________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended July 31, 1997 OR
_ TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number 333-20031
NEOMAGIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0344424
[ State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
3260 Jay Street
Santa Clara, California 95054
[Address of principal executive offices] [Zip Code]
(408) 988- 7020
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months ( or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at August 24, 1997 was 23,850,344
Page 1
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NEOMAGIC CORPORATION
FORM 10-Q
INDEX
PAGE
PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets
July 31, 1997 and January 31, 1997 3
Consolidated Condensed Statements of Operations
Three and six months ended July 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
Six months ended July 31, 1997 and 1996 5
Notes to Unaudited Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Page 2
<PAGE>
Part I. Financial Information
Item I. Financial Statements
NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
July 31, January, 31
1997 1997
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,763 $ 13,458
Restricted cash equivalents - 2,224
Short term investments 21,928 -
Accounts receivable, net 5,242 2,205
Inventory 8,372 5,237
Other current assets 590 344
-------- --------
Total current assets 69,895 23,468
Property, plant and equipment, net 4,213 3,395
Other assets 166 601
-------- --------
Total assets $ 74,274 $ 27,464
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit $ 14,804 $ 14,224
Accounts payable 5,725 5,175
Accrued expenses 3,618 1,617
Current obligations under capital leases 806 1,054
-------- --------
Total current liabilities 24,953 22,070
Noncurrent obligations under capital leases 836 1,170
Other long-term liabilities 21 24
-------- --------
Total liabilities 25,810 23,264
Commitments and contingencies
Stockholders' equity:
Noncumulative convertible preferred stock - 12
Common stock 24 8
Additional paid-in-capital 59,580 20,471
Notes receivable from stockholders (818) (822)
Deferred compensation (2,792) (1,889)
Accumulated deficit (7,530) (13,580)
-------- --------
Total stockholders' equity 48,464 4,200
-------- --------
Total liabilities and stockholders'
equity $ 74,274 $ 27,464
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Month Six Months
Ended Ended
---------------- ----------------
July 31, July 31,
1997 1996 1997 1996
---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $24,570 $ 5,954 $42,851 $ 9,474
Cost of sales 14,522 5,485 25,693 8,303
------- ------- ------- -------
Gross profit 10,048 469 17,158 1,171
Operating expenses:
Research and development 3,338 1,667 5,805 3,676
Sales, general and administrative 2,382 1,553 4,659 2,549
Legal costs - (1,503) - (1,503)
------- ------- ------- -------
Total operating expenses 5,720 1,717 10,464 4,722
Income (loss) from operations 4,328 (1,248) 6,694 (3,551)
Other income (expense), net:
Interest income and other 646 75 962 1,151
Interest expense (314) (210) (538) (370)
------- ------- ------- -------
Income (loss) before income taxes 4,660 (1,383) 7,118 (2,770)
Provision for income taxes 699 - 1,068 -
------- ------- ------- -------
Net income (loss) $ 3,961 $ (1,383) $ 6,050 $(2,770)
Pro forma net income (loss) per share $.15 $(.06) $.24 $(.13)
Common and common equivalent shares
used in computing pro forma net income
(loss) per share 26,175 21,983 24,994 21,996
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 31, July 31,
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $6,050 $ (2,770)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 715 366
Amortization of deferred compensation 314 141
Changes in operating assets and liabilities:
Accounts receivable (3,037) (2,978)
Inventory (3,135) (2,490)
Other current assets (246) (64)
Other assets 435 (50)
Accounts payable 550 2,225
Accrued expenses and other 1,998 (1,054)
-------- --------
Net cash provided by (used for) operating
activities 3,644 (6,674)
======== ========
Investing activities
Purchases of property, plant and equipment (1,533) (1,087)
Purchases of short term investments (22,928) -
Maturities of short term investments 1,000 -
-------- --------
Net cash used for investing activities (23,461) (1,087)
======== ========
Financing activities
Proceeds from sale leaseback liability - 1,089
Payments on lease liability (582) (484)
Proceeds from working capital line of credit 24,041 9,130
Payments on working capital line of credit (23,461) (2,684)
Net proceeds from issuance of common stock 37,900 164
Release of amounts held as restricted cash
equivalents 2,224 -
