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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999,
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
of incorporation or organization No.]
3260 JAY STREET 95054
SANTA CLARA, CALIFORNIA Zip Code
Address of principal executive
offices
</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 $215,067,589 as of March 28, 1999, 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 28,1999 was 24,976,739.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrants 1999 Annual Report to Stockholders--Part II and
Part IV.
(2) Portions of the Registrant's Proxy Statement related to the 1999 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 high-performance semiconductor solutions for sale
to original equipment manufacturers ("OEMs") of mobile computing products. To
date, all the Company's net sales have been derived from the sale of multimedia
accelerators to the notebook PC market.
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 two product lines:
the MagicGraph128 and the MagicMedia256 families of pin-compatible, multimedia
(graphics, text and video) accelerator products incorporating a 128-bit and a
256-bit memory bus, respectively. 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 this product family. In June 1998, the Company announced the industry's first
256-bit multimedia accelerator, the MagicMedia256AV. This chip integrates audio
and DVD video playback acceleration with high-performance PC graphics, into a
single twenty-one million transistor chip, with a peak internal bandwidth of 3.2
gigabytes per second. Through January 1999, the Company shipped over one million
units of the MagicMedia256AV.
The Company believes that the dramatic growth of the Internet has expanded
its market opportunities, by bringing rich multimedia content to end-users at
their offices and in their homes. It is NeoMagic's strategy to participate in
multiple market opportunities driven by these trends towards multimedia,
mobility, and the Internet. To extend beyond the notebook arena, the Company
formed the Consumer Products Division and announced plans to enter into two new
market areas: digital cameras and Digital Versatile Disk (DVD) drive solutions.
The Company recently completed two acquisitions to bolster and accelerate its
new market activities. In February 1999, the Company announced the acquisition
of the Optical Drive Storage Group, located in Manchester, England, from Mitel
Semiconductor, and the acquisition of Associative Computers, Ltd., (ACL) located
in Raanana, Israel, from Robomatix. The Company's plan includes leveraging its
MagicWare embedded DRAM technology with the intellectual properties from these
recent acquisitions to deliver innovative solutions for the capture, storage,
and playback of multimedia content for a rich internet experience on mobile
platforms.
NeoMagic has established strategic relationships with third-party
manufacturing partners 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,
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DVD, 3D 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
All of the Company's net sales in fiscal 1999 were from the sale of
multimedia accelerators to notebook PC OEMs, or to third-party subsystem
manufacturers who design and manufacture notebooks on behalf of the OEMs.
Virtually all 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 notebooks sold by Acer, Compaq, Dell, Fujitsu, Gateway,
Hewlett-Packard, Hitachi, IBM, Micron, Mitsubishi, NEC, Panasonic, Sharp,
Siemens, Sony, and Toshiba.
The products in the MagicGraph128 and MagicMedia256 product families
integrate large DRAM with analog and logic circuitry on a single chip.
NeoMagic's products range from accelerators designed for notebook PCs that span
across all notebook categories including desktop replacement, mainstream, value-
oriented, ultra-portable, and entry level systems. The following table sets
forth information with respect to the Company's main products:
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<CAPTION>
MEMORY
PRODUCT PROJECT STATUS SIZE KEY FEATURES
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<S> <C> <C> <C>
MagicGraph128ZV+ Volume production 9Mbits Zoom Video port for live video capture, TV output
January 1998 support, ultra-portable applications
- -----------------------------------------------------------------------------------------------------------------
MagicGraph128XD Volume production 16Mbits Bus master for 3D/video acceleration, Spread
June 1997 spectrum EMI* suppression, 1024x768 resolution with
greater than 65,000 colors
- -----------------------------------------------------------------------------------------------------------------
MagicMedia256AV Volume production 20Mbits 256-bit integrated graphics/DVD integrated audio,
August 1998 multiple display/dual head, XGA/SXGA support, and
MagicPass-TM- EMI reduction
- -----------------------------------------------------------------------------------------------------------------
MagicWave3DX Volume production N/A Companion chip to MagicMedia256AV providing AC97
August 1998 Audio Codec function and backward compatibility to
legacy audio standards.
</TABLE>
- ------------------------
* Electro-Magnetic Interference
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 128-bit
performance to the most cost conscious notebook computers.
MAGICGRAPH128XD. A pin-compatible alternative to the MagicGraph128ZV+, the
MagicGraph128XD offers higher display resolutions, a larger number of
displayable colors, and higher performance, providing value oriented notebooks
with flexibility in display features and price/performance levels.
MAGICMEDIA256AV. The MagicMedia256AV is the first 256-bit multimedia
accelerator, providing high-end 2D graphics performance, integrated PCI audio
controller functions, and DVD video playback acceleration in a single-chip
multimedia solution for feature-rich notebook computers. To complete the PCI
audio solution of a PC, MagicMedia256AV customers would add an AC97 audio codec
as a companion chip. As an industry-standard component, the AC97 compliant codec
can be acquired from third-party sources or from NeoMagic.
MAGICWAVE3DX. The MagicWave3DX is a companion chip to the MagicMedia256AV,
which provides AC97 compatible audio codec functions, translating the digital
audio data of the MagicMedia256AV's
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integrated audio controller into analog signals provided by the microphone or
needed by the speakers. When used together, the NeoMagic solution provides 3D
audio positioning enhancements and soft Wavetable synthesis. The MagicWave3DX
also provides additional features through its hardware compatibility with legacy
audio standards.
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 the enhancement or redesign for cost reduction
purposes of existing products that will help to maintain or increase the
Company's participation in various product areas. At January 31, 1999, the
Company had approximately 139 employees engaged in research and development.
Research and development expenses in fiscal 1999, 1998 and 1997 were $31.8
million, $16.1 million and $8.6 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 2000. 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 semiconductor solutions to the leading
manufacturers of mobile products. 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, 1999, NeoMagic employed 41 individuals in its sales, marketing and
support organizations, and maintained regional sales offices in California,
Texas, Hong Kong 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 OEM. The Company believes that this approach increases the
likelihood for 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 design the DRAM product
modules
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and NeoMagic designs the overall product, including the analog and logic
circuitry. The DRAM partners then aid 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.
NeoMagic has strategic relationships with Mitsubishi Electric Corporation
("Mitsubishi Electric"), Toshiba Corporation ("Toshiba") and Infineon
Technologies ("Infineon"), formerly Siemens Aktiengesellschaft Semiconductor
Group ("Siemens"), to produce its semiconductor wafers. 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 cost and quality and at
acceptable manufacturing yields, and to deliver those products to the Company on
a timely basis. A manufacturing disruption experienced by any of the Company's
manufacturing partners would have an 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 one of
the Company's suppliers is unsuccessful, the Company's business, financial
condition and results of operations would be materially and adversely affected.
Additionally, there can be no assurances that any of the Company's manufacturing
partners 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. The Company in the past has
experienced difficulties in some of these areas, and there can be no assurance
that in the future the Company will not experience supply-related difficulties,
which could have a material effect on the Company's business, financial
condition and results of operations.
The Company uses other third-party subcontractors to perform assembly and
testing of the Company's products. The Company develops its own software and
hardware for product testing. 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
participates 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 and reliability, price, the efficiency of
production, 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. The
Company's ability to compete in the future will also 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 resources to redesign its
products or obtain license rights
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to technologies owned by third parties in order to ensure compliance with
relevant industry standards. There can be no assurance that the Company could
redesign its products or obtain the necessary third-party licenses within the
appropriate window of market demand. If the Company's products are not in
compliance with prevailing industry standards for a significant period of time,
the Company could miss crucial OEM design cycles, which could result in a
material adverse effect on 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 other future
developments in 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.
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 Technologies
(ATI), Chips & Technologies, Inc. ("Chips & Technologies"- in January 1998,
Intel Corporation acquired Chips and Technologies) 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. Some of the Company's competitors,
including Chips & Technologies and Trident, have announced or introduced
multimedia accelerator products that integrate large DRAM with analog and logic
circuitry on a single chip. Certain of the Company's competitors may offer
products with 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 the multimedia accelerator with other systems components. For
example, Cyrix (acquired by National Semiconductor in July 1997) is in
production of an integrated microprocessor and graphics accelerator. Further,
several of the Company's competitors have announced plans to develop products
that integrate the multimedia accelerator with the core logic chip set. The
successful commercial introduction by competitors of products that integrate
large DRAM with analog and logic circuitry on a single chip, or that eliminate
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 changing demand as rapidly as companies that operate their own
facilities, which could have a material adverse effect on the Company's 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 ten patents, each covering
certain aspects of the design and architecture of the Company's multimedia
accelerators. The Company also acquired and/or licensed intellectual properties
in the areas of mixed signal analog design and array-based processing as part of
the February 1999 acquisitions of the Optical Drive Development Group and ACL.
Additionally, the Company and its newly acquired businesses have patent
applications pending. There can be no assurance that the Company's pending
patent applications, or any future applications will be approved. Further, there
can be no assurance that any issued patents will provide the Company with
significant intellectual property protection, 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. In addition, there
can be no assurance that others will not independently develop similar products,
duplicate the Company's products or design around any patents that may be issued
to the Company.
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The Company also relies on a combination of mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. Despite these efforts, there can be no assurance that others will not
independently develop substantially equivalent intellectual property or
otherwise gain access to the Company's trade secrets or intellectual property,
or disclose such intellectual property or trade secrets, or that the Company can
meaningfully protect its intellectual property. A failure by the Company to
meaningfully protect its intellectual property could have a material adverse
effect on the Company's business, financial condition and results of operations.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
In December 1998, the Company filed a lawsuit in the United States District
Court for the District of Delaware against Trident Microsystems, Inc. The suit
alleges that Trident's embedded DRAM graphics accelerators infringe certain
patents held by the Company. In January 1999, Trident filed a counter claim
against the Company alleging an attempted monopolization in violation of
antitrust laws, arising from NeoMagic's filing of the patent infringement action
against Trident in December. The Company has filed for a summary motion to
dismiss the antitrust claim. There can be no assurance as to the results of the
request for summary motion, the patent infringement suit and the counter-suit
for antitrust filed by Trident.
The Company in the past has been, and in the future may be, notified that it
may be infringing the intellectual property rights of third parties. For
example, in February 1997, Cirrus Logic Inc. ("Cirrus Logic") sent the Company
written notice asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV products infringe six 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, in February 1999, the Company was contacted by two of its customers
that they have been notified of potential infringement by a holder of three
United States patents and are requesting indemnification from NeoMagic. At this
time, the Company's counsel is in the preliminary stage of analyzing these
patents but has not reached a conclusion. 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. Further, 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 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 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
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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. These
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. Also, many of the Company's
customers are moving to "just in time" relationships with their vendors, whereby
orders for product deliveries are not provided to the supplier until just prior
to the requested delivery. 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, 1999, the Company employed a total of 234 full-time
employees, including 139 in research and development, 16 in customer service and
applications engineering, 25 in sales and marketing, 21 in manufacturing and 33
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, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ ----- --------------------------------------------------------------
<S> <C> <C>
Prakash C. Agarwal........................ 45 President, Chief Executive Officer and Director
Kamran Elahian............................ 44 Chairman of the Board
Niall Bartlett............................ 38 Vice President, Lab Director, NeoMagic Technology Labs
Amnon Fisher.............................. 51 Vice President, General Manager--Consumer Products
Ron Jankov................................ 40 Vice President, General Manager--Multimedia Products
Ibrahim Korgav............................ 50 Vice President, Manufacturing Operations
Dr. Clement Leung......................... 49 Vice President, R&D NeoMagic Technology Labs
Merle McClendon........................... 43 Vice President, Finance and Chief Financial Officer
Kenneth Murray............................ 48 Vice President, Human Resources
Deepraj Puar.............................. 53 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 Portable
Product Division. 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, a semiconductor
manufacturer and Momenta Corporation, a pen-based computer company. In addition
to his duties as Chairman of the Company, Mr. Elahian is the Chairman and
co-founder of PlanetWeb, Inc., an Internet software company, Chairman and
co-founder of Centillium Technology Corporation, a telecommunications
semiconductor company and Co-Chairman and founder of Schools Online, a not for
profit company. Mr. Elahian holds a BS degree in Computer Science and
Mathematics and a Masters of Engineering from the University of Utah.
Niall Bartlett joined the Company in November 1995 as Vice President,
Marketing. In February 1999, Mr. Bartlett became Vice President, Lab Director,
NeoMagic Technology Labs. Mr. Bartlett has 14 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. From 1985 to 1991, Mr. Bartlett held a number of graphics
and multimedia engineering positions while working for IBM United Kingdom
Laboratories. Mr. Bartlett holds a BS degree in Electronic Engineering from the
University of Southampton (England).
Amnon Fisher joined the Company in June 1998 as Senior Vice President and
General Manager of the Consumer Products division. Mr. Fisher has over 20 years
experience in product development, marketing, and general management in the
semiconductor industry. Prior to joining NeoMagic, Mr. Fisher served as vice
president and general manager of LSI Logic Corporation, Consumer Products
Division.
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Prior to that, Mr. Fisher held management positions at Fujitsu Microelectronics,
Digital Equipment Corporation, and National Semiconductor Corporation. Mr.
Fisher holds a Bachelor of Science in Electrical Engineering from the Israel
Institute of Technology and a Masters of Science in Electrical Engineering from
the City College of New York.
Daniel Hauck joined the Company in March 1998 as Vice President, Worldwide
Sales. Mr. Hauck has over 18 years of sales experience. Mr. Hauck joined
NeoMagic from Cirrus Logic where he spent 12 years in a variety of senior sales
management positions, most recently as Vice President, Business Development &
Asia Pacific Sales. Prior to Cirrus Logic, Mr. Hauck was employed by Technology
Marketing, Inc. and Rockwell International. Mr. Hauck is a graduate of The Ohio
Institute of Technology where he received his Bachelors in Electrical
Engineering Technology.
Ron Jankov joined the Company in October 1995 as Vice President, Worldwide
Sales. In March 1998, Mr. Jankov was promoted to Senior Vice President and
General Manager of the Multimedia Products division. Mr. Jankov has 17 years of
engineering, operations and sales 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, 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 over 20 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 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, served as Vice President,
Engineering from the Company's inception in 1993 until March 1998, when he
became Vice President, R&D, NeoMagic Technology Labs. Dr. Leung has 14 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 a SB, a SM and a Ph.D.
degree from the Massachusetts Institute of Technology.
Merle McClendon joined the Company in January 1997 as Vice President,
Finance and Chief Financial Officer. Ms. McClendon has 20 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 over 20 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 over 30 years of
engineering and management experience in the semiconductor industry, primarily
in the area of Memory and ASIC chip development. Prior to joining the Company,
Mr. Puar worked at Cirrus Logic, Signetics and Texas Instruments. Mr. Puar holds
a B.TECH degree from the Indian Institute of Technology, Kanpur (India) and a
MSEE degree from Michigan State University.
Page 9
<PAGE>
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 90,000 square feet under leases which
expire on April 30, 2003. The Company leases offices in India, Hong Kong, Taiwan
and Texas under operating leases that expire at various times through September
2000. The Company believes its existing facilities are adequate for its current
needs, but that additional space for growth will be required in the future.
ITEM 3. LEGAL PROCEEDINGS
In December 1998, the Company filed a lawsuit in the United States District
Court for the District of Delaware against Trident Microsystems, Inc.
("Trident"). The suit alleges that Trident's embedded DRAM graphics accelerators
infringe certain patents held by NeoMagic Corporation. In January 1999, Trident
filed a counter claim against the Company alleging an attempted monopolization
in violation of antitrust laws, arising from NeoMagic's filing of the patent
infringement action against Trident in December. The Company has filed for a
summary motion to dismiss the antitrust claim. There can be no assurance as to
the results of the request for summary motion, the patent infringement suit and
the counter-suit for antitrust filed by Trident.
In February 1999, the Company was informed by two of its customers that they
have been notified of potential patent infringement by a holder of three United
States patents and are requesting indemnification from NeoMagic. At this time,
the Company's counsel is in the preliminary stage of analyzing these patents but
has not reached a conclusion. 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
NeoMagic's potential obligation to indemnify such customers will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, 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 products from the Company while under threat of
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Information regarding market, market price range and dividend
information appearing under the caption "Quarterly Data" on page 7 of the
Registrant's 1999 Annual Report to Stockholders is incorporated herein by
reference.
(b) As of March 28, 1999, there were approximately 214 registered holders of
record of the Registrant's Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information regarding selected financial data for fiscal years 1995 through
1999, appearing under the heading "Selected Consolidated Financial Data" on page
6 of the Registrant's 1999 Annual Report to Stockholders is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
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 1999 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY FLUCTUATIONS
The Company currently purchases all its wafers in Japanese yen, and utilizes
foreign currency forward contracts and options to minimize short-term foreign
currency fluctuation exposures related to these purchases. 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 hedge transactions. As of January 31, 1999,
the Company had no option contracts outstanding and its foreign currency forward
contracts were as follows:
<TABLE>
<CAPTION>
NOTIONAL FAIR VALUE
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Foreign Currency Forward Contracts...................................... $ 36.7 ($ 0.6)
</TABLE>
INVESTMENT PORTFOLIO
The primary objective of the Company's investment activities is to preserve
principal and liquidity while at the same time maximizing yields, without
significantly increasing risk. To achieve this objective, the Company places its
investments in instruments that meet high credit rating standards as specified
in the Company's investment policy. The Company's investment policy also
specifies limits on the type, concentration and maturity period of the Company's
investments. The Company does not use derivative financial instruments in its
investment portfolio.
Page 11
<PAGE>
The table below summarizes the Company's investment portfolio. The table
represents principal cash flows and related average fixed interest rates.
