeoMagic-J and/or its Associated Companies under this Agreement,
specifically excluding, however, the DESIGN OF DRAM MEMORY MODULE AND PROCESS
("Claims"), alleging that the manufacture by MELCO or sale by MELCO to NeoMagic-
J and/or its Associated Companies of the Devices or Wafers under this Agreement
infringes or violates any patent, trademark, copyright, trade secret or similar
intellectual property right of the claimant. NeoMagic-J and/or its Associated
Companies shall purchase any work-in-process for Wafers which are the subject of
a Claim which results in the payment of fees for the use of technology of the
claimant to manufacture Devices or Wafers or which are the subject of a judgment
of a court of competent jurisdiction ruling that such manufacture or sale
constitutes an infringement or violation of the third party's intellectual
property. The obligations of NeoMagic-J under this section shall be
<PAGE>
subject to MELCO providing NeoMagic-J (i) prompt notice of the Claim, (ii)
reasonable non-monetary assistance in connection with the defense of the Claim
(at NeoMagic-J's expense and/or its Associated Companies' expense excluding
MELCO's employee expense), and (iii) provided that NeoMagic-J and/or its
Associated Companies assumes and diligently pursues the defense of the Claim,
full control of the defense and settlement of the Claim. Notwithstanding the
foregoing, NeoMagic-J and/or its Associated Companies may not agree to settle
any such Claim without MELCO's prior written consent if such settlement includes
(a) any licensing of Mitsubishi Proprietary Technology or (b) an injunction that
binds MELCO in any way other than an injunction prohibiting MELCO from
manufacturing and distributing the Device to NeoMagic-J (whether or not in a
Wafer). NeoMagic-J and/or its Associated Companies shall keep MELCO apprised of
the progress of any Claims covered by this Section. Notwithstanding the
foregoing, the obligation of NeoMagic-J and/or its Associated Companies to
indemnify MELCO under this section shall not apply to any actions or claims
described in Section 13.2 of this Agreement.
13.2 Indemnification by MELCO. MELCO shall defend AND INDEMNIFY
-------------------------
NeoMagic-J and/or its Associated Companies against or settle any third-party
actions or claims alleging that the manufacture by MELCO or sale or importation
by NeoMagic-J or its Associated Companies of the Devices or Wafers under this
Agreement infringes or violates any patent, trademark, copyright, trade secret
or similar intellectual property right of the claimant, to the extent such
claims allege that the DESIGN OF THE DRAM MEMORY MODULE AND PROCESS infringe or
violate such intellectual property rights of the claimants ("MELCO Claims").
MELCO shall repurchase from NeoMagic-J any Devices or Wafers purchased by
NeoMagic-J and still in its possession which are the subject of a MELCO Claim,
the settlement of which results in the payment by NeoMagic-J and/or its
Associated Companies of fees for the use of technology of the claimant to sell
or use Devices or Wafers or which are the subject of a judgment of a court of
competent jurisdiction ruling that manufacture, sale or use of the Devices or
Wafers constitutes an infringement or violation of the third party's
intellectual property. The obligations of MELCO under this section above shall
be subject to NeoMagic-J and/or its Associated Companies providing MELCO (I)
prompt notice of the MELCO Claim, (ii) reasonable non-monetary assistance in
connection with the defense of the MELCO Claim (at MELCO's expense excluding
NeoMagic-J and/or Associated Company employee expense), and (iii) provided that
MELCO assumes and diligently pursues the defense of the MELCO Claim, full
control of the defense and settlement of the MELCO Claim. Notwithstanding the
foregoing, MELCO may not agree to settle any such MELCO Claim without the prior
written consent of NeoMagic-J and/or the Associated Companies if such settlement
includes (a) any licensing of NeoMagic-J and/or Associated Company Proprietary
Technology or (b) an injunction that binds NeoMagic-J and/or its Associated
Companies in any way other than an injunction prohibiting NeoMagic-J, its
Associated Companies or their reseller customers from selling or using the
Device (whether or not in a Wafer). MELCO shall keep NeoMagic-J and/or its
Associated Companies apprised of the progress of any MELCO Claims covered by
this section. Notwithstanding the foregoing, MELCO's obligation to indemnify
NeoMagic-J or its Associated Companies under this section shall not apply to any
actions or claims described in Section 13.1 of this AGREEMENT.
<PAGE>
MELCO assumes no liability for (i) infringement claims CAUSED BY
combinations of the DRAM MEMORY MODULE design with software or hardware not
provided by MELCO if the infringement could have been avoided by the use of
other commercially acceptable non-infringing software or hardware; or (ii)
infringement claims resulting from any modification of the DRAM core design by
NeoMagic-J and unapproved by MELCO, if the infringement would have been avoided
in the absence of such modification.
13.3 Entire Liability. THIS ARTICLE STATES EACH PARTY'S ENTIRE
----------------
LIABILITY AND OBLIGATION (EXPRESS, STATUTORY, IMPLIED OR OTHERWISE) WITH RESPECT
TO INTELLECTUAL PROPERTY INFRINGEMENT OR VIOLATION OR CLAIMS THEREFOR ARISING
OUT OF THE MANUFACTURE AND SALE OF WAFERS OR DEVICES PURSUANT TO THIS AGREEMENT.
14. ENTIRE AGREEMENT
----------------
This Agreement, together with all Appendices hereto, together with
that certain Prototype Wafer Supply Agreement dated as of September 1, 1995
concerning the Device known as the NMG2 and the agreement referenced and amended
in Section 12.1 of this Agreement, constitute the entire agreement and
understanding among NeoMagic-J and MELCO with respect to the manufacturing and
sale of Wafers and supersede all prior agreements, dealing, and negotiations
with respect thereto. No modification, alteration or amendment of this
Agreement shall be effective unless in writing and signed by authorized
representatives of the parties. No waiver of any breach shall be held to be a
waiver of any other or subsequent breach.
15. TERMINATION FOR CAUSE
---------------------
15.1 Subject to Section 16.3, either party ("terminating party") may
terminate this Agreement immediately upon giving notice in the event of one or
more of the following:
(a) the other party enters into voluntary or involuntary bankruptcy or
insolvency or ceases to make payments to its creditors;
(b) the other party liquidates its business relating to the Wafers or
Devices or makes or causes to be made an assignment of its assets or business,
either in whole or in part, for the benefit of its creditors;
(c) a receiver, trustee or similar fiduciary is appointed to take
over, administer or conduct all or a substantial part of the business or
property of the OTHER party; or
(d) the other party dissolves or liquidates its assets.
15.2 If a substantial change occurs in the ownership or control of the
other party as a result of the purchase of a majority of the equity securities
in such other party (except as a result of an
<PAGE>
initial public offering pursuant to the Securities Act of 1933) without the
prior written consent of the first party for this Agreement to continue after
such change in control (which consent shall not be unreasonably withheld) the
first party may terminate this Agreement upon notice to the other, such
termination to become effective on the sooner of twelve (12) months after it is
given or upon the end of the term of this Agreement.
15.3 If either party is involved in any of the events or occurrences
enumerated in Section 15.1 or 15.2, such party shall give the other party with
immediate notice thereof.
15.4 If a party breaches any of the terms of this Agreement, which
breach shall include without limitation the failure to make full and complete
payment of any amount when due, the other party shall have the right to
terminate this Agreement unless the party committing such breach shall have
corrected such breach within sixty (60) days after receipt of notice thereof
from the party alleging such breach.
16. RIGHT AND OBLIGATION UPON TERMINATION
-------------------------------------
16.1 Termination of this Agreement for any reason shall not affect any
obligation arising prior to the effective date of termination or expiration and
any obligation which from the context thereof is intended to survive the
termination of this Agreement.
16.2 In addition, termination of this Agreement (a) by one party shall
not affect NeoMagic-J's obligation to pay all amounts due or to become due to
MELCO as of the date of termination or (b) by NeoMagic-J shall not affect
Purchase Orders already accepted by MELCO. The price in effect at the
termination date shall apply to deliveries thereafter.
16.3 In the event that MELCO terminates this Agreement pursuant to
Section 15.1 above, MELCO agrees to supply Wafers on the same terms and
conditions herein to NeoMagic-J's customers upon request by such customers.
Neo-Magic-J agrees to provide MELCO with a list of such customers reasonably
prior to the occurrence of any of the events specified in Section 15.1 above.
MELCO agrees that such customers are third party beneficiaries of this Agreement
and may enforce this Section 16.3 against MELCO.
<PAGE>
17. NOTICES
-------
17.1 Any notice given under this Agreement shall be in writing and
shall be sent by registered mail or certified mail, postage prepaid, return
receipt requested, or by any other overnight delivery service which delivers to
the noticed destination and provides proof of delivery to the sender. All
notices shall be effective when first received by a party at the following
address (or to such other address as may be specified by such party by notice in
accordance herewith):
If to MELCO: Mitsubishi Electronic Corporation
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
If to NeoMagic-J: NeoMagic Japan K.K.
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
18. NO IMPLIED LICENSE
------------------
Except as may be otherwise expressly provided for in this Agreement,
neither the terms and conditions of this Agreement nor the acts of any party
pursuant to this Agreement or related to NeoMagic-J's purchase, use, sale or
other distribution of the Wafers or Devices may be considered in any way as a
grant of any license whatsoever under MELCO's or NeoMagic-J's present or future
patents, copyrights, trademarks, trade secrets or other proprietary rights, nor
is any such license granted by implication, estoppel or otherwise.