-------- --------
Net cash provided by financing activities 40,122 7,215
======== ========
Net increase (decrease) in cash and cash
equivalents 20,305 (546)
Cash and cash equivalents at beginning of period 13,458 6,877
-------- --------
Cash and cash equivalents at end of period $ 33,763 $ 6,331
======== ========
Supplemental schedules of cash flow information
Cash paid during the year for:
Interest $ 538 $ 370
</TABLE>
See accompanying notes to consolidated condensed financial statements
Page 5
<PAGE>
NEOMAGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation:
The unaudited consolidated condensed financial statements have
been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission and include the accounts of NeoMagic Corporation
and its wholly owned subsidiaries (collectively "NeoMagic" or the
"Company"). Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant
to such rules and regulations. In the opinion of the Company, the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
financial position at July 31, 1997 and January 31, 1997, and the
operating results and cash flows for the three and six months ended July
31, 1997 and 1996. These financial statements and notes should be read
in conjunction with the Company's audited financial statements and notes
thereto for the year ended January 31, 1997, included in the Company's
Registration Statement on Form S-1 as filed with the Securities and
Exchange Commission on March 13, 1997.
The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for any other
period or for the fiscal year which ends January 31, 1998.
The second fiscal quarters of 1998 and 1997 ended on July 27, 1997
and July 28, 1996, respectively. For ease of presentation, the
accompanying financial statements have been shown as ending on the last
day of the calendar month.
2. Inventory:
Inventory is stated at the lower of cost or market value. Cost
is determined by the first-in, first-out method.
<TABLE>
<CAPTION>
Inventory consists of: July 31, January 31,
1997 1997
-------------------------
(in thousands)
<S> <C> <C>
Raw materials $3,696 $ 464
Work in process 2,980 948
Finished goods 1,696 3,825
-------------------------
Total $8,372 $5,237
=========================
</TABLE>
3. Net Income (Loss) Per Share and Pro forma Net Income (Loss) Per
Share
Except as noted below, net income (loss) per share is computed
using the weighted average number of common shares and dilutive common
equivalent shares 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
included in the computation when dilutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin, 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 initial public offering price) through January 31,
1997. Per share information calculated on this basis is as follows (in
thousands except per share information):
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Three Months Ended Six Months Ended
July 31, July 31,
1997 1996 1997 1996
--------------------------------------
Net income (loss) per share $ .15 $ (.14) $.24 $(.28)
====== ====== ====== ======
Shares used in computing net
income (loss) per share 26,175 9,723 24,994 9,736
The pro forma calculation of net income (loss) per share presented
in the consolidated condensed statements of operations is computed as
described above and also gives retroactive effect to the conversion of
all outstanding shares of convertible preferred stock into common stock,
which took place upon the closing of the Company's initial public
offering using the as-if-converted method.
4. Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which the Company is required
to adopt on January 31, 1998. At that time, the Company will be
required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating basic net income per share, the dilutive effect of stock
options and warrants will be excluded. Basic net income per share
computed in accordance with Statement No. 128 would have been $.02
greater than the net income per share as reported for the three months
ended July 31, 1997. Basic net income per share computed in accordance
with Statement No. 128 would have been $.02 greater than the net income
per share as reported for the six month period ended July 31, 1997. The
impact of Statement No. 128 on the calculation of fully diluted net
income per share for the three and six month periods ended July 31, 1997
is not expected to be material. Assuming the retroactive conversion of
all outstanding shares of convertible preferred stock into common stock,
there is no impact on the implementation of Statement No. 128 to the pro
forma net loss per share as reported for the quarter and six month
periods ended July 31, 1996.