Principal (Notional) amounts as of January 31,1999 maturing in fiscal 2000:
<TABLE>
<CAPTION>
FAIR VALUE
----------------------
TAXABLE NON-TAXABLE
--------- -----------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
<S> <C> <C>
Cash and cash equivalents............................................ $ 34,616 $ 2,015
Weighted average interest rate..................................... 4.2% 3.4%
Short-term investments............................................... 32,274 23,823
Weighted average interest rate..................................... 5.3% 3.9%
--------- -----------
Total cash, cash equivalents and short-term investments.............. $ 66,890 $ 25,838
--------- -----------
--------- -----------
</TABLE>
Interest earned on non-taxable investments receives preferential tax treatment
under the Internal Revenue Code.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements, notes thereto and the report of
independent auditors on pages 21 through 36 of the Registrant's Fiscal 1999
Annual Report to Stockholders is incorporated herein by reference. Unaudited
quarterly financial data for the two-year period ended January 31, 1999 on page
7 of the Registrant's 1999 Annual Report to Stockholders is incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
Page 12
<PAGE>
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 1999 Annual Meeting of Stockholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors is contained
in the section entitled "Election of Directors" in the 1999 Proxy Statement and
is incorporated herein by reference. 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 relating to executive compensation
and transactions is contained in the sections entitled "Election of Directors",
"Director Compensation" and "Executive Compensation" in the 1999 Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this section is contained in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
1999 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this section is contained in the section
entitled "Certain Relationships and Related Transactions" in the 1999 Proxy
Statement and is incorporated herein by reference.
Page 13
<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.
Page 14
<PAGE>
INDEX TO FINANCIAL STATMENTS AND FINANCIAL STATEMENT SCHEDULES
(ITEM 14 (a))
<TABLE>
<CAPTION>
REFERENCE PAGE
--------------------------
<S> <C> <C>
1999 ANNUAL
FORM REPORT TO
10K STOCKHOLDERS
----- -------------
Consolidated Statements of Operations for the three fiscal years ended January 31, 1999...... 21
Consolidated Balance Sheets January 31, 1999 and January 31, 1998............................ 22
Consolidated Statements of Cash Flows for the three fiscal years ended January 31, 1999...... 23
Consolidated Statements of Stockholders' Equity for the three fiscal years ended January 31,
1999....................................................................................... 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, 1999.......... 16
</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 1999 Annual Report to Stockholders, 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 1999 Annual Report to Stockholders is not to be deemed filed as a
part of this report.
Page 15
<PAGE>
NEOMAGIC CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSE DEDUCTIONS OF YEAR
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended January 31, 1997...................................... -- $ 25 -- $ 25
Year ended January 31, 1998...................................... $ 25 $ 107 -- $ 132
Year ended January 31, 1999...................................... $ 132 $ 93 -- $ 225
</TABLE>
Page 16
<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 29, 1999.
<TABLE>
<S> <C> <C>
NEOMAGIC CORPORATION
By: /s/ MERLE MC CLENDON
-----------------------------------------
Merle Mc Clendon
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
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
- ------------------------------ Chairman of the Board April 29, 1998
Kamran Elahian
President, Chief Executive
/s/ PRAKASH AGARWAL Officer and Director
- ------------------------------ (Principal Executive April 29, 1998
Prakash Agarwal Officer)
Vice President Finance,
/s/ MERLE MCCLENDON Chief Financial Officer
- ------------------------------ (Principal Financial April 29, 1998
Merle McClendon Officer)
/s/ BRIAN P. DOUGHERTY
- ------------------------------ Director April 29, 1998
Brian P. Dougherty
/s/ IRWIN FEDERMAN
- ------------------------------ Director April 29, 1998
Irwin Federman
/s/ JIM LALLY
- ------------------------------ Director April 29, 1998
Jim Lally
/s/ KLAUS WIEMER
- ------------------------------ Director April 29, 1998
Klaus Wiemer
</TABLE>
Page 17
<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>
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.
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(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(3) Amendment to Agreement dated as of November 20, 1995, between Registrant and Mitsubishi International
Corporation, as amended.
10.15 1998 Nonstatutory Stock Option Plan
10.16 Wafer Supply Agreement, dated as of March 15, 1999, between NeoMagic International Corporation,
actually-owned subsidiary of Registrant, and Siemens Aktiengesellschaft Semiconductor Group, now
operating as Infineon Technologies.
13.1 Excerpts from Annual Report for the year ended January 31, 1999.
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 Form 10-Q for the period ended
October 31, 1997.
(3) Incorporated by reference to the Company's Form 10-K for the year ended
January 31, 1998
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the fiscal year
ended January 31, 1999.
Page 18
<PAGE>
EXHIBIT 10.15
NEOMAGIC CORPORATION
1998 NONSTATUTORY STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Nonstatutory Stock Option
Plan are:
- to attract and retain the best available personnel for positions of
substantial responsibility,
- to provide additional incentive to Employees, Directors and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws
of any foreign country or jurisdiction where Options are, or will be,
granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the Board in
accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means NeoMagic Corporation, a Delaware corporation.
(h) "CONSULTANT" means any person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services to such entity.
(i) "DIRECTOR" means a member of the Board.
(j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers, employed by the
Company or any Parent or Subsidiary of the Company. A Service Provider shall
not cease to be an Employee in the case of (i) any leave of absence approved
by the Company or (ii) transfers between locations of the Company or between
the Company, its Parent, any Subsidiary, or any successor. Neither service
as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such exchange or
system for the last market trading day prior to the time of
determination, as reported in THE WALL STREET JOURNAL or such other
source as the Administrator deems reliable;
<PAGE>
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day
prior to the day of determination, as reported in THE WALL STREET JOURNAL
or such other source as the Administrator deems reliable;
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "NOTICE OF GRANT" means a written or electronic notice evidencing
certain terms and conditions of an individual Option grant. The Notice of
Grant is part of the Option Agreement.
(o) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "OPTION" means a nonstatutory stock option granted pursuant to the
Plan, that is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Code and the regulations promulgated
thereunder.
(q) "OPTION AGREEMENT" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(r) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(s) "OPTIONED STOCK" means the Common Stock subject to an Option.
(t) "OPTIONEE" means the holder of an outstanding Option granted under
the Plan.
(u) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(v) "PLAN" means this 1998 Nonstatutory Stock Option Plan.
(w) "SERVICE PROVIDER" means an Employee including an Officer,
Consultant or Director.
(x) "SHARE" means a share of the Common Stock, as adjusted in accordance
with Section 12 of the Plan.
(y) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 2,500,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
4. ADMINISTRATION OF THE PLAN.
(a) ADMINISTRATION. The Plan shall be administered by (i) the Board or
(ii) a Committee, which committee shall be constituted to satisfy Applicable
Laws.
2
<PAGE>
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Service Providers to whom Options may be granted
hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be covered by
each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price, the time or times when
Options may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator,
in its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then current Fair
Market Value if the Fair Market Value of the Common Stock covered by such
Option shall have declined since the date the Option was granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and awards granted
pursuant to the Plan;
(x) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(xi) to modify or amend each Option (subject to Section 14(b) of the
Plan), including the discretionary authority to extend the post-termination
exercisability period of Options longer than is otherwise provided for in
the Plan;
(xii) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option previously granted by
the Administrator;
(xiii) to determine the terms and restrictions applicable to Options;
(xiv) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value equal
to the amount required to be withheld. The Fair Market Value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable; and
(xv) to make all other determinations deemed necessary or advisable for
administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options.
5. ELIGIBILITY. Options may be granted to Service Providers except
Officers and Directors; provided, however, that Options may be granted to an
Officer in connection with the Officer's initial employment by the Company.
3
<PAGE>
6. LIMITATION. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. TERM OF PLAN. The Plan shall become effective upon its adoption by the
Board. It shall continue in effect for ten (10) years, unless sooner terminated
under Section 14 of the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be exercised
and shall determine any conditions which must be satisfied before the Option may
be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon exercise
of an option, have been owned by the Optionee for more than six months on
the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the Optionee,
including any liability attributable to the Optionee's participation in any
Company-sponsored deferred compensation program or arrangement;
(vii) such other consideration and method of payment for the issuance of
Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vestings
of Options granted hereunder shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the
4
<PAGE>
Shares are issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement, to
the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the
Option may be exercised within such period of time as is specified in the Option
Agreement (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. NON-TRANSFERABILITY OF OPTIONS. Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
5
<PAGE>
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option, the Optionee shall fully vest in and have
the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock, immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
13. DATE OF GRANT. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by
6
<PAGE>
the Administrator. Notice of the determination shall be provided to each
Optionee within a reasonable time after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise
of an Option unless the exercise of such Option and the issuance and delivery of
such Shares shall comply with Applicable Laws and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
7
<PAGE>
WAFER SUPPLY AGREEMENT
This Wafer Supply Agreement (the "Agreement"), entered into as of March
15, 1999 (the "EFFECTIVE DATE"), is by and between Siemens Aktiengesellschaft
Semiconductor Group, a German corporation, with executive offices at
Balanstrasse 73, 81541 Muenchen, Germany ("SIEMENS") and NeoMagic
International Corporation ("NMI"), a Cayman Island company, with offices c/o
Caledonian Bank & Trust Ltd, Ground Floor, Caledonian House, Mary Street,
P.O. Box 1043, Georgetown, Grand Cayman, B.W.I.
RECITALS
WHEREAS, NMI and its Associated Companies (as defined below) desire to
purchase from Siemens and Siemens desires to supply to NMI silicon wafers on the
terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties agree as follows:
PART I
DEFINITIONS
1.1 "ASSOCIATED COMPANY(IES)" means a corporation or other entity:
(a) more than 50% of whose outstanding shares or securities
(representing the right to vote for the election of Directors or other managing
authorities) are, now or hereafter, owned or controlled, directly or indirectly,
by a party hereto;
(b) which does not have outstanding shares or securities, as may be
the case in a partnership, joint venture or unincorporated association, but more
than 50% of whose ownership interest representing the right to make the
decisions for such corporation, company or other entity is now or hereafter
controlled directly or indirectly by a party hereto;
(c) For the purposes of this Agreement, NeoMagic Corporation, a
California corporation with offices at 3260 Jay Street, Santa Clara, CA 95054,
shall be considered an Associated Company.
1.2 "FABRICATION CYCLE TIME" means the nominal period of time required to
manufacture the Products (as defined in Exhibit B), commencing upon wafer start
and ending on the day when Siemens first delivers the ordered quantity of
Products. The Fabrication Cycle Time for Prototype Production and Volume
Production shall be as set forth in Exhibit B. Fabrication Cycle Time does not
include local national holidays and other factory holidays.
1.3 "LEAD TIME" means the period of time from the placement of a
particular order of a Product until the date of first delivery of the ordered
quantity of the Product.
<PAGE>
1.4 "LOGIC PORTION" means the Product excluding the Memory Module. For
the avoidance of doubt, "Logic Portion" includes the interface between the
Memory Module and the remainder of the Product.
1.5 "MEMORY MODULE" means the embedded DRAM including DRAM-specific
control and interface circuitry, test control logic, and voltage generators and
regulators.
1.6 "PROCESS" means the wafer manufacturing process(es) used by Siemens
as identified in Exhibit A and any other manufacturing processes included within
the scope of this Agreement in accordance with 3.2.
1.7 "PRODUCTS" means semiconductor chips containing memory, logic and
analog elements manufactured hereunder. The Parties may, from time to time,
agree to add other product(s) or other logic or design cores to the definition
and scope of products.
1.8 "PROTOTYPE PRODUCTION" has the meaning given in Section 0 .
1.9 "VOLUME PRODUCTION" has that meaning given in Section 3.9(b).
1.10 "WAFERS" means processed silicon wafers containing finished die for
the Products manufactured by Siemens and sold to NMI.
PART II
INTELLECTUAL PROPERTY RIGHTS
2.1 TECHNICAL INFORMATION. All intellectual property and related rights
in and to technical information of either party which is provided to the other
party in the course of the development of the Product(s) shall continue to
belong to such providing party.
2.2 PATENTS. All intellectual property and related rights in and to all
inventions made by NMI and patents resulting therefrom shall belong to NMI or
its Associated Companies. All intellectual property and related rights in and
to all inventions made by Siemens in the course of the development efforts and
patents resulting therefrom shall belong to Siemens. All intellectual property
and related rights in and to all inventions jointly made by NMI and Siemens in
the course of the development efforts and patents resulting therefrom shall be
jointly owned by NMI or its Associated Companies and Siemens and may be
exploited by a joint owner without accounting to the other party. The parties
shall confer with each other before filing any patent claiming a joint
invention.
2.3 PRODUCT RIGHTS; MASKWORKS. Notwithstanding Section 2.2 title to and
interest in all worldwide mask work rights for the product shall be owned by
NMI but limited to the use in Siemens manufacturing facilities only. NMI
shall have the right to approve all mask stepping Maps on the wafer to ensure
full optimization of silicon use for wafers, such approval not to be
unreasonably withheld. Subject to Siemens's mask work rights set forth
above, NMI shall retain ownership of the Products. Masks will be destroyed
after discontinuance of production. This Agreement shall not be construed as
granting or conferring any intellectual property rights of
-2-
<PAGE>
Siemens or NMI specified in PART II of this Agreement or with respect to the
Products except as explicitly specified herein.
2.4 PROCESS. Subject to Sections 2.1, 2.2 and 2.3 above, Siemens shall
own all intellectual property and related rights in and to the Process.
PART III
WAFER SUPPLY
3.1 WAFER MANUFACTURING. On the terms and conditions of this Agreement,
Siemens will: (i) manufacture processed Wafers; and (ii) sell processed Wafers
to NMI for its own account or as the agent for its Associated Companies.
Siemens will manufacture all Wafers at its Dresden manufacturing facility. If
Siemens desires to change the location at which it manufactures wafers, it will
inform NMI at least 6 months before the change. To ensure consistent quality of
manufactured Wafers, Siemens will provide NMI with a detailed transfer schedule
and samples from the planned new manufacturing site. If NMI raises reasonable
objections regarding the quality of such samples or other material issues,
including reliability or yield concerns, Siemens shall not change the location.
3.2 PROCESSES. Siemens shall manufacture the Wafers using the Process set
forth in Exhibit A. If Siemens moves to a new or different Process, Siemens
will provide reasonable notice to NMI and thereafter provide NMI with all
necessary information (except such information that is subject to
confidentiality agreements with third parties not Associated Companies)
regarding such new processes, in order that NMI can ensure that Siemens can
continue to manufacture wafers pursuant to this Agreement. In any event,
because Siemens considers NMI as a key account and preferred customer, during
the term of this Agreement Siemens shall provide as early access as possible to
newly developed processes.
3.3 DESIGN RULES. The design rules of the * process are specified in
the * (Mu)m Embedded DRAM Design Manual (Document Number *). NMI shall
adhere to such design rules, but NMI may make requests of Siemens to vary
from any applicable Siemens' design rules with respect to design of the
non-memory portion of the Product. Siemens shall not unreasonably withhold
its consent to such variance. However, if Siemens reasonably refuses such
request and NMI nonetheless varies from Siemen's design rules, Siemens shall
bear no responsibility for any Wafer failure (i.e. low yields or
quality/reliability targets or additional cost) due to such variance of the
design rules. NMI shall bear all costs caused by any additional development
work necessitated by such variances, provided that Siemens can demonstrate to
NMI that such additional costs are directly attributable to such variance.
Siemens has a right to reject such waivers if Siemens demonstrates jeopardy
to overall standard production process.
* confidential treatment requested
-3-
<PAGE>
3.4 Qualification and Quality Control.
(a) QUALIFICATION. NMI and Siemens will cooperate fully to qualify
jointly each Product for which Wafers will be manufactured hereunder
("Qualification"). Accordingly, the parties will cooperate to implement a
Qualification procedure pursuant to which the parties will agree on
parameters to monitor product quality and reliability. After qualification,
NMI will notify Siemens when Volume Production will commence.
(b) CHANGES. After Qualification of any Product, Siemens shall not
make any major and/or critical Process change which will impact the performance,
reliability or construction of the Products, without NMI's prior written
consent, which consent shall not be unreasonably withheld. Any such changes
shall be subject to reasonable criteria requested by NMI. Siemens shall notify
NMI in writing in advance of major Process changes, including but not limited to
any changes which may:
(i) degrade Product quality or reliability;
(ii) result in failure of the Product to meet NMI's
specifications;
(iii) substantially slow Process flows;
(iv) change Process control variables, ranges or method
(v) result in Product mask revisions or significant changes to
Wafer sort programs;
NMI shall provide the written consent within two weeks after notification
of change.
(c) PROBLEM NOTIFICATION. Siemens will notify NMI promptly upon
discovering major Process problems in its manufacturing lines that may affect
the delivery capability of Wafers or Wafer yields.
(d) Siemens shall use continual and commercially reasonable efforts
to improve the yield on all Wafers manufactured pursuant to this Agreement.
Without limiting the foregoing, Siemens shall use its commercially reasonable
efforts to maintain failure rates on wafer level at a rate at least as
successful as Siemens's then-current failure rate for production of commodity
DRAM products of the same process generation.
3.5 FORECASTS.
(a) TWELVE-MONTH ROLLING FORECASTS. Each month NMI will provide
Siemens a rolling forecast ("Forecast") of the number of Wafers, which NMI
intends to purchase during each of the next twelve (12) months. The Forecast
will be based on "Wafers out," i.e., on deliveries expected to be made by
Siemens each month. Siemens shall provide enough manufacturing capacity to
supply the forecasted wafers subject to the quantity adjustments as stated in
paragraph 3.4(d).
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<PAGE>
(b) FORECAST ACKNOWLEDGMENT. Siemens will treat NMI as a Key Account
and therefore will apply best efforts to manufacture the number of wafers
indicated by each forecast. The Parties shall mutually agree on a committed
forecast.
(c) REQUIRED ORDERS. Purchases will be confirmed by firm purchase
orders placed at least twelve (12) weeks prior to the beginning of the month in
which shipment is expected. The parties shall jointly work together to reduce
the cycle time. In a normal product mode, NMI may order once a month on a
weekly basis and Siemens will deliver such orders as per the agreed-upon cycle
time. For example, if NMI submits a Forecast at the end of December, 1998, a
purchase order must be placed for April of 1999. The ramp-up-plan for the first
product shall be mutually agreed between NMI and Siemens.
(d) LIMITED QUANTITY ADJUSTMENTS.
(i) NMI may increase or decrease Forecast quantities for
the fifth and sixth calendar month following the date of the Forecast by no more
than * and for the seventh calendar month by no more than *. The accumulated
decrease or increase of the Forecast quantities within these three months will
be not more than * , except upon mutual agreement of the parties.
(ii) For example, if NMI submits a Forecast in December 1998
estimating Product purchases of * Wafers in each of May, June, and July of
1999, then the Forecast submitted in January 1999 may increase estimated Product
purchases for May and June up (or down) by a quantity of * Wafers (i.e., *)or
down (or up) by a quantity of * Wafers (i.e., *) for July.