19. GENERAL
-------
19.1 All publicity and public announcements concerning the formation and
existence of this Agreement shall be planned and coordinated by and between the
parties. Neither party shall disclose any of the provisions of this Agreement
without the prior written consent of the other party, which consent shall not be
unreasonably withheld; provided that, a party may disclose, in a manner
consistent with industry standards and custom, the existence of this Agreement
and that the parties are doing business with the other without disclosing the
terms of any provisions of this Agreement. Notwithstanding the foregoing,
either party may disclose any information concerning this Agreement to the
extent required by the rules, orders, regulations, subpoenas or directives of a
court, government or governmental agency, after giving prior notice to the other
party and subject to the disclosing party obtaining confidentiality treatment of
the Agreement's provisions to the extent permitted.
<PAGE>
19.2 As used in this Agreement, except for terms of payment and cure period
for default and where otherwise noted, the term "days" shall mean business days.
19.3 Each party is an independent contractor and not an agent or employee
of the other party. Neither MELCO nor NeoMagic-J is authorized to represent or
make any commitments on behalf of the other.
19.4 Except as otherwise specified in this Agreement, all rights and
remedies conferred by this Agreement, by any other instrument or by laws are
cumulative and may be exercised singularly or concurrently. If any provision of
this Agreement is held invalid or unenforceable pursuant to any law or
regulation of any government or by any court, such invalidity or
unenforceability shall not affect the enforceability of other provisions
contained in this Agreement. This Agreement and any Purchase Orders issued
under this Agreement shall be governed by and interpreted in accordance with the
laws of Japan.
19.5 Neither party shall be liable for indirect, special or consequential
damages, loss of use of the Device or Wafers or loss of profits by reason of any
breach or default under this Agreement.
19.6 Clause headings contained in this Agreement are for reference purposes
only and have no interpretative significance.
19.7 Each party shall be responsible for compliance with the U.S. Export
Administration Regulations in connection with their respective exports from the
United States of commodities or technical data relating to this Agreement and
with the export laws of Japan in connection with their respective exports from
Japan of such commodities or technical data.
19.8 If there are any conflicts between the English language version of
this Agreement and any Japanese language version of this Agreement, the parties
shall confer and in good faith attempt to resolve the conflict by referring to
the English language version as a base.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
by their authorized representatives as of the day and year first above written.
NEOMAGIC JAPAN K.K. MITSUBISHI ELECTRIC CORP
By:___________________ By:_____________________
Name:_________________ Name:___________________
Title:________________ Title:__________________
WITNESSED BY: WITNESSED BY:
NEOMAGIC INTERNATIONAL NEOMAGIC CORPORATION
BY:___________________ BY:_____________________
NAME:_________________ NAME:___________________
TITLE:________________ TITLE:__________________
<PAGE>
Appendices
----------
<TABLE>
<S> <C> <C>
A - Process
D - DRAM Memory Module - Specifications
E - Process Specifications
F - Inspection Specifications
G - Confidentiality
</TABLE>
<PAGE>
Appendix A
----------
<TABLE>
<CAPTION>
Process Process ID
- -------------------------------------- --------------------------------------
<S> <C>
16 Meg ASIC DRAM Generation 2.5
16 Meg ASIC DRAM Generation 3.0
</TABLE>
<PAGE>
Appendix D
----------
[ * ]
[Confidential Treatment Required]
<PAGE>
Appendix E
----------
[ * ]
[Confidential Treatment Required]
<PAGE>
Appendix F (plan)
-----------------
Specification for wafer appearance inspection
---------------------------------------------
1. Method for inspection
This inspection is basically done by looking at wafers with naked eye.
2. Inspection standard
A wafer which satisfies one of the following conditions should not be
shipped.
Conditions:
(1) Broken wafer (Except for a wafer that has broken edges which size is
smaller than the size of fig. 1.)
(2) Cracked wafer
(3) Crooked wafer which cannot be diced
(4) No glass coated wafer
(5) No PIX coated wafer
<PAGE>
Appendix G
----------
[ * ]
[Confidential Treatment Required]
<PAGE>
EXHIBIT 10.10
AGREEMENT
This AGREEMENT is made and entered into as of the 20th of November, 1995 by and
between NeoMagic Corporation, a company organized and existing under the laws of
California, U.S.A., having an office and place of business at 2710 Walsh Avenue,
Santa Clara, California 95051 (hereinafter referred to as "NMC") and Mitsubishi
International Corporation, a company organized and existing under the laws of
New York, U.S.A., having an office and place of business at 850 Hansen Way,
Suite 100, Palo Alto, California, 94306 (hereinafter referred to as "MIC").
WITNESSETH:
WHEREAS, NMC has been engaged in the business of designing and selling
semiconductors (hereinafter referred to as "Products"), and
WHEREAS, MIC has for many years engaged in the business of international trading
and trade financing.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
1. APPOINTMENT
-----------
NMC hereby appoints MIC as its non-exclusive buying agent for purchasing of
Products from semiconductor manufacturers (hereinafter referred to as
"Foundries") and providing MIC's trade financing to NMC and MIC accepts such an
appointment.
2. SCOPE OF WORK
-------------
a. NMC shall negotiate and settle directly with Foundries regarding
prices and delivery schedule of Products from Foundries to NMC.
1
<PAGE>
b. Upon request of NMC, MIC shall support negotiations between Foundries
and NMC.
c. NMC shall place purchase orders with Foundries for Products and send
copies to MIC with the following provisions:
(1) NMC shall notify MIC 2 days prior to its issuance of the
purchase order.
(2) The purchase order shall instruct Foundries to ship to NMC's
designated location but bill to MIC.
(3) The purchase order shall instruct Foundries to acknowledge the
order with both NMC and MIC.
d. MIC on behalf of NMC shall pay Foundries pursuant to payment terms of
the purchase order from NMC to Foundries.
e. MIC shall bill NMC upon receipt of the invoice from Foundries but
defer the due date for payment from NMC to MIC for 90 days beyond the
due date for the payment from MIC to Foundries.
f. Upon NMC's request, MIC shall assist NMC in establishing and keeping
close communications and relations with Foundries.
3. TERMS OF PAYMENT
----------------
a. Payment to be made by NMC to MIC shall be net 90 days beyond the due
date for the payment from MIC to Foundries.
b. The invoice amount from MIC to NMC shall include MIC's commission and
interest.
c. In the event that MIC pays foundries in Japanese Yen,
(1) MIC shall apply the tentative exchange rate in computing NMC's
liability to MIC prior to the payment date from
2
<PAGE>
MIC to Foundries. The exchange rate used by MIC will be stated
on the face of the invoice.
(2) The US$/Japanese Yen exchange rate for the date when MIC pays
Foundries shall be applied to the invoice from MIC to NMC. A
revised invoice will be issued to NMC with the new exchange rate
used by MIC stated on the face of the revised invoice.
(3) NMC shall have the option to pay MIC in either US Dollars or in
Japanese Yen.
4. COMMISSION
----------
a. As full compensation for the services rendered by MIC to NMC
hereunder, NMC agrees to a commission at the rate set forth in
Subsection 4.b on the price of each sale of Products from MIC to NMC.
b. The commission for each calendar quarter shall be determined on the
first day of each calendar quarter as follows:
(1) In the event that the total sales amount from MIC to NMC in the
previous calendar quarter shall be equal to or less than
$1,500,000, the commission rate for the calendar quarter shall
be 2% of the purchase price of Products from Foundries to MIC.
(2) In the event that the total sales amount from MIC to NMC in the
previous calendar quarter shall be more than $1,500,000, the
commission rate for the calendar quarter shall be 1.25% of the
purchase price of the Products from Foundries to MIC.
(3) If there is a need to change the commission rate, the rate shall
be reviewed and determined by written mutual
3
<PAGE>
agreement between NMC and MIC from time to time at the request
of either party.
5. INTEREST
--------
a. The trade financing made hereunder shall bear interest (computed on
the basis of a 365-day year) at the rate of MIC's internal interest
rate on each order from NMC to MIC.
b. MIC's internal interest rate to NMC shall be adjusted subject to the
USA financial market situation, but at least 1.5% below the prime rate
of interest as published in the Wall Street Journal on the date of the
invoice.
c. MIC shall confirm to NMC MIC's internal interest rate upon receipt of
each order from NMC.
6. CREDIT LINE
-----------
a. The credit line and the period of the credit line from MIC to NMC
shall be set forth in Exhibit A attached hereto.
b. The subsequent credit line and the period of the subsequent credit
line shall be determined by the end of the period of the credit line
set forth in Exhibit A by mutual agreement.
