<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
FAROUDJA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3651 77-0444978
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
750 PALOMAR AVENUE, SUNNYVALE, CALIFORNIA 94086
(408) 735-1492
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
MICHAEL J. MOONE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FAROUDJA, INC.
750 PALOMAR AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 735-1492
(Name, address, including zip code, and telephone number, including area code of
agent for service)
------------------------
COPIES TO:
MARK A. BONENFANT PATRICK J. SCHULTHEIS
Buchalter, Nemer, Fields & Younger Wilson Sonsini Goodrich & Rosati
a Professional Corporation Professional Corporation
601 South Figueroa Street, Suite 2400 650 Page Mill Road
Los Angeles, California 90017 Palo Alto, California 94304
(213) 891-0700 (415) 493-9300
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______________
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.001 par value per share........................................ $34,500,000 $10,455
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 30, 1997
[LOGO]
SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being offered by
Faroudja, Inc. ("Faroudja" or the "Company"). Prior to this Offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $ and $ per
share. See "Underwriting" for information relating to the method of determining
the initial public offering price.
-------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 6.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share............................. $ $ $
Total (3)............................. $ $ $
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) One of the Company's stockholders has granted the Underwriters a 30-day
option to purchase up to an additional shares of Common Stock solely to
cover over-allotments, if any. See "Principal and Selling Stockholders" and
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholder will be $ , $ and $ , respectively.
-------------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY VOLPE BROWN WHELAN & COMPANY
The date of this Prospectus is , 1997
<PAGE>
Front Cover Spread
1. Graphic presentation indicating how Faroudja current products and Faroudja
future products are utilized from the origination and production of video
signals to the reception and presentation of the video signal to a viewer
2. Picture of a Faroudja "system"
3. Picture of Faroudja board level product.
4. Picture of a Faroudja integrated circuit.
5. Picture of S3 trademark to represent Faroudja licensing.
6. Text:
"Faroudja designs, develops and markets video image enhancement products
that significantly improve images to achieve cinema-like quality.
Faroudja's technology, experience and reputation for providing sophisticated
video processing, products will enable it to address opportunities in the
emerging Digital Television (DTV) and High Definition Television (HDTV)
broadcast environment and in the converging Personal Computer (PC) and TV
markets.
Description of Inside Front Cover
1. Actual photograph of a standard image.
2. Actual photograph using Faroudja line processing, color bleeding and detail
enhancement circuitry.
3. TEXT:
Through more than 25 years of product development and technological
advances, the Company has established a reputation for excellence in
video signal processing and video image enhancement in the high end home
theater, industrial and broadcast markets.
4. Faroudja Picture Plus trademark.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
------------------------
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary........................................................................................ 4
Risk Factors................................................................................... 6
Use of Proceeds................................................................................ 17
Dividend Policy................................................................................ 17
Capitalization................................................................................. 18
Dilution....................................................................................... 19
Selected Consolidated Financial Data........................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 22
Business....................................................................................... 30
Management..................................................................................... 42
Certain Transactions........................................................................... 52
Principal and Selling Stockholders............................................................. 54
Description of Capital Stock................................................................... 56
Shares Eligible for Future Sale................................................................ 60
Underwriting................................................................................... 62
Legal Matters.................................................................................. 63
Experts........................................................................................ 63
Available Information.......................................................................... 63
Index to Consolidated Financial Statements..................................................... F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements examined by an independent
public accounting firm and quarterly reports for the first three quarters of
each year containing interim unaudited financial information. Upon completion of
the Offering contemplated hereby, the Company will be subject to the
informational requirements of the Securities and Exchange Act of 1934, and in
accordance therewith, will be filing reports and other information with the
Securities and Exchange Commission.
FAROUDJA, PICTURE PLUS and PRESENTATION PLUS are trademarks of the Company.
All other trademarks or tradenames referred to in the Prospectus are the
property of their respective owners.
The Company was incorporated in the State of Delaware on December 26, 1996.