(iii) NMI may increase or decrease the Forecasted quantities
for the eighth, ninth and tenth calendar months following the date of the
Forecast by up to * in the next month's Forecast.
(iv) Forecast quantities for the eleventh and twelfth months
following the date of the Forecast will be based on NMI's best estimate made in
good faith and may be revised up or down in the following monthly Forecast
according to changes in NMI's best estimates.
3.6 DEMAND. NMI shall not be under any obligation to purchase wafers
hereunder except as otherwise provided by Sections 3.5 or 3.7.
3.7 PURCHASE ORDER PROCESS. All purchases under this Agreement will be
initiated by authorized NMI orders. Purchase orders shall state unit quantities,
unit descriptions, requested delivery dates, prices and shipping instructions.
In the event of any conflict between a purchase order and this Agreement, this
Agreement shall control as to such conflict.
* confidential treatment requested
-5-
<PAGE>
3.8 ORDER ACKNOWLEDGMENT. Siemens agrees to accept all Product
purchase orders within the limits of the committed Forecast as defined in
3.5(b). Siemens will use diligent efforts to manufacture ordered Products in
excess of the Forecast, subject to its then existing third-party capacity
commitments. Siemens agrees to deliver a written acknowledgment of such
purchase order within five (5) working days after receipt of the purchase
order. Siemens's failure to deliver such an acknowledgement shall be
considered acceptance of such purchase order.
3.9 PROTOTYPE AND VOLUME PRODUCTION LOTS. NMI shall order Products in
either Prototype Production lots or Volume Production lots as follows:
PROTOTYPE LOTS. NMI may order Wafers in prototype lots ("Prototype
Production") whenever NMI: (i) seeks a Qualification in accordance with
Section 3.4(a); (ii) seeks to make any engineering changes, including without
limitation changes to improve Product functionality and Wafer yield; or (iii)
elects, at NMI's risk, to purchase Wafers in volume prior to Qualification.
If Siemens reasonably demonstrates to NMI that manufacture of the Prototype
Lot would (i) cause substantial and material adverse consequences to
Siemens's manufacturing process or equipment or (ii) would result in the
manufacture of an integrated circuit that would otherwise substantially harm
any equipment on which such circuit operated, Siemens will have the right to
reject purchase orders for such Prototype Lot, provided that if NMI
demonstrates that such resulting circuit would operate without adverse
consequences under different operating tolerances (such as through a
specification change or errata sheet), Siemens will nevertheless continue to
manufacture such Prototype Lot. In such case already existing purchase orders
for prototype production will be adapted mutually. The further procedure
regarding already started lots will be defined mutually. Prototype lots are
not covered via the forecast. NMI will place purchase orders for prototype
lots on a weekly basis. Feedback regarding the acceptance of such purchase
orders will be given within five working days from Siemens to NMI. The price
for prototype lots is defined in Exhibit D.
(i) A Prototype Production lot shall contain the number of
Wafers specified in Exhibit B. NMI may order multiple Prototype Production lots
of the same Wafer. NMI may require Siemens to hold Prototype Production at
"gate" or "contact" intermediate stages of production. NMI should not hold lots
longer than sixty (60) days in such an intermediate stage. During Prototype
Production, Siemens will provide "Vth" and "gate" length process splits (i.e.,
examine Wafers at a particular step in fabrication) in order for NMI to evaluate
variations within the specifications for each process.
(ii) Siemens will use its standard manufacturing procedures
for producing Prototype Lots. Notwithstanding the foregoing, NMI acknowledges
that (i) Wafers delivered from such Prototype Production are not quality
controlled and (ii) Siemens extends no warranty to Wafers from Prototype
Production. NMI shall indemnify, defend and hold Siemens harmless from any
product liability claim made by a third party against Siemens based on use of a
Wafer from a Prototype Lot.
(iii) SIEMENS EXPRESSLY DISCLAIMS EACH AND EVERY WARRANTY
REGARDING ANY WAFERS DELIVERED PURSUANT TO THIS SECTION
-6-
<PAGE>
3.90, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
(b) VOLUME PRODUCTION LOTS. Upon Qualification of any particular
Product, NMI may order that Product only in volume production lots ("Volume
Production"). A Volume Production lot shall contain the number of Wafers
specified in Exhibit B.
(c) CANCELLATION. NMI may cancel Product purchase order(s) or any
portions thereof for any reason by notifying Siemens in writing prior to the
scheduled delivery date on the purchase order(s), provided that NMI pays the
fees specified in this Section 3.9(c). Cancellation shall be effective upon
Siemens's receipt of the written cancellation notice from NMI, or upon the date
specified in such cancellation notice if later than the date of receipt.
Siemens shall cease all work on such canceled purchase order quantities in
accordance with the cancellation notice; provided that NMI shall pay a
cancellation charge calculated in the manner provided below ("Cancellation
Charge"). Siemens will invoice Cancellation Charges, if any, at the end of each
month, and NMI will pay the Cancellation Charge within forty-five (45) days
after receipt of invoice. The foregoing rights shall be Siemens's sole remedy
for any cancellation of a purchase order or failure to order quantities
specified in a Forecast. The Cancellation Charge shall be calculated as a
percentage of the Wafer price otherwise payable based upon the number of weeks
between the date NMI submits the cancellation notice and the delivery date of
the wafers as set forth in the then most current Report (as defined in
Section 3.10(b). Such rate is as follows:
<TABLE>
<CAPTION>
0 - 1 weeks prior to * % of price due
delivery date
<S> <C>
1-2 * %
3-4 * %
5-6 * %
7-8 * %
9-11 * %
12-13 * %
>13 * %
</TABLE>
(d) At NMI's request, Siemens shall deliver all work-in-process to
NMI or destroy all such work-in-process and provide written certification of
destruction to NMI. Notwithstanding the foregoing, there shall not be any
cancellation change if NMI cancels an order before wafers are physically started
or the production time.
* confidential treatment requested
-7-
<PAGE>
3.10 Delivery and Shipping.
(a) DELIVERY COMMITMENTS. Siemens will deliver Wafers to the carrier
for shipment, (i) within three (3) days plus the Fabrication Cycle Time from the
date of purchase order for Prototype Production, and (ii) within one (1) week
plus the Fabrication Cycle Time from the date of purchase order for Volume
Production, unless NMI requests a longer period. Siemens will use reasonable
efforts to distribute the manufacture of Wafers evenly throughout each month
(i.e., start and complete Wafers linearly). Upon NMI's reasonable request,
Siemens will hold Products during their manufacture in accordance with terms to
be agreed upon by the parties. If Wafers are held by NMI during manufacture,
the foregoing delivery commitments will be extended by the number of days that
the Wafers are held.
(b) WORK-IN-PROCESS REPORTING. Siemens will provide NMI with work-
in-process reports ("Reports") on a periodic basis. Reports shall be sent to
NMI via facsimile or email. The Reports shall include information concerning:
(i) the type, quantity and Siemens lot number of Wafers at each stage of
production (by mask location); (ii) the remaining number of Wafers ready for
shipment; (iii) estimated delivery dates; and (iv) such other information as is
customary or useful for such Reports. The format and frequency of the Reports
will be determined by the development work as it is completed, provided that the
frequency shall be once per week.
(c) SHIPPING. All Wafers shall be delivered to NMI or its designated
assembly location and shall be suitably packed for shipment in Siemens's
standard containers, marked for shipment as specified in NMI's purchase order,
and delivered to a carrier or forwarding agent chosen by NMI. However, should
NMI fail to designate a carrier, forwarding agent or type of conveyance, Siemens
shall make such designation in conformance with its standard shipping practices.
Shipment will be "ex works (EXW) fabrication location" according to the
Incoterms 1990.
3.11 TEST AND INSPECTION.
(a) BY SIEMENS. Siemens will supply to NMI, with each Wafer
shipment, process control monitor ("PCM") test results and actual Wafer sort
data results. In addition and without limiting the foregoing, Siemens will
apply its standard outgoing visual inspection procedures and tests, provided
that such data will not be reported on a regular basis unless NMI so requests on
a specific lot.
(b) REPORTS. Siemens will supply NMI with reliability and
statistical quality data on the Siemens standard process, which is made for the
same product line, at regular intervals to be agreed upon but no less than once
a quarter. The format and the contents of these report(s) are to be mutually
agreed upon. Upon reasonable notice, Siemens will allow NMI on-site inspection
at reasonable intervals to ensure that Siemens follows the reliability and
testing procedures set forth in this Agreement.
(c) BY NMI. Wafers manufactured using the Process set forth in
Exhibit A shall be subject to incoming inspection, electrical testing and
reliability testing by NMI in accordance with the acceptance criteria set forth
in Exhibit C hereto. Wafers manufactured under other Processes (jointly defined
by the parties in accordance with Section 3.2) shall be subject to incoming
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<PAGE>
inspection, electrical testing and reliability testing by NMI in accordance with
updated acceptance criteria which the parties agree to negotiate in good faith
promptly at or prior to the implementation of any such other Process. Wafers
meeting applicable initial acceptance criteria or updated acceptance criteria
will be deemed accepted by NMI, and NMI shall so notify Siemens.
(d) TEST FAILURE. If any Wafer or lot of Wafers fails incoming
inspection or test, and if test failure is caused by any defect in the Process
used by Siemens, any defect in the Memory Module provided by Siemens or any
other design core (if such core is provided by Siemens), NMI may reject such lot
or Wafer in writing as soon as possible but at least within thirty (30) days
after delivery and return such lot or Wafer to Siemens, at Siemens's expense,
for a full refund. NMI will explain the reasons for wishing to reject a lot,
and Siemens will be entitled to examine any lot that NMI wishes to reject. The
parties will seek in good faith to resolve any disagreement as to whether a lot
is conforming. For return shipment, NMI shall use reasonable commercial efforts
to use Siemens's original packing, but in any event shall use commercially
reasonable packaging, and supply all identifying shipping documents in order to
avoid any deterioration of the goods.
(e) LOW LINE YIELD ON VOLUME PRODUCTION. If the Yield, good
memory/wafer yield, which meets the inspection and test criteria, is less than
the valid lower limit as defined in 3.11 (f), and if NMI so requests, Siemens
will explain the reasons for the low line yield. Lots or Wafers with sort
yields below * may not be shipped unless NMI's prior approval is obtained.
(f) YIELD BASED ADJUSTMENTS. Wafer prices shall be adjusted if the
average Yield (as defined in Exhibit D) of Wafer Lots delivered in a given
calendar quarter is below the allowance range ("Allowance Range," as further
defined below). The basic post-fuse memory yield assumed for all calculations
shall be as defined in Exhibit D. The Allowance Range (as an average of all
delivered wafers in calendar quarter) which causes no wafer price adjustment
shall depend on the production volume as follows:
(i) There shall be no yield based adjustment for Wafer Outs
less than * Wafers per quarter during Ramp-up.
(ii) During the first quarter in which Wafer Out volume is
between * and * ( * ), the Allowance Range shall be the Lower Limit 1 as
specified in Exhibit D.
(iii) After the second production quarter when Wafer Outs are
greater than * , the Allowance Range shall be the Lower Limit 2 as specified in
Exhibit D.
(iv) Regardless of the foregoing, Siemens shall in all cases
use its usual high manufacturing standards consistent with the standards of
other semiconductor manufacturers.
(v) In addition to the foregoing, the parties shall work
together to achieve a consistent Process Defect Rate of less than * .
* confidential treatment requested
-9-
<PAGE>
(g) The price adjustment shall be determined according to an
adjusted Wafer value that is equal to the actual price adjusted by the
percentage change from the Established Standard Yield, subject to the
Allowance Range. For example, if the average Yield rate is * and the lower
limit of the Allowance Range is also * in the case of a Product with an
Established Standard Yield of * , there shall be no value adjustment; if the
average Yield rate is * for that Product and the current price is * , the
adjusted value shall be * x * = *. The Established Standard Yield will be
reviewed in every quarter and mutually agreed upon to apply for the following
three months. NMI shall have the option of obtaining a credit or prompt
refund of the amount of any adjustments.
(h) For the purposes of this Section 3.11, the following definitions
apply:
(i) "Wafer Lot" shall mean 25 Wafers; and
(ii) "Yield" shall mean electrically good memory dice
divided by the number of full die locations on the Wafer (i.e., excluding
locations which are not complete due to the curved edge of the Wafer so long
as Siemens uses best efforts to optimize the use and coverage of silicon on a
Wafer).
PART IV
COMPENSATION
4.1 PURCHASE PRICE. The price of the Wafers shall be determined from
time to time by agreement. The price shall be adjusted according to
Section 3.11(f). The fixed price for any quarter will be reviewed during the
last month of the previous quarter and mutually agreed to by the parties in good
faith. For example, the Q2 (April-June) price will be finalized by December
End. If an agreement cannot be reached in time, the current price will continue
to be used for the products already ordered in that time period. Wafer prices
are to be adjusted back to agreed prices for that period once the price
agreement is reached.
THIS IS NOT VALID FOR THE START UP PHASE WITH THE FIRST PRODUCT * AND THE AGREED
SPECIAL PRICES FOR *. The price agreement for * and the Forecast for * have to
be agreed on by the end of * the latest.
4.2 PAYMENT. Siemens may submit invoices for Wafers not earlier than the
date of Wafer shipment to NMI. Invoices shall be paid within * days after
receipt. Payment will be made by NMI or its agent. Payment shall be in United
States dollars unless otherwise agreed. For masks tooled by Siemens hereunder,
Siemens may submit mask tooling invoices with the first prototype lot.
TAXES. Because NMI intends to transport Wafers out of Germany, purchase prices
shall be inclusive of all taxes and customs duties, and Siemens shall pay and be
liable for all taxes and duties imposed by any taxing jurisdiction in Germany or
at the location of fabrication.
* confidential treatment requested
-10-
<PAGE>
PART V
WARRANTY AND DISCLAIMER; LIABILITY
5.1 WARRANTY. Siemens warrants that the Wafers manufactured hereunder
shall be free from defects or failures in material and workmanship for the
period of one (1) year from the date of shipment and shall conform to the
initial specifications set forth in Exhibit C ("Specifications") as may be
amended by the parties' mutual written agreement. Siemens will, at NMI's
option, promptly replace the defective Wafers or provide NMI with credit.
Siemens shall not be liable, and the above warranty does not extend to, defects
or failures in Wafers to the extent such defects or failures unavoidably result
from defects in the design of the Logic Portion or any other technology or
information provided from NMI to Siemens in writing hereunder.
5.2 NOTICE. Upon discovery of nonconforming Wafers by NMI, NMI shall
promptly notify Siemens in writing of the nature of the defects or failures in
detail, and on Siemens's request, shall return such non-conforming Wafers to
Siemens.
5.3 DISCLAIMERS. THE PRODUCT QUALITY WARRANTY SET FORTH ABOVE IS
EXCLUSIVE AND NO OTHER PRODUCT QUALITY WARRANTY, WHETHER WRITTEN OR ORAL, IS
EXPRESSED OR IMPLIED. SIEMENS SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.4 LIMITATION OF LIABILITY. Siemens assumes liability for any personal
injury for which it is found responsible without limitation. If found
responsible for property damages of NMI and/or its Associated Companies and/or
its or their direct customers, Siemens shall indemnify NMI and/or its Associated
Companies for expenses incurred for restoration of the damaged property up to a
maximum amount of U.S. * per damage event. Excluding damages that result from
a breach of PART II and Section 7.1, in no event will either party be liable for
indirect or consequential damages arising from interrupted operation, loss of
profits, loss of information and data, except in cases of gross negligence,
intent or in any cases where liability is mandatory at law.
PART VI
INTELLECTUAL PROPERTY INDEMNITY
6.1 INDEMNIFICATION BY NMI. NMI agrees to defend Siemens against any
third-party actions or claims arising out of the manufacture, use, sale, offer
for sale, or importation of Products and brought against Siemens to the extent
based upon a claim that the Logic Portion infringes any worldwide patent,
trademark or copyright, trade secret or similar intellectual property right of
any third party, and NMI agrees to purchase any work-in-process for Products and
to pay any settlement amounts or damages awarded against Siemens (including
reasonable attorneys fees and court costs) to the extent based upon such a
claim; provided that Siemens provides NMI (i) prompt notice thereof, (ii)
reasonable assistance in connection with the defense thereof (at NMI's expense
excluding Siemens employee expense), and (iii) full control of the defense and
settlement thereof. NMI shall not settle any such claim in a manner that has a
material adverse effect on Siemens
* confidential treatment requested
-11-
<PAGE>
without Siemens's prior written consent. NMI agrees to keep Siemens apprised
of the progress of any action or claims covered by this Section 6.1.
Notwithstanding the foregoing, NMI's obligation to indemnify Siemens under
this Section 6.1 shall not apply to any actions or claims described in
Section 6.2 below.
6.2 INDEMNIFICATION BY SIEMENS.
(a) Siemens agrees to defend NMI and/or its Associated Companies
against any third-party actions or claims arising out of the manufacture, use,
sale, offer for sale, or importation of Products and brought against NMI and/or
its Associated Companies to the extent based upon a claim that the use of any
Process used by Siemens or any technology or information provided by Siemens
under this Agreement (including but not limited to the Memory Module) infringes
or misappropriates (directly or indirectly, such as, without limitation, through
the sale or importation of a wafer manufactured by any such Process) any
worldwide patent, copyright, trade secret or other intellectual property right
of any third party, and agrees to pay any settlement amounts or damages awarded
against NMI and/or its Associated Companies (including reasonable attorneys fees
and court costs) to the extent based upon such a claim; provided that NMI and/or
its Associated Companies provides Siemens (i) reasonably prompt notice thereof,
(ii) reasonable assistance in connection with the defense thereof (at Siemens's
expense excluding NMI and/or Associated Company employee expense), and (iii)
allows Siemens full control of the defense and settlement thereof. Siemens
shall not settle any such claim in a manner that has a material adverse effect
on NMI without NMI's prior written consent. Siemens agrees to keep NMI and/or
its Associated Companies apprised of the progress of any action covered by this
Section 6.2.
(b) Siemens shall at all times have the right to: (i) obtain
appropriate licenses to, or (ii) modify the Process or Memory Module (as
applicable) provided that the resulting Product complies with the specifications
set forth in Exhibit C and subject to NMI's right to approve such changes in
advance, such pre-approval not to be unreasonably withheld. However, if an
action described in Section 6.2(a) is brought, NMI at its option may return to
Siemens all inventory and work-in-process for Products judged to be infringing
(whether by final judgment, preliminary injunction or other preliminary relief),
and Siemens shall refund any payments made to it by NMI for such Products.
