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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL ENDED JANUARY 31, 1998,
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
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NEOMAGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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
</TABLE>
Registrant's telephone number, including area code (408) 988-7020
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10K. / /
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $344,020,758 as of March 22, 1998, based upon the
closing price on the Nasdaq National Market reported for such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purposes.
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at March 22, 1998 was 24,371,931.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Annual Report to Stockholders for fiscal year ended January 31,
1998--Part II and Part IV.
(2) Portions of the Registrant's Proxy Statement related to the 1998 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission subsequent to the date hereof--Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
NeoMagic Corporation (the "Company") was incorporated as a California
corporation in May 1993. The Company was subsequently reincorporated as a
Delaware corporation in February 1997. The Company's initial public offering
occurred in March 1997. The Company operates in one industry segment. NeoMagic
designs, develops and markets multimedia accelerators for sale to notebook PC
manufactures.
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, low weight, favorable thermal characteristics
and low cost, among others--the multimedia capabilities of notebook PCs have
historically lagged those of desktop computers. Until 1997, this limited the
effectiveness of multimedia applications in notebook PCs.
To fully mobilize multimedia, the Company believed notebook PC manufacturers
required a new approach for developing multimedia accelerators which deliver
higher performance while minimizing power consumption, system size, weight,
complexity and cost.
The Company, based on its knowledge of and experience in the industry,
believes it has developed the first commercially available high performance
silicon technology that integrates large DRAM memory with analog and logic
circuitry to provide multimedia solutions on a single chip. NeoMagic has
pioneered a new technology to provide multimedia semiconductor solutions for
notebook PCs which overcomes the limitations of traditional architectures. Using
this technology, the Company has developed its first product line: the
MagicGraph128 family of pin-compatible, multimedia (graphics, text and video)
accelerator products incorporating a 128-bit memory bus. These products provide
state-of-the art multimedia capability while decreasing power consumption, size,
weight, system design complexity and cost. The Company introduced its first
MagicGraph128 product in March 1995, and is currently in production with the
fourth generation of its MagicGraph128 product family.
NeoMagic has established strategic relationships with Mitsubishi Electric
Corporation ("Mitsubishi Electric") and Toshiba Corporation ("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 partners designs the DRAM
modules, 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 and other multimedia technologies, driver and
BIOS software, and power management in its continued development of solutions
that facilitate the mobilization of multimedia applications.
PRODUCTS
The Company sells its products to notebook PC original equipment
manufacturers (OEMs) as well as to third-party subsystem manufacturers who
design and manufacture notebook PCs on behalf of the brand name OEMs. Sixteen of
the world's largest notebook PC manufacturers have designed or are designing
notebook PCs to include NeoMagic products. NeoMagic products are currently used
in notebook PCs sold by Acer, Compaq, Dell, Fujitsu, Gateway 2000,
Hewlett-Packard, Hitachi, IBM, Micron, Mitsubishi, NEC, Panasonic, Sharp,
Siemens, Sony, and Toshiba. NeoMagic sells its products either directly to these
companies or to subcontractors of such companies.
Each product in the MagicGraph128 line of pin-compatible 128-bit multimedia
accelerators integrates large DRAM with analog and logic circuitry on a single
176-pin chip. NeoMagic's family of products range
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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 five products:
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MEMORY KEY FEATURES
PRODUCT PRODUCT STATUS SIZE ADDED WITH NEW GENERATION
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<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
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MagicGraph128V Volume production 9Mbits Video acceleration for MPEG playback
June 1996 24-bit RAMDAC
800x600 resolution with greater than 65,000 colors
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MagicGraph128ZV Volume production 9Mbits Zoom Video port for live video capture
September 1996 TV output support
MagicGraph128ZV+ Volume production 9Mbits Low cost solution for Entry level
January 1998 and ultra-portable applications
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MagicGraph128XD Volume production 16Mbits Bus master for 3D/video acceleration
June 1997 Spread spectrum EMI* suppression
1024x768 resolution with greater then 65,000 colors
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* Electro-Magnetic Interference
MAGICGRAPH128. The Company believes that the MagicGraph128, its first
product, is the industry's first 128-bit, single-chip graphics accelerator for
notebook computers. The MagicGraph128 provides high performance graphics for
mainstream business and consumer notebooks while decreasing power consumption,
size, system design complexity and cost.
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.
MAGICGRAPH128ZV+. The MagicGraph128ZV+ provides a value-oriented multimedia
solution for entry level and ultra portable notebook computers. The
MagicGraph128ZV+ provides a Microsoft PC97 compliant feature set with 128bit
performance to the most cost conscious notebook computers.
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.
RESEARCH AND DEVELOPMENT
The Company considers the timely development and introduction of new
products to be essential to maintaining its competitive position and
capitalizing on market opportunities. Research and development efforts focus on
the design of new products and enhancements of existing ones that will help to
maintain or increase the Company's participation in various product areas. At
January 31, 1998, the Company had
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approximately 91 employees engaged in research and development. Research and
development expenses in fiscal 1998, 1997 and 1996 were $16.1 million, $8.6
million and $4.9 million, 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 are expected to increase in absolute
dollars in fiscal 1999. The development and successful introduction of new
products presents a variety of risks and there can be no assurance that these or
other product development efforts will be completed at the time the Company
expects, or that new products will be accepted in the marketplace.
SALES AND MARKETING
NeoMagic's sales and marketing strategy is an integral part of the Company's
effort to become the 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 deliveries
and, maintaining a high level of customer satisfaction which encourages
customers to utilize subsequent generations of NeoMagic's products.
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
January 31, 1998, NeoMagic employed 25 individuals in its sales, marketing and
support organization and maintained regional sales offices in Santa Clara,
California, Austin, Texas, Japan and Taiwan.
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
the timely release of customer products to market.
MANUFACTURING
The Company's products require semiconductor wafers manufactured with
state-of-the-art fabrication equipment and technology. 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 partners designs the DRAM product
modules, and NeoMagic designs the overall product, including the analog and
logic circuitry. The DRAM partners 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.
NeoMagic has established strategic relationships with Mitsubishi Electric
and Toshiba to produce its semiconductor wafers and uses other independent
contractors to perform assembly, packaging and testing. The Company's
relationships with Mitsubishi Electric and Toshiba are formalized in separate
five year wafer supply agreements. 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
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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. A manufacturing disruption
experienced by either of the Company's manufacturing partners would impact the
production of the Company's business, financial condition and results of
operations. Furthermore, in the event that the transition to the next generation
of manufacturing technologies at Mitsubishi Electric or Toshiba is unsuccessful
the Company's business, financial condition and results of operations would be
materially and adversely affected. 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. 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, if the Company is required to find alternative
subcontractors, shipments could be delayed 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.
COMPETITION
The market for multimedia accelerators for notebook PCs in which the Company
operates 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, some 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 ATI ("ATI"), Chips &
Technologies, Inc. ("Chips & Technologies"-in January 1998, Intel Corporation
acquired Chips and Technologies.), 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
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, Trident and S3 have announced that they
have or will begin sampling an integrated multimedia accelerator solution for
the notebook PC market that would directly compete with the Company's products.
Competition also exists from manufacturers that integrate a microprocessor with
a multimedia controller. Cyrix ("Cyrix" acquired by National Semiconductor in
July 1998) is in production with such a product. The successful commercial
introduction of a product by competitors that integrates large DRAM with analog
and logic circuitry on a single chip or a product that eliminates the need for a
separate multimedia
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accelerator in notebook PCs could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company relies in part on patents to protect its intellectual property.
In the United States, the Company has been issued five patents, each covering
certain aspects of the design and architecture of the Company's multimedia
accelerators. In addition, the Company has 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, the Company received a written notice from Cirrus
Logic asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV products infringe three United States patents held by Cirrus
Logic. The Company believes that the Company's MagicGraph128, MagicGraph128V and
MagicGraph 128ZV products do not infringe any of the claims of these patents.
The Company's belief is based upon a legal opinion from its patent counsel,
Townsend and Townsend and Crew LLP ("Townsend"). However, there can be no
assurance that Cirrus Logic will not file a lawsuit against the Company or that
the Company would prevail in any such litigation.
Further, the Company was notified by certain of its customers that a law
suit had been filed and served by a 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 may have 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 potential
obligations 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 that the Company's MagicGraph128 and MagicGraph128V products do
not infringe any of the claims of such patent. The Company's belief is based
upon a legal opinion from its patent counsel, Townsend and Townsend and Crew
LLP. There can be no assurances 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 patent litigation, or that such customers will continue to
purchase the Company's products under the threat of litigation.
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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
commercially reasonable terms could have a material adverse effect on the
Company's business, financial condition and results of operations.
BACKLOG
Sales of the Company's products are primarily 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 is a meaningful
indicator of future sales.
EMPLOYEES
As of January 31, 1998, the Company employed a total of 162 full-time
employees, including 91 in research and development, 10 in customer service and
applications engineering, 15 in sales and marketing, 19 in manufacturing and 27
in finance and administration. The Company also employs, from time to time, a
number 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.
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MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company as of January 31, 1998 are as follows:
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NAME AGE POSITION
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<S> <C> <C>
Prakash C. Agarwal.............................. 44 President, Chief Executive Officer and Director
Kamran Elahian.................................. 43 Chairman of the Board
Niall Bartlett.................................. 37 Vice President, Marketing
Ron Jankov...................................... 39 Vice President, Sales
Ibrahim Korgav.................................. 49 Vice President, Manufacturing Operations
Dr. Clement Leung............................... 48 Vice President, Engineering
Merle McClendon................................. 42 Vice President, Finance and Chief Financial
Officer
Kenneth Murray.................................. 47 Vice President, Human Resources
Deepraj Puar.................................... 52 Vice President, Technology
</TABLE>
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 20 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 ("Cirrus
Logic") Portable Product Division, a semiconductor manufacturer. Mr. Agarwal
holds a BS and a MS degree in Electrical Engineering from the University of
Illinois.
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 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, Chairman and Chief Executive
Officer of Centillium, a telecommunications semiconductor company and the
Chairman of Project Neat, Inc., a not for profit company. Mr. Elahian holds a BS
in Computer Science, a BS in Mathematics and a Masters of Engineering from the
University of Utah.
Niall Bartlett joined the Company in November 1995 as Vice President,
Marketing. Mr. Bartlett has 13 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).
Ron Jankov joined the Company in October 1995 as Vice President, Sales. Mr.
Jankov has 16 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.