7. EVENT OF DEFAULT
----------------
a. Each of the following events and occurrences shall constitute an event
of default ("Event of Default") under this Agreement:
(1) NMC fails to pay when due any amount (including interest)
payable under this Agreement and such failure is not cured
within 5 business days thereafter;
4
<PAGE>
(2) NMC fails to comply with any other terms or conditions contained
herein and such failure is not remedied within thirty (30) days
thereafter;
(3) NMC is in default of the terms of any indebtedness of NMC to any
other lender or financier and such indebtedness is accelerated
and becomes payable by reason of such default;
(4) the commencement of proceedings in bankruptcy, or for
reorganization of NMC under the Federal Bankruptcy Code, as
amended, or any other laws, whether state or federal, for the
benefit of the debtor, which are not revoked within sixty (60)
days of their commencement;
(5) the appointment of a receiver, trustee or custodian for NMC or
for the substantial part of the assets of NMC, or the
institution of proceedings for dissolution or the full or
partial liquidation of NMC, and such receiver, trustee or
custodian shall not be discharged within sixty (60) days of
their appointment;
(6) the discontinuance of the business of NMC; or
(7) the dissolution of NMC.
b. If an Event of Default shall occur and be continuing, MIC may, by
written notice to NMC, (1) declare all outstanding amounts, together
with accrued interest and any other sums payable hereunder, to be
immediately due and payable, and the same shall thereupon become due
and payable without presentment, demand, protest or notice of any
kind, and NMC shall pay to MIC the entire amount then outstanding and
interest accrued thereon, and (2) declare the credit line granted by
MIC hereunder canceled, such cancellation becoming effective upon the
giving of such notice.
5
<PAGE>
8. SECURITY AGREEMENT
------------------
NMC agrees to conclude a SECURITY AGREEMENT with MIC in the form of Exhibit
B attached hereto by which NMC agrees to provide a security interest in
cash, accounts receivable or inventories possessed by NMC to MIC as a
security for the payments to be made by NMC hereunder.
9. TERM AND TERMINATION
--------------------
This Agreement shall be in effect for a period of one (1) year commencing
on the date first above written and shall be extended for one (1) year and
thereafter from year to year successively unless a notice is given by one
of the parties to the other at least ninety (90) days before the end of the
then current term that it does not wish to extend this Agreement.
10. RELATIONSHIP BETWEEN THE PARTIES
--------------------------------
The relationship between NMC and MIC shall be that of an independent
contractor. Unless otherwise mutually agreed, MIC is not authorized to
make, nor shall it make any promise or commitment which bonds NMC to any
third party without the prior written consent of NMC.
11. CONFIDENTIAL INFORMATION
------------------------
a. "Confidential Information" means all or any portion of information
disclosed by one party to the other during the term of this Agreement
which is: (i) written, recorded, graphical, or in other tangible form
and which is marked "Proprietary," "Confidential" or with a similar
legend denoting the proprietary interest of the disclosing party; or
(ii) oral information to the extent it is identified by the disclosing
party as "Proprietary" or "Confidential" at the time of oral
disclosure; provided, however, Confidential Information shall not
include
6
<PAGE>
information that: (a) is or becomes publicly known through no fault of
the receiving party; or (b) is in the possession of the receiving
party prior to its disclosure by the disclosing party and not subject
to other restriction on disclosure.
b. Each party hereby agrees not to use, utilize, disclose or reveal
Confidential Information to any person, company or other entities
without obtaining written consent by the disclosing party.
12. ASSIGNMENT
----------
It is agreed that this Agreement and the rights and obligations of the
parties hereunder shall not be assigned to any third party without the
prior written consent of the other party.
13. INDEMNIFICATION
---------------
NMC hereby agrees to indemnify, defend and hold MIC harmless from and
against any and all losses, costs, liabilities, claims and expenses
including attorney fees arising out of, relating to or in connection with
Products or their infringement of any patent, copyright or mask work right
of any third party, or the design, manufacture, condition or use of
Products.
14. NOTICE
------
Notices and other communications made by one of the parties to this
Agreement shall be deemed given and effective when posted by registered
mail, postage prepaid, or by facsimile addressed to the other party as
follows:
7
<PAGE>
To NMC:
NeoMagic Corporation
2710 Walsh Avenue
Santa Clara, California 95051
Facsimile Number: 408-988-7032
To MIC:
Mitsubishi International Corporation
850 Hansen Way, Suite 100
Palo Alto, California 94306
Facsimile Number: 415-493-0318
15. GOVERNING LAW
-------------
This Agreement shall be governed by and construed in all respects in
accordance with the laws of California, U.S.A.
16. ENTIRE AGREEMENT
----------------
This Agreement represents the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all previous
communications, representations or agreements, either oral or written,
between the parties hereto with respect to the subject matter hereof, and
no agreement or understanding varying or extending the same will be binding
upon either party hereto unless in writing, signed by a duly authorized
officer or representative thereof.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed in duplicate, each duplicate to serve as an original as of the day and
year first above written.
NeoMagic Corporation Mitsubishi International Corporation
/s/ Lori Holland /s/ Junji Inoue
- ---------------------- ------------------------
Lori Holland Junji Inoue
General Manager
Palo Alto Office
9
<PAGE>
Exhibit A
CREDIT LINE
-----------
NMC and MIC agree with the credit line and credit line period from MIC to NMC as
follows:
CREDIT LINE US$ 4,500,000
CREDIT LINE PERIOD: from November 20, 1995 to March 31, 1996
The credit line after March, 1996 shall be determined by the end of March, 1996
by mutual agreement between NMC and MIC.
Mitsubishi International Corp. NeoMagic Corporation
/s/ J. Inoue /s/ Lori Holland
- ---------------------- --------------------------
By: J. Inoue By: Lori Holland
Title: General Manager Title: CFO
Date: 11-20-95 Date: 11-20-95
10
<PAGE>
Exhibit A
CREDIT LINE
-----------
NMC and MIC agree with the credit line and credit line period from MIC to NMC as
follows:
CREDIT LINE: US$ 13,000,000
CREDIT LINE PERIOD: from July 1, 1996 to December 1, 1996
CONDITIONS: NMC agrees to deposit an amount equal to or larger
than the portion exceeding $10,000,000 into an
escrow account. The parties understand that, on a
day to day basis, the balance on this line of
credit will be changing, sometimes materially. NMC
agrees to use its best efforts to ensure that the
escrow account is sufficiently funded in a timely
manner to comply with this agreed upon
requirement. MIC understands that, from time to
time, due to the lag in notification of a wafer
shipment, an early shipment from the foundry or
remittance to MIC from NMC, that the balance on
the line of credit may be in fluctuation and may
cause a situation that, for a short period of
time, the escrow account is over or under funded
on a day-to-day basis. Both parties agree to work
together to minimize this situation and provide
timely information exchange to enable NMC to fund
the escrow account as agreed upon.
10
<PAGE>
Exhibit A
CREDIT LINE
-----------
NMC and MIC agree with the credit line and credit line period from MIC to NMC as
follows:
CREDIT LINE: US$ 7,000,000
CREDIT LINE PERIOD: from April 1, 1996 to September 30, 1996
The credit line after September, 1996 shall be determined by the end of
September, 1996 by mutual agreement between NMC and MIC.
Mitsubishi International Corp. NeoMagic Corporation
/s/ Junji Inoue /s/ Lori Holland
- ------------------------------ ------------------------------
By: JUNGI INOUE By: LORI HOLLAND
Title: GENERAL MANAGER Title: CHIEF FINANCIAL OFFICER
Date: Mar. 29, 1996 Date:
<PAGE>
Exhibit A
CREDIT LINE
-----------
NMC and MIC agree with the credit line and credit line period from MIC to NMC
as follows:
CREDIT LINE: US$ 15,000,000
CREDIT LINE PERIOD: from December 20, 1996 to March 31, 1997
CONDITIONS: NMC agrees to deposit an amount equal to or larger
than the portion exceeding $12,000,000 into an
escrow account. The parties understand that, on a
day to day basis, the balance on this line of
credit will be changing, sometimes materially. NMC
agrees to use its best efforts to ensure that the
escrow account is sufficiently funded in a timely
manner to comply with this agreed upon
requirement. MIC understands that, from time to
time, due to the lag in notification of a wafer
shipment, an early shipment from the foundry or
remittance to MIC from NMC, that the balance on
the line of credit may be in fluctuation and may
cause a situation that, for a short period of
time, the escrow account is over or under funded
on a day-to-day basis. Both parties agree to work
together to minimize this situation and provide
timely information exchange to enable NMC to fund
the escrow account as agreed upon.
The credit line after March, 1997 shall be determined by the end of March, 1997
by mutual agreement between NMC and MIC.
Mitsubishi International Corp. NeoMagic Corporation
/s/ Junji Inoue /s/ P.C. Agarwal
- ------------------------------ -----------------------------
By: Junji Inoue By:
Title: General Manager Title:
Date: Date:
11
<PAGE>
Exhibit B
GENERAL SECURITY AGREEMENT
--------------------------
This Agreement made this 15th day of November 1995, between Mitsubishi
International Corporation (herein called "Secured Party") and NeoMagic
Corporation (herein called "Debtor").
1. DEFINITIONS OF TERMS USED HEREIN
--------------------------------
(a) "Debtor" includes NeoMagic Corporation with its office in Santa
Clara, California.