(c) EXCLUSIONS. Siemens shall not be obligated to indemnify and hold
harmless NMI where the infringement is caused by: (i) the use of Products by NMI
and/or its Associated Companies in combination with other circuits components,
components, devices or products if both (x) the infringement would not have
occurred but for such combination and could have been avoided by a different
commercially viable combination and (y) such combination is not reasonably
necessary to use the Product for its intended purpose; (ii) use of the Products
by NMI and/or its Associated Companies in applications or environments for which
Products were not designed; or (iii) modifications to the Products by NMI and/or
its Associated Companies if such infringement would have been avoided absent
such modifications, unless such modifications were authorized by Siemens.
6.3 ENTIRE LIABILITY. THE FOREGOING STATES EACH PARTY'S ENTIRE LIABILITY
AND OBLIGATION (EXPRESS, STATUTORY, IMPLIED OR OTHERWISE) UNDER THIS AGREEMENT
WITH RESPECT TO INFRINGEMENT OF THIRD PARTY INTELLECTUAL
-12-
<PAGE>
PROPERTY. IN NO EVENT SHALL EITHER PARTY'S ENTIRE LIABILITY PURSUANT TO THIS
PART VI ARISING OUT OF ANY INFRINGEMENT CLAIM EXCEED THE AMOUNT PAID OR
PAYABLE BY NMI HEREUNDER FOR THE PRODUCTS THAT ARE THE SUBJECT OF SUCH CLAIM.
PART VII
GENERAL PROVISIONS
7.1 CONFIDENTIALITY.
(a) CONFIDENTIAL INFORMATION. "Confidential Information" means any
technical data, trade secret, know-how, or other information disclosed by any
party (including the Associated Companies) hereunder, either directly or
indirectly, in writing, orally, by drawing or by inspections, and which shall be
marked by the disclosing party as "Confidential" or "Proprietary". If such
information is disclosed orally, through demonstration or by inspection, in
order to be deemed Confidential Information, it must be specifically designated
as being of a confidential nature at the time of disclosure and confirmed in
writing to be received by the receiving party within ten (10) days of such
disclosure.
(b) EXCLUSIONS. Notwithstanding the foregoing, Confidential
Information shall not include information which:
(i) is known to the receiving party at the time of
disclosure or becomes known to the receiving party without breach of this
Agreement;
(ii) is or becomes publicly known through no wrongful act of
the receiving party or any affiliate of the receiving party;
(iii) is rightfully received from a third party (excluding
the Associated Companies) without restriction on disclosure;
(iv) is independently developed by the receiving party or
any of its affiliates by persons who had no access to the information;
(v) is furnished to any third party by the disclosing party
without restriction on its disclosure; or
(vi) is approved for release upon a prior written consent of
the disclosing party.
(c) COMPELLED DISCLOSURE. Notwithstanding the foregoing, a receiving
party may disclose Confidential Information if such Confidential Information is
disclosed pursuant to judicial order, requirement of a governmental agency or by
operation of law; provided, however, that the receiving party shall provide
prior notice to the disclosing party and thereafter use reasonable commercial
efforts to assist the disclosing party in preventing or controlling such
compelled disclosure.
-13-
<PAGE>
(d) NONDISCLOSURE. The receiving party agrees that it will not
disclose any Confidential Information to any third party except for the
Associated Companies that agree in writing to this PART VII and will not use
Confidential Information of the disclosing party for any purpose other than for
the performance of obligations under this Agreement. The receiving party
further agrees that Confidential Information shall remain the sole property of
the disclosing party and that it will take all reasonable precautions to prevent
any unauthorized disclosure of Confidential Information by its employees and
independent contractors. No license shall be granted by the disclosing party to
the receiving party with respect to Confidential Information disclosed hereunder
unless otherwise expressly provided herein. Each party will disclose the
other's Confidential Information only to those of its employees that have a need
to know and who are informed that such information is confidential.
(e) NONDISCLOSURE AGREEMENTS. Each party agrees that it (i) has or
that it shall obtain the execution of standard nondisclosure undertakings with
its employees, (ii) shall diligently enforce such agreements, and (iii) shall be
responsible for the actions of such employees in this respect.
(f) RETURN OF CONFIDENTIAL INFORMATION. After expiration or
termination of this Agreement upon the request of the disclosing party, the
receiving party will promptly return all Confidential Information furnished
hereunder and all copies thereof.
(g) PUBLICITY. The parties agree that all publicity and public
announcements concerning the formation and existence of this Agreement shall be
jointly planned and coordinated by and among the parties. Neither party shall
disclose any of the provisions of this Agreement, the existence of this
Agreement, nor that the parties are doing business with one another to any third
party without the prior written consent of the other party. NMI will be
responsible for all communications with NMI's customers concerning the subject
matter hereof, and Siemens agrees to forward to NMI any communications it
receives from NMI's customers. Notwithstanding the foregoing, any party may
disclose information concerning this Agreement as required by the rules, orders,
regulations, subpoenas or directives of a court, government or governmental
agency, after giving prior notice to the other parties and either party may
disclose this Agreement to its attorneys, accountants or like consultants that
have a need to know or to potential investors or potential acquiring companies.
(h) REMEDY FOR BREACH OF CONFIDENTIALITY. If a party breaches any of
its obligations with respect to confidentiality and unauthorized use of
Confidential Information hereunder, the non-breaching party shall be entitled to
equitable relief to protect its interest therein, including but not limited to
injunctive relief, as well as money damages.
7.2 TERM AND TERMINATION. This Agreement shall remain in force for five
(5) years from the time the first product is released to production by NMI
unless it is terminated earlier as provided in this Agreement. At the end of
five (5) years, this Agreement will be extended for another one (1) year under
the same terms and conditions provided herein unless notice of termination is
given by either party twelve (12) months prior to the expiration date.
Notwithstanding the foregoing, all existing orders and the provisions of PART V,
PART VI, and Sections 7.1 and 7.6 of PART VII shall survive any termination or
expiration of this Agreement.
-14-
<PAGE>
(a) Subject to Section 7.2(b), either party may terminate this
Agreement with immediate effect, at its sole discretion, upon giving written
notice to the other party, in case:
(i) the other party defaults in the performance of any
material obligation hereunder, and if any such default is not corrected within
ninety (90) days after the defaulting party receives written notice of such
default from the non-defaulting party,
(ii) the business of the other party as a commercial
enterprise ceases, or
(iii) The other party files a petition in bankruptcy, or is
adjudicated bankrupt, or makes a general assignment for the benefit of
creditors, or becomes insolvent, or is otherwise unable to meet its business
obligations for a period of three (3) consecutive months.
(b) In the event that Siemens terminates this Agreement pursuant to
Section 7.2(a)(ii) or 7.2(a)(iii) above, Siemens agrees to supply Wafers, on the
terms and conditions hereof to NMI's customers upon request by such customers
and for the period that this Agreement would have otherwise been in effect
absent such termination. NMI agrees to provide Siemens with a list of such
customers reasonably prior to the occurrence of the events specified in Sections
7.2(a)(ii) or 7.2(a)(iii) above.
7.3 FORCE MAJEURE. The parties shall not be liable to one another for
failure to perform any part of this Agreement except for any payment obligation
when such failure is due to fire, flood, strikes, labor troubles or other
industrial disturbances, inevitable accidents, war (declared or undeclared),
embargoes, blockades, legal restrictions, governmental regulations or orders,
riots, insurrections, or any cause beyond the control of such party. However,
the party so prevented from performance shall use diligent efforts to resume
performance, and the parties shall proceed under this Agreement when the causes
of such nonperformance have ceased or have been eliminated.
7.4 ASSIGNMENT. Neither Party may assign this Agreement, delegate its
obligations or assign its rights thereunder without the prior written consent of
the other Party, which consent will not be unreasonably withheld.
Notwithstanding the foregoing and without consent of the other Party:
(a) Either Party may assign this Agreement, delegate its obligations
or assign its rights thereunder to an Affiliated Company. An "Affiliated
Company" is any corporation, company or other entity which: (i) is Controlled by
a Party hereto; (ii) Controls a Party hereto; or (iii) is under common control
with a Party hereto. For this purpose, "Control" means that more than fifty
percent (50%) of the controlled entity's outstanding shares or ownership
interest representing the right to make decisions for such entity are owned or
controlled, directly or indirectly, by the controlling entity; and
(b) Siemens may assign this Agreement, delegate its obligations or
assign its rights thereunder to a third party to whom all or substantially all
assets of Siemens Semiconductor Group or of the business unit performing this
Agreement are transferred.
Without limiting the foregoing, this Agreement shall be binding upon and
inure to the benefit of each Party's successors and permitted assigns.
-15-
<PAGE>
7.5 GOVERNING LAW; DISPUTES. This Agreement will be interpreted and
enforced in accordance with the laws of Switzerland without reference to
conflicts of law principles. This Agreement shall not be governed by the 1980
U.N. Convention on Contracts for the International Sale of Goods. Each party
will use reasonable good faith efforts to settle any dispute arising out of this
Agreement. Should such efforts prove unsuccessful, any dispute or claim arising
out of or in relation to this Agreement, or the interpretation, making,
performance, breach or termination thereof, shall be finally settled by binding
arbitration under the Rules of Conciliation and Arbitration of the International
Chamber of Commerce as presently in force ("Rules") and by three (3) arbitrators
appointed in accordance with said Rules. Judgment on the award rendered may be
entered in any court having jurisdiction thereof. The place of arbitration
shall be in Zurich. Any monetary award shall be in U.S. dollars and the
arbitration shall be conducted in the English language.
7.6 EXPORT CONTROLS. Siemens and NMI acknowledge that they are each
subject to regulation by agencies of the U.S. and German Governments, including
the U.S. Department of Commerce, which prohibit export or diversion of certain
products and technology to certain countries. Any and all obligations of the
parties to provide technical information, technical assistance, any media in
which any of the foregoing is contained, training and related technical data
(collectively, "Data") shall be subject in all respect to such United States and
German laws and regulation as shall from time to time govern the license and
delivery of technology and products abroad by persons subject to the
jurisdiction of the United States, including the Export Administration Act of
1979, as amended, any successor legislation, and the Export Administration
Regulations issued by the Department of Commerce, International Trade
Administration, Bureau of Export Administration.
7.7 NOTICE. Any notice required or permitted to be given under this
Agreement shall be delivered (i) by hand, (ii) by registered or certified mail,
postage prepaid, return receipt requested, to the address of the other party
first set forth above, or to such other address as a party may designated by
written notice in accordance with this Section 7.7 by overnight courier, or
(iii) by electronic transmission with conforming letter mailed under the
conditions described in (ii). Notice so given shall be deemed effective when
received, or if not received by reason of fault of addressee, when delivered.
If to Siemens, to:
Siemens Aktiengesellschaft
Balanstrasse 73, 81541
Muenchen, Germany
If to NMI, to:
Prakash Agarwal
NeoMagic International Corporation
c/o Caledonian Bank & Trust Ltd.
Ground Floor
Caledonian House
Mary Street
P.O. Box 1043
-16-
<PAGE>
Georgetown, Grand Cayman, B.W.I.
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Michael J. Danaher
7.8 RELATIONSHIP OF PARTIES. The relationship between NMI and Siemens
under this Agreement is that of independent contractors and neither shall be,
nor represent itself to be, the joint venturer, franchiser, franchisee, partner,
broker, employee, servant, agent, or representative of the other for any purpose
whatsoever. No party is granted any right or authority to assume or create any
obligation or responsibility, express or implied, on behalf of, or in the name
of, another party or to bind another in any matter or thing whatsoever.
7.9 WAIVER. Should any of the parties fail to exercise or enforce
any provision of this Agreement or to waive any rights in respect thereto, such
waiver or failure shall not be construed as constituting a continuing waiver or
a waiver of any other right.
7.10 SEVERABILITY. In the event that any provision or provisions of this
Agreement shall be held to be unenforceable, the parties shall renegotiate those
provisions in good faith to be valid, enforceable substitute provisions which
provisions shall reflect as closely as possible the intent of the original
provisions of this Agreement. If the parties fail to negotiate a substitute
provision, this Agreement will continue in full force and effect without said
provision and will be interpreted to reflect the original intent of the parties.
7.11 ENTIRE AGREEMENT. This Agreement, including the Exhibits referred
to herein, contains the entire understanding of the parties, and supersedes
any prior agreement between or among the parties with respect to its subject
matter. In case of any conflicts between this Agreement and any purchase
orders, acceptances, correspondence, memorandum, listing sheets and other
documents forming part of any order for Products, this Agreement shall
govern. This Agreement shall not be amended or modified except by written
instrument signed by the duly authorized representatives of the parties
hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized representatives or officers, effective as of the
Effective Date.
SIEMENS NEOMAGIC INTERNATIONAL
CORPORATION
By: /s/ Andrea von Zitzewitz By: /s/ Prakash Agarwal
------------------------------------- -----------------------------
Name: Andrea von Zitzewitz Name: Prakash Agarwal
----------------------------------- ---------------------------
President, Memory Products Division CEO President
Title: Title:
----------------------------------- ---------------------------
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<PAGE>
EXHIBITS
--------
A - Initial Process(es)
B - Production Information
C - Acceptance Criteria
D - Average Yields
E - DRAM Memory Module Specifications
-19-
<PAGE>
EXHIBIT A
INITIAL PROCESS(ES)
For the first Product (*) * Process will be used according to Siemens
Dresden * Document Nr.: * (*). *
* confidential treatment requested
-20-
<PAGE>
EXHIBIT B
---------
PRODUCTION INFORMATION
FABRICATION CYCLE TIMES:
------------------------
PROTOTYPE (ACCELERATED):
* weeks from the fab start to the start of memory repair.
* weeks from M1 to memory repair.
* weeks for memory repair to wafer repair, test, and ship.
VOLUME: * weeks from the fab start to ship (lead time)
Target * weeks (cycle time)
WAFERS PER LOT: (nominal at wafer start)
PROTOTYPE: *
VOLUME: *
* confidential treatment requested
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<PAGE>
EXHIBIT C
---------
Acceptance Criteria
For wafer shipment Siemens Dresden Document " * Wafer
Acceptance Documentation":
No. * shall be followed.
Reliability Goals:
The goal for early failure rate (EFR) of tested good * memory cores
shall be the same as for Siemens commodity DRAM (64 M SDRAM) at the same
production step i.e. * .
EFR goal value for 64 M SDRAM in * micron is * dpm (February 1999)
cumulated over 365 days normalized to * junction temperature and
external supply voltage * Volt after component test. For long term
failure rate of the embedded DRAM core, the goal is * FITS @ T(junction)
= * Celsius.
* confidential treatment requested
EXHIBIT D
---------
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<PAGE>
LEADPRODUCT * :
- -----------------
- ------------------------------------------------------------------------------
Product Technology EDRAM Average Lower Limit Lower Limit
Memory Size Memory 1 2
Yield 1)
- ------------------------------------------------------------------------------
* * * * * *
- ------------------------------------------------------------------------------
1) Average Memory Yield means average agreed post fuse yield (average of all
wafers out in a calendar quarter)
PRICES *) :
- ------------------------------------------------------------------------------
Quarter 3 Calendar Year Quarter 4 Calendar Year
1999 1999
- ------------------------------------------------------------------------------
Production Wafer **) * *
- ------------------------------------------------------------------------------
Prototype Wafer
Price Multiplication
Factor (based on one
Production Wafer):
- - w/o changes to * *
Production wafer
* *
- - with process changes / * *
splits
* *
- normal accelerated
- normal rocket lot
- ------------------------------------------------------------------------------
Mask Set * US $ * US $
- ------------------------------------------------------------------------------
*) Prices will be renegotiated and mutually agreed on a quarterly basis
**) Based on a maximum of * Wafer starts per week
***) Accelerated charge and material hold will not apply to the first *
prototype lots. NeoMagic Corporation may order up to * more prototype lots
using normal cycle time that may require material hold at standard price.
The prices for the following quarters will be agreed according to 4.1 and
documented in a separate agreement.
* confidential treatment requested
EXHIBIT E
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<PAGE>
EMBEDDED DRAM CORE FOR NMG5
PRODUCT SPECIFICATION
<TABLE>
<CAPTION>
DESCRIPTION: SIGNALS:
<S> <C>
*
*
* 256-bit *
* *
synchronous DRAM module.
*
*
*
*
*
FEATURES:
* *
* *
* *
* *
* *
* *
* *
* *
* *
* *
* *
* *
* *
* *
* *
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
* confidential treatment requested
</TABLE>
-24-
<PAGE>
Exhibit 13.1
NEOMAGIC'S VISION, SINCE OUR FOUNDING, HAS BEEN TO PROVIDE SEMICONDUCTOR
SOLUTIONS THAT BRING THE EXCITEMENT OF HIGH-PERFORMANCE MULTIMEDIA CONTENT TO
MOBILE USERS. BASED ON INNOVATIVE MAGICWARE TECHNOLOGY AND TWO SUCCESSFUL
PRODUCT FAMILIES, WE HAVE RISEN TO A POSITION OF LEADERSHIP IN
THE NOTEBOOK PC MULTIMEDIA ACCELERATOR MARKET, ENABLING A NEW GENERATION OF
THIN-AND-LIGHT MULTIMEDIA NOTEBOOK PCS. WITH THIS AS OUR FOUNDATION, WE NOW
EXTEND OUR ACTIVITIES TO NEW MARKET OPPORTUNITIES THAT ARISE IN THE
INTERNET AGE.
NEOMAGIC'S INNOVATIVE TECHNOLOGIES FOR IMAGE PROCESSING, REAL-TIME MPEG-2
ENCODING, AND LOW-POWER SINGLE-CHIP EMBEDDED MEMORY SOLUTIONS CAN OFFER
ECONOMICAL WEB-FRIENDLY DIGITAL CAMERAS FOR THE CAPTURE OF MULTIMEDIA
CONTENT FOR A RICH INTERNET EXPERIENCE ON MOBILE PLATFORMS.