Ibrahim Korgav joined the Company in 1994 as Vice President, Manufacturing
Operations. Mr. Korgav has 21 years of experience in manufacturing management in
the semiconductor industry. Prior to joining the Company, Mr. Korgav was the
Vice President of Quality/Operations and a co-founder of Micro Linear
Corporation, a semiconductor manufacturer. Mr. Korgav holds a BS degree in
Engineering
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from Middle East Technical University (Ankara, Turkey) and a MS degree in
Mechanical Engineering from the University of Tulsa.
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 13
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.
Merle McClendon joined the Company in January 1997 as its Vice President,
Finance and Chief Financial Officer. Ms. McClendon has 19 years of finance
experience. From 1993 through 1996, Ms. McClendon was Vice President and
Corporate Controller at S3 Inc., 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.
Kenneth Murray joined the Company in October 1997 as Vice President, Human
Resources. Mr. Murray has 25 years of human resource experience. Prior to
joining the Company, Mr. Murray was Vice President, Human Resources at Akashic
Memories Corporation, a magnetic media company. Mr. Murray holds a BS degree in
Business Administration from San Jose State University.
Deepraj Puar, a co-founder of the Company, has been Vice President,
Technology since the Company's inception in 1993. Mr. Puar has 27 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.
ITEM 2. PROPERTIES
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. Effective January, 1998 the Company entered into a
second noncancellable operating lease for a second 45,000 square foot building
adjacent to its principal headquarters. This lease has a coterminous provision
with the original lease expiring on April, 2003. The Company also leases sales
offices in Austin, Texas and Taiwan under operating leases that expire in
February, 1999 and April, 1999, respectively. 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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Reference is made to the information regarding market, market price range
and dividend information appearing under "Quarterly Data (Unaudited)" on
page 7 of the Registrant's Fiscal 1998 Annual Report which information is
hereby incorporated by reference.
(b) As of March 22, 1998, there were approximately 228 registered holders of
record of the Registrant's Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Reference is made to the information regarding selected financial data for
the period from May 26, 1993 (inception) through January 31, 1994 and fiscal
years 1995 through 1998, under the heading "Financial Summary" on page 6 of the
Registrant's Fiscal 1998 Annual Report, which information is hereby incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Reference is made to the information appearing under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 8 through 20 of the Registrant's Fiscal 1998 Annual Report,
which information is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of NeoMagic Corporation at January 31,
1998 and January 31, 1997 and for each of the three years in the period ended
January 31, 1998 and notes thereto, and the Report of Independent Auditors
thereon and NeoMagic Corporation's unaudited quarterly financial data for the
two-year period ended January 31, 1998 are incorporated by reference from the
Registrant's Fiscal 1998 Annual Report, on pages 21 to 36 and page 7.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
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PART III
Certain information required by Part III is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this section is incorporated by reference from
the information in the section entitled "Election of Directors" in the Proxy
Statement. The required information concerning executive officers of the Company
is contained in the section entitled "Management" in Part I of this Form 10-K.
Item 405 of Regulation S-K calls for disclosure of any known late filing of
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this section is incorporated by reference from
the information in the sections entitled "Election of Directors," "Director
Compensation" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this section is incorporated by reference from
the information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The financial statements listed in the accompanying index to financial
statements and financial statement schedules are filed or incorporated
by reference as a part of this report.
2. Financial Statement Schedule.
The financial statement schedule listed in the accompanying index to
financial statements and financial statement schedules is filed as a
part of this report and should be read in conjunction with the
Consolidated Financial Statements of NeoMagic Corporation.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this report.
(b) Reports on Form 8-K
None.
12
<PAGE>
INDEX TO FINANCIAL STATMENTS AND FINANCIAL STATEMENT SCHEDULES
(ITEM 14 (A))
<TABLE>
<CAPTION>
REFERENCE PAGE
--------------------------
1998 ANNUAL
FORM REPORT TO
10K STOCKHOLDERS
----- -------------
<S> <C> <C>
Consolidated Statements of Operations for the three fiscal years ended
January 31, 1998.................................................................... 21
Consolidated Balance Sheets
January 31, 1998 and January 31, 1997............................................... 22
Consolidated Statements of Cash Flows for the three fiscal years ended
January 31, 1998.................................................................... 23
Consolidated Statements of Stockholders' Equity for the three fiscal years
ended January 31, 1998.............................................................. 24
Notes to Consolidated Financial Statements............................................ 25-35
Report of Ernst & Young LLP Independent Auditors...................................... 36
Supplementary Information (Unaudited)
Selected Quarterly Consolidated Financial Data...................................... 7
Valuation and Qualifying Accounts for the three fiscal years ended
January 31, 1998.................................................................... 14
</TABLE>
Schedules other that the one listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
The consolidated financial statements listed in the above index, which are
included in the Company's Fiscal 1998 Annual Report, are hereby incorporated by
reference. With the exception of the pages listed in the above index and the
portions of such report referred to in Items 5, 6, 7 and 8 of this Form 10-K,
the Fiscal 1998 Annual Report is not to be deemed filed as a part of this
report.
13
<PAGE>
NEOMAGIC CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSE DEDUCTIONS END OF YEAR
------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended January 31, 1996...................................... -- -- -- --
Year ended January 31, 1997...................................... -- $ 25 -- $ 25
Year ended January 31, 1998...................................... $ 25 $ 107 -- $ 132
</TABLE>
14
<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, on April 22, 1998.
NEOMAGIC CORPORATION
By: /s/ MERLE MCCLENDON
-----------------------------------
Merle McClendon
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL
OFFICER)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the date indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
<C> <S> <C>
/s/ KAMRAN ELAHIAN April 22, 1998
------------------------------------------- Chairman of the Board
Kamran Elahian
/s/ PRAKASH AGARWAL President, Chief Executive Officer and April 22, 1998
------------------------------------------- Director (Principal Executive Officer)
Prakash Agarwal
/s/ MERLE MCCLENDON Vice President Finance, Chief Financial April 22, 1998
------------------------------------------- Officer (Principal Financial Officer)
Merle McClendon
/s/ BRIAN P. DOUGHERTY April 22, 1998
------------------------------------------- Director
Brian P. Dougherty
/s/ IRWIN FEDERMAN April 22, 1998
------------------------------------------- Director
Irwin Federman
/s/ JIM LALLY April 22, 1998
------------------------------------------- Director
Jim Lally
/s/ MICHAEL MORITZ April 22, 1998
------------------------------------------- Director
Michael Moritz
/s/ KLAUS WIEMER April 22, 1998
------------------------------------------- Director
Klaus Wiemer
</TABLE>
15
<PAGE>
INDEX TO EXHIBITS
The following Exhibits are filed as part of, or incorporated by reference into,
this Report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------
<C> <S>
1.1(1) Form of Underwriting Agreement.
3.1(1) Certificate of Incorporation of Registrant.
3.2(1) 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(1) Bylaws of Registrant.
4.1(1) Form of Registrant's Common Stock Certificate.
4.2(1) Second Amended Rights Agreement, dated as of June 30,1995, between Registrant and the parties
indicated therein.
10.1(1) Form of Indemnification Agreement entered into by Registrant with each of its directors and
executive officers.
10.1(2) Lease Agreement, dated as of October 9,1997, between Registrant and A&P Family Investments, as
landlord for the leased premises located at 3250 Jay Street.
10.2(1) Amended and Restated 1993 Stock Plan and related agreements.
10.2(2) Amendment 1, dated as of October 15, 1997, between Registrant and A&P Family Investments, as
landlord for the leased premises located at 3260 Jay Street.
10.3(1) Second Amended and Restated Rights Agreement, dated as of June 30, 1995, between Registrant and the
parties indicated therein (included in Exhibit 4.2).
10.3(2) Amendment to Agreement dated as of November 20, 1995, between Registrant and Mitsubishi
International Corporation, as amended.
10.4(1) Wafer Supply Agreement, dated as of January 21, 1997, between NeoMagic International Corporation,
actually-owned subsidiary of Registrant, and Mitsubishi Electric Corporation.
10.5(1) Form of promissory note.
10.6(1) Lease Agreement, dated as of February 5, 1996, between Registrant and A&P Family Investments, as
landlord.
10.8(1) Master Lease Agreement, as amended, dated as of November 24, 1993, between Registrant and Comdisco,
Inc., and certain exhibits thereto.
10.9(1) Master Lease Agreement, dated as of July 19, 1995, between Registrant and Venture Lending & Leasing,
Inc., and certain exhibits thereto.
10.10(1) Agreement, dated as of November 20, 1995, between Registrant and Mitsubishi International
Corporation as amended.
10.11(1) General Security Agreement, dated November 15, 1995, between Registrant and Mitsubishi International
Corporation.
10.13(1) 1997 Employee Stock Purchase Plan, with exhibit
10.14 Amendment to Agreement dated as of November 20, 1995, between Registrant and Mitsubishi
International Corporation, as amended.
13.1 Excerpts from Annual Report for the year ended January 31, 1998.
21.0 NeoMagic Subsidiaries.
23.0 Consent of Ernst & Young, LLP, Independent Auditors.
27.0 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's S-1 for the year ended January
31, 1997
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended October 31, 1997.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the fiscal year
ended January 31, 1998.
<PAGE>
Exhibit 10.14
MEMORANDUM
This Memorandum made and entered into the 5th day of January, 1998 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. (herinafter referred to as "MIC"), regarding modifications and
amendments to the Agreement made and entered into the 20th day of November 1995,
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 30 days after the
delivery of Products from Foundries, beginning with deliveries
after January 31, 1998.
2. The Subsection 4.b. of the ORIGINAL AGREEMENT shall be modified as follows:
4. COMMISSION
b.
(1) The commission rate shall be 1.50% minus one sixth of Mitsubishi
Corporation's internal Interest rate (hereinafter referred to as
"MC's Interest Rate") of the purchase price of Products from
Foundries to MIC for the shipments from January 1, 1998 to
June 30, 1998.
(2) The Commission rate shall be 1.25% minus one sixth of MC's
Interest Rate of the purchase price of Products from Foundries
to MIC for the shipments after July 1, 1998.
(3) MC's Interest Rate shall be adjusted subject to the Japanese
financial market situation, but higher that Japanese Yen London
Inter-Bank Bid Rate (LIBID)as published in the Nikkei Newspaper
on the date of the invoice.
(4) If there is a need to change the commission rate, the rate shall
be reviewed and determined by written mutual agreement between
NMC and IC form time to time at the request of either party.
IN WITNESS WHEREOF, the parties have hereunto executed this Memorandum on the
date first above written.