(b) "Insolvency" for purposes of this Agreement shall include, but is not
limited to,
(1) the insolvency, suspension of usual business, general
assignment or failure of the Debtor, or of any endorser, guarantor, surety or
other person liable upon or for any of the liabilities of the Debtor hereunder
(hereafter sometimes referred to as "accommodation party"), or
(2) the appointment of a receiver, conservator, rehabilitator or
similar officer for the Debtor or accommodation party or for any of the property
of any thereof and such receiver, conservator, rehabilitator or similar officer
is not discharged within 45 days, or
(3) the issuance of any warrant of attachment against any property
of the Debtor or any accommodation party, that remains unbounded for a period of
45 days, or the taking of possession of, or assumption of control over, all or
any substantial party of the property of the Debtor or any accommodation party
by the United States Government, foreign governments (de facto or de jurs) or
any agency of any thereof, or
(4) the filing of a petition in bankruptcy by or against the Debtor
or
<PAGE>
General Security Agreement
- --------------------------
Page-2
accommodation party which is not discharged within 45 days, or
(5) the commencement of any proceeding by or against the Debtor or
any accommodation party under any bankruptcy or debtor's law (or similar law
analogous in purpose or effect) for the relief or reorganization, extension,
arrangement or readjustment of any of the obligations of any thereof, and which
proceeding is not dismissed within 45 days, or
(6) the commencement of any proceedings supplementary to any
execution relating to any judgment against the Debtor or any accommodation
party.
(c) "Collateral" means:
(1) all inventory and goods of the Debtor, now owned or hereafter
acquired, including inventory or goods in transit, and wherever located which
are held for sale or lease or are to be furnished under contracts of service, or
which are raw material, work in process, or materials used or consumed in
Debtor's business, or finished goods and supplies customarily classified as
inventory.
(2) all rights of Debtor to payments which are to be earned by
performance under contracts for sale or lease of goods and services by Debtor,
now existing or hereafter arising.
(3) all accounts, notes, drafts, securities, documents, chattel
paper, contract rights, acceptances and other forms of claims, demands,
instruments and receivable of the undersigned for goods sold or leased or
services performed by the Debtor, now existing or hereafter arising, together
with all guaranties and securities therefor and all right, title and interest of
the Debtor in the merchandise which gave or shall give rise thereto, including
the right of stoppage in transit.
<PAGE>
General Security Agreement
- --------------------------
Page-3
(4) proceeds, products and accessions of and to all of the
foregoing.
(5) the balance of any account in the name of Debtor, cash or
deposit account, if any, now or hereafter existing, of Debtor with the Secured
Party and any other claim of the Secured Party against the Debtor, now or
hereafter existing.
(6) all insurance policies heretofore or hereafter placed by
Debtor on any or all of the above described Collateral and the proceeds of any
such insurance.
2. SECURITY INTEREST
-----------------
The Debtor hereby grants to the Secured Party a security interest in the
Collateral in order to secure payment and performance of all liabilities and
obligations of Debtor to the Secured Party as a result of any and all other
obligations of Debtor to the Secured Party of any kind and description, direct
or indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and howsoever evidenced or acquired, and whether joint,
several, or joint and several (all being hereafter called the "obligations").
Without limiting the foregoing in any way, this security interest secures the
payment and performance of all of Debtor's liabilities, duties, and obligations
pursuant to the sale of goods by the Secured Party to the Debtor.
3. SALE OF MATERIALS
-----------------
Subject to the terms and provisions of this Agreement and in consideration
of the security interests herein granted, the Secured Party will, from time to
time, but on such terms and conditions as Secured Party may specify and subject
to its absolute right to refuse so to do, sell or cause any of its
correspondents to sell Mitsubishi's materials or goods or services, at the
request of or for the account of the Debtor.
4. MUTUAL AGREEMENT
----------------
<PAGE>
General Security Agreement
- --------------------------
Page-4
(a) Without limiting the foregoing in any way whatsoever, the security
interest created herein shall extend, apply and continue to any and all future
sales of materials or goods or services by the Secured Party or its
representatives or agents to Debtor, and
(b) Secured Party and Debtor as used in this Security Agreement include
the successor or assigns of those parties, and
(c) The law governing this secured transaction shall be that of
California in force at the date of this Security Agreement, and
(d) This Security Agreement shall be given its plain and simple meaning
consistent with performance thereof by the parties and the California Commercial
Code. The titles of the several articles shall not be considered a part of this
Agreement so as to otherwise alter such meaning, and
(e) Neither party hereto shall be deemed to have waived any of its rights
under or upon the liabilities or Collateral presently existing or created
hereunder unless such waiver be in writing and signed by the party making such
waiver, and
(f) Whenever in this Security Agreement the context so requires, the
singular shall include the plural, and
(g) This Agreement shall terminate after written notice from either party
to the other, that no further sales are to be made, is received and Debtor pays
in full all obligations and all indebtedness of Debtor to the Secured Party, and
(h) This Agreement shall take effect immediately upon execution by the
Debtor, and the execution hereof by the Secured Party shall not be required as a
condition to the effectiveness of this Agreement. The provision for execution of
this
<PAGE>
General Security Agreement
- --------------------------
Page-5
Agreement by the Secured Party is only for purpose of filing this Agreement as
a security agreement under the Uniform Commercial Code, if execution hereof by
the Secured Party is required for purpose of such filing.
5. WARRANTIES BY DEBTOR
--------------------
Debtor hereby warrants and guarantees the following:
(a) Debtor's mailing address is:
2710 Walsh Avenue
-----------------
Santa Clara, California 95051
-----------------------------
The address of Debtor's chief place of business is:
2710 Walsh Avenue
-----------------
Santa Clara, California 95051
-----------------------------
Debtor has no other place of business.
The address at which Debtor keeps all of its records which are
controlling for the general accounting purposes of Debtor is:
2710 Walsh Avenue
-----------------
Santa Clara, California 95051
-----------------------------
All inventory presently held by Debtor is kept at the following
locations:
2710 Walsh Avenue
-----------------
Santa Clara, California 95051
-----------------------------
<PAGE>
General Security Agreement
- --------------------------
Page-6
(b) Debtor is a company duly organized and existing under and by virtue
of the laws of the State of California, is in good standing, is duly qualified
to do business in the State of California, and is empowered to enter into this
Agreement.
(c) That information supplied and statement made by Debtor in any
financial, credit or accounting statement presented to the Secured Party, if
any, prior to or pursuant to this Security Agreement are or will be true and
correct. Quarter's statement is subject to year-end adjustment.
6. DUTIES AND OBLIGATIONS OF DEBTOR
--------------------------------
(a) Without the prior written consent of the Secured Party, the Debtor
will not file or authorize or permit to be filed in any jurisdiction any such
financing or like statement in which the Secured Party is not named as the sole
secured party with respect to the Collateral.
(b) Debtor will have and maintain insurance at all times with respect to
all inventory and goods, including goods in transit, at their full insurable
value against risk of fire (including so-called extended coverage), theft, and
all other usual risks and such special risks as the Secured Party may reasonably
designate in such form, for such periods and written by such companies as may be
satisfactory to Secured Party to proceeds of, such insurance to be payable to
the Secured Party and Debtor as their interests may appear, that all policies of
insurance shall provide for ten (10) days, written minimum cancellation notice
to the Secured Party and at the request of the Secured Party shall be delivered
to and held by it. In the event of failure by Debtor to provide insurance as
herein provided, Secured Party may, at Secured Party's option, provide such
insurance and Debtor shall pay to Secured Party may, at Secured Party's option
declare Debtor in default and proceed with its remedies granted herein.
(c) Debtor shall defend at its cost any claim that (i) its title to the
Collateral
<PAGE>
General Security Agreement
- --------------------------
Page-7
set forth in paragraph 1(c) above, and (ii) this Security Agreement as a lien
and charge upon the aforementioned Collateral. The assertion by anyone of any
claim shall not constitute a default hereunder if such claim is diligently,
adequately and successfully contested by Debtor or is settled or discharged by
Debtor with reasonable diligence. In the event of failure by the Debtor to
diligently defend or contest any such claim, Secured Party may, at Secured
Party's option, contest, settle or discharge any such claim, and Debtor shall
pay to Secured Party, on demand, the reasonable cost and expense, including
attorney's fees, thereof.
7. RIGHTS OF THE SECURED PARTY PRIOR TO DEFAULT
--------------------------------------------
(a) Notwithstanding any other part of this Agreement, the Secured Party
may enter upon Debtor's premises at any reasonable time and upon reasonable
prior notice and with minimum interference with Debtor's business operations to
inspect Debtor's books and records pertaining to the Collateral or its proceeds
and Debtor shall assist the Secured Party in whatever way reasonably necessary
to make any inspection.
(b) The Debtor hereby agrees that upon five (5) business days written
notice from the Secured Party it will do any or all of the following:
(1) deliver to the Secured Party lists or copies of all accounts
which are proceeds of Debtor's inventory promptly after they arise;
(2) joint with the Secured Party at its request in executing
financing statements and pay the cost of filing the same wherever the Secured
Party deems appropriate and will do, make, execute and deliver all such
reasonably additional and further acts, things, deeds, assurance and instruments
as the Secured Party may reasonably require to completely vest in it and assure
to it its rights hereunder in and to inventory and the proceeds and will pay all
reasonable out-of-pocket expenses, including the enforcement of any of the
obligations or the administration, preservation
<PAGE>
General Security Agreement
- --------------------------
Page-8
or protection of or realization upon the Collateral or any part thereof.