5. Working Capital Line of Credit
The Company maintains a revolving credit agreement ("Credit
Agreement") with Mitsubishi International Corporation. The Credit
Agreement is used to provide 60 day extended credit terms to finance
wafer inventory purchases. The Credit Agreement was amended to provide
that effective April 1, 1997 (i) the permitted borrowings would be
increased from $15 million to $18 million, (ii) the compensating balance
requirement was eliminated and (iii) the expiration date of the Credit
Agreement was changed to January 31, 1998.
6. Contingencies
In February 1997, Cirrus Logic sent the Company written notice
asserting that the Company's MagicGraph128T, MagicGraph128VT and
MagicGraph128ZVT products infringe three United States patents held by
Cirrus Logic. Since receiving the notice of alleged infringement, the
Company has advised Cirrus Logic that the Company does not believe that
any of its products infringes any claims of the patents. The Company
also has undergone a confidential external infringement review and has
conducted its own internal infringement review, and the Company
continues to believe that the Cirrus Logic infringement allegations are
unfounded. However, there can be no assurances that Cirrus Logic will
not file a lawsuit against the Company or that the Company would prevail
in any such litigation. Any protracted litigation by Cirrus Logic or
the success of Cirrus Logic in any such litigation could have a material
and adverse effect on the Company's financial position or results of
operations.
Page 7
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Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
When used in this discussion, the words "expects," "anticipates"
and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements concerning the
timing of availability and functionality of products under development,
product mix, trends in average selling prices, the growth rate of the
market for PCs, the percentage of export sales and sales to strategic
customers, the adoption or retention of industry standards, and the
availability and cost of products from the Company's suppliers, are
subject to risks and uncertainties, including those set forth below
under "Factors that May Affect Results," that could cause actual
results to differ materially from those projected. These forward-
looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained
herein to reflect any changes in the Company's expectations with regard
thereto or any changes in events, conditions or circumstances on which
any such statement is based.
Overview
The Company designs, develops and markets multimedia accelerators
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
capabilities while decreasing power consumption, size, system design
complexity and cost.
The following information should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 19-25 of the Company's Prospectus dated March
13, 1997.
Results of Operations
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1997 1996 1997 1996
---------------- -----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.1 92.1 60.0 87.6
----- ----- ----- -----
Gross profit 40.9 7.9 40.0 12.4
Operating expenses:
Research and development 13.6 28.0 13.5 38.8
Sales, general and administrative 9.7 26.1 10.9 26.9
Legal costs - (25.2) - (15.9)
----- ----- ----- -----
Total operating expenses 23.3 28.9 24.4 49.8
----- ----- ----- -----
Income (loss) from operations 17.6 (21.0) 15.6 (37.4)
Other income (expense), net:
Interest income and other 2.6 1.3 2.2 12.1
Interest expense (1.3) (3.5) (1.2) (3.9)
----- ----- ----- -----
Income (loss) before income taxes 18.9 (23.2) 16.6 (29.2)
Provision for income taxes 2.8 - 2.5 -
----- ----- ----- -----
Net income (loss) 16.1 (23.2) 14.1 (29.2)
===== ===== ===== =====
</TABLE>
Page 8
<PAGE>
Net sales
The Company's net sales to date have been generated from the sale
of its multimedia accelerators. The Company's products are used in, and
its business is dependent on, the personal computer industry with sales
primarily in Asia, Japan, and the United States. Net sales were $24.6
million for the three months ended July 31, 1997, compared to $6.0
million for the three months ended July 31, 1996. Net sales were $42.9
million for the six months ended July 31, 1997, compared to $9.5 million
for the six months ended July 31, 1996. Net sales increased primarily as
a result of 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 products, and the Company's investment in sales and marketing
activities. The Company expects that the percentage of its net sales
represented by any one product or type of product may change
significantly from period to period as new products are introduced and
existing products reach the end of their product life cycles. Due to
competitive price pressures, the Company's products experience declining
unit average selling prices over time, which at times can be
substantial.