Mitsubishi International Corp. NeoMagic Corporation
/s/ MASAYOSHI HIRANO /s/ PRAKASH AGARWAL
- --------------------------------- --------------------------------
By: Masayoshi Hirano By: Prakash Agarwal
Title: General Manager Title: President and Chief
Date: January 5, 1998 Executive Officer
Date: January 5, 1998
<PAGE>
FISCAL 1998 ANNUAL REPORT
[NeoMagic logo]
<PAGE>
DIFFERENTIATION THROUGH INTEGRATION
NeoMagic Corporation is the pioneer of embedded semiconductor memory technology
and the world's first producer of a 128-bit single-chip multimedia accelerator
for notebook computers. As the first company to design and deliver integrated
DRAM, complex logic, and analog circuits in a single chip, NeoMagic enables
notebook manufacturers to offer portable PCs that achieve high-performance
multimedia display capabilities in compact, lightweight mobile designs with
increased battery life.
Less than three years after introducing its first product, NeoMagic's customer
list has grown to include virtually every major producer of PC-compatible
notebook computers worldwide. Based in Santa Clara, California, NeoMagic
maintains sales offices in Santa Clara, California; Austin, Texas; Japan and
Taiwan. NeoMagic's common stock trades on the Nasdaq stock market under the
symbol NMGC.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
NET SALES (Millions) .2 40.8 124.7
NET INCOME PER SHARE (LOSS) (Dollars) NA .07 .82
NET INCOME (LOSS) (Millions) (6.9) (1.2) 20.8
TOTAL ASSETS (Millions) 8.7 27.5 107.6
</TABLE>
1
<PAGE>
LETTER TO OUR STOCKHOLDERS
NeoMagic's fiscal year ended January 1998 (fiscal 1998) was a year of
exceptional growth and notable success. We experienced continued improvements
in revenues, gross margins, operating margins, and net profitability in each
quarter of the fiscal year. We extended our product offering, expanded our
market share, added major new customers, and strengthened the foundations of
our company to allow us to build for the future.
FINANCIAL PERFORMANCE
We completed an initial public offering of common stock in the first quarter
of our year, raising approximately $38 million to strengthen our financial
position. Our revenues in fiscal 1998 grew by 206% compared to the prior
fiscal year, and we finished the year with $124.7 million in sales compared
to $40.8 million for the fiscal year ended January 1997. Fiscal 1998 was our
first full year of profitability. Net income for the year was $20.8 million,
or $0.82 per diluted share, compared to a net loss of $1.2 million, or a loss
of $0.07 per diluted share for the prior year. We are particularly pleased
that we were able to improve the level of profits during each quarter of a
year of dramatic expansion in revenues. In November of 1997, the Fabless
Semiconductor Association awarded NeoMagic the title of Best Financially
Managed Public Fabless Semiconductor Company.
BUSINESS REVIEW
NeoMagic entered the year with a strong product offering in the first three
members of our MagicGraph128 family of single-chip multimedia accelerators.
In our second quarter we introduced the fourth member of this award-winning
family, the MagicGraph128XD. The success of this product contributed
significantly to our market share gains over the second half of the year, as
it took a leading position in the new generation of notebook computers
introduced in the fall.
During the fourth quarter we introduced the MagicGraph128ZV+, a new product
targeted at the value-priced end of the notebook market. When value pricing
was combined with the high performance, small size, and low power consumption
of the MagicGraph family, this product quickly became a hit in the smallest
ultra-portable notebook market. With this product NeoMagic now spans the
market requirements from market-leading performance to highly economical
solutions.
These new products helped attract major new customers to NeoMagic. During the
course of the fiscal year we added such prestigious names as Gateway2000,
IBM, Micron, Panasonic, Siemens, and Sony to our list of customers. They
joined a client list which already included such notable computer makers as
Acer, Compaq, Dell, Fujitsu, Hewlett-Packard, Hitachi, Mitsubishi, NEC, and
Sharp. At the end of our fourth quarter, Toshiba introduced its Libretto
100CT mini-notebook in Europe using our MagicGraph128XD, marking the first
appearance of a NeoMagic product in a Toshiba machine. With this
introduction, NeoMagic now counts all of the major notebook PC makers among
our customers.
It has been our experience that in many cases a new customer will implement a
single project as a trial of our technology, our product, and indeed our
company. We work closely to help our customer complete the development of
their machine, and then to meet their quality and production requirements.
They learn the many benefits of our technology, and also observe first-hand
the capabilities and dedication of our team. If our first project with a
customer is successful, we often find expanded opportunities for our products
within other segments of the customer's product line. Although we now count
all major notebook PC makers as customers, we have not yet achieved the
maximum potential for our market share. While some companies, most notably
our earlier customers, now use NeoMagic accelerators in many or all of their
notebook computers, at other companies there are customer models that still
do not include a NeoMagic accelerator. Continued high levels of innovation,
brisk execution, and dedicated support are still required for us to address
the additional opportunities within our existing customers.
2
<PAGE>
"NEOMAGIC NOW SPANS THE MARKET REQUIREMENTS FROM MARKET-LEADING PERFORMANCE
TO HIGHLY ECONOMICAL SOLUTIONS"
OUR VISION LOOKING FORWARD
When we formed NeoMagic a few short years ago, it was our vision to provide
semiconductor solutions which would bring the performance and features of
multimedia computing to the mobile computer market, without compromising
size, weight, or battery life of the notebook PC. We described our mission as
one of "mobilizing multimedia," and addressed the conflicting requirements of
raising performance while reducing power and size with a revolutionary
technology which we call MagicWare(TM). We have developed and proven the
viability and the value of integrating large amounts of logic, analog
functions, and memory onto a single chip. We have led our industry in a new
technical direction.
We intend to continue building upon this vision. We will continue to enhance
our existing product line with new architectures for higher performance, with
new features, and with new manufacturing technologies. We will also begin to
expand into new product areas. Our goals in the coming fiscal year are to
introduce both a new family of multimedia accelerators to supplement the
MagicGraph128 family, and also to introduce the first of our new product
lines outside of the notebook multimedia accelerator arena.
We view the trend toward mobility as a long-term opportunity. Whatever form
that opportunity may take, we foresee continued growing demand for electronic
devices which enhance the productivity, education, and entertainment of an
increasingly mobile population worldwide.
For NeoMagic, "mobilizing multimedia" means providing high-performance, small
form-factor and long battery life semiconductor solutions for displaying,
storing, capturing, or communicating text, graphics, video, and audio
information. Our approach is one of providing "differentiation through
integration," bringing together diverse technologies to provide value-added
solutions which allow our customers' products to stand out in their
respective markets. Our journey has just begun.
We welcome our stockholders, employees, vendors, and customers to join us in
our journey.
PICTURE PRAKASH AGARWAL, PRESIDENT AND
CHIEF EXECUTIVE OFFICER (STANDING)
KAMRAN ELAHIAN, CHAIRMAN (SEATED)
3
<PAGE>
WWW.NEOMAGIC.COM
Computers have progressed from the room-sized, multi-ton mainframe to the
five-pound notebook which fits easily into a briefcase. The way we use
computers has progressed as well, from a tool for processing numbers and
storing data, to a tool for accessing information and communicating ideas.
The technology of multimedia is a critical part of this progress.
The NeoMagic story is the story of mobilizing multimedia. This means that we
saw the need to add value to portable computing by delivering new technology
that offers high-performance multimedia capabilities and increased battery
life, in smaller, lighter weight computers. TO MORE FULLY APPRECIATE THIS
VALUE, WE INVITE YOU TO STEP OUT OF THE WORLD OF PAPER AND INK, AND TO JOIN
US IN OUR WORLD OF IMAGES, SIGHTS, AND SOUNDS.
AT WWW.NEOMAGIC.COM THE WRITTEN WORD IS ONLY THE BEGINNING. Learn about our
products. See our customers. Review the latest news. And join us for a
"virtual meeting" with our management. Through the technologies of multimedia
and the world wide web, you can see, hear, and experience the NeoMagic story
for yourself.
If you happen to have a notebook running graphics from a NeoMagic MagicGraph
accelerator, your visual experience will be enhanced by downloading the
"virtual meeting" and sizing the window to suit your own tastes.
4
<PAGE>
FINANCIAL REPORT
<TABLE>
<CAPTION>
Page
----
<S> <C>
Selected Consolidated Financial Data.................................................. 6
Quarterly Data........................................................................ 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 8
Consolidated Statements of Operations................................................. 21
Consolidated Balance Sheets........................................................... 22
Consolidated Statements of Cash Flows................................................. 23
Consolidated Statements of Stockholders' Equity....................................... 24
Notes to Consolidated Financial Statements............................................ 25
Report of Ernst & Young LLP, Independent Auditors..................................... 36
Corporate Directory................................................................... Inside back cover
</TABLE>
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
MAY 26, 1993
(INCEPTION)
THROUGH
JANUARY 31,
YEAR ENDED JANUARY 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales $ 124,654 $ 40,792 $ 243 $ - $ -
Cost of sales 73,171 28,650 165 - -
----------------------------------------------------------------
Gross margin 51,483 12,142 78 - -
Operating expenses:
Research and development 16,091 8,606 4,934 2,423 465
Sales, general and administrative 12,290 6,522 1,606 968 308
Legal costs (1) - (1,503) 610 1,500 -
----------------------------------------------------------------
Total operating expenses 28,381 13,625 7,150 4,891 773
Income (loss) from operations 23,102 (1,483) (7,072) (4,891) (773)
Other income (expense), net:
Interest income and other 2,643 1,366 385 194 16
Interest expense (1,298) (1,046) (182) (94) -
----------------------------------------------------------------
Income (loss) before income taxes 24,447 (1,163) (6,869) (4,791) (757)
Provision for income taxes 3,667 - - - -
----------------------------------------------------------------
Net income (loss) $ 20,780 $ (1,163) $ (6,869) $ (4,791) $ (757)
----------------------------------------------------------------
----------------------------------------------------------------
Pro forma basic net income (loss) per share (2) $ .95 $ (.07)
Pro forma diluted net income (loss) per share (2) $ .82 $ (.07)
Weighted common shares outstanding (2) 21,924 17,238
Weighted common shares outstanding assuming
dilution (2) 25,336 17,238
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 35,004 $ 13,458 $ 6,877 $ 4,902 $ 530
Short-term investments 36,016 - - - -
Working capital 53,518 1,398 4,069 2,846 618
Total assets 107,583 27,464 8,749 5,956 1,039
Long-term obligations 646 1,194 749 452 185
Total stockholders' equity 65,127 4,200 4,542 3,313 753
STATISTICAL DATA:
Number of employees 162 94 44 23 10
Revenue/employee $ 769 $ 434 $ 6 $ - $ -
</TABLE>
- --------------
(1) Relates to amounts provided by the Company for estimated legal fees
associated with litigation which was dismissed in the second quarter of
fiscal 1997. The $1.5 million benefit in legal costs during the year ended
January 31, 1997 was due to the reversal of previously provided legal fees
as a result of such dismissal. See Note 10 of Notes to Consolidated
Financial Statements.