The Company's principal executive offices are located at 750 Palomar Avenue,
Sunnyvale, California 94086 and its telephone number is (408) 735-1492. All
references to the "Company" shall mean Faroudja, Inc. and its predecessors and
subsidiaries, unless the context otherwise requires.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE FACTORS DISCUSSED UNDER "RISK FACTORS." THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Faroudja is a leader in the video image enhancement field. The Company
designs, develops and markets a range of video image enhancement products that
significantly improve displayed images to achieve cinema-like quality. Through
more than 25 years of product development and technological advances, the
Company has established a reputation for excellence in video signal processing
and video image enhancement in the high-end home theater, industrial and
broadcast markets. The Company believes that its technology, experience and
reputation in these markets will enable it to address opportunities in the
emerging digital television ("DTV") and digital high definition television
("HDTV") broadcast environment and to facilitate the convergence of the personal
computer ("PC") and the television ("TV").
Video images can currently be displayed on a variety of media, including
color TVs, projection systems and PCs. Historically, there has been a
substantial difference in the quality of these various media. TV signals are
produced in accordance with the NTSC standard, which was originally developed in
the 1940s for black and white programs. This standard was last modified in the
1950s to make possible the compatible transmission of black and white and color
programs. The technical compromises required to achieve compatibility introduced
image degrading imperfections, which are increasingly visible as screen sizes
become larger. Over the last decade, consumer interest in home theaters and
large screen TVs has increased dramatically, fueled by decreasing equipment
prices and the advent of cable TV, direct broadcast satellite, laser discs, VCRs
and most recently digital video discs ("DVD").
The Company's products for the TV market substantially reduce the
imperfections inherent in analog NTSC signals and dramatically improve displayed
images, giving the observer a far richer viewing experience. The Company's
technology improves picture quality by removing artifacts and noise, detecting
and compensating for motion, enhancing resolution and multiplying the number of
lines displayed on the TV screen.
Faroudja intends to capitalize on its experience and core technologies to
address the problems of standards conversion and upscaling anticipated in the
emerging DTV/HDTV broadcast equipment market. The Federal Communications
Commission ("FCC") recently established standards for DTV broadcasting in the
U.S. and has targeted the eventual phase out of analog (NTSC) broadcasting by
the year 2006. Faroudja is developing products that it believes will assist
broadcasters in responding to evolving regulatory and market requirements by
allowing them to continue to use a significant portion of their current
infrastructure, thereby reducing capital costs associated with the transition
from analog to digital transmission.
The Company believes that the use of the PC as an entertainment device in
the future will depend in large part on the PC's ability to display TV images.
The two media use different display formats--TV signals use an interlaced format
while PCs use a progressive scanning format. The Company's technology
significantly reduces the image imperfections caused by the
interlace/progressive conversion, which will enable the display of high quality
TV pictures on PC screens. The Company and S3 Incorporated ("S3"), a leading
supplier of advanced graphics accelerators for multimedia computer systems, are
working jointly, pursuant to a recent license agreement, to develop integrated
circuits incorporating the Company's video processing technology for use in PCs.
The Company intends to establish additional relationships with companies
whose technology, products and product strategies complement those of the
Company. The Company markets its products for the TV market through a network of
home theater, industrial and commercial dealers as well as OEM customers. For
the broadcast market, the Company utilizes its direct sales force. The Company
intends to expand its international sales and marketing activities in order to
increase export sales.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
Common Stock offered by the Company................ shares
<S> <C>
Common Stock outstanding after the Offering........ shares(1)
Use of Proceeds.................................... For research and development and
general corporate purposes, including
working capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. FDJA
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues........................... $ 3,437 $ 5,684 $ 8,065 $ 11,954 $ 13,126 $ 5,590 $ 7,864
Gross profit............................. 1,298 3,557 5,067 7,739 8,329 3,523 5,578
Operating income (loss).................. (448) 1,206 1,859 4,006 2,115 989 767
Net income (loss)........................ $ (393) $ 1,251 $ 1,929 $ 4,009 $ 1,511 $ 808 $ 534
Net income per share..................... $ 0.05
Shares used in per share
calculation(2)......................... 9,742
PRO FORMA DATA(3):
Pro forma adjustments.................... $ (192) $ (192)
Pro forma net income..................... 1,319 616
Pro forma net income per share........... $ 0.14 $ 0.07
Shares used in per share
calculation(2)......................... 9,171 8,943
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
AS
ACTUAL ADJUSTED(4)
--------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................................... $ 7,793 $
Working capital....................................................................... 11,185
Total assets.......................................................................... 15,225
Total long-term debt.................................................................. --
Total stockholders' equity............................................................ 12,923
</TABLE>
- ------------------------
(1) Based on shares outstanding as of June 30, 1997. Excludes (i) 1,578,349
shares of Common Stock issuable upon exercise of stock options outstanding
as of June 30, 1997, (ii) an aggregate of 864,271 shares of Common Stock
reserved for future issuance pursuant to the Company's stock option and
stock purchase plans and (iii) 179,601 shares of Common Stock issuable upon
exercise of outstanding warrants. See "Capitalization," "Management--Stock
Plans," "Certain Transactions," "Description of Capital Stock" and Note 6 of
Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate net income per share.