Export sales accounted for 79.3% and 90.2% of net sales in the
three months ended July 31, 1997 and 1996, respectively. Export sales
accounted for 82.5% and 93.8% of net sales in the six months ended July
31, 1997 and 1996, respectively. Approximately 55.7% and 68.2% of
export sales for the three and six months ended July 31, 1997,
respectively were to affiliates of United States customers. The Company
expects that export sales will continue to represent a significant
portion of net sales, although there can be no assurance that export
sales as a percentage of net sales will remain at current levels. All
sales transactions were denominated in U.S. dollars.
Five customers accounted for 18.2%, 14.5%, 12.7%, 12.4% and 12.4%
of net sales for the three months ended July 31, 1997. Three customers
accounted for 33.1%, 22.1% and 16.6% of net sales for the three months
ended July 31, 1996. Five customers accounted for 18.9%, 16.1%, 13.7%,
11.9% and 11.4% of net sales for the six months ended July 31, 1997.
Three customers accounted for 49.2%, 15.8% and 15.2% of net sales for
the six months ended July 31, 1996. The Company expects a significant
portion of its future sales to remain concentrated with a limited number
of strategic customers. There can be no assurance that the Company will
be able to retain its strategic customers or that such customers will
not cancel or reschedule orders or, in the event orders are canceled,
that such orders will be replaced by other orders. In addition, sales
to any particular customer may fluctuate significantly from quarter to
quarter. The occurrence of any such events or the loss of a strategic
customer could have a material adverse effect on the Company's operating
results.
Gross Profit
Gross profit was $10.0 million and $469,000 for the three months
ended July 31, 1997 and 1996, respectively. Gross profit increased to
40.9% of net sales for the three months ended July 31, 1997 from 7.9% of
net sales in the three months ended July 31, 1996. Gross profit was
$17.2 million and $1.2 million for the six months ended July 31, 1997
and 1996, respectively. Gross profit percentages increased to 40.0% for
the six months ended July 31, 1997 from 12.4% in the six months ended
July 31, 1996. The gross profit in the three months ended July 31, 1996
was negatively impacted by costs stemming from a design error for which
the Company recorded a $1.2 million reserve in that quarter. The
additional increases in gross profit percentage for the three and six
month periods ended July 31, 1997 were due primarily to lower wafer
pricing and improved yields on higher production volumes.
In the future, the Company's gross margin percentages may be
affected by increased competition and related decreases in unit average
selling prices (particularly with respect to older generation products),
timing of volume shipments of new products, the availability and cost of
products from the Company's suppliers and changes in the mix of products
sold.
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Research and Development Expenses
Research and development expenses were $3.3 million and $1.7 for
the three months ended July 31, 1997 and 1996, respectively.
Research and development expenses were $5.8 million and $3.7 for the six
months ended July 31, 1997 and 1996, respectively. The Company has
made and intends to continue to make significant investments in research
and development to remain competitive by developing new and enhanced
products to serve its identified markets. Research and development
expenses increased primarily due to increased employee related expenses
largely related to additional personnel and to a lesser extent
engineering and equipment related expenses. Research and development
expenses are expected to increase in absolute dollars in fiscal 1998.
Sales, General and Administrative Expenses
Sales, general and administrative expenses were $2.4 and $1.6
million in the three months ending July 31, 1997 and 1996, respectively.
Sales, general and administrative expenses were $4.7 and $2.5 million in
the six months ending July 31, 1997 and 1996, respectively. Sales,
general and administrative expenses increased as a result of increased
employee related expenses largely related to additional personnel,
increased commissions associated with higher sales levels and higher
administrative expenses associated with being a public company. The
Company anticipates that sales, general and administrative expenses will
increase in absolute dollars in fiscal 1998.