WE SEE THE DVD BECOMING A COMMON MEDIA FOR PC DATA, FOR IN-HOME AND PORTABLE
CONSUMER VIDEO AND AUDIO ENTERTAINMENT SYSTEMS, FOR ELECTRONIC GAME SYSTEMS, AND
MANY OTHER MULTIMEDIA DATA INTENSIVE APPLICATIONS, WHERE NEOMAGIC'S EMBEDDED
DRAM TECHNOLOGY CAN OFFER VALUE-ADDED SEMICONDUCTOR
SOLUTIONS FOR DVD DRIVE MANUFACTURERS.
<PAGE>
To Our Stockholders:
NeoMagic's fiscal year ended January of 1999 (fiscal 1999) was our second year
as a publicly held company, and was again a year of exceptional financial and
business results, and continued growth and progress. We achieved higher revenue,
higher operating profits, and greater market share in each successive quarter of
the fiscal year.
We successfully launched a new family of products in our existing line of
multimedia accelerators for notebook computers, and grew to be the leading
supplier of notebook multimedia ICs worldwide. We believe our success stems
from the combination of our proprietary MagicWare-TM- embedded DRAM technology,
our focus on mobility, and our broad product offering in the
MagicGraph-Registered Trademark-128 and MagicMedia-TM- 256 families of
multimedia accelerators for notebook PCs. We also believe that the dramatic
growth of the World Wide Web has expanded our market and our opportunities,
bringing rich multimedia content to end-users at their offices and in their
homes, propelling us towards a future where anytime-anywhere access to the full
body of human knowledge can become an every day experience.
It is NeoMagic's strategy to participate in multiple market opportunities driven
by these trends towards multimedia, mobility, and the Internet. To extend beyond
the notebook arena, we moved forward this year with the formation of our
Consumer Products Division and the announcement of plans to enter into two new
market areas: digital cameras and Digital Versatile Disk (DVD) drive solutions.
Our plan includes leveraging our MagicWare embedded DRAM technology to deliver
innovative solutions for the capture, storage, and playback of multimedia
content for a rich Internet experience on mobile platforms.
FINANCIAL PERFORMANCE
NeoMagic reported net sales for the fiscal year ended January 31, 1999 of $240.5
million, and net income of $31.2 million, or $1.19 per diluted share. Compared
to fiscal 1998, our revenue grew by 93% and our operating profit increased by
95%. We have now fully utilized the net operating loss carryforwards from our
formative years, causing our effective tax rate to increase from 15% to 34%
during the year. Yet, even with this added tax burden, our net profits grew by
50% from fiscal 1998.
NeoMagic's productivity, as measured by the annualized revenue per employee
during the fourth quarter, was amongst the highest in the semiconductor industry
at over $1.2 million per employee.
BUSINESS REVIEW
NeoMagic began the year by adding Toshiba, the world's leading producer of
notebook PCs, to our customer list. With that addition, virtually every major
manufacturer of notebook PCs has now become a customer of NeoMagic for at least
a portion of their multimedia chip requirements. Market research firms confirmed
that in the fourth quarter of 1997, NeoMagic became the market leader among
notebook PC graphics vendors on a revenue basis. In the second quarter of 1998,
we became the market share leader based on unit shipments as well. Throughout
the year, there was continued demand for the MagicGraph128 family of multi-media
accelerators, with every one of our major customers adopting it across one or
more of their notebook models.
[GRAPHIC]
KAMRAN ELAHIAN, CHAIRMAN (LEFT).
PRAKASH AGARWAL, PRESIDENT AND
CHIEF EXECUTIVE OFFICER (RIGHT).
In June 1998, NeoMagic announced the industry's first 256-bit multimedia
accelerator, the MagicMedia256AV. The first product in a new family, this chip
integrates audio and DVD video playback acceleration with high-performance PC
graphics, into a single twenty-one million transistor chip, with a peak internal
bandwidth of 3.2 gigabytes per second. The editors of PC Magazine recognized the
MagicMedia256AV for technical excellence at Comdex, and in the December issue of
the publication stated, "The latest graphics accelerator from NeoMagic is the
best on the market to date for performance notebooks." The MagicMedia256AV
quickly became a major factor in the market and in our business. Sales of the
MagicMedia256AV grew sharply in the second half of the fiscal year, and over one
million units had been shipped by fiscal year end in January 1999.
The majority of our production capacity was provided by our long-term business
partner Mitsubishi Electric for production of both the MagicGraph128 and the
MagicMedia256 product lines. NeoMagic added Toshiba Semiconductor as an
additional manufacturing supplier, and during the fiscal year they served as a
significant source for the 256-bit product family. By the end of January 1999,
NeoMagic had shipped more than twelve million multimedia accelerators.
<PAGE>
Several awards were garnered over the year. In June, Prakash Agarwal was named
High-Tech "Entrepreneur of the Year" in Northern California by Ernst & Young
LLP. In December, Agarwal was named one of the "Hot 25 Executives to Watch" by
ELECTRONIC BUSINESS NEWS, as an "industry mover and shaker" leading the Company
to effect major changes in the industry.
The MagicGraph128 Design Team was awarded the Mobile Innovation Award by MOBILE
COMPUTING magazine in July.
The Fabless Semiconductor Association (FSA) again recognized NeoMagic's
financial performance. In December 1998, the Company was chosen for the second
consecutive year as the Best Financially Managed Fabless Company. In selecting
NeoMagic Corporation as the winner, the FSA considered return on investment,
return on equity, inventory turns, days sales outstanding, cash per share, sales
per employee, and current ratio, comparing these indices with all other fabless
semiconductor companies.
LOOKING FORWARD*
Our vision, since our founding, has been to provide semiconductor solutions for
delivering high-performance multimedia content to mobile users. We described our
mission as "mobilizing multimedia," and addressed the conflicting requirements
of raising performance while reducing power consumption and size. We have proven
the viability and value of the revolutionary MagicWare technology we developed,
which integrates large amounts of memory, logic, and analog functions into a
single chip. We have led our industry in a new technical direction and risen to
a position of leadership in the notebook PC multimedia accelerator market.
Today NeoMagic's long-term strategy is to become a major supplier of fundamental
technologies for mobilizing the capture, storage, access, and playback of
digital multimedia content, bringing rich multimedia capabilities and
anywhere-anytime mobility to the internet experience. We envision a future where
easy-to-use, economical digital cameras will capture web-ready multimedia
images, where formats and storage media will allow multimedia content to move
seamlessly and fluidly between PCs and consumer electronics systems, and where
users will be able to access information, be it data, images, sound, or video,
wherever and whenever they choose.
We continue to invest in our notebook PC multimedia product line. We have
enabled a new generation of thin-and-light notebook PC products through the size
reductions and power savings that our integration provides. In our MagicGraph128
family, we provided the first single-chip graphics solutions, and in our
MagicMedia256 family we have now integrated audio and DVD video playback as
well, bringing higher levels of multimedia content to highly mobile platforms.
3D graphics will be integrated next, with insatiable demands for more memory in
order to achieve more performance and a richer visual environment. This
transition may offer expanded opportunities for differentiation, as our
proprietary MagicWare technology and embedded DRAM experience allow us to drive
levels of memory integration not achievable by our peers.
As we ended our fiscal year, we completed two acquisitions to bolster and
accelerate our new market activities. In February 1999, we announced the
acquisition of the Optical Drive Storage Group, located in Manchester, U.K.,
from Mitel Semiconductor, and the acquisition of Associative Computers, Ltd.,
(ACL) located in Raanana, Israel, from Robomatix. These groups have now become
NeoMagic's United Kingdom Development Center and NeoMagic's Israel Development
Center, respectively. These two recent acquisitions have bolstered NeoMagic's
already impressive intellectual property portfolio. The Company now has 15
issued patents, and more than 50 patent applications actively in process.
We see the DVD becoming a common media for PC data, for in-home and portable
consumer video and audio entertainment systems, for electronic game systems, and
many other multimedia data intensive applications. A common aspect of these DVD
systems will be their ability to decode MPEG video streams, a feature they will
share with high-definition TV and satellite set-top boxes.
<PAGE>
We believe that the consumer electronics and computer industries are now
approaching a significant point of inflection, as digital media converges onto a
cross-platform set of standard media and data formats. Our markets are poised
for explosive growth over the next several years.
The new NeoMagic United Kingdom Development Center's significant experience in
mixed-signal analog design and DVD optical storage read-channel technology, when
coupled with the Company's existing DVD controller development activities, will
expand the Company's ability to offer semiconductor solutions to DVD drive
manufacturers.
The NeoMagic Israel Development Center's associative array processing
technology, when combined with NeoMagic's MagicWare embedded DRAM technology,
provides a technology platform from which the Company will develop products to
support new levels of image processing performance, including real time MPEG-2
encoding, in low-power single-chip solutions for economical web-friendly digital
cameras.
The proprietary embedded DRAM technology, which we have developed and proven,
will be the technical foundation upon which we build our long-term strategy. Our
success in notebook multimedia components has placed us firmly in a
market-leading position for mobile playback of multimedia content, and has given
us the resources and the opportunity to drive our technology into new market
areas. We are actively investing in developing solutions for new markets, and
with our recent acquisitions, we add newly acquired technology that will combine
with our MagicWare technology to provide compelling semiconductor solutions for
the capture and storage of digital multimedia content.
In summary, NeoMagic's business strategy reflects a coherent, multi-faceted
approach to revolutionizing and mobilizing digital multimedia for the Internet
age. Building upon our success in multimedia accelerators for portable PCs,
NeoMagic's long-term vision is to become the source for fundamental technologies
for mobilizing the capture, storage, access, and playback of digital multimedia
content for rich Internet experiences. The three markets now being pursued,
notebook multimedia accelerators, digital cameras, and DVD drives and recorders,
are projected to provide multi-billion dollar annual IC market opportunities
over the next several years.
Our approach continues to be one of providing "differentiation through
integration," bringing together diverse technologies to provide value-added
semiconductor solutions which allow our customers' products to stand out in
their respective markets. With a strong technical foundation, a history of
successful execution, a worldwide talent pool, and a roadmap for multiple
generations of new products and revolutionary capabilities, we look forward to a
future of innovation and opportunity.
We welcome our stockholders, employees, vendors, and customers to join us as we
seek our futures together in the age of the Internet.
/s/ Kamran Elahian
Kamran Elahian
CHAIRMAN
/s/ Prakash Agarwal
Prakash Agarwal
PRESIDENT & CHIEF EXECUTIVE OFFICER
BE IT DATA, IMAGES, SOUND, OR VIDEO, WHEREVER AND WHENEVER THEY CHOOSE.
* THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT INTENTIONS AND EXPECTATIONS. ACTUAL EVENTS AND RESULTS
COULD VARY SIGNIFICANTLY BASED ON A VARIETY OF FACTORS, WHICH ARE DESCRIBED
IN THE "FACTORS THAT MAY AFFECT RESULTS" SECTION OF MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN THIS
DOCUMENT.
<PAGE>
BOARD OF DIRECTORS
Kamran Elahian
CHAIRMAN OF THE BOARD
Prakash Agarwal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Brian P. Dougherty
PRESIDENT, WINK COMMUNICATIONS
Irwin Federman
GENERAL PARTNER, U.S. VENTURE PARTNERS
Jim Lally
PARTNER, KLEINER, PERKINS, CAUFIELD & BYERS
Klaus Wiemer
MEISSNER+WURST GMBH, STUTTGART, GERMANY
EXECUTIVE OFFICERS AS OF APRIL 1, 1999
Prakash Agarwal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Niall Bartlett
VICE PRESIDENT, LAB DIRECTOR, NEOMAGIC TECHNOLOGY LAB
Kamran Elahian
CHAIRMAN OF THE BOARD
Amnon Fisher
SENIOR VICE PRESIDENT AND GENERAL MANAGER,
CONSUMER PRODUCTS DIVISION
Daniel Hauck
VICE PRESIDENT, WORLDWIDE SALES
Ron Jankov
SENIOR VICE PRESIDENT AND GENERAL MANAGER,
MULTIMEDIA PRODUCTS DIVISION
Ibrahim Korgav
VICE PRESIDENT, MANUFACTURING OPERATIONS
Dr. Clement Leung
VICE PRESIDENT, R&D NEOMAGIC TECHNOLOGY LAB
Merle McClendon
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
Kenneth Murray
VICE PRESIDENT, HUMAN RESOURCES
Deepraj Puar
VICE PRESIDENT, TECHNOLOGY
CORPORATE HEADQUARTERS
NeoMagic Corporation
3260 Jay Street
Santa Clara, CA 95054
Telephone 408-988-7020
NEOMAGIC SALES OFFICES
NeoMagic Austin
8500 N. Mopac, Suite 812
Austin, TX 78759
Tel 512-343-9112
NeoMagic Hong Kong
Suite 3012, 30/F, Tower 1, The Gateway
25 Canton Road
Kowloon Hong Kong
Tel 852-2110-5700
NeoMagic International Taiwan
10FL-D, No. 170 Tun-Hwa North Road
Taipei, Taiwan, ROC
Tel 011-2-2547-3168
DEVELOPMENT OFFICES
NeoMagic Israel Ltd.
Raanana, Israel
NeoMagic U.K. Limited
Oldham, Greater Manchester, U.K.
NeoMagic Semiconductor
India Pvt. Ltd.
Kanpur, India
REGISTRAR AND TRANSFER AGENT
BankBoston, NA
c/o Boston EquiServe
PO Box 8040
Boston, MA 02266-8040
LEGAL COUNSEL
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
INDEPENDENT AUDITORS
Ernst & Young LLP
55 Almaden Boulevard
San Jose, CA 95113
COMMON STOCK
Nasdaq Symbol: NMGC
INVESTOR INFORMATION
www.neomagic.com
FORM 10-K
A copy of the Company's current Form 10-K as filed with the Securities and
Exchange Commission may be obtained without charge by writing:
NeoMagic Corporation
Investor Relations
3260 Jay Street
Santa Clara, CA 95054
or by calling 408-988-7020 x461
or may be obtained through our
web site at www.neomagic.com
<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>
YEAR ENDED JANUARY 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 240,503 $ 124,654 $ 40,792 $ 243 $ --
Cost of sales 142,881 73,171 28,650 165 --
--------- --------- --------- --------- ---------
Gross margin 97,622 51,483 12,142 78 --
Operating expenses:
Research and development 31,756 16,091 8,606 4,934 2,423
Sales, general and administrative 20,740 12,290 6,522 1,606 968
Legal costs (1) -- -- (1,503) 610 1,500
--------- --------- --------- --------- ---------
Total operating expenses 52,496 28,381 13,625 7,150 4,891
Income (loss) from operations 45,126 23,102 (1,483) (7,072) (4,891)
Interest income and other 3,810 2,643 1,366 385 194
Interest expense (1,339) (1,298) (1,046) (182) (94)
--------- --------- --------- --------- ---------
Income (loss) before income taxes 47,597 24,447 (1,163) (6,869) (4,791)
Provision for income taxes 16,395 3,667 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 31,202 $ 20,780 $ (1,163) $ (6,869) $ (4,791)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic net income (loss) per share (2) $ 1.32 $ .95 $ (.07)
Diluted net income (loss) per share (2) $ 1.19 $ .82 $ (.07)
Weighted common shares outstanding (2) 23,710 21,924 17,238
Weighted common shares outstanding
assuming dilution (2) 26,153 25,336 17,238
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 36,631 $ 35,004 $ 13,458 $ 6,877 $ 4,902
Short-term investments 56,097 36,016 -- -- --
Working capital 92,839 53,518 1,398 4,069 2,846
Total assets 144,374 107,583 27,464 8,749 5,956
Long-term obligations -- 646 1,194 749 452
Total stockholders' equity 103,395 65,127 4,200 4,542 3,313
OTHER DATA:
Number of employees 234 162 94 44 23
Revenue/employee $ 1,028 $ 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 1999 Q1 Q2 Q3 Q4
- -----------------------------------------------------------------------------------------------------------------------
(unaudited, in thousands except per share data)
<S> <C> <C> <C> <C>
Net sales $ 47,738 $ 53,396 $ 67,401 $ 71,968
Cost of sales 27,510 31,058 40,436 43,877
-------- -------- -------- --------
Gross margin 20,228 22,338 26,965 28,091
Operating expenses:
Research and development 6,252 7,314 8,729 9,461
Sales, general and administrative 4,356 4,848 5,845 5,691
-------- -------- -------- --------
Total operating expenses 10,608 12,162 14,574 15,152
Income from operations 9,620 10,176 12,391 12,939
Interest income and other 975 919 1,039 877
Interest expense (324) (372) (245) (398)
-------- -------- -------- --------
Income before income taxes 10,271 10,723 13,185 13,418
Provision for income taxes 3,595 3,753 4,615 4,432
-------- -------- -------- --------
Net income $ 6,676 $ 6,970 $ 8,570 $ 8,986
-------- -------- -------- --------
-------- -------- -------- --------
Basic net income per share (1) $ .29 $ .30 $ .36 $ .37
Diluted net income per share (1) $ .26 $ .27 $ .33 $ .34
Weighted common shares outstanding (1) 23,295 23,595 23,828 24,120
Weighted average common shares outstanding assuming dilution (1) 26,098 26,033 25,950 26,530
Price range common stock:
Low $ 15.75 $ 12.63 $ 10.69 $ 14.00
High $ 21.81 $ 22.50 $ 17.13 $ 22.88
</TABLE>
<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
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 (1) $ .11 $ .18 $ .29 $ .36
Diluted net income per share (1) $ .09 $ .15 $ .25 $ .32
Weighted common shares outstanding (1) 19,845 22,161 22,713 22,976
Weighted average common shares outstanding assuming dilution (1) 23,398 25,893 26,144 25,907
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
</TABLE>
The Company had 214 stockholders of record as of March 28, 1999. 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) 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 notebook 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 high-performance semiconductor
solutions for sale to original equipment manufacturers ("OEM") of mobile
computing products including notebook PCs, and more recently digital cameras and
DVD drives. The Company pioneered the first commercially available
high-performance silicon technology that integrates DRAM, complex logic and
analog circuits into a single chip. The Company's proprietary MagicWare(TM)
technology eliminates the need to drive signals off-chip to discrete memory,
achieving its performance advantage while actually lowering the power
consumption and extending the battery life for smaller, lighter weight portable
devices. The first commercial application for the Company's technology is in the
design, development and marketing of multimedia accelerators for sale to
notebook computer manufacturers. The Company's MagicGraph128 and MagicMedia256
families of pin-compatible multimedia accelerators incorporate 128-bit and
256-bit memory buses, respectively.