(3) Reflects the pro forma effect of the Company being treated as a C
Corporation rather than an S Corporation for federal and state income tax
purposes, effective January 1, 1996, at an effective tax rate of
approximately 40%. See "Certain Transactions--Subchapter S Distributions."
(4) Adjusted to give effect to the sale of shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $
per share. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY SHOULD CAREFULLY REVIEW THE FOLLOWING RISK FACTORS AS WELL AS THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE
FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS; SEASONALITY
The Company's operating results have varied in the past and are likely to
vary significantly in the future from period to period as a result of a number
of factors, including the volume and timing of orders received during the
period, fluctuations in the amount and timing of license and royalty revenues,
the timing of new product introductions by the Company and its competitors,
demand for and market acceptance of the Company's products, product line
maturation, the impact of price competition on the Company's average selling
prices, delays encountered by the Company's strategic partners, the availability
and pricing of components for the Company's products, changes in product or
distribution channel mix and product returns from customers. Many of these
factors are beyond the Company's control. In addition, due to the short product
life cycles that characterize the markets for the Company's products, the
Company's failure to introduce new, competitive products consistently and in a
timely manner could materially adversely affect operating results for one or
more product cycles. The Company recently entered into a license agreement with
S3 pursuant to which the Company may receive royalties and may receive quarterly
prepaid license fees to maintain exclusivity. S3 is under no obligation to
market any products or to make the payments necessary to maintain its exclusive
license rights. There can be no assurance that the Company will receive any
further payments pursuant to this agreement, and the amount of any such payments
cannot be predicted. As a result, license and royalty revenues may be higher or
lower than expected in any given quarter.
Gross margins may vary from period to period as a result of a number of
factors, including the mix of products sold, new product introductions,
fluctuations in the receipt of license and royalty revenues, and the mix of
distribution channels. The Company's gross margins may also be adversely
affected by shortages in the availability of key components for the Company's
products. To maintain favorable margin levels on product sales, the Company must
introduce new products, must introduce enhanced versions of its products, and
must continue its cost reduction efforts. The Company anticipates that it will
incur lower overall gross margins in future periods as it introduces lower
margin products for consumer markets.
Customers generally order on an as-needed basis and, accordingly, the
Company has historically operated with a relatively small backlog.
Notwithstanding the difficulty in forecasting future sales and the relatively
small level of backlog at any given time, the Company generally must plan
production, order components and undertake its development, sales and marketing
activities and other commitments months in advance of orders for its products.
Accordingly, any shortfall in revenues in a given quarter may adversely impact
the Company's operating results due to an inability to adjust expenses during
the quarter to offset any reduced level of revenues for the quarter.
The Company currently derives a substantial portion of its total revenues
from the sale of a relatively small number of high priced products. The
Company's backlog at the beginning of a quarter typically does not include all
sales required to achieve the Company's sales objectives for that quarter.