Legal Costs
The benefit in legal costs of $1.5 million in the second quarter
ended July 31, 1996 was due to the reversal of a reserve balance of
previously estimated legal costs.
Other Income (Expense), Net.
Other income (expense), net increased to $332,000 in the three
months ended July 31, 1997 from ($135,000) in the three months ended
July 31, 1996. The $467,000 increase in other income (expense), net
was primarily due to additional interest income resulting from higher
average amounts of cash and short-term investments in the three months
ended July 31, 1997 compared to the same period in 1996, offset
partially by higher interest expense related to the working capital line
of credit with Mitsubishi International Corporation which resulted from
an increase in wafer purchases over the previous period.
Other income (expense), net decreased to $424,000 in the six
months ended July 31, 1997 from $781,000 in the six months ended July
31, 1996. The decrease of $357,000 in other income (expense), net was
due to $975,000 of non-recurring engineering services income in the six
months ended July 31, 1996 compared to higher interest income and
interest expense included in the corresponding six months ended July 31,
1997. The increase in interest income and expense in the six month
period ending July 31, 1997 related to larger average amounts of cash
and cash equivalents and short term investments and additional interest
expense related to the working capital line of credit with Mitsubishi
International Corporation which resulted from an increase in wafer
purchases over the previous period. The non-recurring engineering
services performed in fiscal 1997 consisted primarily of consulting
services and allowing a customer access to certain technology,
previously developed by the Company for its own use, to construct
complex logic. The Company does not expect such engineering services to
be provided on a regular basis, if at all, in future periods.
Therefore, the Company has classified such revenues in other income.
Income Taxes
The Company's effective tax rate for the three and six months
ended July 31, 1997 was 15%, compared to an effective tax rate for the
three and six months ended July 31, 1996 of 0%. The difference between
the Company's effective tax rate and the statutory rate for the three
months ended July 31, 1997 is primarily due to the utilization of the
Company's net operating loss carryforwards.
Page 10
<PAGE>
Liquidity and Capital Resources
The Company's cash, cash equivalents and short term investments
increased $40 million during the first six months ended July 31, 1997 to
$55.7 million from $15.7 million at the end of fiscal 1997. The
increase is due to net proceeds from the issuance of common stock
related to the initial public offering in the first quarter of fiscal
1998 and net cash provided from operations. Working capital at July 31,
1997 and July 31, 1996 was $44.9 million and $1.2 million, respectively.
During the first six months ended July 31, 1997 the Company
generated $3.6 million of cash and cash equivalents from its operating
activities, compared to $6.7 million of cash and cash equivalents used
in operating activities during the six months ended July 31, 1996. The
increase in cash generated from operations is primarily attributable to
$6.1 million in net income for the six month period ended July 31, 1997
compared to a net loss of $2.8 million for the corresponding period
ended July 31, 1996. The increase also relates to changes in accrued
expenses, accounts payable and other assets offset by cash invested in
inventories and accounts receivable.
Net cash used for investing activities for the six months ended
July 31, 1997 and 1996 was $23.5 million and $1.1 million respectively.
The increase was primarily due to $21.9 million of net purchases of
short-term investments in the period ended July 31, 1997 and a $1.5
million investment in plant, property and equipment. Continued
expansion of the Company's business may require higher levels of capital
equipment purchases, technology investments, foundry investments and
other payments to secure manufacturing capacity. The timing and amount
of future investments will depend primarily on the growth of the
Company's future revenues.
Net cash provided by financing activities for the six months ended
July 31, 1997 and 1996 was $40.1 million and $7.2 million, respectively.
The increase primarily represents the net proceeds from the initial
public offering of $37.8 in the first quarter of fiscal 1998, and the
release of amounts previously held as restricted cash offset in part by
a decrease in the net proceeds related to the working capital line of
credit.