All of the Company's net sales in fiscal 1999, 1998 and 1997 were derived
from sales of its multimedia accelerator products, and the Company expects this
trend to continue at least through fiscal 2000. 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 distributors sell the product. 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 64.9%, 66.5% and 79.7% of the
Company's net sales for fiscal 1999, 1998 and 1997, 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.
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"), Toshiba Corporation ("Toshiba") and Infineon Technologies
("Infineon"), formerly Siemens Aktiengesellschaft Semiconductor Group, to
produce its semiconductor wafers and uses other independent contractors to
perform assembly, packaging and testing. The Company's foundry relationships 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 independent vendors. To date, all of the Company's wafer purchases,
which constitute a significant part of its cost of sales, 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, the Company is obligated to provide
rolling 12-month forecasts of anticipated purchases and place binding purchase
orders up to 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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 1999, 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, 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 59.4 58.7 70.2
----- ----- -----
Gross margin 40.6 41.3 29.8
Operating expenses:
Research and development 13.2 12.9 21.1
Sales, general and administrative 8.6 9.9 16.0
Legal costs -- -- (3.7)
----- ----- -----
Total operating expenses 21.8 22.8 33.4
----- ----- -----
----- ----- -----
Income (loss) from operations 18.8 18.5 (3.6)
Interest income and other 1.6 2.1 3.3
Interest expense (.6) (1.0) (2.6)
----- ----- -----
Income (loss) before income taxes 19.8 19.6 (2.9)
Provision for income taxes 6.8 2.9 --
----- ----- -----
Net income (loss) 13.0% 16.7% (2.9)%
----- ----- -----
----- ----- -----
</TABLE>
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 upon, the personal computer industry with sales primarily in Asia,
Japan, and the United States. Net sales were $240.5 million, $124.7 million and
$40.8 million in fiscal 1999, 1998 and 1997, 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 and
MagicMedia256 product families expanding 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, a decrease in DRAM pricing and
the trend in the market toward lower cost notebook computers, the Company's
products may 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 with headquarters in the United States, and foreign
system manufacturers that sell to United States-based OEMs) accounted for 83.6%,
83.2% and 96.2% of net sales in fiscal 1999, 1998 and 1997, 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.
Three customers accounted for 19.8%, 17.1% and 10.5%, respectively, of net
sales in fiscal 1999. 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. 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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GROSS MARGIN
Gross margin was $97.6 million, $51.5 million and $12.1 million in fiscal
1999, 1998 and 1997, respectively. The gross margin percentage decreased to
40.6% of net sales in fiscal 1999 from 41.3% of net sales in fiscal 1998 due
primarily to declines in unit average selling prices stemming from the market
trend toward lower priced notebooks and increased competition. Also affecting
fiscal 1999 gross margin was a decrease in the dollar/yen exchange rate
(primarily in the fourth fiscal quarter) and low production yields on new
product ramp-ups. These factors were mitigated in part by other product cost
decreases stemming from the Company's cost reduction efforts. The gross margin
percentage increased to 41.3% of net sales in fiscal 1998 from 29.8% of net
sales in fiscal 1997 due to lower wafer pricing and improved yields in fiscal
1998, and the inclusion in fiscal 1997 of inventory charges relating to a design
error and excess inventory of $1.2 million and $1.5 million, respectively.
In the future, the Company's gross margin percentages may be affected by
the continued trend in the market toward lower priced notebooks, 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 (particularly on new
products) 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 $31.8 million, $16.1 million
and $8.6 million in fiscal 1999, 1998 and 1997, 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 2000.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES
Sales, general and administrative expenses were $20.7 million, $12.3
million and $6.5 million in fiscal 1999, 1998 and 1997, respectively. Sales,
general and administrative expenses increased as a result of increased
commissions associated with higher sales levels and increased employee related
expenses largely related to additional personnel. Sales, general and
administrative expenses are expected to increase in absolute dollars in fiscal
2000.
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, the Company recorded an additional
accrual for legal costs of $610,000. In fiscal 1997, based on the dismissal of
such litigation, the remaining reserve balance of $1.5 million was reversed. See
Note 10 of Notes to Consolidated Financial Statements.
INTEREST INCOME AND OTHER
The Company earns interest on its cash and short-term investments. Interest
income and other was $3.8 million, $2.6 million and $1.4 million in fiscal 1999,
1998 and 1997, respectively. The increases in both fiscal 1999 and fiscal 1998
stemmed from higher interest income earned on higher cash and short-term
investment balances.
INTEREST EXPENSE
The Company pays interest and commissions on wafer purchases and interest
on its leases. Interest expense was $1.3 million, $1.3 million and $1.0 million
in fiscal 1999, 1998 and 1997, respectively. The increase in interest expense
from fiscal 1997 to fiscal 1999 reflects increased wafer purchases, offset in
part by lower interest and commission rates under the working capital line of
credit. See Note 5 of Notes to Consolidated Financial Statements for further
discussion of the working capital line of credit.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
The Company's effective tax rate was 34% in fiscal 1999 and 15% in fiscal
1998. The Company recorded no provision for federal or state income taxes in
fiscal 1997. The increase in the fiscal 1999 effective tax rate stems from net
operating loss carryforwards being fully utilized in fiscal 1998. The difference
between the Company's fiscal 1999 effective tax rate and the statutory rate is
primarily due to the utilization of research and development tax credits. The
difference between the Company's fiscal 1998 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 were $92.7
million, $71.0 million and $15.7 million as of the end of fiscal 1999, 1998 and
1997, respectively. The increase in cash, cash equivalents and short-term
investments in fiscal 1999 stems primarily from cash provided by operating
activities, offset in part by the pay-down of the working capital line of credit
and investments in property, plant and equipment. In January 1998, in exchange
for a lower commission rate, the payment terms on wafer purchases were changed
from payable in 90 days from shipment to payable in 30 days from shipment. The
increase in cash, cash equivalents and short-term investments in fiscal 1998 was
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 $39.9 million to $92.8 million at January
31, 1999 from $52.9 million at January 31, 1998.
Cash and cash equivalents provided from (used for) operating activities
were $45.1 million, $15.4 million and ($3.1) million in fiscal 1999, 1998 and
1997, respectively. The cash provided from operating activities in fiscal 1999
stems primarily from $31.2 million in net income, an increase in accounts
payable and a reduction in deferred taxes, offset in part by increased accounts
receivable, inventory and other assets. The cash provided from operating
activities in fiscal 1998 stems primarily from $20.8 million in net income and
increases in accrued expenses and accounts payable, offset by increases in
accounts receivable, inventory and deferred taxes. The cash used for operating
activities in fiscal 1997 stems primarily from $1.2 million in net loss and
increases in accounts receivable and inventory, offset in part by increases in
accounts payable.
Net cash used for investing activities in fiscal 1999, 1998 and 1997 was
$25.5 million, $40.5 million and $3.1 million, respectively. Net cash used for
investing activities in fiscal 1999 related primarily to $20.1 million of net
purchases of short-term investments and $5.4 million of investments in property,
plant and equipment. Net cash used for investing activities in fiscal 1998 and
1997 was related to net purchases of short-term investments and 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 used for financing activities in fiscal 1999 was $18.0 million,
compared to net cash provided by financing activities of $46.7 million and $12.8
million in fiscal 1998 and 1997, respectively. The net cash used for financing
activities in fiscal 1999 related primarily to the pay-down of the working
capital line of credit of $21.0 million, offset in part by proceeds from the
issuance of common stock. The net cash provided by financing activities in
fiscal 1998 primarily represents net proceeds from the initial public offering
of $37.8 million, net proceeds related to the working capital line of credit and
the release of amounts previously held as restricted cash. 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.
At January 31, 1999, the Company's principal sources of liquidity included
cash, cash equivalents and short-term investments of $92.7 million. 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 twelve months. The Company currently expects to
spend approximately $7.0 million to $10.0 million on capital items during the
next twelve months, consisting primarily of purchases of development tools and
software and personal computers. Investments will continue in new product
development in new and existing areas of technology. Cash may also be used to
acquire technology through purchases and strategic acquisitions, such as the
acquisitions in February 1999 of ACL and the Optical Drive Development Group
(see Note 12 of Notes to Consolidated Financial Statements for further
discussion of recent 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, marketing and administrative infrastructure, the timing of new product
introductions 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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF CURRENCY EXCHANGE RATES
Because the Company currently purchases all wafers under purchase contracts
denominated in yen, significant appreciation in the value of the 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 generally
enters into foreign currency forward contracts and foreign currency options to
minimize short-term 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 foreign currency losses in the future, nor can
the Company predict the effect of exchange rate fluctuations upon future
operating results.
IMPACT OF YEAR 2000
Like many other companies, the year 2000 computer issue creates risks for
the Company. If computer systems do not correctly recognize and process date
information beyond calendar year 1999, there could be an adverse impact on the
Company's operations. Computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
The Company has completed an initial assessment of its internal computer
systems, and does not believe that it will be required to modify or replace
significant portions of its internal systems so that they will function properly
with respect to dates in the year 2000 and thereafter. The Company's internal
computer systems consist primarily of third party software tools for
engineering, sales, finance and human resources functions. The Company has
reviewed its internal business software including system software for order
management, finance, purchasing and human resources. All major system software
was found to be year 2000 compliant. The Company is working closely with the
suppliers of its engineering software tools on the year 2000 issue, and plans to
have all such tools updated and tested for year 2000 compliance by the middle of
fiscal 2000. The Company is also reviewing its networks, telephones, PCs and
workstations, and expects all to be in compliance by the middle of fiscal 2000.
For all new software purchases, the Company requires year 2000 compliance.
NeoMagic does not operate its own manufacturing facilities. Rather, the
Company's products are manufactured and tested by independent third party
suppliers, primarily located in Asia and Japan. The Company believes that its
most reasonably likely worst case year 2000 scenario would relate to problems
with its third-party suppliers rather than with the Company's internal systems
or its products. The Company has contacted critical suppliers of products and
services to determine whether or not the suppliers' operations and the products
and services they provide are year 2000 capable. Highest priority is being
placed on working with suppliers that are critical to the delivery of the
Company's products to customers. A worst case scenario involving a critical
supplier would be the partial or complete shutdown of the supplier and its
resulting inability to provide its products or services to the Company on a
timely basis. The Company continues to monitor its suppliers and will develop
specific contingency plans by the middle of fiscal 2000 to address issues
related to suppliers that are not considered to be taking all steps necessary to
ensure year 2000 capability. Where efforts to work with critical suppliers to
ensure year 2000 capability have not been successful, contingency planning
generally emphasizes the identification of substitute and second-source
suppliers where available or planned increases in inventory levels of specific
products in advance of the end of calendar year 1999. This contingency planning
is expected to be ongoing through calendar 1999.
The Company's year 2000 efforts to date have largely been carried out with
existing personnel, and the incremental costs incurred to date have been less
than $250,000. Management believes that incremental costs to be incurred going
forward to assure that its internal systems and products are year 2000 capable
will be less than $250,000. However, the Company is not in a position to
identify or to avoid all possible adverse year 2000 scenarios, particularly as
it relates to its third-party suppliers. Due to the large number of variables
involved, the Company cannot provide an estimate of the damage it might suffer
if any of these adverse scenarios were to occur. As such, there can be no
assurance that the failure to ensure year 2000 capability by a supplier or
another third party would not have a material adverse effect on the Company's
financial condition or overall results of operations.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FACTORS THAT MAY AFFECT RESULTS
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
NeoMagic's quarterly and annual results of operations are affected by a
variety of factors that could materially adversely affect net sales, gross
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), incorrect forecasting of future revenues, fluctuations in
manufacturing yields, availability and cost of manufacturing capacity, foreign
exchange rate fluctuations, 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, the Company's ability to leverage its technology across new
markets, market acceptance of the end-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 average 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, 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
and profits. The Company may be unable to adjust spending sufficiently in a
timely manner to compensate for any unexpected sales shortfall, which could
materially adversely affect quarterly operating results. Accordingly, the
Company believes that period-to-period comparisons of its operating results
should not be relied upon as an indication of future performance. In addition,
the results of any quarterly period are not indicative of results to be expected
for a full fiscal year. In future quarters, the Company's operating results may
be below the expectations of public market analysts or investors. In such event,
the market price of the Common Stock would be materially adversely affected.
RISKS ASSOCIATED WITH DEPENDENCE ON THE NOTEBOOK PC MARKET
The Company's products are currently 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 forecasted 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 crucial OEM design cycles,
which could result in a material adverse effect on 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 other future developments in 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 on the Company's
business, financial condition and results of operations.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PRODUCT CONCENTRATION, RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS
The Company's revenues currently 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 revenue generating
product line, the Company's revenues and results of operations would be
materially adversely affected if for any reason it were unsuccessful in selling
multimedia accelerators. The notebook PC market frequently undergoes transitions
in which products rapidly incorporate new features and performance standards on
an industry-wide basis. If the Company's products were unable to support the new
feature sets or performance levels stemming from such a transition, the Company
would likely not have the opportunity to compete for new design wins until it
was able to incorporate the new feature sets or performance requirements into
its products. 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 or 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. Failure by the Company to continually design and
introduce advanced products in a timely manner and to reduce product costs on
older products would have a material adverse effect on the Company's net sales,
gross margins and results of operations.
CONSUMER PRODUCT EXECUTION
The Company announced the formation of the Consumer Products division in
June 1998. The division will explore consumer semiconductor product
opportunities in emerging markets such as digital video disks, digital cameras,
and other consumer products that can benefit from the advantages of embedded
DRAM MagicWare(TM) technology pioneered by NeoMagic. In February 1999, the
Company completed two acquisitions to further the development efforts of the
Consumer Products division. The Company acquired the Optical Drive Development
Group and associated DVD intellectual properties from Mitel Semiconductor in
Manchester, England and the assets and intellectual properties of ACL of Tel
Aviv, Israel from Robomatix Technologies Ltd. The DVD and digital camera markets
are new and evolving. The Company's ability to compete in these new markets will
depend on its ability to identify and ensure compliance with evolving industry
standards, develop and market compelling semiconductor solutions, and deliver
those solutions to the market in a timely and cost effective manner. Any such
new product development program faces substantial risks and uncertainties,
including risks as to the costs, timing and results of engineering efforts,
competitive risks and market development risks. There can be no assurance that
the products the Company expects to introduce will incorporate the features,
functionality and pricing demanded by the market, 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.
CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base in the
notebook PC market. 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 purchase
agreements. As a result, the Company's business, financial condition and results
of operations could be materially adversely affected by the decision of a single
customer to cease using the Company's products, or by a decline in the number of
notebook PCs sold by a single customer.
EFFECTS OF CHANGES IN DRAM PRICING
The Company's products feature large DRAM memory integrated with analog and
logic circuitry on a single chip, while its competitors often provide discrete
analog and logic circuitry to be used in conjunction with DRAM supplied by
others. The selling prices of the Company's products reflect many factors,
including the prices of DRAM chips. As the Company places firm purchase
commitments for wafers some 3 to 4 months in advance, significant reductions in
the market price of DRAM could cause the Company's products to become less
competitively priced relative to competing discrete solutions with
non-integrated DRAM. In this circumstance, the Company could be forced to
respond to pricing pressures precipitated by changes in the DRAM market by
reducing the average
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
selling prices of its products to current and prospective customers. Recently,
the DRAM market has experienced significant price erosion, which has been a
factor in the overall decline in the average selling price of the Company's
products. Because the Company's product costs cannot be adjusted as rapidly as
changes in the market price of DRAM, the Company's business, financial condition
and results of operations may be materially and adversely affected by
unanticipated changes in the price of DRAM.
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 Technologies
(ATI), Chips & Technologies, Inc. ("Chips & Technologies"- in January 1998,
Intel Corporation acquired Chips and Technologies) 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. Some of the Company's competitors,
including Chips & Technologies and Trident have announced or introduced
multimedia accelerator products that integrate large DRAM with analog and logic
circuitry on a single chip. Certain of the Company's competitors may offer
products with 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 the multimedia accelerator with other systems components. For
example, Cyrix (acquired by National Semiconductor in July 1997) is in
production of an integrated microprocessor and graphics accelerator. Further,
several of the Company's competitors have announced plans to develop products
that integrate the multimedia accelerator with the core logic chip set. The
successful commercial introduction by competitors of products that integrate
large DRAM with analog and logic circuitry on a single chip or that eliminate
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 changing demand as rapidly as companies that operate their own
facilities, which could have a material adverse effect on the Company's 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 wafers currently are
manufactured by Mitsubishi Electric and Toshiba in Japan. In February 1999, the
Company entered into a wafer supply agreement with Infineon (formerly Siemens)
of Germany. Each of these manufacturing relationships is 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 manufactured by a single
source. Since, in the Company's experience, 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 ranges from four to
nine months, there may be no readily available alternative source of supply for
specific products. A manufacturing disruption experienced by any of the
Company's manufacturing partners or the failure of one of the Company's
manufacturing partners to dedicate adequate resources to the production of the
Company's products 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
by the Company's manufacturing partners is unsuccessful, the Company's business,
financial condition and results of operations would be materially and adversely
affected.
15
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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, 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 its manufacturing partners to produce wafers with
acceptable quality and manufacturing yields, deliver those wafers on a timely
basis to the Company's third-party assembly subcontractors and to allocate to
the Company a portion of their manufacturing capacity sufficient to meet the
Company's needs. Although the Company's products are designed using the process
design rules of the particular manufacturer, there can be no assurance that the
Company's manufacturing partners 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 the Company's
manufacturing partners will continue to devote adequate 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. The
Company in the past has experienced difficulties in some of these areas, and
there can be no assurance that in the future the Company will not experience
supply-related difficulties, which could 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 were 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, Toshiba and
Infineon, the Company is obligated to provide rolling 12-month forecasts of
anticipated purchases and to place binding purchase orders three to 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 shortage of wafers for a particular product. Also, many of the
Company's customers are moving to "just in time" relationships with their
vendors, which can shift the risk of carrying inventory back to the supplier. As
a result of the long lead-time for manufacturing wafers and the increase in
"just in time" ordering by PC manufacturers, semiconductor companies such as the
Company from time-to-time must take charges for excess inventory. Significant
write-offs of excess inventory could have a material adverse effect on the
Company's financial condition and results of operations. Conversely, failure to
order sufficient wafers would cause the Company to miss revenue opportunities
and, if significant, could impact sales by the Company's customers, which could
adversely affect the Company's customer relationships and thereby materially
adversely affect the Company's business, financial condition and results of
operations.