Consequently, the Company's total revenues and operating results for a quarter
depend upon the Company obtaining orders for products to be shipped in the same
quarter. In addition, from time to time, a significant portion of the Company's
sales have been derived from sales of multiple products to a limited number of
customers. The volume and timing of orders received during a quarter are
difficult to forecast. A disproportionate percentage of the Company's total
revenues in any quarter may be generated in the last month of a quarter. As a
result, a shortfall in sales in any quarter as compared to expectations may not
be identifiable until the end of the quarter. A delay in shipment
6
<PAGE>
near the end of a particular quarter, due, for example, to an unanticipated
shipment rescheduling, to cancellations by customers or to unexpected
manufacturing difficulties experienced by the Company or its suppliers may cause
total revenues in a particular quarter to fall significantly below the Company's
expectations and may thus materially adversely affect the Company's operating
results for such quarter. The Company's industry is subject to a high degree of
seasonality, and demand for the Company's products has historically been highest
in the third and fourth quarters of each calendar year. As a result, sales are
typically highest in these quarters and may be lower in following quarters.
RISKS ASSOCIATED WITH NEW MARKETS AND APPLICATIONS; MARKET ACCEPTANCE
Substantially all of the Company's revenues in 1996 were derived from sales
of products that address the high-end home theater and industrial TV markets.
Certain of the Company's current products and certain of its planned future
products generally address markets that are not now and may never become
substantial commercial markets. The Company's future growth will depend, in
large part, on the Company's ability to identify new markets for its products
and to apply its video enhancement technology to evolving markets and
applications that require superior visual images. There can be no assurance that
these markets will become substantial commercial markets or that they will
evolve in such a manner that the Company's products achieve market acceptance.
For example, one of the products the Company manufactures for the TV market is
the DV1000, a DVD player. However, a significant market for DVD players has not
yet developed. The Company also intends to exploit what it believes will be the
convergence of the TV and PC markets. There can be no assurance that the TV and
PC markets will converge, that this new market will present substantial
commercial opportunities, or that the Company's products will adequately address
this market in a timely manner. The Company has experienced, and expects to
continue to experience, technological and pricing constraints that may preclude
the development of products that address emerging markets. There can be no
assurance that the Company or its original equipment manufacturer ("OEM")
customers will continue their existing product development efforts, or, if
continued, that such efforts will be successful, that markets will develop in a
timely manner, or at all, for any of the Company's or such customers' products,
or that the Company's and its customers' products will not be superseded by
other technology or products.
RISKS ASSOCIATED WITH CHANGING TV STANDARDS
The Company is developing products that are designed to conform with certain
current industry broadcast standards. However, there can be no assurance that
manufacturers will continue to follow these standards or that competing
standards will not emerge which will be preferred by manufacturers or consumers.
The acceptance of the Company's products also depends in part upon third-party
content providers developing and marketing content for end user systems, such as
video and audio playback systems, in a format compatible with the Company's
products. There can be no assurance that these or other factors beyond the
Company's control will not adversely affect the development of markets for the
Company's products.
The FCC has required broadcasters to begin broadcasting digital signals in
May 1999, targeting the phase out of the current analog signals by the year
2006. There is considerable uncertainty among broadcasters and providers of
broadcast, reception and display equipment as to how DTV will be implemented, as
to how broadly and rapidly DTV will be deployed, and as to when, if ever, analog
TV will be discontinued. There can be no assurance that the market for the
Company's products will continue following the introduction of DTV or if
competing standards or technologies emerge that are preferred by manufacturers
and consumers. In addition, there can be no assurance that DTV and related
products will gain market acceptance or that third-party content providers will
develop and market content for end user systems using a digital format or a
format compatible with the Company's products. There can be no assurance that
such factors beyond the Company's control will not adversely affect the
development of markets for the Company's products.
7
<PAGE>
DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND RISK OF TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by evolving
industry standards, rapid technological change, frequent new product
introductions and short product life cycles. The Company's future success will
depend, in large part, on its ability to continue to enhance its existing
products and to develop new products and features to meet changing customer
requirements and evolving industry standards. The Company anticipates that sales
from its line multiplier product lines will experience limited growth, or may
decline, in future periods. The Company expects that more than one-half of its
total revenues in 1998 will be derived from license and royalty revenues and
sales of recently introduced products, as well as products which the Company is
developing. The success of new products depends on a number of factors,
including proper selection and timely introduction of planned new products,
successful and timely completion of product development, accurate estimation of
demand for new products, market acceptance of new products of the Company and
its OEM customers, the Company's ability to offer new products at competitive
prices, the availability of adequate staffing to produce and sell such new
products, and competition from products introduced by competitors. Certain of
these factors are outside the control of the Company. See "--Risks Associated
with New Markets and Applications; Market Acceptance." For example, to date
sales of the Company's DVD players have been minimal, and initial sales of the
Company's rear projection TV are not expected until the fourth quarter of 1997.