(2) See Note 1 and Note 3 of Notes to Consolidated Financial Statements.
6
<PAGE>
QUARTERLY DATA
<TABLE>
<CAPTION>
FISCAL 1998 Q1 Q2 Q3 Q4
- ----------------------------------------------------------------------------------------------------------
(unaudited, in thousands except per share data)
<S> <C> <C> <C> <C>
Net sales $ 18,281 $ 24,570 $ 37,146 $ 44,657
Cost of sales 11,171 14,522 21,568 25,910
-------- -------- -------- --------
Gross margin 7,110 10,048 15,578 18,747
Operating expenses:
Research and development 2,467 3,338 4,924 5,362
Sales, general and administrative 2,277 2,382 3,452 4,179
-------- -------- -------- --------
Total operating expenses 4,744 5,720 8,376 9,541
Income from operations 2,366 4,328 7,202 9,206
Other income (expense), net:
Interest income and other 316 646 823 858
Interest expense (224) (314) (325) (435)
-------- -------- -------- --------
Income before income taxes 2,458 4,660 7,700 9,629
Provision for income taxes 369 699 1,155 1,444
-------- -------- -------- --------
Net income $ 2,089 $ 3,961 $ 6,545 $ 8,185
-------- -------- -------- --------
-------- -------- -------- --------
Basic net income per share (2) $ .11 $ .18 $ .29 $ .36
Diluted net income per share (2) $ .09 $ .15 $ .25 $ .32
Weighted common shares outstanding (2) 19,845 22,161 22,713 22,976
Weighted average common shares outstanding assuming 23,398 25,893 26,144 25,907
dilution (2)
Price range common stock(commencing March 13, 1997):
Low $ 11.13 $ 11.63 $ 13.50 $ 12.31
High $ 15.75 $ 26.13 $ 22.88 $ 18.13
<CAPTION>
FISCAL 1997 Q1 Q2 Q3 Q4
- ----------------------------------------------------------------------------------------------------------
(unaudited, in thousands)
<S> <C> <C> <C> <C>
Net sales $ 3,520 $ 5,954 $ 15,035 $ 16,283
Cost of sales 2,818 5,485 9,994 10,353
-------- -------- -------- --------
Gross margin 702 469 5,041 5,930
Operating expenses:
Research and development 2,009 1,667 2,250 2,680
Sales, general and administrative 996 1,553 1,950 2,023
Legal costs (1) - (1,503) - -
-------- -------- -------- --------
Total operating expenses 3,005 1,717 4,200 4,703
Income (loss) from operations (2,303) (1,248) 841 1,227
Other income (expense), net:
Interest income and other 1,076 75 42 173
Interest expense (160) (210) (316) (360)
-------- -------- -------- --------
Net income (loss) $ (1,387) $ (1,383) $ 567 $ 1,040
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The Company had 228 stockholders of record as of March 22, 1998. The
Company has not paid any dividends on its common stock. The Company currently
intends to reinvest earnings in its business and does not anticipate paying
cash dividends to stockholders.
(1) Relates to amounts provided by the Company for estimated legal fees
associated with litigation which was dismissed in the second quarter of
fiscal 1997. The $1.5 million benefit in legal costs during the year
ended January 31, 1997 was due to the reversal of previously provided
legal fees as a result of such dismissal. See Note 10 of Notes to
Consolidated Financial Statements.
(2) See Note 1 and Note 3 of Notes to Consolidated Financial Statements.
7
<PAGE>
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, competition,
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.
Since its inception in May 1993 through the end of fiscal 1996,
NeoMagic was in the development stage and 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 incurred losses in each
fiscal year until fiscal year 1998. At the end of fiscal 1998 the Company had
retained earnings of $7.2 million. The Company first recognized revenue on
product sales in fiscal 1996. Operating results in fiscal 1998 have benefited
from increased market acceptance of the Company's products. The Company
recognizes revenue at the time of product shipment for product sales directly
to customers. The Company's policy is to defer recognition of revenue of
shipments to distributors until the product is sold by the distributors.
All of the Company's net sales in fiscal 1998, 1997 and 1996 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 66.5%, 79.7% and 100%
of the Company's net sales for fiscal 1998, 1997 and 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
manufactures who sell to United States-based OEMs) accounted for 83.2%,
96.2% and 90.0% of the Company's net sales in fiscal 1998, 1997 and 1996,
respectively. The Company expects that the net sales derived from purchases
by international customers will continue to represent a significant portion
of 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 Mitsubishi Electric Corporation
("Mitsubishi Electric") and Toshiba Corporation ("Toshiba") to produce its
semiconductor wafers and uses other independent contractors to perform
assembly, packaging and testing. The Company's relationships with Mitsubishi
Electric and Toshiba are formalized in separate five year wafer supply
agreements. 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 and pays an agreed price for wafers meeting certain acceptance
criteria. All of the Company's products are assembled and tested by
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
independent vendors. To date, all of the Company's wafer purchases, which
constitute a significant part of its cost of goods sold, have been priced 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 options and may continue to
do so in the future.
Under its wafer supply agreements with Mitsubishi Electric and
Toshiba, the Company is obligated to provide rolling 12-month forecasts of
anticipated purchases and 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 forecast 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. Throughout fiscal 1998, the
Company has continued to devote resources to research and development efforts
as well as to make additional investments in sales, marketing, manufacturing
and administrative infrastructures to support the increased sales experienced
within the year. The Company expects to continue to devote substantial
resources to research and development efforts for the foreseeable future. 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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 58.7 70.2 67.9
-----------------------------------
Gross margin 41.3 29.8 32.1
Operating expenses:
Research and development 12.9 21.1 2,030.4
Sales, general and administrative 9.9 16.0 660.9
Legal costs - (3.7) 251.0
-----------------------------------
Total operating expenses 22.8 33.4 2,942.3
-----------------------------------
Income (loss) from operations 18.5 (3.6) (2,910.2)
Other income (expense), net:
Interest income and other 2.1 3.3 158.4
Interest expense (1.0) (2.6) (74.9)
-----------------------------------
Income (loss) before income taxes 19.6 (2.9) (2,826.7)
Provision for income taxes 2.9 - -
-----------------------------------
Net income (loss) 16.7% (2.9)% (2,826.7)%
-----------------------------------
-----------------------------------
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $124.7 million, $40.8
million and $243,000 in fiscal 1998, 1997 and 1996, respectively. 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
competition, the Company's products experience declining unit average selling
prices over time, which at times can be substantial.
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 83.2%, 96.2% and 90.0% of net sales in fiscal 1998, 1997 and 1996,
respectively. 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 United States
dollars.
Five customers accounted for 14.4%, 13.6%, 13.5%, 13.3% and 11.7%,
respectively, of net sales in fiscal 1998. Three customers accounted for
31.6%, 19.8% and 14.6%, respectively, of net sales in fiscal 1997. Three
customers accounted for 34.6%, 28.6% and 14.4%, respectively of net sales in
fiscal 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 MARGIN
Gross margin was $51.5 million and $12.1 million in fiscal 1998 and
1997, respectively. The gross margin percentage increased to 41.3% of net
sales in fiscal 1998 from 29.8% of net sales in fiscal 1997. The gross margin
in fiscal 1997 was negatively impacted by costs stemming from a design error
for which the Company recorded a $1.2 million reserve in the second quarter
and excess inventory charges of $750,000 in both the third and fourth
quarters. The additional increases in gross margin in fiscal 1998 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),
changes in the mix of products sold, timing of volume shipments of new
products, the availability and cost of products from the Company's suppliers,
manufacturing yields, and foreign currency exchange rate fluctuations.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses include compensation and
associated costs relating to development personnel, operating system software
costs and prototyping costs which are comprised of photomask costs and
pre-production wafer costs. Research and development expenses were $16.1
million, $8.6 million and $4.9 million in fiscal 1998, 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 and to a lesser extent consulting, engineering and
equipment related expenses. Research and development expenses are expected to
increase in absolute dollars in fiscal 1999.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SALES, GENERAL AND ADMINISTRATIVE EXPENSES
Sales, general and administrative expenses were $12.3 million, $6.5
million and $1.6 million in fiscal 1998, 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. Sales, general and
administrative expenses are expected to increase in absolute dollars in
fiscal 1999.
LEGAL COSTS
Legal costs consist of amounts provided by the Company for estimated
legal fees associated with the litigation with Cirrus Logic, which was
dismissed in the second quarter of fiscal 1997. In fiscal 1995, the Company
accrued $1.5 million for such legal costs. In fiscal 1996, an additional
accrual of $610,000 was recorded by the Company. In fiscal 1997, based on the
dismissal of such litigation, the remaining reserve balance of $1.5 million
was reversed. The settlement which gave rise to the dismissal did not involve
cash payments, but did include a non-solicitation provision and certain
contingent cross licensing provisions. The Company does not believe that such
settlement will have a material adverse effect on the Company's future
operations. See Note 10 of Notes to Consolidated Financial Statements.
OTHER INCOME (EXPENSE), NET.
The Company incurs interest expense on borrowings under the
Company's working capital line of credit and on lease obligations used to
finance certain equipment. The Company earns interest on its cash and
short-term investments. Other income (expense), net was $1.3 million,
$320,000 and $203,000 in fiscal 1998, 1997 and 1996, respectively. The
increase in other income (expense), net between fiscal 1998 and 1997 was due
to interest income on higher cash and short-term investment balances
maintained during fiscal 1998. The increase in other income (expense), net
from fiscal 1996 to fiscal 1997 was due to approximately $1.0 million in
proceeds received for non-recurring engineering services performed by
NeoMagic, substantially offset by higher interest expense resulting from
borrowings under the Company's working capital line and additional lease
obligations used to finance certain equipment borrowings. The Company does
not anticipate generating income from engineering services on a regular
basis, if at all, in future periods.
INCOME TAXES
The Company's effective tax rate was 15% in fiscal 1998. The Company
recorded no provision for federal or state income taxes in fiscal 1997 and
1996. In fiscal 1998, the difference between the Company's effective tax rate
and the statutory rate is primarily due to the utilization of the Company's
net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
increased $55.3 million in fiscal 1998 to $71.0 million at January 31, 1998
from $15.7 million at January 31, 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 increased $52.1 million to $53.5 million at January 31, 1998
from $1.4 million at January 31, 1997.