8. EVENTS OF DEFAULT
-----------------
Each of the following shall be an event of default.
(a) If Debtor defaults in the due performance or observance of any other
obligation of Debtor under this Security Agreement and fails to cure such
default within 30 days after receipt of written notice from Secured Party by
registered mail.
(b) If any representation or warranty or guarantee made by Debtor herein
or in any other statement heretofore or hereafter furnished by Debtor to the
Secured party proves to be false or misleading in any material respect.
(c) If Debtor becomes insolvent as defined in Section 1(b) above.
9. ADDITIONAL RIGHTS OF SECURED PARTY AFTER DEFAULT
------------------------------------------------
(a) When Debtor is so in default, all obligations secured hereby shall
become immediately due and payable at Secured Party's option without notice to
Debtor, and Secured Party may in its sole discretion proceed to enforce payment
of the same and exercise any or all of the rights and remedies afforded to
Secured Party by the Uniform Commercial Code or otherwise possessed by Secured
Party.
(b) In addition thereto, the Debtor further agrees as follows:
(1) In the event that notice is necessary under applicable law,
written notice mailed to the Debtor or any accommodation party given seven (7)
business days prior to the date of public sale of any of the Collateral subject
to the security interest
<PAGE>
General Security Agreement
- --------------------------
Page-9
created herein or prior to the date after which private sale or any other
disposition of said Collateral will be made shall constitute reasonable notice,
but notice given in any other reasonable manner or at any other time shall be
sufficient.
(2) In the event of sale or other disposition of any such
Collateral, the Secured Party may apply the proceeds of any such sale or
disposition to the satisfaction of its reasonable attorney's fees, legal
expenses, and other costs and expenses incurred in connection with its taking,
retaking, holding, preparing for sale and selling of the Collateral.
(3) Without precluding any other methods of sale, the sale of
Collateral shall have been made in commercially reasonable manner if conducted
in conformity with reasonable practices disposing of similar property.
(4) The Collateral need not be present at any public or private
sale or in view of the purchaser or purchasers and title shall pass upon such
sale wherever the property or any part thereof is located with like effects as
though all the property were present and in the possession of the person
conducting the sale and were physically delivered to the purchaser or
purchasers; the Secured Party may bid for and purchase at any public or private
sale the Collateral offered for sale or any part thereof and by such Secured
Party shall become the owner thereof.
(5) Secured Party may deduct from the gross proceeds of any public
or private sale the reasonable expenses incurred by Secured Party in connection
therewith, including reasonable attorney's fees and brokers' commissions, if
any, and the net proceeds then remaining shall be applied first to the
satisfaction of the amount owed to the Secured Party and any amount then
remaining shall be returned to the Debtor.
<PAGE>
General Security Agreement
- --------------------------
Page-10
(6) The Secured Party may require the Debtor to assemble the
Collateral, taking all necessary or appropriate action to preserve and keep it
in good condition and make such available to the Secured Party at a place and
time convenient to both parties, all at the expense of the Debtor. Furthermore,
in any such event, to the extent permitted under applicable law, full power and
authority are hereby given to the Secured Party to sell, assign and deliver the
whole of the Collateral or any part thereof, at any time at any broker's board,
or at public or private sale, at the option of the Secured Party and no delay on
the Secured Party's part in exercising any power of sale or any other rights or
options hereunder, and no notice or demand, which may be given to or made upon
the Debtor by the Secured Party with to or made upon the Debtor by the Secured
Party with respect to any power of sales or other right or option hereunder,
shall constitute a waiver thereof, or limit or impair the Secured Party's right
to take any action or to exercise any power of sale or any other rights
hereunder, without notice or demand, or prejudice the rights of the Secured
Party as against the Debtor in any respect.
(c) Without limiting any of foregoing, the Secured Party upon default
of the Debtor, may take possession of the Collateral. In taking possession, the
Secured Party may proceed without judicial process or may proceed by action. The
Debtor, upon two (2) business days written notice from the Secured Party, must
assemble all of the Collateral and make it available to the Secured Party at a
place designated by the Secured Party which is reasonable convenient to the
Secured Party and the Debtor. At the Secured Party's option, the Secured Party
may, without removal from the Debtor's premises determine that any or all of the
Collateral is unusable, and may dispose of the unusable Collateral on the
premises of the Debtor.
(d) Delivery to the Secured Party promptly upon receipt all proceeds
of its inventory received by the Debtor including proceeds of account referred
to above, in the exact form in which they are received.
<PAGE>
General Security Agreement
- --------------------------
Page-11
(e) To evidence the Secured Party's rights hereunder, assign or
endorsee proceeds of Collateral to the Secured Party.
(f) Notify account debtors that their accounts have been assigned
to the Secured Party and shall be paid to the Secured Party and indicate on all
invoices to such account debtors that the accounts are payable to the Secured
Party. The Secured Party shall have full power to notify account debtors,
collect, compromise, endorse, sell, or otherwise deal with proceeds in its own
name or that of Debtor at any time. The Secured Party in its sole discretion may
apply cash proceeds to the payment of any liabilities or may release such cash
proceeds to Debtor for use in the operation of Debtor's business.
10. DISPOSITION OF PROCEEDS FROM SALE OF DEBTOR'S COLLATERAL
--------------------------------------------------------
AFTER DEFAULT BY DEBTOR.
- -----------------------
(a) After default, the Secured Party may sell, lease or otherwise
dispose of any or all of the Collateral in its then condition or after
preparation or processing. The proceeds of disposition shall be applied first to
the reasonable expenses of retaking, holding, preparation for sale, selling and
the like and the reasonable attorney's fees and legal expenses incurred by the
Secured Party and second to the satisfaction of all of the indebtedness owed by
the Debtor to the Secured Party and any amount remaining shall be returned to
the Debtor.
(b) If the proceeds from the sale of the Collateral are not
sufficient to satisfy the indebtedness of the Debtor to the Secured Party, the
Secured Party may proceed against the Debtor for any deficiency.
11. RIGHTS OF DEBTOR
----------------
<PAGE>
General Security Agreement
- --------------------------
Page-12
Until default, Debtor may use its inventory and goods in any
lawful manner not inconsistent with this Agreement and with the terms of
insurance thereon; may sell its inventory and goods in the ordinary course of
business; and may use and consume any raw materials or supplies, the use and
consumption of which is necessary in order to carry on Debtor's business.
12. Amendment of Agreement
----------------------
Debtor reserve the right to amend this agreement to accommodate
accounts receivable financing at some time in the future. Debtor will negotiate
new terms with the secured party at that time.
DEBTOR: NeoMagic Corporation
BY : /s/ Lori Holland 11-15-95
----------------------
TITLE : VP. CFO
ADDRESS: 2710 Walsh Avenue, Santa Clara
California 95051
SECURED PARTY: Mitsubishi International Corporation
BY : /s/ Junji Inoue
----------------------
TITLE : General Manager of Palo Alto Office
ADDRESS: Standford Research Park 850 Hansen Way Suite 100
Palo Alto, California 94306
<PAGE>
[LETTERHEAD OF MITSUBISHI INTERNATIONAL CORPORATION APPEARS HERE]
January 9, 1996
NeoMagic Corporation
3260 Jay Street
Santa Clara, CA 95054
Attn: Mr. Prakash Agarwal
President & CEO
Dear Mr. Agarwal:
In regards to the Agreement between NeoMagic and MIC dated October, 1995 and the
recent Agreement Addendum Memorandum dated January 8, 1997, I would like to
address any concerns you might have regarding the issue of interest charges.
We have left the interest provision in the agreement as a general term and
condition due to the likelihood that future foundries will include companies
besides Mitsubishi Electric, such as Toshiba. As we cannot predict what our
payment terms with these companies will be, we decided to maintain the
provision.
However, I would like to confirm with you that, as per our agreement, we will
not charge interest to NeoMagic on transactions involving Mitsubishi Electric
wafers provided that Mitsubishi Electric grants us payment terms of 70 days or
longer.
Please countersign and return a copy of this letter to acknowledge your
understanding and acceptance of the above.
If you have any questions, please contact Koji Osawa at (415) 496-5432 or by fax
at (415) 493-0318.
Regards,
MITSUBISHI INTERNATIONAL CORPORATION
Palo Alto Office
/s/ Junji Inoue
- ----------------------
Junji Inoue
General Manager
NEOMAGIC CORPORATION
- --------------------------------
Prakash Agarwal, President & CEO
Date:
----------
<PAGE>
MEMORANDUM
This Memorandum made and entered into the 8th day of January, 1997 by and
between NeoMagic Corporation, a company organized and existing under the laws of
California, U.S.A. (hereinafter referred to as "NMC"), and Mitsubishi
International Corporation, a company organized and existing under the laws of
New York, U.S.A. (hereinafter referred to as "MIC"), regarding modifications and
amendments of the Agreement made and entered into the 20th day of November, 1995
by and between the parties hereto (hereinafter referred to as "ORIGINAL
AGREEMENT").
WITNESSETH:
It is mutually agreed as follows:
1. The Subsection 3.a. of the ORIGINAL AGREEMENT shall be modified as follows:
3. TERMS OF PAYMENT
----------------
a. Payment to be made by NMC to MIC shall be net 90 days after the
delivery of Products from Foundries.