Sales of the Company's board level products, and future license and royalty
revenues, depend in part upon the ability of the Company's OEM customers and
licensees to successfully develop and market products incorporating the
Company's products or technology. The Company's products intended for the
digital broadcast market are not expected to be field tested until the fourth
quarter of 1997 and are not expected to be available for sale until 1998. There
can be no assurance that the Company's broadcast products, assuming timely
development and satisfactory completion of field tests, will be accepted by the
broadcast market. There can be no assurance as to the amount of royalties, if
any, to be paid to the Company under the S3 agreement because S3 is under no
obligation to maintain its exclusive license with the Company or to develop
products incorporating the Company's technology under the agreement.
The incorporation of the Company's products into its OEM customers' product
designs often requires significant expenditures by the Company, which
expenditures may precede volume sales of the Company's products, if any, by one
year or more. The introduction of new or enhanced products also requires the
Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, to avoid excessive levels of older
product inventories and to ensure that adequate supplies of new products can be
delivered to meet customer demand.
There can be no assurance that the Company will identify new product
opportunities, will successfully develop and bring to market new products, will
achieve design wins or will respond effectively to technological changes or
product announcements by others, or that the Company's new products will achieve
market acceptance. A failure in any of these areas would have a material adverse
effect on the Company's business, financial condition and operating results.
DISTRIBUTION RISKS; DIVERSIFICATION OF SALES CHANNELS
The Company sells its products domestically and internationally through
distributors and dealers, as well as to OEM customers, and the Company's success
depends on the continued efforts of its network of direct and indirect
distributors and dealers. The loss of, or reduction in sales to, any of the
Company's key customers could have a material adverse affect on the Company's
operating results. The short life cycles of the Company's products and the
difficulty in predicting future sales increase the risk that new product
introductions, price reductions by the Company or its competitors or other
factors affecting the video imaging industry could result in significant product
returns. In addition, there can be no assurance that new product introductions
by competitors or other market factors will not require the Company to reduce
prices in a manner or at a time which has a material adverse impact upon the
Company's business, financial condition and operating results.
8
<PAGE>
An integral element of the Company's strategy is to enhance and diversify
its international and domestic distribution channels. The Company has
distribution relationships with Ampro Corp. ("Ampro"), Hughes-JVC Technology
Corporation ("Hughes/JVC"), NEC Technologies, Inc. USA ("NEC"), CinemaPro
Corporation dba Runco International ("Runco") and Vidikron of America, Inc.
("Vidikron"). However, none of such distributors is obligated to purchase the
Company's products. The Company is currently investing, and plans to continue to
invest, a significant portion of its cash and personnel resources to expand its
domestic and international direct sales and marketing force and to develop
distribution relationships with additional third-party distributors and
resellers. The Company's ability to achieve revenue growth in the future will
depend in large part on its success in recruiting and training sufficient sales
personnel, distributors and resellers. Certain of the Company's existing
distributors currently distribute, or may in the future distribute, the product
lines of the Company's competitors. There can be no assurance that the Company
will be able to attract, train and retain a sufficient number of its existing or
future third-party distributors or direct sales personnel or that such
third-party distributors will recommend, or continue to recommend, the Company's
products or devote sufficient resources to market and provide the necessary
customer support for such products. All of these factors could have a material
adverse effect on the Company's business, financial condition and operating
results.
COMPETITION
The markets in which the Company competes are intensely competitive and are
characterized by rapid technological change, rapid product obsolescence and
price competition. The Company expects competition to increase in the future
from existing competitors and from other companies that may enter the Company's
existing or future markets with products or technologies which may be less
costly or provide higher performance or more desirable features than the
Company's products. The Company's existing and potential competitors include
several large domestic and international companies that have substantially
greater financial, manufacturing, technical, marketing, distribution and other
resources than the Company. In the TV market for video processors, the Company's
principal competitors are DWIN Electronics, Inc. ("DWIN"), Extron Electronics
("Extron"), NEC, Snell & Wilcox Inc. ("Snell & Wilcox"), Sony Corporation
("Sony") and Yamashita Engineering Manufacturing, Inc. ("YEM"). In the market
for broadcast products, the Company's principal competitors are Extron, Leitch,
Incorporated ("Leitch"), Matsushita Consumer Electronics Co. ("Matsushita"),
Snell & Wilcox, Sony Broadcast Products, Incorporated ("Sony Broadcast") and
Vistek Electronics, Ltd. ("Vistek").