In fiscal 1998 the Company generated $15.4 million of cash and cash
equivalents from its operating activities, compared to $3.1 million and $6.4
million of cash and cash equivalents used in operating activities in fiscal
1997 and 1996, respectively. The increase in cash generated from operations
is primarily attributable to $20.8 million in net income in fiscal 1998
compared to net losses of $1.2 million and $6.9 million in fiscal 1997 and
1996, respectively. The increases in cash generated from operating activities
for fiscal 1998 was also related to changes in accrued expenses and accounts
payable offset by increases in accounts receivable, inventory and deferred
taxes.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Net cash used for investing activities in fiscal 1998, 1997 and 1996
was $40.5 million, $3.1 million and $728,000, respectively. The increase in
fiscal 1998 was primarily due to $36.0 million of net purchases of short-term
investments and $4.5 million of investments in property, plant and equipment.
Net cash used for investing activities in fiscal 1997 and 1996 was related to
investments in property, plant 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 in fiscal 1998, 1997 and
1996 was $46.7 million, $12.8 million and $9.1 million, respectively. The
increase in fiscal 1998 primarily represents net proceeds from the initial
public offering of $37.8 million, 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. Net cash provided by financing activities
in fiscal 1997 relates primarily to net proceeds of $13.8 million related to
the working capital line of credit, offset by amounts held as restricted cash
and cash equivalents. Net cash provided by financing activities in fiscal
1996 relate to net proceeds from issuances of noncumulative convertible
preferred stock.
At January 31, 1998 the Company's principal sources of liquidity
included cash and cash equivalents and short-term investments of $71.0
million and borrowings under the working capital line of credit agreement
which provided 60 day extended credit terms on water purchases. In January
1998, the working capital line of credit was revised such that for wafer
shipments subsequent to January 31, 1998 payment for wafers must be made
within 30 days of wafer shipment. 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. The Company currently expects to make approximately $8.0 to
$9.0 million in capital expenditures during the next twelve months,
consisting primarily of purchases of development tools and software and
personal computer. Investments will continue in product development in new
and existing areas of technology. Cash may also be used to acquire technology
through purchases and strategic acquisitions. 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
Because the Company currently purchases wafers under purchase
contracts denominated in yen, significant appreciation in the value of yen
relative to the value of the U.S. dollar would make the wafers relatively
more expensive to the Company, which could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company from time to time enters into foreign currency forward contracts and
foreign currency options 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. Notwithstanding the measures the
Company has adopted, due to the unpredictability and volatility of currency
exchange rates and currency controls, there can be no assurance that the
Company will not experience currency losses in the future, nor can the
Company predict the effect of exchange rate fluctuations upon future
operating results.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If the Company's
internal systems do not correctly recognize date information when the year
changes to 2000, there could be an adverse impact on the Company's
operations. The Company has completed an assessment and does not believe that
it will be required to modify or replace significant portions of its software
so that its computer systems will function properly with respect to dates in
the year 2000 and thereafter. The Company has also assessed the capability of
its products sold to customers and believes that it has no exposure to
contingencies related to the Year 2000 Issues for the products it has sold.
Management believes that the likelihood of a material adverse impact due to
problems with internal systems or products sold to
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
customers is remote and expects that any costs to be incurred to assure year
2000 capability will not have a material adverse effect on the Company's
financial position or results of operations. The Company is contacting
critical suppliers of products and services to determine that the suppliers'
operations and the products and services they provide are year 2000 capable.
There can be no assurance that another company's failure to ensure year 2000
capability would not have an adverse effect on the Company.
FACTORS THAT MAY AFFECT RESULTS
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
NeoMagic's quarterly and annual results of operations are effected by
a variety of factors that could materially adversely effect net sales, gross
margin 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 effect 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 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
effected.
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 its 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
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
adverse effect 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 effect 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
effected 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 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 subcontractor 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, the majority 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 effected 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.
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 often 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 effected
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 66% in
fiscal 1998, and this decline effected 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 effecting
ongoing product pricing as well as resulting in the loss of design wins for
new notebook PCs. In this circumstance, competitors without embedded DRAM
potentially could be 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 margin
would be materially and adversely impacted.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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,
some 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
ATI ("ATI"), Chips & Technologies, Inc. ("Chips & Technologies"--in January
1998, Intel Corporation acquired Chips and Technologies), 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 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, Trident and S3 have publicly disclosed that they have or will
begin sampling an integrated multimedia accelerator solution for the notebook
PC market that would directly compete with the Company's products. Certain of
the Company's competitors offer more functionality and/or higher processor
speeds at the expense of battery life and power consumption than the
Company's product offerings. These feature sets may be more competitive for
certain applications than the Company's products. Potential competition also
could come from manufacturers that integrate a microprocessor with a
multimedia controller. Cyrix (acquired by National Semiconductor in July
1997) is in production of such a product. The successful commercial
introduction of such a product by competitors that integrates large DRAM with
analog and logic circuitry on a single chip or 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 effecting 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.
DEPENDENCE ON MANUFACTURING RELATIONSHIPS
The Company's products require wafers manufactured with
state-of-the-art fabrication equipment and techniques. The Company's products
are primarily manufactured by Mitsubishi Electric Corporation ("Mitsubishi
Electric") in Japan. In fiscal 1998, the Company began manufacturing wafers
with Toshiba Corporation ("Toshiba") in Japan. Each of these manufacturing
relationships are covered under the terms of a five-year wafer supply
agreement. The Company expects that, for the foreseeable future, some 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 a foundry to switch to a new product line
is four to nine 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
results of operations. Furthermore, in the event that the transition to the
next generation of manufacturing technologies at Mitsubishi Electric or
Toshiba is unsuccessful, the Company's business, financial condition and
results of operations would be materially and adversely effected.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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
Toshiba 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. 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 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 from the suppliers. 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 effect the Company's
customer relationships and thereby materially adversely effect 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 effect the Company's net sales, gross margins and
results of operations.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. Historically the Company
has experienced lower yields on new products. 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 in fiscal 1997. 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 additional manufacturing partners
develop, yields could be adversely effected 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 margins. 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 margin could be
materially adversely effected.
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 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. For
example, both 3-D and DVD functionality are becoming increasingly important
for notebook PCs. The Company's ability to compete may depend on its ability
to incorporate these features in its products. 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 effected. 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 the Company's products,
rendering the Company's product technologically infeasible or uncompetitive.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The multiple chip solutions offered by some of 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 which are compelling enough in order 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.
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 five patents,
each covering certain aspects of the design and architecture of the Company's
multimedia accelerators. In addition, the Company has 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
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 MagicGraph128, MagicGraph128V and
MagicGraph128ZV 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 infringe 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.
Further, the Company was notified by certain of its customers that a
law suit had been filed and served by a 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 may have 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 potential obligations 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 that the Company's MagicGraph128
and MagicGraph128V products do not infringe any of the claims of such patent.
The Company's belief is based upon a legal opinion from its patent counsel,
Townsend and Townsend and Crew LLP. There can be no assurances that the
holders of such patent will not file a lawsuit against the Company or its
customers, that the Company or such customers would prevail in any patent
litigation, or that such customers will continue to purchase the Company's
products while the Company is under the threat of litigation.
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 effect 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.
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 of customers headquartered in the United States and foreign system
manufacturers that sell to United States-based OEMs) accounted for 83.2%,
96.2% and 90.0% of the Company's net sales for fiscal 1998, 1997 and 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 assembly and test services 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 foreign exchange 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 assembly and test service 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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 both domestically and internationally, 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. 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 effected.
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.
20
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales $ 124,654 $ 40,792 $ 243
Cost of sales 73,171 28,650 165
--------------------------------------
Gross margin 51,483 12,142 78
Operating expenses:
Research and development 16,091 8,606 4,934
Sales, general and administrative 12,290 6,522 1,606
Legal costs - (1,503) 610
--------------------------------------
Total operating expenses 28,381 13,625 7,150
Income (loss) from operations 23,102 (1,483) (7,072)
Other income (expense), net:
Interest income and other 2,643 1,366 385
Interest expense (1,298) (1,046) (182)
--------------------------------------
Income (loss) before income taxes 24,447 (1,163) (6,869)
Provision for income taxes 3,667 - -
--------------------------------------
Net income (loss) $ 20,780 $ (1,163) $ (6,869)
--------------------------------------
--------------------------------------
Pro forma basic net income (loss) per share $ .95 $ (.07)
Pro forma diluted net income (loss) per share $ .82 $ (.07)
Weighted common shares outstanding 21,924 17,238
Weighted common shares outstanding assuming
dilution 25,336 17,238
</TABLE>
See accompanying notes.
21
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, 1998 1997
- --------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,004 $ 13,458
Restricted cash equivalents - 2,224
Short-term investments 36,016 -
Accounts receivable, less allowance for doubtful accounts of
$132 at January 31, 1998 and $25 at January 31, 1997 11,236 2,205
Inventory 9,342 5,237
Other current assets 3,730 344
--------------------------
Total current assets 95,328 23,468
Property, plant and equipment, net 6,232 3,395
Deferred tax assets 5,669 -
Other assets 354 601
--------------------------
Total assets $107,583 $ 27,464
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit $ 21,041 $ 14,224
Accounts payable 9,490 5,175
Accrued expenses 10,652 1,617
Current obligations under capital leases 627 1,054
--------------------------
Total current liabilities 41,810 22,070
Long-term obligations under capital leases and other 646 1,194
--------------------------
Total liabilities 42,456 23,264
Commitments and contingencies
Stockholders' equity:
Noncumulative convertible preferred stock, $.001 par value:
Authorized shares 2,000,000 at January 31, 1998 and 12,868,315
at January 31, 1997
Issued and outstanding shares - none at January 31, 1998 and
12,259,614 at January 31, 1997 - 12
Common stock, $.001 par value:
Authorized shares - 60,000,000
Issued and outstanding shares - 24,204,602 at January 31, 1998
and 8,072,591 at January 31, 1997 24 8
Additional paid-in-capital 61,263 20,471
Notes receivable from stockholders (559) (822)
Deferred compensation (2,801) (1,889)
Retained earnings (Accumulated deficit) 7,200 (13,580)
--------------------------
Total stockholders' equity 65,127 4,200
--------------------------
Total liabilities and stockholders' equity $107,583 $ 27,464
--------------------------
--------------------------
</TABLE>
See accompanying notes.