At July 31, 1997 the Company's principal sources of liquidity
included cash and cash equivalents and short-term investments of $55.7
million and borrowings from Mitsubishi International Corporation, under
a working capital revolving credit agreement. The Company believes
these available funds and anticipated funds from operations will satisfy
the Company's projected working capital, and capital expenditure
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,
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.
Impact of Currency Exchange Rates
The Company currently purchases wafers under purchase contracts
denominated in yen. The Company from time to time 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. Future exchange rate fluctuations could have a material
adverse effect on the Company's business, financial condition and
results of operation.
Page 11
<PAGE>
Factors that May Affect Results
Fluctuations in Quarterly 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, (i.e., the portion of the Company's revenues represented
by the Company's various products and customers); 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 Dependence on the 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 in general, 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, 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
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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. 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 likely lose design wins and moreover,
not have the opportunity to compete for new design wins until it was
able to incorporate changes resulting from market transitions or to take
advantage of future product transitions. 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 Company's sales are concentrated within a limited customer
base. 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. Furthermore, all of the Company's sales are made on
the basis of purchase orders rather than pursuant to long-term
agreements. 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 and 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
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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.
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 Mitsubishi Electric Corporation
("Mitsubishi Electric") in Japan under the terms of a five-year wafer
supply agreement. Mitsubishi Electric is currently producing six and
eight-inch wafers for the Company. The Company also has entered into a
five-year wafer supply agreement with Toshiba Corporation ("Toshiba") in
Japan 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 12 months and the estimated time for
Mitsubishi Electric 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 business, financial condition and result of operations.
Furthermore, in the event that the transition to the next generation of
manufacturing technologies at Mitsubishi Electric 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 Mitsubishi Electric, 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 Mitsubishi Electric 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 Mitsubishi
Electric 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. Such assembly and testing is conducted on a
purchase order basis. As a result of its 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
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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 agreements with Mitsubishi Electric and
Toshiba, the Company is obligated to provide rolling 12-month forecasts
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 charges totaling $1.5 million for excess inventory in
fiscal 1997. 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 margins 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
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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 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 Mitsubishi Electric, 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
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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.
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"). On July 28 1997, Intel Corporation
announced its intention to purchase Chips and Technologies. NeoMagic
may also face increased competition from new entrants into the notebook
PC multimedia accelerator market including 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 reportedly
begun sampling an integrated multimedia accelerator solution for the
notebook PC market that would directly compete with the Company's
products. Potential competition also could come from manufacturers that
integrate a microprocessor with a multimedia controller. Although Intel
has not announced any such product independently, its relationship with
Chips and Technologies could yield a commercial product in the future.
Furthermore, Cyrix Corporation ("Cyrix") announced such a product in
early 1997. To the Company's knowledge, the Cyrix product does not
eliminate the need for multimedia accelerators in notebook PCs. The
successful commercial introduction of such a product that eliminates the
need for a separate multimedia accelerator in notebook PCs 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. Uncompetitive pricing and
loss of design wins could have a material and adverse effect on the
Company's business, financial condition, and results of operations.
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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 three
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.
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.
As a general matter, the semiconductor industry is characterized
by substantial litigation regarding patent and other intellectual
property rights. 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. 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 June 1996, but the Company incurred an
aggregate of $703,000 in expenses in connection with such litigation
during fiscal 1995 and fiscal 1996. This settlement did not involve
cash payments but did include a non-solicitation provision and certain
contingent cross-licensing provisions. In February 1997, Cirrus Logic
sent the Company written notice asserting that the Company's
MagicGraph128T, MagicGraph128VT and MagicGraph128ZVT products infringe
three United States patents held by Cirrus Logic. Since receiving the
notice of alleged infringement, the Company has advised Cirrus Logic
that the Company does not believe that any of its products infringes any
claims of the patents. The Company also has undergone a confidential
external infringement review and has conducted its own internal
infringement review, and the Company continues to believe that the
Cirrus Logic infringement allegations are unfounded. However, there can
be no assurances that Cirrus Logic will not file a lawsuit against the
Company or that the Company would prevail in any such litigation. Any
protracted litigation by Cirrus Logic or the success of Cirrus Logic in
any such litigation could have a material and adverse effect on the
Company's financial position or results of operations.