MANUFACTURING YIELDS
The fabrication of semiconductors is a complex and precise process. Because
NeoMagic's products feature the integration of large DRAM memory with analog and
logic circuitry on a single chip, a manufacturer must obtain acceptable yields
of both the memory and logic portions of such products, compounding the
complexity of the manufacturing process. As a result, the Company may face
greater manufacturing challenges than its competitors. Minute levels of
contaminants in the manufacturing environment, defects in masks used to print
circuits on a wafer, difficulties in the fabrication process or other factors
can cause a substantial percentage of wafers to be rejected or a significant
number of die on each wafer to be nonfunctional. Many of these problems are
difficult to diagnose and time consuming or expensive to remedy. As a result,
semiconductor companies often experience problems in achieving acceptable wafer
manufacturing yields, which are represented by the number of good die as a
proportion of the total number of die on any particular wafer. The Company
purchases wafers, not die, and pays an agreed upon price for wafers meeting
certain acceptance criteria. Accordingly, the Company bears the risk of the
yield of good die from wafers purchased meeting the acceptance criteria. Poor
yields would materially adversely affect 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 of both 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 identifying, communicating and resolving
manufacturing yield problems. As the Company's relationships with additional
manufacturing partners develop, yields could be adversely affected due to
difficulties associated with adopting the Company's technology and product
design to the proprietary process technology and design rules of each
manufacturer. Any significant decrease in manufacturing yields could result in
an increase in the Company's per unit product cost and could force the Company
to allocate its available product supply among its customers, 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 affected.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT, RAPID TECHNOLOGICAL CHANGE
The Company's business, financial condition and results of operations will
depend to a significant extent on its ability to maintain its position in the
market for multimedia accelerator products that integrate large DRAM with analog
and logic circuitry on a single chip. As a result, the Company believes that
significant expenditures for research and development will continue to be
required in the future. The notebook PC market for which the Company's 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 on a timely
basis. For example, 3-D, digital audio 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 strategic manufacturing partners to effectively design
and implement the manufacture of new products, quality of new products,
differentiation of new products from those of the Company's competitors and
market acceptance of NeoMagic's and its customers' products. There can be no
assurance that the products the Company expects to introduce will incorporate
the features and functionality demanded by system manufacturers and consumers of
notebook PCs, will be successfully developed, or will be introduced within the
appropriate window of market demand. The failure of the Company to successfully
introduce new products and achieve market acceptance for such products would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The integration of large DRAM memory with analog and logic circuitry on a
single chip is highly complex and is critical to the Company's success. Because
of the complexity of its products, however, NeoMagic has experienced delays from
time to time in completing development and introduction of new products. In the
event that there are delays in the completion of development of future products,
including the products currently expected to be announced over the next year,
the Company's business, financial condition, and results of operations would be
materially adversely affected. Although the development cycles for the memory
and logic portions of the Company's products have been relatively synchronized
to date, there can be no assurance that this synchronization will continue in
the future. In addition, there can be no assurance that fundamental advances in
either the memory or logic components of the Company's products will not
significantly increase the complexity inherent in the design and manufacture of
the Company's products, rendering the Company's product technologically
infeasible or uncompetitive. The multiple chip solutions offered by some of the
Company's competitors are less complex to design and manufacture than the
Company's integrated 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 the products mature. Thus, the Company will need to continue
introducing compelling new products at relatively higher average selling prices
in order to maintain overall average selling prices. There can be no assurance
that the Company will successfully identify new product opportunities or develop
and bring to market new products in a timely manner. Further, there can be no
assurance 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 new designs by its customers. The
failure of the Company's new product development efforts and its ability to
bring new products to market on a timely basis would have a material adverse
effect on NeoMagic's business, financial condition and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPERTY RIGHTS
The Company relies in part on patents to protect its intellectual property.
In the United States, the Company has been issued ten patents, each covering
certain aspects of the design and architecture of the Company's multimedia
accelerators. The Company also acquired and/or licensed intellectual properties
in the areas of mixed signal analog design and array-based processing as part of
the February 1999 acquisitions of the Optical Drive Development Group and ACL.
Additionally, the Company and its newly acquired businesses have patent
applications pending. There can be no assurance that the Company's pending
patent applications, or any future applications will be approved. Further, there
can be no assurance that any issued patents will provide the Company with
significant intellectual property protection, 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. In addition, there
can be no assurance that others will not indepen-dently 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.
In December 1998, the Company filed a lawsuit in the United States District
Court for the District of Delaware against Trident Microsystems, Inc. The suit
alleges that Trident's embedded DRAM graphics accelerators infringe certain
patents held by NeoMagic Corporation. In January 1999, Trident filed a counter
claim against the Company alleging an attempted monopolization in violation of
antitrust laws, arising from NeoMagic's filing of the patent infringement action
against Trident in December. The Company has filed for a summary motion to
dismiss the antitrust claim. There can be no assurance as to the result of the
request for summary motion, the patent infringement suit and the counter-suit
for antitrust filed by Trident.
The Company in the past has been, and in the future may be, notified that
it may be infringing the intellectual property rights of third parties. For
example, in February 1997, Cirrus Logic Inc. ("Cirrus Logic") sent the Company
written notice asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV products infringe six 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, in February 1999, the Company was contacted by two of its
customers that they have been notified of potential infringement by a holder of
three United States patents and are requesting indemnification from NeoMagic. At
this time, the Company's counsel is in the preliminary stage of analyzing these
patents but has not reached a conclusion. 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. Further, 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 while the
Company is under the threat of litigation.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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
requests 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.
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 the foreign
operations of customers with headquarters in the United States and foreign
system manufacturers that sell to United States-based OEMs) accounted for 83.6%,
83.2% and 96.2% of the Company's net sales for fiscal 1999, 1998 and 1997,
respectively. The Company expects that net sales derived from international
sales will continue to represent a significant portion of its total net sales.
Letters of credit issued by customers support a portion of the Company's
international sales. To date, the Company's international sales have been
denominated in United States dollars. Increases in the value of the U.S. dollar
relative to the local currency of the Company's customers could make the
Company's products relatively more expensive than competitors' products sold in
the customer's local currency.
International manufacturers produce all of the Company's wafers. 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, wafers are priced in Japanese yen. As a
result, the Company's costs 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 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 inability to fully hedge against currency exchange rate fluctuations
could have a material and sudden adverse effect on the Company's business,
financial condition and results of operations.
International sales and manufacturing operations are subject to a variety
of risks, including fluctuations in currency exchange rates, tariffs, import
restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles, potentially adverse tax
consequences and export license requirements. In addition, the Company is
subject to the risks inherent in conducting business internationally including
foreign government regulation, political and economic instability, and
unexpected changes in diplomatic and trade relationships. Moreover, the laws of
certain foreign countries in which the Company's products may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States, thus increasing the possibility of piracy of the Company's
products. There can be no assurance that one or more of these risks will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
NEED FOR ADDITIONAL CAPITAL
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company believes that its existing capital resources will be
sufficient to meet the Company's capital requirements through the next 12
months, although the Company could be required, or could elect, to seek to raise
additional capital during such period. The Company's future capital requirements
will depend on many factors, including the rate of net sales growth, timing and
extent of spending to support research and development programs in new and
existing areas of technology, expansion of sales and marketing support
activities, and timing and customer acceptance for new products and enhancements
to existing 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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 may continue to place a significant strain on the Company's limited
personnel and other resources. To manage these expanded operations effectively,
including the operations of recently acquired entities in the U.K. and Israel,
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 affected.
DEPENDENCE ON QUALIFIED PERSONNEL
The Company's future success depends in part on the continued service of
its key engineering, sales, marketing, manufacturing, finance and executive
personnel, and its ability to identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor
industry, and there can be no assurance that the Company will be able to
continue to attract and train qualified personnel necessary for the development
of its business. The Company's anticipated growth is expected to place increased
demands on the Company's resources and will likely require the addition of new
management personnel and the development of additional expertise by existing
management personnel. Failure to recruit key personnel in a timely manner, or
the loss of existing 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 Company's Common Stock, like that of other
semiconductor companies, has been and is likely to continue to be, highly
volatile. The market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The market price of the Company's Common Stock could be
subject to significant fluctuations in response to various factors, including
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, general conditions in the semiconductor and PC
industries, unanticipated shifts in the notebook PC market or industry
standards, loss of key customers, changes in DRAM pricing, litigation
commencement or developments, 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, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales $ 240,503 $ 124,654 $ 40,792
Cost of sales 142,881 73,171 28,650
--------- --------- ---------
Gross margin 97,622 51,483 12,142
Operating expenses:
Research and development 31,756 16,091 8,606
Sales, general and administrative 20,740 12,290 6,522
Legal costs -- -- (1,503)
--------- --------- ---------
Total operating expenses 52,496 28,381 13,625
Income (loss) from operations 45,126 23,102 (1,483)
Interest income and other 3,810 2,643 1,366
Interest expense (1,339) (1,298) (1,046)
--------- --------- ---------
Income (loss) before income taxes 47,597 24,447 (1,163)
Provision for income taxes 16,395 3,667 --
--------- --------- ---------
Net income (loss) $ 31,202 $ 20,780 $ (1,163)
--------- --------- ---------
--------- --------- ---------
Basic net income (loss) per share $ 1.32 $ .95 $ (.07)
Diluted net income (loss) per share $ 1.19 $ .82 $ (.07)
Weighted common shares outstanding 23,710 21,924 17,238
Weighted common shares outstanding assuming dilution 26,153 25,336 17,238
</TABLE>
See accompanying notes.
21
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,631 $ 35,004
Short-term investments 56,097 36,016
Accounts receivable, less allowance for doubtful accounts of $225 at January 31, 1999
and $132 at January 31, 1998 19,363 11,236
Inventory 19,046 9,342
Other current assets 2,681 3,730
--------- ---------
Total current assets 133,818 95,328
Property, plant and equipment, net 8,335 6,232
Deferred tax assets 1,034 5,669
Other assets 1,187 354
--------- ---------
Total assets $ 144,374 $ 107,583
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,296 $ 9,490
Working capital line of credit -- 21,041
Compensation and related benefits 4,046 3,005
Income taxes 3,059 4,524
Other accruals 1,876 3,123
Obligations under capital leases 702 1,273
--------- ---------
Total current liabilities 40,979 42,456
Commitments and contingencies
Stockholders' equity:
Noncumulative convertible preferred stock, $.001 par value:
Authorized shares - 2,000,000 Issued
and outstanding shares - none at January 31, 1999 and 1998 -- --
Common stock, $.001 par value:
Authorized shares - 60,000,000
Issued and outstanding shares - 24,890,291 at January 31, 1999 and
24,204,602 at January 31, 1998 25 24
Additional paid-in-capital 67,286 61,263
Notes receivable from stockholders (554) (559)
Deferred compensation (1,764) (2,801)
Retained earnings 38,402 7,200
--------- ---------
Total stockholders' equity 103,395 65,127
--------- ---------
Total liabilities and stockholders' equity $ 144,374 $ 107,583
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
22
<PAGE>
NEOMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 31,202 $ 20,780 $ (1,163)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 3,281 1,679 813
Amortization of deferred compensation 807 776 375
Tax benefit from employee stock options 2,661 750 --
Deferred taxes 5,896 (8,571) --
Changes in operating assets and liabilities:
Accounts receivable (8,127) (9,031) (2,067)
Inventory (9,704) (4,105) (4,906)
Other current assets (212) (485) (163)
Other assets (833) 248 (482)
Accounts payable 21,806 4,315 4,606
Compensation and related benefits 1,041 1,864 1,141
Income taxes (1,465) 4,524 --
Other accruals (1,247) 2,647 (1,223)
-------- -------- --------
Net cash provided by (used for) operating activities 45,106 15,391 (3,069)
-------- -------- --------
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,384) (4,516) (3,105)
Purchases of short-term investments (69,616) (58,649) --
Maturities of short-term investments 49,535 22,633 --
-------- -------- --------
Net cash used for investing activities (25,465) (40,532) (3,105)
-------- -------- --------
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from sale leaseback liability -- -- 1,689
Payments on lease obligations (571) (975) (966)
Proceeds from working capital line of credit -- 59,760 27,941
Payments on working capital line of credit (21,041) (52,943) (14,131)
Net proceeds from issuance of common stock, net of repurchases 3,593 38,358 446
Payments received from notes receivable from stockholders 5 263 --
Amounts held as restricted cash equivalents -- -- (2,224)
Release of amounts held as restricted cash equivalents -- 2,224 --
-------- -------- --------
Net cash provided by (used for) financing activities (18,014) 46,687 12,755
-------- -------- --------
-------- -------- --------
Net increase in cash and cash equivalents 1,627 21,546 6,581
Cash and cash equivalents at beginning of period 35,004 13,458 6,877
-------- -------- --------
Cash and cash equivalents at end of period $ 36,631 $ 35,004 $ 13,458
-------- -------- --------
-------- -------- --------
Supplemental schedules of cash flow information
Cash paid during the year for:
Interest $ 1,339 $ 1,298 $ 1,045
Taxes $ 9,303 $ 6,964 $ --
Supplemental schedules of non-cash investing and financing activities
Issuance of common stock in exchange for promissory notes $ -- $ -- $ 592
Deferred compensation $ (230) $ 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 ADD'L
--------------------------- ---------------------------- PAID-IN
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES AMT SHARES AMT CAPITAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996 12,259,614 $ 12 6,922,633 $ 7 $ 17,302
---------- ----------- --------- ----------- -----------
Issuance of common stock under
stock option plan -- -- 1,465,750 1 997
Repurchase of common stock at cost
and payments on promissory notes -- -- (315,792) -- (92)
Payment of promissory note -- -- -- -- --
Deferred compensation
relating to stock options -- -- -- -- 2,264
Amortization of deferred compensation
relating to stock options -- -- -- -- --
Net loss -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at January 31, 1997 12,259,614 12 8,072,591 8 20,471
---------- ----------- --------- ----------- -----------
Issuance of common stock in
conjunction with initial public
offering -- -- 3,475,000 4 37,756
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 -- 259
Issuance of common stock under
employee stock purchase plan -- -- 35,987 -- 367
Repurchase of common stock at cost -- -- (12,813) -- (28)
Payment on promissory notes -- -- -- -- --
Deferred compensation
relating to stock options -- -- -- -- 1,688
Amortization of deferred compensation
relating to stock options -- -- -- -- --
Tax benefit attributable to stock options -- -- -- -- 750
Net income -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at January 31, 1998 -- -- 24,204,602 24 61,263
---------- ----------- --------- ----------- -----------
Issuance of common stock under
stock option plan -- -- 598,030 1 2,330
Issuance of common stock under
employee stock purchase plan -- -- 117,679 -- 1,285
Repurchase of common stock at cost -- -- (30,020) -- (23)
Payment on promissory notes -- -- -- -- --
Deferred compensation
relating to stock options -- -- -- -- (230)
Amortization of deferred compensation
relating to stock options -- -- -- -- --
Tax benefit attributable to stock options -- -- -- -- 2,661
Net income -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at January 31, 1999 -- $ -- 24,890,291 $ 25 $ 67,286
---------- ----------- --------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
RETAINED
NOTES EARNINGS TOTAL
RECEIVABLE FROM DEFERRED (ACCUMULATED STOCKHOLDERS'
STOCKHOLDERS COMPENSATION DEFICIT) EQUITY
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 31, 1996 $ (362) $ -- $ (12,417) $ 4,542
----------- --------- ----------- -----------
Issuance of common stock under
stock option plan (592) -- -- 406
Repurchase of common stock at cost
and payments on promissory notes 109 -- -- 17
Payment of promissory note 23 -- -- 23
Deferred compensation
relating to stock options -- (2,264) -- --
Amortization of deferred compensation
relating to stock options -- 375 -- 375
Net loss -- -- (1,163) (1,163)
----------- --------- ----------- -----------
Balance at January 31, 1997 (822) (1,889) (13,580) 4,200
----------- --------- ----------- -----------
Issuance of common stock in
conjunction with initial public
offering -- -- -- 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
Issuance of common stock under
employee stock purchase plan -- -- -- 367
Repurchase of common stock at cost -- -- -- (28)
Payment on promissory notes 263 -- -- 263
Deferred compensation
relating to stock options -- (1,688) -- --
Amortization of deferred compensation
relating to stock options -- 776 -- 776
Tax benefit attributable to stock options -- -- -- 750
Net income -- -- 20,780 20,780
----------- --------- ----------- -----------
Balance at January 31, 1998 (559) (2,801) 7,200 65,127
----------- --------- ----------- -----------
Issuance of common stock under
stock option plan -- -- -- 2,331
Issuance of common stock under
employee stock purchase plan -- -- -- 1,285
Repurchase of common stock at cost -- -- -- (23)
Payment on promissory notes 5 -- -- 5
Deferred compensation
relating to stock options -- 230 --
Amortization of deferred compensation
relating to stock options -- 807 -- 807
Tax benefit attributable to stock options -- -- -- 2,661
Net income -- -- 31,202 31,202
----------- --------- ----------- -----------
Balance at January 31, 1999 $ (554) $ (1,764) $ 38,402 $ 103,395
----------- --------- ----------- -----------
</TABLE>
See accompanying notes.
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 in 1993 in California
and reincorporated in Delaware in February 1997. The Company pioneered the
integration of DRAM, complex logic and analog circuits into a single integrated
circuit. The Company designs, develops and markets high-performance
semiconductor solutions for sale to original equipment manufacturers ("OEMs") of
mobile computing products. The first commercial application of the Company's
technology is in the multimedia accelerator market for notebook PCs.
BASIS OF PRESENTATION
The Company's fiscal year consists of a fifty-two week period ending on the
Sunday closest to the January month end. Fiscal years 1997 and 1998 ended on
January 26 and 25, respectively. Fiscal year 1999 ended on January 31, 1999 and
was a fifty-three week fiscal year. For convenience, the accompanying
consolidated 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.
RECLASSIFICATIONS
Certain amounts for prior years have been reclassified to conform to
current year presentation.
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 in the financial statements and
accompanying notes.
ACTUAL RESULTS COULD DIFFER FROM THOSE ESTIMATES.