22
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $20,780 $ (1,163) $ (6,869)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 1,679 813 528
Amortization of deferred compensation 776 375 -
Tax benefit from employee stock options 750 - -
Deferred taxes (8,571) - -
Changes in operating assets and liabilities:
Accounts receivable (9,031) (2,067) (138)
Inventory (4,105) (4,906) (331)
Other current assets (485) (163) (46)
Other assets 248 (482) (103)
Accounts payable 4,315 4,606 314
Accrued expenses 9,035 (82) 232
--------------------------------------
Net cash provided by (used for) operating activities 15,391 (3,069) (6,413)
--------------------------------------
--------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,516) (3,105) (728)
Purchases of short-term investments (58,649) - -
Maturities of short-term investments 22,633 - -
--------------------------------------
Net cash used for investing activities (40,532) (3,105) (728)
--------------------------------------
--------------------------------------
FINANCING ACTIVITIES
Proceeds from sale leaseback liability - 1,689 1,243
Payments on lease obligations (975) (966) (639)
Proceeds from working capital line of credit 59,760 27,941 414
Payments on working capital line of credit (52,943) (14,131) -
Net proceeds from issuances of noncumulative convertible
preferred stock - - 8,047
Net proceeds from issuance of common stock 38,358 446 51
Payments received from notes receivable from stockholders 263
Amounts held as restricted cash equivalents - (2,224) -
Release of amounts held as restricted cash equivalents 2,224 - -
--------------------------------------
Net cash provided by financing activities 46,687 12,755 9,116
--------------------------------------
--------------------------------------
Net increase in cash and cash equivalents 21,546 6,581 1,975
Supplemental schedules of cash flow information
Cash and cash equivalents at beginning of period 13,458 6,877 4,902
--------------------------------------
Cash and cash equivalents at end of period $ 35,004 $ 13,458 $ 6,877
--------------------------------------
--------------------------------------
Cash paid during the year for:
Interest $ 1,298 $ 1,045 $ 153
Taxes $ 6,964 $ - $ -
Supplemental schedules of noncash investing and financing activities
Issuance of common stock in exchange for promissory notes $ - $ 592 $ 219
Deferred compensation $ 1,688 $ 2,264 $ -
</TABLE>
See accompanying notes.
23
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- -----------------
SHARES AMT SHARES AMT
- -----------------------------------------------------------------------------------------------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Balance at January 31, 1995 9,439,614 $ 9 6,183,030 $ 6
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Issuance of Series D preferred stock, net of issuance costs
of $18 2,820,000 3 -- --
Issuance of common stock under stock option plan -- -- 1,008,257 1
Repurchase of common stock at cost and payments on
promissory notes -- -- (268,654) --
Net loss -- -- -- --
- -----------------------------------------------------------------------------------------------------
Balance at January 31, 1996 12,259,614 12 6,922,633 7
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Issuance of common stock under stock option plan -- -- 1,465,750 1
Repurchase of common stock at cost and payments on
promissory notes -- -- (315,792) --
Payment of promissory note -- -- -- --
Deferred compensation relating to stock options -- -- -- --
Amortization of deferred compensation relating to stock
options -- -- -- --
Net loss -- -- -- --
- -----------------------------------------------------------------------------------------------------
Balance at January 31, 1997 12,259,614 12 8,072,591 8
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Issuance of common stock in conjunction with initial public
offering -- -- 3,475,000 4
Conversion of preferred stock to common stock in conjunction
with initial public offering (12,259,614) (12) 12,259,614 12
Exercise of warrants -- -- 206,498 --
Issuance of common stock under stock option plan -- -- 167,725 --
Issuance of common stock under employee stock purchase plan -- -- 35,987 --
Repurchase of common stock at cost -- -- (12,813) --
Payment on promissory notes -- -- -- --
Deferred compensation relating to stock options -- -- -- --
Amortization of deferred compensation relating to stock
options -- -- -- --
Tax benefit attributable to stock options -- -- -- --
Net income -- -- -- --
- -----------------------------------------------------------------------------------------------------
Balance at January 31, 1998 -- $ -- 24,204,602 $ 24
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
<CAPTION>
NOTES RETAINED
ADD'L RECEIVABLE EARNINGS TOTAL
PAID-IN FROM DEFERRED (ACCUMULATED STOCKHOLDERS'
CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) EQUITY
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1995 $ 9,008 $(162) $ -- $ (5,548) $ 3,313
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of Series D preferred stock, net of issuance costs
of $18 8,044 -- -- -- 8,047
Issuance of common stock under stock option plan 262 (219) -- -- 44
Repurchase of common stock at cost and payments on
promissory notes (12) 19 -- -- 7
Net loss -- -- -- (6,869) (6,869)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1996 17,302 (362) -- (12,417) 4,542
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock under stock option plan 997 (592) -- -- 406
Repurchase of common stock at cost and payments on
promissory notes (92) 109 -- -- 17
Payment of promissory note -- 23 -- -- 23
Deferred compensation relating to stock options 2,264 -- (2,264) -- --
Amortization of deferred compensation relating to stock
options -- -- 375 -- 375
Net loss -- -- -- (1,163) (1,163)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1997 20,471 (822) (1,889) (13,580) 4,200
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock in conjunction with initial public
offering 37,756 -- -- -- 37,760
Conversion of preferred stock to common stock in conjunction
with initial public offering -- -- -- -- --
Exercise of warrants -- -- -- -- --
Issuance of common stock under stock option plan 259 -- -- -- 259
Issuance of common stock under employee stock purchase plan 367 -- -- -- 367
Repurchase of common stock at cost (28) -- -- -- (28)
Payment on promissory notes -- 263 -- -- 263
Deferred compensation relating to stock options 1,688 -- (1,688) -- --
Amortization of deferred compensation relating to stock
options -- -- 776 -- 776
Tax benefit attributable to stock options 750 -- -- -- 750
Net income -- -- -- 20,780 20,780
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 $61,263 $(559) $(2,801) $ 7,200 $65,127
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying note.
24
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
NeoMagic Corporation (the "Company") was incorporated on May 26,
1993 in California and reincorporated in Delaware on February 13, 1997. 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 1996, 1997 and 1998 ended on January 28, 26
and 25, respectively. Fiscal year 1999 will be a fifty-three week fiscal year
ending on January 31, 1999. For convenience, the accompanying financial
statements have been presented 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.
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 currently manufactured by two
companies in Japan, each under the terms of a five-year wafer supply
agreement. A manufacturing disruption experienced by either of the Company's
manufacturing partners could impact the production of the Company's products
for a substantial period of time, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Under the wafer supply agreements, the Company must provide rolling
12-month forecasts of anticipated purchases and place binding purchase orders
four months prior to shipment. 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 utilizes derivative financial instruments to hedge wafer
inventory purchases which are priced in yen. The Company utilizes foreign
currency forward contracts and options to minimize foreign currency
fluctuation exposures related to these purchase commitments. The Company does
not use derivative financial instruments for speculative or trading purposes.
The Company's accounting policy for these instruments is based on the
Company's designation of such instruments as a hedge transaction. 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. Gains and losses on currency forward
contracts and options that are designated as hedges, for which a firm
commitment has been attained, are deferred and recognized in income in the
same period that the underlying transactions are settled. Gains and losses on
any instrument not meeting the above criteria would be recognized in income
in the current period. If an underlying hedged transaction is terminated
earlier than initially anticipated, the offsetting gain or loss on the
related derivative instrument would be recognized in income in the same
period. Subsequent gains or losses on the related derivative instrument would
be recognized in income in each period until the instrument matures, is
terminated or sold.
25
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid financial instruments,
consisting of investments in money market funds, commercial paper and
municipal bonds with original maturities of 90 days or less at the time of
acquisition.
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 (expense), net. The cost of securities sold is based
on the specific identification method.
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, 1998 and 1997, and consist of the
following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash equivalents:
Money market funds $ 5,272 $ 6,803
Commercial paper 24,197 6,594
Municipal bonds - 800
--------------------------
Total $ 29,469 $ 14,197
--------------------------
--------------------------
Short-term investments:
Medium term notes $ 11,158 $ -
U.S. Government agencies 8,082 -
Corporate bonds 7,148 -
Corporate notes 5,602 -
Market auction preferreds 2,028 -
Foreign debt securities 1,011 -
Commercial paper 987 -
--------------------------
Total $ 36,016 $ -
--------------------------
--------------------------
</TABLE>
The above amounts for cash equivalents include $254,000 and
$1,970,000 of money market funds and commercial paper, respectively,
classified as restricted cash equivalents which were required to be
maintained under the working capital line of credit as of January 31, 1997.
Gross unrealized gains and losses on available-for-sale securities
at January 31, 1998 and 1997 and gross realized gains and losses on sales of
available-for-sale securities in fiscal 1998, 1997 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.
26
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment, net of
estimated returns. Revenue on shipment to distributors are deferred until the
products are sold by the distributor.
CONCENTRATION OF CREDIT RISK
The Company sells its products to notebook PC OEMs as well as to
third-party system manufacturers who design and manufacture notebook PC's on
behalf of the brand name OEMs. 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.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company adopted SFAS 123 in
fiscal 1997. The Company accounts for employee stock options in accordance
with Accounting Principles Board Opinion No. 25, and has adopted the
"disclosure only" alternative described in SFAS 123.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 replaces the calculation of primary and fully diluted earnings per
share with basic and diluted earning per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to fully diluted earnings per share.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company intends to adopt Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130") and
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131") in fiscal
1999. Both will require additional disclosure but will not have a material
effect on the Company's financial position or results of operations. SFAS 130
will first be reflected in the Company's first quarter of fiscal 1999 interim
financial statements. Components of comprehensive income include items such
as net income and changes in the value of available-for-sale securities. SFAS
131 requires segments to be determined based on how management measures
performance and makes decisions about allocating resources. SFAS 131 will
first be reflected in the Company's fiscal 1999 Annual Report.
27
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARIZED BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
JANUARY 31, 1998 1997
- ------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Inventory:
Raw materials $ 989 $ 464
Work in process 1,904 948
Finished goods 6,449 3,825
------------------------------------
Total $ 9,342 $ 5,237
------------------------------------
------------------------------------
Property, plant and equipment:
Computer equipment and software $ 8,017 $ 4,288
Furniture and fixtures 917 495
Machinery and equipment 645 280
------------------------------------
Total 9,579 5,063
Less accumulated depreciation and amortization (3,347) (1,668)
------------------------------------
Property, plant and equipment, net $ 6,232 $ 3,395
------------------------------------
------------------------------------
Accrued Expenses:
Compensation and related benefits $ 3,005 $ 1,141
Income taxes 4,524
Other accruals 3,123 476
------------------------------------
Total $ 10,652 $ 1,617
------------------------------------
------------------------------------
</TABLE>
3. EARNINGS PER SHARE
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98"). Under SAB 98, certain shares of
convertible preferred stock, options and warrants to purchase common stock,
issued at prices substantially below the per share price sold in the Company's
initial public offering in March 1997, previously included in the computation of
shares outstanding pursuant to Staff Accounting Bulletins Nos. 55, 64 and 83 are
now excluded from the computation. Basic and diluted earnings per share have
been retroactively restated to apply the requirements of SAB 98.