2. The Subsection 4.b. of the ORIGINAL AGREEMENT shall be modified as follows:
4. COMMISSION
----------
b. (1) The commission rate shall be 1.75% of the purchase price of
Products from Foundries to MIC.
(2) If there is a need to change the commission rate, the rate
shall be reviewed and determined by written mutual agreement
between NMC and MIC from time to time at the request of either
party.
3. The Section 14 of the ORIGINAL AGREEMENT shall be modified as follows:
14. NOTICE
------
Notices and other communications made by one of the parties to this
Agreement shall be deemed given and effective when posted by registered
mail, postage prepaid, or by facsimile addressed to the other party as
follows:
To NMC:
NeoMagic Corporation
3260 Jay Street
Santa Clara, California 95054
Facsimile Number: 408-988-7032
To MIC:
Mitsubishi International Corporation
850 Hansen Way, Suite 100
Palo Alto, California 94306
Facsimile Number: 415-493-0318
<PAGE>
Memorandum
MIC/NeoMagic
1/8/97
Page 2
4. All provisions of the ORIGINAL AGREEMENT other than those altered by this
Memorandum shall not be changed and will remain in full force and effect.
IN WITNESS WHEREOF, the parties have hereunto executed this Memorandum on the
date first above written.
Mitsubishi International Corp. NeoMagic Corporation
/s/ Junji Inoue
- ------------------------------ -------------------------------
By: Junji Inoue By:
Title: General Manager Title:
Date: January 8, 1997 Date:
<PAGE>
EXHIBIT 10.11
GENERAL SECURITY AGREEMENT
--------------------------
This Agreement made this 15th day of November 1995, between Mitsubishi
International Corporation (herein called "Secured Party") and NeoMagic
Corporation (herein called "Debtor").
1. DEFINITIONS OF TERMS USED HEREIN
--------------------------------
(a) "Debtor" includes NeoMagic Corporation with its office in Santa
Clara, California.
(b) "Insolvency" for purposes of this Agreement shall include, but is not
limited to,
(1) the insolvency, suspension of usual business, general
assignment or failure of the Debtor, or of any endorser, guarantor, surety or
other person liable upon or for any of the liabilities of the Debtor hereunder
(hereafter sometimes referred to as "accommodation party"), or
(2) the appointment of a receiver, conservator, rehabilitator or
similar officer for the Debtor or accommodation party or for any of the property
of any thereof and such receiver, conservator, rehabilitator or similar officer
is not discharged within 45 days, or
(3) the issuance of any warrant of attachment against any property
of the Debtor or any accommodation party, that remains unbounded for a period of
45 days, or the taking of possession of, or assumption of control over, all or
any substantial party of the property of the Debtor or any accommodation party
by the United States Government, foreign governments (de facto or de jurs) or
any agency of any thereof, or
(4) the filing of a petition in bankruptcy by or against the Debtor
or
<PAGE>
General Security Agreement
- --------------------------
Page-2
accommodation party which is not discharged within 45 days, or
(5) the commencement of any proceeding by or against the Debtor or
any accommodation party under any bankruptcy or debtor's law (or similar law
analogous in purpose or effect) for the relief or reorganization, extension,
arrangement or readjustment of any of the obligations of any thereof, and which
proceeding is not dismissed within 45 days, or
(6) the commencement of any proceedings supplementary to any
execution relating to any judgment against the Debtor or any accommodation
party.
(c) "Collateral" means:
(1) all inventory and goods of the Debtor, now owned or hereafter
acquired, including inventory or goods in transit, and wherever located which
are held for sale or lease or are to be furnished under contracts of service, or
which are raw material, work in process, or materials used or consumed in
Debtor's business, or finished goods and supplies customarily classified as
inventory.
(2) all rights of Debtor to payments which are to be earned by
performance under contracts for sale or lease of goods and services by Debtor,
now existing or hereafter arising.
(3) all accounts, notes, drafts, securities, documents, chattel
paper, contract rights, acceptances and other forms of claims, demands,
instruments and receivable of the undersigned for goods sold or leased or
services performed by the Debtor, now existing or hereafter arising, together
with all guaranties and securities therefor and all right, title and interest of
the Debtor in the merchandise which gave or shall give rise thereto, including
the right of stoppage in transit.
<PAGE>
General Security Agreement
- --------------------------
Page-3
(4) proceeds, products and accessions of and to all of the
foregoing.
(5) the balance of any account in the name of Debtor, cash or
deposit account, if any, now or hereafter existing, of Debtor with the Secured
Party and any other claim of the Secured Party against the Debtor, now or
hereafter existing.
(6) all insurance policies heretofore or hereafter placed by
Debtor on any or all of the above described Collateral and the proceeds of any
such insurance.
2. SECURITY INTEREST
-----------------
The Debtor hereby grants to the Secured Party a security interest in the
Collateral in order to secure payment and performance of all liabilities and
obligations of Debtor to the Secured Party as a result of any and all other
obligations of Debtor to the Secured Party of any kind and description, direct
or indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and howsoever evidenced or acquired, and whether joint,
several, or joint and several (all being hereafter called the "obligations").
Without limiting the foregoing in any way, this security interest secures the
payment and performance of all of Debtor's liabilities, duties, and obligations
pursuant to the sale of goods by the Secured Party to the Debtor.
3. SALE OF MATERIALS
-----------------
Subject to the terms and provisions of this Agreement and in consideration
of the security interests herein granted, the Secured Party will, from time to
time, but on such terms and conditions as Secured Party may specify and subject
to its absolute right to refuse so to do, sell or cause any of its
correspondents to sell Mitsubishi's materials or goods or services, at the
request of or for the account of the Debtor.
4. MUTUAL AGREEMENT
----------------
<PAGE>
General Security Agreement
- --------------------------
Page-4
(a) Without limiting the foregoing in any way whatsoever, the security
interest created herein shall extend, apply and continue to any and all future
sales of materials or goods or services by the Secured Party or its
representatives or agents to Debtor, and
(b) Secured Party and Debtor as used in this Security Agreement include
the successor or assigns of those parties, and
(c) The law governing this secured transaction shall be that of
California in force at the date of this Security Agreement, and
(d) This Security Agreement shall be given its plain and simple meaning
consistent with performance thereof by the parties and the California Commercial
Code. The titles of the several articles shall not be considered a part of this
Agreement so as to otherwise alter such meaning, and
(e) Neither party hereto shall be deemed to have waived any of its rights
under or upon the liabilities or Collateral presently existing or created
hereunder unless such waiver be in writing and signed by the party making such
waiver, and
(f) Whenever in this Security Agreement the context so requires, the
singular shall include the plural, and
(g) This Agreement shall terminate after written notice from either party
to the other, that no further sales are to be made, is received and Debtor pays
in full all obligations and all indebtedness of Debtor to the Secured Party, and
(h) This Agreement shall take effect immediately upon execution by the
Debtor, and the execution hereof by the Secured Party shall not be required as a
condition to the effectiveness of this Agreement. The provision for execution of
this
<PAGE>
General Security Agreement
- --------------------------
Page-5
Agreement by the Secured Party is only for purpose of filing this Agreement as
a security agreement under the Uniform Commercial Code, if execution hereof by
the Secured Party is required for purpose of such filing.
5. WARRANTIES BY DEBTOR
--------------------
Debtor hereby warrants and guarantees the following:
(a) Debtor's mailing address is:
2710 Walsh Avenue
-----------------
Santa Clara, California 95051
-----------------------------
The address of Debtor's chief place of business is:
2710 Walsh Avenue
-----------------
Santa Clara, California 95051
-----------------------------
Debtor has no other place of business.
The address at which Debtor keeps all of its records which are
controlling for the general accounting purposes of Debtor is:
2710 Walsh Avenue
-----------------
Santa Clara, California 95051
-----------------------------
All inventory presently held by Debtor is kept at the following
locations:
2710 Walsh Avenue
-----------------
Santa Clara, California 95051
-----------------------------
<PAGE>
General Security Agreement
- --------------------------
Page-6
(b) Debtor is a company duly organized and existing under and by virtue
of the laws of the State of California, is in good standing, is duly qualified
to do business in the State of California, and is empowered to enter into this
Agreement.
(c) That information supplied and statement made by Debtor in any
financial, credit or accounting statement presented to the Secured Party, if
any, prior to or pursuant to this Security Agreement are or will be true and
correct. Quarter's statement is subject to year-end adjustment.
6. DUTIES AND OBLIGATIONS OF DEBTOR
--------------------------------
(a) Without the prior written consent of the Secured Party, the Debtor
will not file or authorize or permit to be filed in any jurisdiction any such
financing or like statement in which the Secured Party is not named as the sole
secured party with respect to the Collateral.
(b) Debtor will have and maintain insurance at all times with respect to
all inventory and goods, including goods in transit, at their full insurable
value against risk of fire (including so-called extended coverage), theft, and
all other usual risks and such special risks as the Secured Party may reasonably
designate in such form, for such periods and written by such companies as may be
satisfactory to Secured Party to proceeds of, such insurance to be payable to
the Secured Party and Debtor as their interests may appear, that all policies of
insurance shall provide for ten (10) days, written minimum cancellation notice
to the Secured Party and at the request of the Secured Party shall be delivered
to and held by it. In the event of failure by Debtor to provide insurance as
herein provided, Secured Party may, at Secured Party's option, provide such
insurance and Debtor shall pay to Secured Party may, at Secured Party's option
declare Debtor in default and proceed with its remedies granted herein.