All of the Company's wafers are currently manufactured by third-party
suppliers, each under the terms of five-year wafer supply agreements. A
manufacturing disruption experienced by any of the Company's manufacturing
partners or the failure of one of the Company's manufacturing partners to devote
adequate resources to the production of the Company's products would 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
three to 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 the 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 includes its effectiveness in risk
reduction and 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.
25
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of 90
days or less are considered cash equivalents. Investments with an original
maturity of greater than 90 days, but less than one year, are classified as
short-term investments.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS 115, 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. Securities not classified as held-to-maturity are
classified as available-for-sale and are reported at fair market 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 interest income and other. The
cost of securities sold is based on the specific identification method.
All cash equivalents and short-term investments are classified as available
for sale and are recorded at fair market value. For all classifications of
securities, cost approximates fair market value as of January 31, 1999 and 1998,
and consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, 1999 1998
- ----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents:
Money market funds $12,042 $ 5,272
Commercial paper 21,074 24,197
Municipal bonds 2,015 --
Bank accounts 1,500 5,535
------- -------
Total $36,631 $35,004
------- -------
------- -------
Short-term investments:
Market auction preferred - non-taxable $21,811 $ --
Market auction preferred - taxable 10,026 2,028
Medium term notes 9,272 11,158
Commercial paper 6,930 987
Corporate notes 4,165 5,602
U.S. Government agencies 3,025 8,082
Corporate bonds 868 7,148
Foreign debt securities -- 1,011
------- -------
Total $56,097 $36,016
------- -------
------- -------
</TABLE>
Gross realized and unrealized gains and losses on available-for-sale
securities in fiscal 1999, 1998 and 1997 were immaterial.
INVENTORY
Inventories are stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided on a
straight-line basis over the estimated useful life of the respective assets,
generally three to five years or, in the case of property under capital leases,
over the lesser of the useful life of the assets or lease term.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment, net of estimated
returns. Revenue on shipment to distributors is deferred until the distributor
sells the product.
26
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 PCs 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.
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 earnings 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.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS 130") during the quarter ended April
30, 1998. SFAS 130 establishes new standards for the reporting and displaying of
comprehensive income and its components. The adoption of this Statement had no
impact on the Company's net income or stockholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments to be included in comprehensive income.
Gross unrealized gains and losses on available-for-sale securities and foreign
currency translation adjustments for fiscal years 1999, 1998 and 1997 were
immaterial.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, ("SFAS 131") "Disclosures about Segments
of an Enterprise and Related Information." The statement changes standards for
the way that public business enterprises identify and report operating segments
in annual and interim financial statements. This statement requires selected
information about an enterprise's operating segments. Currently, the Company has
one operating segment by which management evaluates performance. All of the
Company's net sales to date have been derived from the sale of multimedia
accelerators, and the Company expects this to continue through fiscal 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities." The Standard will require companies to
record all derivatives held on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, changes in the fair value of the derivative is either offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or recognized in other comprehensive income until the value
related to the ineffective portion of a hedge, if any, is recognized in
earnings. The Company expects to adopt SFAS 133 as of the beginning of its
fiscal year 2001. The effect of adoption of the Standard is currently being
evaluated, but is not expected to have a material effect on the Company's
financial position or results of operations.
27
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARIZED BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
JANUARY 31, 1999 1998
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Raw materials $ 6,396 $ 989
Work in process 4,717 1,904
Finished goods 7,933 6,449
-------- --------
Total $ 19,046 $ 9,342
-------- --------
-------- --------
Property, plant and equipment:
Computer equipment and software $ 12,179 $ 8,017
Furniture and fixtures 1,645 917
Machinery and equipment 1,139 645
-------- --------
Total 14,963 9,579
Less accumulated depreciation and amortization (6,628) (3,347)
-------- --------
Property, plant and equipment, net $ 8,335 $ 6,232
-------- --------
-------- --------
</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, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 31,202 $ 20,780 $(1,163)
---------- -------- -------
Denominator:
Denominator for basic earnings per share - weighted-average shares 23,710 20,361 4,978
Effect of dilutive securities:
Employee stock options 2,354 3,227 --
Warrants 89 185 --
Convertible preferred stock -- 1,563 --
---------- -------- -------
Dilutive potential common shares 2,443 4,975 --
---------- -------- -------
Denominator for diluted earnings per share - adjusted weighted-
average shares and assumed conversions 26,153 25,336 4,978
---------- -------- -------
---------- -------- -------
Basic earnings per share $ 1.32 $ 1.02 $ (.23)
Diluted earnings per share $ 1.19 $ .82 $ (.23)
</TABLE>
The basic and diluted net income (loss) per share data 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.
28
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DERIVATIVE FINANCIAL INSTRUMENTS
All of the Company's sales and the majority of its purchases are
denominated in U.S. dollars. However, the Company's wafer purchases are
denominated in Japanese yen. The Company enters into foreign exchange forward
and option contracts to hedge this foreign currency exposure. Outstanding
foreign currency forward and option contracts at January 31, 1999 totaled $36.7
million and $0, respectively. Outstanding foreign currency forward and option
contracts at January 31, 1998 totaled $42.8 million and $15 million,
respectively. The Company does not enter into speculative foreign exchange
contracts to profit on exchange rate fluctuations.
Using the exchange rate at the reporting date, the estimated fair market
value of the foreign currency forward contracts at January 31, 1999 is
($598,000).
5. LINES OF CREDIT
Prior to February 1998, the Company maintained a revolving credit agreement
("Working Capital Line") with Mitsubishi International Corporation ("MIC") that
provided extended payment terms to finance wafer purchases. In exchange for the
extended terms and other consulting and logistic support services provided by
MIC, the Company paid to MIC interest and commissions. In January 1998, in
exchange for a reduction in the commission rate, the Company and MIC amended the
agreement such that for shipments subsequent to January 31, 1998, payment for
wafers must be made 30 days after wafer shipment. In fiscal 1999, all amounts
owed to MIC for wafer purchases are reflected in accounts payable.
In August 1998, NeoMagic International, a subsidiary of NeoMagic
Corporation, established a $10 million line of credit used for letters of
credit. The line of credit is collateralized by deposits equal to the total
current balances of all outstanding letters of credit. As of January 31,1999,
there was no balance outstanding under the line of credit.
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 and are active:
<TABLE>
<CAPTION>
JANUARY 31, 1999 1998
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Property, plant and equipment under capital lease $ 935 $ 1,609
Accumulated amortization (665) (977)
------- -------
Net property, plant and equipment under capital lease $ 270 $ 632
------- -------
------- -------
</TABLE>
Future minimum payments under capital leases consist of the following at January
31, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31,
- -----------------------------------------------------
(IN THOUSANDS)
<S> <C>
2000 $755
----
Total minimum lease payments 755
Amount representing interest 53
----
Present value of net minimum lease payments 702
Less current portion 702
----
Long-term portion $ --
----
----
</TABLE>
29
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision for income taxes in fiscal 1999, 1998 and 1997 consist of the
following :
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999 1998 1997
- --------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 10,168 $ 11,300 $ --
State 331 938 --
-------- -------- ---------
10,499 12,238 --
Deferred:
Federal 5,640 (7,870) --
State 256 (701) --
-------- -------- ---------
5,896 (8,571) --
-------- -------- ---------
Total provision for income taxes $ 16,395 $ 3,667 $ --
-------- -------- ---------
-------- -------- ---------
</TABLE>
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable for fiscal 1999 and 1998 by $2.7 million and
$0.8 million, respectively.
The Company's income tax provision differs from the federal statutory rate of
35% due to the following:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Pretax income (loss) $ 47,597 $ 24,447 $(1,163)
Federal statutory rate 35% 35% 35%
Expected tax (benefit) 16,659 8,556 (407)
State taxes (net of federal benefit) 381 154 --
Utilization of research and development tax credits (1,239) (844) --
Net operating loss not benefited -- -- 407
Utilization of net operating losses not previously benefited -- (4,199) --
Other 594 -- --
-------- -------- --------
Provision for income taxes $ 16,395 $ 3,667 $ --
-------- -------- --------
-------- -------- --------
</TABLE>
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, 1999 1998
- ------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Capitalized research and development $ 490 $ 490
Losses from foreign operations 788 4,505
Reserves and accruals 1,110 2,835
Other 287 741
------ ------
Total deferred tax assets 2,675 8,571
Valuation allowance -- --
------ ------
Net deferred tax assets $2,675 $8,571
------ ------
------ ------
</TABLE>
Cumulative losses from foreign operations through fiscal 1999 were immaterial.
30
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999 to
purchase shares of common stock:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OF SHARES PER SHARE DATE ISSUED EXPIRATION OF WARRANTS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
43,200 $0.625 May 1994 March 2002
36,666 $1.50 July 1994 March 2002
15,789 $2.85 August 1995 March 2002
- ------
95,655
</TABLE>
In February 1999, the warrants were exercised.
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 reserved 7,775,000 shares of common stock for issuance under the Plan.
In June 1998, an additional 875,000 shares were approved by the Shareholders of
the Company at the Annual Shareholders meeting, bringing the total reserved
under the Plan to 8,650,000 shares. Unless terminated sooner, the Plan will
terminate automatically in December 2003. The Board of Directors determines
vesting provisions for stock purchase rights and options granted under the Plan.
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. As of January 31,
1999, 551,502 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 schedules set out in the option agreement.
In June 1998, the Company adopted the 1998 Nonstatutory Stock Option Plan
whereby the Board of Directors may grant nonstatutory stock options to
employees, consultants and directors. The Company reserved 2,500,000 shares of
common stock for issuance under the Plan. Unless terminated sooner, the plan
will terminate automatically in June 2008.
In September 1998, the Board of Directors approved a resolution allowing
employees to exchange their existing vested and unvested stock options for new
options having an exercise price of $11.50 per share, the then current market
price of the Company's common stock. Options to purchase 2,085,700 shares, with
an average original exercise price of $15.48 per share, were exchanged by
employees. Vested exchanged options were not exercisable by the employees until
March 31, 1999. Options exchanged are included in the fiscal 1999 canceled and
granted numbers below.
31
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity, and related information for
the three years ended January 31, 1999 follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE
(OPTIONS) EXERCISE PRICE
- -------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 3,751,700 13.43
Exercised (598,030) 3.94
Canceled (2,485,350) 14.61
--------- ------
Balance at January 31, 1999 4,331,345 $ 9.30
</TABLE>
At January 31, 1999, options to purchase 849,870 shares of common stock
were vested at prices ranging from $.15 to $22.44 and 3,189,120 shares of common
stock were available for future grants under the Plan.
The following table summarizes information about stock options outstanding at
January 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
---------------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED
NUMBER CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
$0.15 - $0.80 590,024 7.08 $ 0.77
$1.00 - $ 3.50 154,346 7.57 2.14
$7.50 918,108 7.93 7.50
$9.60 - $11.13 187,167 9.23 10.59
$11.50 2,077,200 9.01 11.50
$12.63 - $22.44 404,500 9.41 16.72
--------- ---- ---------
4,331,345 8.51 $ 9.30
--------- ---- ---------
--------- ---- ---------
</TABLE>
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, effective upon the
completion of the initial public offering in March 1997. 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 1999 and 1998, 117,679 and 35,987 shares of common stock at an
average price of $10.92 and $10.20 per share, respectively, were issued under
the 1997 Purchase Plan. Shares available for purchase under the 1997 Purchase
Plan were 346,334 at January 31, 1999.
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 effect 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 1999 and 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, 1999 1998 1997 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Risk-free interest rates 4.8% 5.9% 6.3% 5.4% 5.5%
Volatility .65 .69 -- .70 .74
Expected life of option in years 5.0 5.0 4.7 1.01 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 1999 net income and earnings per
share would have decreased by approximately $8.9 million, or $0.38 per share and
$0.34 per share for basic and diluted earnings per share, respectively. 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 $0.09 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. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized over the
option's vesting period and stock purchased under the 1997 Purchase Plan 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.
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.
There were no options granted during fiscal 1999 with an exercise price
less than the market price at the date of grant. 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
1999, 1998 and 1997 with exercise prices equal to the market price at the date
of grant is $13.40, $8.39 and $2.00 per share, respectively.
DEFERRED STOCK COMPENSATION
In connection with the grant of certain stock options to employees in
fiscal 1999, 1998 and 1997, the Company recorded deferred compensation of
($230,000), $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. The fiscal 1998 and 1997 amounts are presented as a
reduction of stockholders' equity and are amortized ratably over the vesting
period of the related options. The fiscal 1999 amount reflects the unamortized
portion related to the cancellation of these options upon employee terminations.
33
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. In April
1998, the Company initiated a matching program, whereby the Company contributes
$0.20 for every dollar the employee contributes to the plan up to the first 6%
of earnings. The Company made matching contributions to employees of $128,000 in
fiscal 1999.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
In May 1996, the Company moved its principal headquarters to a new facility
in Santa Clara, California, under a non-cancelable operating lease that expires
in April 2003. In January 1998, the Company entered into a second non-cancelable
operating lease for the building adjacent to its principal headquarters. This
lease has a co-terminous provision with the original lease expiring in April
2003. The Company leases offices in India, Hong Kong, Taiwan and Texas under
operating leases that expire at various times through September 2000. Future
minimum lease payments under operating leases as of January 31, 1999 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31:
- ---------------------------------------------------------
(IN THOUSANDS)
<S> <C>
2000 $ 2,043
2001 1,998
2002 1,994
2003 2,047
2004 520
---------
Total minimum lease payments $ 8,602
---------
---------
</TABLE>
Rental expense under operating leases was $2,004,000, $988,000, and
$647,000 in fiscal 1999, 1998 and 1997, 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.
Rental income related to this sublease agreement was $458,000 in fiscal 1999. As
of January 31, 1999, future minimum rentals to be received under this sublease
total $46,000 in fiscal 2000.
CONTINGENCIES
In February 1999, the Company was contacted by two of its customers that
they have been notified of potential infringement by a holder of three United
States patents and are requesting indemnification from NeoMagic. At this time,
the Company's counsel is in the preliminary stage of analyzing these patents but
has not reached a conclusion. 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. Further, 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 while the Company is under the
threat of litigation.
In December 1998, the Company filed a lawsuit in the United States District
Court for the District of Delaware against Trident Microsystems, Inc.
("Trident"). The suit alleges that Trident's embedded DRAM graphics accelerators
infringe certain patents held by NeoMagic Corporation. In January 1999, Trident
filed a counter claim against the Company alleging an attempted monopolization
in violation of antitrust laws, arising from NeoMagic's filing of the patent
infringement action against Trident in December. The Company has filed for a
summary motion to dismiss the antitrust claim. There can be no assurance as to
the result of the request for summary motion, the patent infringement suit and
the counter-suit for antitrust filed by Trident.
34
<PAGE>
NEOMAGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In February 1997, Cirrus Logic Inc. ("Cirrus Logic") sent the Company
written notice asserting that the Company's MagicGraph128, MagicGraph128V and
MagicGraph128ZV products infringe six 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 and results of operations.
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 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 1999 three customers accounted for 19.8%, 17.1% and 10.5%,
respectively, of net 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.
Fiscal 1999 net sales to customers in Taiwan, Japan, North America and Europe
totaled 50.9%, 29.0%, 16.9% and 3.2%, respectively, of net sales. Net sales to
customers in Taiwan, Japan, North America 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.
12. SUBSEQUENT EVENTS
In February 1999, the Company completed two acquisitions to further its
development efforts of consumer products. The Company acquired the Optical Drive
Development Group and associated DVD intellectual properties from Mitel
Semiconductor in Manchester, England for $4 million in cash. The group is a team
of 16 professionals with experience in mixed-signal analog design and a DVD
optical storage read-channel product line. The Company also acquired the assets
and intellectual property of ACL of Tel Aviv, Israel from Robomatix Technologies
Ltd. for $5 million in cash and a net exercise warrant to purchase up to 100,000
shares of NeoMagic common stock at an exercise price of $20 per share. An
additional $1million in cash incentives were paid to certain employees of ACL.
As part of this acquisition, NeoMagic will acquire a team of 10 engineering and
research professionals from ACL who have developed an array-based processing
architecture. Both acquisitions will be recorded using the purchase method of
accounting.
In February 1999, the Company signed a 5-year wafer supply agreement with
Infineon Technologies (formerly Siemens Aktiengesselschaft Semiconductor Group)
of Germany. The agreement reflects terms similar to those with Mitsubishi and
Toshiba, except that the wafers will be purchased in U.S. dollars. The Company
does not anticipate volume production at Infineon until the fourth quarter of
fiscal 2000.
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 1999. 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, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended January 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
February 12, 1999
36
<PAGE>
EXHIBIT 21.0
NEOMAGIC CORPORATION
SUBSIDIARIES
(All 100% Owned)
<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
- ------------------------------------------------------------------- -------------------------
<S> <C>
NeoMagic International............................................. Grand Cayman Island
NeoMagic Japan K.K................................................. Japan
NeoMagic Israel Ltd................................................ Israel
NeoMagic U.K. Ltd.................................................. England
NeoMagic Semiconductor India Pvt. Ltd.............................. India
</TABLE>
<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 12, 1999, included in
the 1999 Annual Report to Stockholders of NeoMagic Corporation.
Our audits also include the financial statement schedule 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 schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Forms S-8 No. 333-30843 and 333-57217) of our report dated February
12, 1999, with respect to the financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
NeoMagic Corporation.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Jose, California
April 28, 1999
<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 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> JAN-26-1998
<PERIOD-END> JAN-31-1999
<CASH> 36,631
<SECURITIES> 56,097
<RECEIVABLES> 19,363
<ALLOWANCES> 0
<INVENTORY> 19,046
<CURRENT-ASSETS> 2,681
<PP&E> 14,963
<DEPRECIATION> 6,628
<TOTAL-ASSETS> 144,374
<CURRENT-LIABILITIES> 40,979
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 103,370
<TOTAL-LIABILITY-AND-EQUITY> 144,374
<SALES> 240,503
<TOTAL-REVENUES> 240,503
<CGS> 142,881
<TOTAL-COSTS> 142,881
<OTHER-EXPENSES> 52,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,339
<INCOME-PRETAX> 47,597
<INCOME-TAX> 16,395
<INCOME-CONTINUING> 31,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,202
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.19
</TABLE>