Per share information calculated on this basis is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 20,780 $ (1,163) $ (6,869)
----------------------------------------
----------------------------------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 20,361 4,978 2,665
Effect of dilutive securities:
Employee stock options 3,227 - -
Warrants 185 - -
Convertible preferred stock 1,563 - -
----------------------------------------
Dilutive potential common shares 4,975 - -
----------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 25,336 4,978 2,665
----------------------------------------
----------------------------------------
Basic earnings per share $ 1.02 $ (.23) $ (2.58)
Diluted earnings per share $ .82 $ (.23) $ (2.58)
</TABLE>
28
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma basic and pro forma diluted net income (loss) per
share presented in the statements of operations has been computed as
described above and also gives effect, even if antidilutive, to 12,259,614
preferred shares that were automatically converted to common stock upon the
closing of the Company's initial public offering in March 1997, using the
if-converted method.
4. DERIVATIVE FINANICAL INSTRUMENTS
Outstanding notional amounts of derivative financial instruments at
January 31, 1998 were $42.8 million and $15 million for currency forward
contracts and currency options, respectively. While the contract or notional
amounts provide one measure of the volume of these transactions, they do not
represent the amount of the Company's exposure to credit risk. The amounts
potentially subject to credit risk (arising from the possible inability of
counterparties to meet the terms of their contract) are generally limited to
the amounts, if any, by which the counterparties' obligations exceed the
obligations of the Company.
The estimated fair value of currency forward contracts and currency
options were $(1.3) million and $388,000, respectively, at January 31, 1998.
5. WORKING CAPITAL LINE OF CREDIT
The Company maintained a revolving credit agreement ("Credit
Agreement") with Mitsubishi International that provided extended credit terms
to finance wafer inventory purchases. For periods prior to January 31, 1997,
the agreement permitted 90 day extended credit terms and the interest rate
was based on the lender's internal interest rate which was required to be at
least 1.5% below the prime rate on the date of invoice, approximately 30 days
after receipt of wafers. The Company also paid a commission of 1.25% to 2.00%
based on the lending level during the prior calendar quarter. Effective
January 31, 1997, Mitsubishi International's sole compensation for financing
of the wafer purchases was a commission of 1.75% of wafer purchases and the
extended credit terms was amended to 60 days. The Credit Agreement contains
standard events of default which if triggered can permit Mitsubishi
International to declare all amounts outstanding under the Credit Agreement
due and payable. Effective January 5, 1998, in exchange for a reduction in
the commission rate the Company and Mitsubishi International amended the
agreement such that for shipments subsequent to January 31, 1998,
payment for wafers must be made 30 days subsequent to shipment.
6. OBLIGATIONS UNDER CAPITAL LEASES
The Company has entered into various capital leases, including sale
and leaseback transactions to finance purchases of property, plant and
equipment, software and masks. 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 common
stock were granted as described in Note 8. Property, plant and equipment
includes the following amounts for leases that have been capitalized:
<TABLE>
<CAPTION>
JANUARY 31, 1998 1997
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Property, plant and equipment under capital lease $ 1,609 $ 2,686
Accumulated amortization (977) (1,474)
-------------------------------
Net property, plant and equipment under capital lease $ 632 $ 1,212
-------------------------------
-------------------------------
</TABLE>
29
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum payments under capital leases consist of the following at
January 31, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31,
- -----------------------------------------------------------------
(in thousands)
<S> <C>
1999 $ 730
2000 660
2001 53
-------
Total minimum lease payments 1,443
Amount representing interest 170
-------
Present value of net minimum lease payments 1,273
Less current portion 627
-------
Long-term portion $ 646
-------
-------
</TABLE>
7. INCOME TAXES
The provision in fiscal 1998, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 11,300 $ - $ -
State 938 - -
---------------------------------------
12,238 - -
Deferred:
Federal (7,870) - -
State (701) - -
---------------------------------------
(8,571) - -
---------------------------------------
Total provision for income taxes $ 3,667 $ - $ -
---------------------------------------
---------------------------------------
</TABLE>
The Company's effective income tax provision differs from the federal
statutory rate of 35% due to the following:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
(in thousands except percentages)
<S> <C> <C> <C>
Pretax income (loss) $ 24,447 $ (1,163) $ 6,869
Federal statutory rate 35% 35% 35%
Expected tax (benefit) 8,556 (407) (2,404)
State taxes (net of federal benefit) 154 - -
- -
Utilization of research and
development tax credits (844) - -
Net operating loss not benefited - 407 2,404
Utilization of net operating losses
not previously benefited (4,199) - -
----------------------------------------------------------
Provision for income taxes $ 3,667 $ - $ -
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
30
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount 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
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998 1997
- --------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforwards $ - $ 4,800
Research credit carryforwards - 500
Capitalized research and development 490 400
Losses from foreign operations 4,505 -
Reserves and accruals 2,835 -
Other 741 -
-----------------------------------
Total deferred tax assets 8,571 5,700
Valuation allowance - (5,700)
-----------------------------------
Net deferred tax asset $ 8,571 $ -
-----------------------------------
-----------------------------------
</TABLE>
The valuation allowance decreased by $5.7 million and increased by
$700,000 in fiscal 1998 and 1997, respectively. Losses from foreign
operations for fiscal 1998 were $12.9 million.
8. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In March 1997, the Company completed an initial public offering of
3,475,000 shares of common stock. The Company received net proceeds of $37.8
million. In connection with the initial public offering, Series A, B, C and D
preferred stock, then outstanding, converted into 12,259,614 shares of common
stock.
PREFERRED STOCK
In December 1996, the Board of Directors approved an amendment to
the Certificate of Incorporation to allow 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.
WARRANTS
The Company granted warrants in connection with certain lease
arrangements. The Company had the following warrants outstanding at January
31, 1998 to purchase shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE DATE
SHARES PER SHARE ISSUED EXPIRATION OF WARRANTS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
43,200 $0.625 5/94 March 2002
36,666 $1.50 7/94 March 2002
15,789 $2.85 8/95 March 2002
------
95,655
</TABLE>
31
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The Company has reserved 7,775,000 shares of
common stock for issuance under the Plan. Unless terminated sooner, the Plan
will terminate automatically in December 2003. 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 grant. In the event of voluntary or involuntary termination of
employment with the Company for any reason, with or without cause, all
unvested options are forfeited and all vested options must be exercised
within a thirty-day period or they are forfeited. Certain of the options and
stock purchase rights are exercisable immediately upon grant. However, common
shares issued on exercise of options prior to vesting are subject to
repurchase by the Company if the holder is no longer employed by the Company.
As of January 31, 1998, 1,131,540 shares of common stock were subject to this
repurchase provision. Other options granted under the Plan are exercisable
during their term in accordance with the vesting schedule set out in the
notice of grant.
A summary of the Company's stock option activity, and related
information for the three years ended January 31, 1998 follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
(OPTIONS)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 31, 1995 317,520 $ .15
Granted 1,448,100 .27
Exercised (1,008,257) .26
Canceled (182,863) .22
-----------------------------
Balance at January 31,1996 574,500 .22
Granted 3,385,000 3.02
Exercised (1,465,750) .61
Canceled (53,000) .77
-----------------------------
Balance at January 31, 1997 2,440,750 3.86
Granted 1,446,000 13.68
Exercised (167,725) 1.54
Canceled (56,000) 6.32
-----------------------------
Balance at January 31, 1998 3,663,025 $ 7.80
</TABLE>
At January 31, 1998, options to purchase 403,975 shares of common
stock were vested at prices ranging from $.15 to $21.81 and 1,050,200 shares
of common stock were available for future grants under the Plan.
The following table summarizes information about stock options
outstanding at January 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED
CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICES NUMBER OUTSTANDING LIFE EXERCISE PRICE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.15 - $0.80 874,299 8.04 $ 0.73
$1.00 - $ 3.50 349,826 8.62 2.35
$7.50 1,198,900 8.94 7.50
$9.60 - $13.31 439,000 9.39 12.33
$13.50 - $15.20 372,000 9.79 14.41
$15.40 - $21.81 429,000 9.62 17.14
--------------------------------------------
3,663,025 8.92 $ 7.80
--------------------------------------------
--------------------------------------------
</TABLE>
32
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock awards because,
as discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, when the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation is recognized.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options.
In fiscal 1998, the fair value of each option grant was estimated on
the date of the grant using the Black-Scholes option-pricing model using a
dividend yield of 0% and the following additional weighted-average
assumptions. In fiscal 1997, the fair value for each option grant was
estimated at the date of grant using the minimum value method using a
dividend yield of 0% with the below weighted average assumptions. The minimum
value method differs from methods designed to estimate the fair value of an
option, such as the Black-Scholes option pricing model, because it does not
consider the effect of expected volatility.
<TABLE>
<CAPTION>
EMPLOYEE STOCK
EMPLOYEE OPTION PLANS PURCHASE PLAN
YEAR ENDED JANUARY 31, 1998 1997 1996 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-free interest rates 5.9% 6.3% 5.6% 5.5%
Volatility .69 - - .74
Expected life of option in years 5.0 4.7 5.0 0.6
</TABLE>
Had compensation costs been determined based upon the fair value at
the grant date for awards under these plans, consistent with the methodology
prescribed under SFAS 123, the Company's fiscal 1998 net income and earnings
per share would have decreased by approximately $2.4 million, or $0.12 per
share and $.09 per share for basic and diluted earnings per share,
respectively. The Company's fiscal 1997 net loss and net loss per share would
have been increased by approximately $153,000, or $0.03 per share for both
basic and diluted earnings per share. The Company's fiscal 1996 net loss and
net loss per share would have been increased by approximately $4,000, with no
effect on basic and diluted earnings per share. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the option's vesting period and stock purchased under the ESPP is
amortized over the six month purchase period. The effects on pro forma
disclosure of applying SFAS 123 are not likely to be representative of the
effects on pro forma disclosure of future years. Because SFAS 123 is
applicable only to options granted subsequent to January 31, 1995, the pro
forma effect will not be fully reflected until fiscal 1999.
The basic and diluted net income (loss) per share above does not
assume the conversion of preferred stock effective upon the closing of the
Company's initial public offering and is calculated using the weighted
average number of shares of common stock outstanding as described in Note 1.
The weighted average fair value of options granted during fiscal
1998 and 1997 with exercise prices less than the market price at the date of
grant is $12.55 and $1.28 per share, respectively. The weighted average fair
value of options granted during fiscal 1998, 1997 and 1996 with exercise
prices equal to the market price at the date of grant is, $8.39, $2.00 and
$.06 per share, respectively.