(c) Debtor shall defend at its cost any claim that (i) its title to the
Collateral
<PAGE>
General Security Agreement
- --------------------------
Page-7
set forth in paragraph 1(c) above, and (ii) this Security Agreement as a lien
and charge upon the aforementioned Collateral. The assertion by anyone of any
claim shall not constitute a default hereunder if such claim is diligently,
adequately and successfully contested by Debtor or is settled or discharged by
Debtor with reasonable diligence. In the event of failure by the Debtor to
diligently defend or contest any such claim, Secured Party may, at Secured
Party's option, contest, settle or discharge any such claim, and Debtor shall
pay to Secured Party, on demand, the reasonable cost and expense, including
attorney's fees, thereof.
7. RIGHTS OF THE SECURED PARTY PRIOR TO DEFAULT
--------------------------------------------
(a) Notwithstanding any other part of this Agreement, the Secured Party
may enter upon Debtor's premises at any reasonable time and upon reasonable
prior notice and with minimum interference with Debtor's business operations to
inspect Debtor's books and records pertaining to the Collateral or its proceeds
and Debtor shall assist the Secured Party in whatever way reasonably necessary
to make any inspection.
(b) The Debtor hereby agrees that upon five (5) business days written
notice from the Secured Party it will do any or all of the following:
(1) deliver to the Secured Party lists or copies of all accounts
which are proceeds of Debtor's inventory promptly after they arise;
(2) joint with the Secured Party at its request in executing
financing statements and pay the cost of filing the same wherever the Secured
Party deems appropriate and will do, make, execute and deliver all such
reasonably additional and further acts, things, deeds, assurance and instruments
as the Secured Party may reasonably require to completely vest in it and assure
to it its rights hereunder in and to inventory and the proceeds and will pay all
reasonable out-of-pocket expenses, including the enforcement of any of the
obligations or the administration, preservation
<PAGE>
General Security Agreement
- --------------------------
Page-8
or protection of or realization upon the Collateral or any part thereof.
8. EVENTS OF DEFAULT
-----------------
Each of the following shall be an event of default.
(a) If Debtor defaults in the due performance or observance of any other
obligation of Debtor under this Security Agreement and fails to cure such
default within 30 days after receipt of written notice from Secured Party by
registered mail.
(b) If any representation or warranty or guarantee made by Debtor herein
or in any other statement heretofore or hereafter furnished by Debtor to the
Secured party proves to be false or misleading in any material respect.
(c) If Debtor becomes insolvent as defined in Section 1(b) above.
9. ADDITIONAL RIGHTS OF SECURED PARTY AFTER DEFAULT
------------------------------------------------
(a) When Debtor is so in default, all obligations secured hereby shall
become immediately due and payable at Secured Party's option without notice to
Debtor, and Secured Party may in its sole discretion proceed to enforce payment
of the same and exercise any or all of the rights and remedies afforded to
Secured Party by the Uniform Commercial Code or otherwise possessed by Secured
Party.
(b) In addition thereto, the Debtor further agrees as follows:
(1) In the event that notice is necessary under applicable law,
written notice mailed to the Debtor or any accommodation party given seven (7)
business days prior to the date of public sale of any of the Collateral subject
to the security interest
<PAGE>
General Security Agreement
- --------------------------
Page-9
created herein or prior to the date after which private sale or any other
disposition of said Collateral will be made shall constitute reasonable notice,
but notice given in any other reasonable manner or at any other time shall be
sufficient.
(2) In the event of sale or other disposition of any such
Collateral, the Secured Party may apply the proceeds of any such sale or
disposition to the satisfaction of its reasonable attorney's fees, legal
expenses, and other costs and expenses incurred in connection with its taking,
retaking, holding, preparing for sale and selling of the Collateral.
(3) Without precluding any other methods of sale, the sale of
Collateral shall have been made in commercially reasonable manner if conducted
in conformity with reasonable practices disposing of similar property.
(4) The Collateral need not be present at any public or private
sale or in view of the purchaser or purchasers and title shall pass upon such
sale wherever the property or any part thereof is located with like effects as
though all the property were present and in the possession of the person
conducting the sale and were physically delivered to the purchaser or
purchasers; the Secured Party may bid for and purchase at any public or private
sale the Collateral offered for sale or any part thereof and by such Secured
Party shall become the owner thereof.
(5) Secured Party may deduct from the gross proceeds of any public
or private sale the reasonable expenses incurred by Secured Party in connection
therewith, including reasonable attorney's fees and brokers' commissions, if
any, and the net proceeds then remaining shall be applied first to the
satisfaction of the amount owed to the Secured Party and any amount then
remaining shall be returned to the Debtor.
<PAGE>
General Security Agreement
- --------------------------
Page-10
(6) The Secured Party may require the Debtor to assemble the
Collateral, taking all necessary or appropriate action to preserve and keep it
in good condition and make such available to the Secured Party at a place and
time convenient to both parties, all at the expense of the Debtor. Furthermore,
in any such event, to the extent permitted under applicable law, full power and
authority are hereby given to the Secured Party to sell, assign and deliver the
whole of the Collateral or any part thereof, at any time at any broker's board,
or at public or private sale, at the option of the Secured Party and no delay on
the Secured Party's part in exercising any power of sale or any other rights or
options hereunder, and no notice or demand, which may be given to or made upon
the Debtor by the Secured Party with to or made upon the Debtor by the Secured
Party with respect to any power of sales or other right or option hereunder,
shall constitute a waiver thereof, or limit or impair the Secured Party's right
to take any action or to exercise any power of sale or any other rights
hereunder, without notice or demand, or prejudice the rights of the Secured
Party as against the Debtor in any respect.
(c) Without limiting any of foregoing, the Secured Party upon default
of the Debtor, may take possession of the Collateral. In taking possession, the
Secured Party may proceed without judicial process or may proceed by action. The
Debtor, upon two (2) business days written notice from the Secured Party, must
assemble all of the Collateral and make it available to the Secured Party at a
place designated by the Secured Party which is reasonable convenient to the
Secured Party and the Debtor. At the Secured Party's option, the Secured Party
may, without removal from the Debtor's premises determine that any or all of the
Collateral is unusable, and may dispose of the unusable Collateral on the
premises of the Debtor.
(d) Delivery to the Secured Party promptly upon receipt all proceeds
of its inventory received by the Debtor including proceeds of account referred
to above, in the exact form in which they are received.
<PAGE>
General Security Agreement
- --------------------------
Page-11
(e) To evidence the Secured Party's rights hereunder, assign or
endorsee proceeds of Collateral to the Secured Party.
(f) Notify account debtors that their accounts have been assigned
to the Secured Party and shall be paid to the Secured Party and indicate on all
invoices to such account debtors that the accounts are payable to the Secured
Party. The Secured Party shall have full power to notify account debtors,
collect, compromise, endorse, sell, or otherwise deal with proceeds in its own
name or that of Debtor at any time. The Secured Party in its sole discretion may
apply cash proceeds to the payment of any liabilities or may release such cash
proceeds to Debtor for use in the operation of Debtor's business.
10. DISPOSITION OF PROCEEDS FROM SALE OF DEBTOR'S COLLATERAL
--------------------------------------------------------
AFTER DEFAULT BY DEBTOR.
- -----------------------
(a) After default, the Secured Party may sell, lease or otherwise
dispose of any or all of the Collateral in its then condition or after
preparation or processing. The proceeds of disposition shall be applied first to
the reasonable expenses of retaking, holding, preparation for sale, selling and
the like and the reasonable attorney's fees and legal expenses incurred by the
Secured Party and second to the satisfaction of all of the indebtedness owed by
the Debtor to the Secured Party and any amount remaining shall be returned to
the Debtor.
(b) If the proceeds from the sale of the Collateral are not
sufficient to satisfy the indebtedness of the Debtor to the Secured Party, the
Secured Party may proceed against the Debtor for any deficiency.
11. RIGHTS OF DEBTOR
----------------
<PAGE>
General Security Agreement
- --------------------------
Page-12
Until default, Debtor may use its inventory and goods in any
lawful manner not inconsistent with this Agreement and with the terms of
insurance thereon; may sell its inventory and goods in the ordinary course of
business; and may use and consume any raw materials or supplies, the use and
consumption of which is necessary in order to carry on Debtor's business.
12. Amendment of Agreement
----------------------
Debtor reserve the right to amend this agreement to accommodate
accounts receivable financing at some time in the future. Debtor will negotiate
new terms with the secured party at that time.
DEBTOR: NeoMagic Corporation
BY : /s/ Lori Holland 11-15-95
----------------------
TITLE : VP. CFO
ADDRESS: 2710 Walsh Avenue, Santa Clara
California 95051
SECURED PARTY: Mitsubishi International Corporation
BY : /s/ Junji Inoue
----------------------
TITLE : General Manager of Palo Alto Office
ADDRESS: Standford Research Park 850 Hansen Way Suite 100
Palo Alto, California 94306
<PAGE>
EXHIBIT 10.12
ESCROW AGREEMENT
----------------
This Agreement is made as of September 27, 1996 by and between NeoMagic
Corporation, a California corporation with the head office at 3260 Jay Street,
Santa Clara, California 95054 (hereinafter referred to as "NMC") and Mitsubishi
International Corporation, a New York corporation acting through its Palo Alto
branch office at 850 Hansen Way, Suite 100, Palo Alto, California 94306
(hereinafter referred to as "MIC").