Any patent 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. There can be no assurance that current or future
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
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commercially reasonable terms could have a
material adverse effect on the Company's business, financial condition
and results of operations.
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 90.0% and 96.2% of the Company's net sales for fiscal 1996
and fiscal 1997, 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. Under the Company's wafer supply agreements
with Mitsubishi Electric and Toshiba, products are priced 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 will continue to do so
in the future. However, there can be no assurance that such hedging
will be adequate. 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 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 may 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.
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
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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, 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.
Volatility of Stock Price
The market price of the shares of Common Stock, like that of the
common stock of many other semiconductor companies, has been and is
likely to be highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. The market price
of the Common Stock could be subject to significant fluctuations in
response to quarter-to-quarter 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 PC industries, unanticipated shifts
in the Notebook PC market or industry standards, loss of customers,
changes in DRAM pricing, the commencement of, developments in or outcome
of litigation, changes in or the failure by the Company to meet
estimates of the Company's performance by securities analysts, market
conditions for high technology stocks in general, and other events or
factors.
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Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- ------------
11.1 Computation of Pro Forma Net Income (Loss) Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended July 31, 1997.
Page 21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEOMAGIC CORPORATION
(Registrant)
/S/ MERLE MC CLENDON
--------------------
MERLE MC CLENDON
Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
September 5, 1997
Page 22
<PAGE>
EXHIBIT INDEX
Exhibit Page
Numbers Description Number
- ------- ----------- ------
11.1 Computation of Pro Forma Net Income (Loss) Per Share
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 11.1
EXHIBIT 11.1 COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31, July 31, July 31,
1997 1996 1997 1996
-------------------------------------
<S> <C> <C> <C> <C>
Pro forma net income (loss) per share:
Weighted average shares outstanding 23,845 6,891 19,786 6,904
Common equivalent shares from common
stock, stock options and preferred
stock warrants granted or issued during
the twelve-month period prior to the
Company's initial public offering related
to Staff Accounting Bulletin Topic 4D - 2,832 - 2,832
Dilutive common stock equivalents:
Common stock options, using
treasury stock method 2,055 - 1,804 -
Common stock warrants, using
treasury stock method 275 - 278 -
Convertible preferred stock
using the as-if converted method - - 3,126 -
Adjustment to reflect the effect of the
retroactive conversion of convertible
preferred stock from the date of issuance - 12,260 - 12,260
------------------------------------
Common and common equivalent shares used in
the calculation of pro forma net income
(loss) per share 26,175 21,983 24,994 21,996
====================================
Net income (loss) $3,961 $(1,383) $6,050 $(2,770)
Pro forma net income (loss) per share $.15 $(.06) $.24 $(.13)
====================================
Pro forma fully diluted net income (loss) per share:
Weighted average shares outstanding 23,845 6,891 19,786 6,904
Common equivalent shares from common
stock, stock options and preferred
stock warrants granted or issued during
the twelve-month period prior to the
Company's initial public offering related
to Staff Accounting Bulletin Topic 4D - 2,832 - 2,832
Dilutive common stock equivalents
Common stock options, using
treasury stock method 2,075 - 2,010 -
Common stock warrants, using
treasury stock method 276 - 286 -
Convertible preferred stock using
the as-if converted method - - 3,126 -
Adjustment to reflect the effect of the
retroactive conversion of convertible
preferred stock from the date of issuance - 12,260 - 12,260
------------------------------------
Common and common equivalent shares used
in the calculation of net income (loss)
per share 26,196 21,983 25,208 21,996
====================================
Net income (loss) $3,961 $(1,383) $6,050 $(2,770)
Pro forma net income (loss) per share $.15 $(.06) $.24 $(.13)
====================================
</TABLE>