33
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEFERRED STOCK COMPENSATION
In connection with the grant of certain stock options to employees
in fiscal 1998 and 1997, the Company recorded deferred compensation of
$1,688,000 and $2,264,000, respectively for the difference between the fair
value of common stock for accounting purposes and the option exercise price
at the date of grant. Such amount is presented as a reduction of
stockholders' equity and is amortized ratably over the vesting period of the
related options.
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. A total of
500,000 shares of common stock has been reserved for issuance under the 1997
Purchase Plan. The 1997 Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code and has consecutive and overlapping
twenty-four month offering periods that begin every six months. The 1997
Purchase Plan commenced 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. The 1997 Purchase Plan permits eligible employees to
purchase common stock through payroll deductions of up to 10% of the
employee's compensation. The price of common stock to be purchased under the
1997 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.
In fiscal 1998, 35,987 shares of common stock at a price of $10.20
per share were issued under the 1997 Purchase Plan. Shares available for
purchase under the Purchase Plan were 464,013 at January 31, 1998.
9. 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.
10. 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. In January 1998 the Company entered into a second
noncallellable operating lease for the building adjacent to its principal
headquarters. This lease has a co-terminous provision with the original lease
expiring on April 2003. The Company also leases sales offices in Texas and
Taiwan under operating leases that expires in February 1999 and April 1999,
respectively. Future minimum lease payments under operating leases at January
31, 1998, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31
- -------------------------------------------
(in thousands)
<S> <C>
1999 1,911
2000 1,905
2001 1,940
2002 1,994
2003 2,048
Thereafter 520
--------
Total minimum lease payments $10,318
--------
--------
</TABLE>
34
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rental expense under operating leases was $988,000, $647,000 and
$97,000 in fiscal 1998, 1997 and 1996, respectively.
In fiscal 1997, the Company began subletting a portion of its main
operating facility under operating leases expiring through March 1998. This
sublease was terminated in October 1997, prior to the expiration date of the
sublease. Rental income related to this sublease in fiscal 1998 and 1997 was
$168,000 and $175,000, respectively.
In January 1998, the Company signed an additional sublease
agreement. As of January 31, 1998, future minimum rentals to be received
under this noncancellable sublease totaled $340,000 and $15,000, in fiscal
1999 and 2000, respectively.
CONTINGENCIES
In February 1997, Cirrus Logic sent the Company written notice
asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV 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 infringe 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.
Furthermore, the Company was notified by certain of its customers that
a lawsuit had been filed and served by a 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 may have 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 potential obligations 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 that the Company's MagicGraph128
and MagicGraph128V products do not infringe any of the claims of such patent.
The Company's belief is based upon a legal opinion from its patent counsel,
Townsend and Townsend and Crew LLP. There can be no assurances that the
Company or such customers would prevail in any patent litigation, or that
such customers will continue to purchase the Company's products under the
threat of litigation.
In November 1994, one of the Company's competitors (the "plaintiff")
filed an action 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. In June 1996, the litigation
was dismissed and no amounts were required to be paid by the Company. The
settlement agreement which gave rise to the dismissal did however include a
non-solicitation provision and certain contingent cross-licensing provisions.
In fiscal 1996 and 1995, the Company recorded charges to operations totaling
$610,000 and $1,500,000, respectively, for estimated legal costs related to
the litigation. In fiscal 1997, due to the dismissal of the litigation, legal
costs were reduced by $1,503,000 due to the reversal of previously estimated
legal fees.
11. SIGNIFICANT CUSTOMERS AND EXPORT SALES
In fiscal 1998, five customers accounted for 14.4%, 13.6%, 13.5%,
13.3% and 11.7%, respectively, of net sales. In fiscal 1997 three customers
accounted for 31.6%, 19.8% and 14.6%, respectively, of net sales. In fiscal
1996, three customers accounted for 34.6%, 28.6% and 14.4%, respectively, of
net sales. Net sales to customers in Asia-Pacific, Japan, United States and
Europe totaled 50.3%, 29.7%, 16.8% and 3.2% respectively, of net sales in
fiscal 1998 and 61.7%, 34.5% 3.8% and 0%, respectively, of net sales in
fiscal 1997 and 82%, 8%, 10% and 0%, respectively, of net sales in fiscal
1996.
35
<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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended January 31, 1998. 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of NeoMagic Corporation at January 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended January 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
February 6, 1998
36
<PAGE>
NeoMagic Corporation
<TABLE>
<S> <C> <C>
BOARD OF DIRECTORS EXECUTIVE OFFICERS AS OF APRIL 1, 1998 CORPORATE HEADQUARTERS
Kamran Elahian A VIRTUAL MEETING WITH MANAGEMENT NeoMagic Corporation
CHAIRMAIN IS AVAILABLE AT THE NEOMAGIC WEB SITE: 3260 Jay Stree
WWW.NEOMAGIC.COM Santa Clara, CA 95054
Prakash Agarwal Telephone 408-988-7020
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Prakash Agarwal REGISTRAR AND TRANSFER AGENT
Brian Dougherty PRESIDENT AND CHIEF EXECUTIVE OFFICER BankBoston, NA
PRESIDENT, WINK COMMUNICATIONS c/o Boston EquiServe
Kamran Elahian PO Box 8040
Irwin Federman CHAIRMAIN Boston, MA 02266-8040
GENERAL PARTNER, U.S. VENTURE
PARTNERS
Niall Bartlett LEGAL COUNSEL
James Lally VICE PRESIDENT CORPORATE MARKETING Wilson, Sonsini, Goodrich &
PARTNER, KLEINER, PERKINGS, Rosati
CAUFIELD & BYERS 650 Page Mill Road
Daniel Hauck Palo Alto, CA 94304-1050
Michael Moritz VICE PRESIDENT, WORLDWIDE SALES
GENERAL PARTNER, SEQUOIA CAPITAL INDEPENDENT AUDITORS
Dr. Clement Leung Ernst & Young LLP
Klaus Wiemer VICE PRESIDENT, CORPORATE R&D 55 Almaden Boulevard
MEISSNER+WURST GMBH, STUTTGART, San Jose, CA 95113
GERMANY
Ron Jankov
SENIOR VICE PRESIDENT AND GENERAL MANAGER, COMMON STOCK
MULTIMEDIA PRODUCTS DIVISION Nasdaq Symbol: NMGC
Ibrahim Korgav INVESTOR RELATIONS
VICE PRESIDENT MANUFACTURING OPERATIONS www.neomagic.com
Merle McClendon FORM 10-K
VICE PRESIDENT FINANCE AND A copy of the Company's current
CHIEF FINANCIAL OFFICER Form 10-K as filed with the
Securitied and Exchange
Commission may be obtained
Kenneth Murray without charge by writing:
VICE PRESIDENT HUMAN RESOURCES
NeoMagic Corporation
Deepraj Puar Investor Relations
VICE PRESIDENT, TECHNOLOGY 3260 Jay Street
Santa Clara, CA 95054
or by calling (408) 988-7020 X461
or may be obtained through
our website at www.neomagic.com
</TABLE>
<PAGE>
3260 Jay Street [NeoMagic logo]
Santa Clara, CA 95054
Telephone 408 988 7020
Fax 408 988 7032
www.neomagic.com
<PAGE>
Exhibit 21.0
NEOMAGIC CORPORATION
SUBSIDIARIES
(All 100% Owned)
JURISDICTION
NAME OF INCORPORATION
- ---- ----------------
NeoMagic International Grand Cayman Island
NeoMagic Japan K.K. Japan
<PAGE>
Exhibit 23.0
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of NeoMagic Corporation of our report dated February 6, 1998, included in the
1998 Annual Report to Stockholders of NeoMagic Corporation.
Our audits also include the financial statement schedules of NeoMagic
Corporation listed in Item 14(a). 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 schedules 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.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-20031) of our report dated February 6, 1998, with
respect to the financial statements incorporated herein by reference, and our
report included n the preceding paragraph with respect to the financial
statement schedules included in this Annual Report (Form 10-K) of NeoMagic
Corporation.
/s/ Ernst & Young LLP
--------------------------
ERNST & YOUNG LLP
San Jose, California
April 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE TWELVE MONTH PERIOD ENDED JANUARY 25, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 3-MOS 3-MOS 3-MOS
12-MOS
<FISCAL-YEAR-END> JAN-26-1997 JAN-25-1998 JAN-25-1998 JAN-25-1998
JAN-25-1998
<PERIOD-START> JAN-29-1996 JAN-27-1997 APR-28-1997 JUL-28-1997
JAN-27-1997
<PERIOD-END> JAN-26-1997 APR-27-1997 JUL-27-1997 OCT-26-1997
JAN-25-1998
<CASH> 15,682 29,645 33,763 24,145
35,004
<SECURITIES> 0 17,831 21,928 38,265
36,016
<RECEIVABLES> 2,205 6,175 5,242 10,159
11,236
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 5,237 5,157 8,372 4,148
9,342
<CURRENT-ASSETS> 23,468 59,529 69,895 77,247
95,328
<PP&E> 5,063 5,720 6,596 8,066
9,579
<DEPRECIATION> 1,668 2,006 2,383 2,816
3,347
<TOTAL-ASSETS> 27,464 63,449 74,274 83,201
107,583
<CURRENT-LIABILITIES> 22,070 18,169 24,953 26,632
41,810
<BONDS> 0 0 0 0
0
0 0 0 0
0
12 0 0 0
0
<COMMON> 8 24 24 24
24
<OTHER-SE> 4,180 44,249 48,440 55,806
65,103
<TOTAL-LIABILITY-AND-EQUITY> 27,464 63,449 74,274 83,201
107,583
<SALES> 40,792 18,281 24,570 37,146
124,654
<TOTAL-REVENUES> 40,792 18,281 24,570 37,146
124,654
<CGS> 28,650 11,171 14,522 21,568
73,171
<TOTAL-COSTS> 28,650 11,171 14,522 21,568
73,171
<OTHER-EXPENSES> 13,625 4,744 5,720 8,376
28,381
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 1,046 224 314 325
1,298
<INCOME-PRETAX> (1,163) 2,458 4,660 7,700
24,447
<INCOME-TAX> 0 369 699 1,155
3,667
<INCOME-CONTINUING> (1,163) 2,089 3,961 6,545
20,780
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (1,163) 2,089 3,961 6,545
20,780
<EPS-PRIMARY> (0.07) 0.11 0.18 0.29
0.95
<EPS-DILUTED> (0.07) 0.09 0.15 0.25
0.82
</TABLE>