WITNESSETH:
WHEREAS, NMC and MIC has entered into an agreement ("Agreement") dated
November 20, 1995, whereby MIC will provide trade financing service to NMC in
NMC's purchasing semiconductors from its manufacturers, and
WHEREAS, in providing financial services, upon request by NMC, MIC
agrees to set-up a credit line in an amount exceeding US$ 10 Million but not
exceeding US$ 13 Million for a period of 5 months commencing on July 1, 1996,
and
WHEREAS, as a security for such a credit line that exceeds US$ 10
Million, NMC agrees to establish a money market account with Morgan Stanley
("Account") in such a manner and terms as hereinbelow set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreement,
herein contained, the parties hereto agree as follows:
1. ACCOUNT
a. NMC shall establish and open a money market account with Morgan Stanley
Bank at 555 California Street, San Francisco, CA ("Account") in the name of
NeoMagic Escrow Account by October 1, 1996.
b. The Account shall at least include, but not be limited to the following
terms.
(1) Any withdrawal from, drawing out of money transfer or any payment
through the Account shall not be permitted unless the authorized signers
representing NMC and MIC respectively co-sign the documents required for such
release of Deposit Money, as defined in Section 2.b. below.
(2) NMC shall be entitled to earn any interest accrued to the Account
<PAGE>
2. DEPOSIT
a. On each day of 10th, 20th, and the end of every month (each date an
"Estimation Date")(if such day falls on non-business day, next business day),
commencing on October 1, 1996, NMC and MIC shall confer to estimate and
determine the amount ("Estimated Excess Amount") by which MIC financing exceeds
US$ 10 Million by giving due consideration on scheduled shipments and
prospective payments being made during next following 10 days.
b. Forthwith after such mutual agreement upon the Estimated Excess Amount,
NMC shall deposit a sum equal to the Estimated Excess Amount (the "Deposit
Money") into the Account. NMC shall send the voucher evidencing such Deposit
Money to MIC as soon as practicable. Nothing in this Escrow Agreement shall
obligate NMC to deposit money into the Account insofar as MIC's financing will
not exceed US$ 10 Million.
3. WITHDRAWAL
a. Subject to Subsections 3.b and 3.c, whenever NMC desires to withdraw a
certain amount of money from the Account, NMC shall give a written request (the
"Withdrawal Request") to MIC, stating its reason, the amount and date of
withdrawal (the "Withdrawal Date").
b. MIC shall agree to the withdrawal by NMC of the amount equal to the
difference between US$ 10 Million and outstanding balance of trade financing
then in effect (the "Trade Financing Balance"), if and when all of the following
conditions is fulfilled to the satisfaction of MIC:
(1) The outstanding Trade Financing Balance on the proposed Withdrawal
Date is less than US$ 10 Million and in MIC's reasonable judgment there is no
forecasting that it will cause the Trade Financing Balance to exceed US$ 10
Million as of the next Estimation Date; and
(2) No default either in payment or under the Agreement and/or other
contracts with any third party has occurred on the part of NMC.
c. NMC is permitted to give such Withdrawal Request, once during each of
first, second, and third 10 day period of each month. NMC shall be limited to 3
Withdrawal Requests per month.
4. COLLATERAL
a. NMC shall intend to hold the Account in trust for the sole and exclusive
benefit of MIC, and the Account shall constitute a part of the collateral under
that certain General Security Agreement dated November 15, 1995, between NMC and
MIC, therefore in no
<PAGE>
even shall NMC enter into any contract, agreement or undertaking of whatsoever
nature with any third party or take any action or procedure, which by operation
of law or otherwise result in granting a first priority security interest in the
Account to such third party.
b. In the event that NMC fails to make payment to MIC pursuant to the
Agreement, upon request of MIC, NMC agrees to sign any documents
reasonably necessary in order for MIC to receive money for applying it
to the repayment of outstanding debt owed to MIC.
5. COST, EXPENSE AND TAX
a. NMC shall be responsible for any costs, expenses, charges and taxes (if
any) of any nature whatsoever which may be incurred due to any transaction in
respect of the Account.
b. NMC shall hold MIC harmless against any claim, changes (including
attorney fees), or liabilities (including tax liability) which MIC may incur in
connection with operation of the Account under this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed in duplicate, each duplicate to serve as an original as of the day and
year first above written.
NEOMAGIC CORPORATION
By: /s/ Prakash Agarwal
---------------------------------
Name: Prakash Agarwal
-------------------------------
Title: President/CEO
------------------------------
MITSUBISHI INTERNATIONAL CORPORATION
By: /s/ Junji Inque
---------------------------------
Name: Junji Inque
-------------------------------
Title: GENERAL MANAGER - PALO ALTO OFFICE
------------------------------
<PAGE>
EXHIBIT 11.1
EXHIBIT 11.1 COMPUTATION OF NET LOSS AND PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
Nine Months
Year Ended January 31, Ended October 31,
------------------------------------- ------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net loss (757,000) (4,791,000) (6,869,000) (4,295,000) (1,953,000)
Weighted average common shares outstanding 5,212,500 5,425,408 6,362,535 6,250,111 6,844,224
Shares related to Staff Accounting
Bulletin Topic 4D:
Common stock 412,020 412,020 412,020 412,020 412,020
Common stock options 2,192,524 2,192,524 2,192,524 2,192,524 2,192,524
Preferred stock warrants 6,600 6,600 6,600 6,600 6,600
Total shares used in computing
net loss per share 7,823,644 8,036,552 8,973,679 8,861,255 9,455,368
Net loss per share $ (0.10) $ (0.60) $ (0.77) $ (0.48) $ (0.21)
Calculation of shares outstanding for
computing pro forma net loss per share:
Shares used in computing net loss
per share 8,973,679 9,455,368
Adjustment to reflect the effect of the
assumed conversion of convertible
preferred stock from the date of
issuance 12,259,614 12,259,614
Shares used in computing pro forma
net loss per share 21,233,293 21,714,982
Pro forma net loss per share $ (0.32) $ (0.09)
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- ---- -------------------
<S> <C>
NeoMagic International...................................... Grand Cayman Island
NeoMagic Japan KK........................................... Japan
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001030485
<NAME> NEOMAGIC CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> JAN-31-1996 OCT-31-1995
<PERIOD-START> FEB-01-1995 FEB-01-1995
<PERIOD-END> JAN-31-1996 OCT-31-1995
<CASH> 6,877 0
<SECURITIES> 0 0
<RECEIVABLES> 138 0
<ALLOWANCES> 0 0
<INVENTORY> 331 0
<CURRENT-ASSETS> 7,527 0
<PP&E> 1,958 0
<DEPRECIATION> 855 0
<TOTAL-ASSETS> 8,749 0
<CURRENT-LIABILITIES> 3,458 0
<BONDS> 0 0
0 0
12 0
<COMMON> 7 0
<OTHER-SE> 4,523 0
<TOTAL-LIABILITY-AND-EQUITY> 8,749 0
<SALES> 243 72
<TOTAL-REVENUES> 243 72
<CGS> 165 46
<TOTAL-COSTS> 165 46
<OTHER-EXPENSES> 7,150 4,481
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 182 117
<INCOME-PRETAX> (6,869) (4,295)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,869) (4,295)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,869) (4,295)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (.32) 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001030485
<NAME> NEOMAGIC CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 11,840
<SECURITIES> 0
<RECEIVABLES> 5,278
<ALLOWANCES> (57)
<INVENTORY> 3,312
<CURRENT-ASSETS> 20,734
<PP&E> 3,268
<DEPRECIATION> 1,463
<TOTAL-ASSETS> 22,695
<CURRENT-LIABILITIES> 18,738
<BONDS> 0
0
12
<COMMON> 8
<OTHER-SE> 2,876
<TOTAL-LIABILITY-AND-EQUITY> 22,695
<SALES> 24,509
<TOTAL-REVENUES> 24,509
<CGS> 18,285
<TOTAL-COSTS> 18,285
<OTHER-EXPENSES> 8,684
<LOSS-PROVISION> 57
<INTEREST-EXPENSE> 686
<INCOME-PRETAX> (1,953)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,953)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,953)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.09)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-31-1994 JAN-31-1995
<PERIOD-START> MAY-26-1993 FEB-01-1994
<PERIOD-END> JAN-31-1994 JAN-31-1995
<CASH> 0 4,902
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 5,037
<PP&E> 0 1,230
<DEPRECIATION> 0 (327)
<TOTAL-ASSETS> 0 5,956
<CURRENT-LIABILITIES> 0 2,191
<BONDS> 0 0
0 0
0 9
<COMMON> 0 6
<OTHER-SE> 0 3,298
<TOTAL-LIABILITY-AND-EQUITY> 0 5,956
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 773 4,891
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 94
<INCOME-PRETAX> (757) (4,791)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (757) (4,791)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (757) (4,791)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