As the Company's products penetrate broader markets and as these markets
become commercial markets, the Company expects to face competition from
diversified electronic and semiconductor companies.
Certain of the Company's principal competitors maintain their own
manufacturing facilities, including semiconductor foundries, and may therefore
benefit from certain capacity, cost and technical advantages. Since the Company
does not operate its own semiconductor manufacturing, assembly or test
facilities, it may not be able to reduce its costs as rapidly as companies that
operate their own facilities. The failure of the Company to introduce lower cost
versions of its products in a timely manner or to successfully manage its
manufacturing, assembly and testing relationships would have a material adverse
effect on its business, operating results and financial condition.
The Company believes that its ability to compete successfully in the rapidly
evolving markets for high performance video technology depends on a number of
factors, including protection of its proprietary technology and information, the
price, quality and performance of the Company's and its competitors products,
the timing and success of new product introductions by the Company, its
customers and its competitors, the emergence of new industry standards, the
Company's ability to obtain and locate adequate foundry capacity, the number and
nature of the Company's competitors in a given market and general market and
economic conditions. There can be no assurance that the Company will compete
successfully in the future with respect to these or any other competitive
factors. See "--Limited Protection of Proprietary Rights; Risk of Third Party
Infringement."
9
<PAGE>
DEPENDENCE ON STRATEGIC RELATIONSHIPS
The Company expects that a significant portion of its annual revenues and
profits in the future will depend on strategic relationships. In particular,
under the license agreement with S3, the Company depends on S3 to develop and
market products incorporating the Company's technology for use in PCs.
Similarly, the Company depends on Runco and Vidikron to sell products which
incorporate the Company's technology, and a failure by these companies to make
such sales will adversely affect the Company's total revenues in the future. The
Company and Texas Instruments Incorporated ("TI") have entered into an agreement
pursuant to which TI has engaged the Company to develop improvements for the TI
Digital Light Processing-TM- based projector systems ("DLP"). TI may, but is not
required to, incorporate the results of such development in its DLPs. If TI
chooses to incorporate such improvements, it will enter into a royalty agreement
with the Company for the sale of DLPs incorporating the Company's technology.
There can be no assurance that any of the Company's strategic relationships will
result in the introduction of new products incorporating the Company's
technology or will result in substantial revenues for the Company. In the event
that the Company's strategic relationships fail to result in substantial
revenues to the Company, the Company's business, financial condition and
operating results will be materially adversely affected.
The Company has licensed, and intends to continue to license, its
technologies and intellectual property to others. The licenses may allow
licensees to purchase from the Company or the Company's suppliers board level or
chip level products developed by or for the Company, which implement certain of
the Company's technologies. The Company's licensees may be larger and have
greater market recognition and financial, technological, engineering,
manufacturing and distribution capabilities than the Company. In addition, such
licensees may use such technologies either alone or in combination with other
technologies to develop products which could compete with the Company's
technologies and products. While the Company may sell board level or chip level
products to licensees and may receive royalties from such licensees, there can
be no assurance that the technologies and products offered by such licensees
will not compete directly with those of the Company, have performance, cost or
other advantages over those of the Company or have an adverse impact on the
sales or other licensing activities of the Company.
MANAGEMENT OF GROWTH
Since 1993, the Company has experienced, and expects to continue to
experience, a significant expansion in its overall level of business and
operations, including research and development, marketing, technical support and
sales and distribution. This growth has placed, and is expected to continue to
place, significant strain on the Company's management, operating and financial
resources resulting in new and increased responsibilities for management
personnel. There can be no assurance that the Company's management, personnel,
systems, procedures and controls will be adequate to support the Company's
existing and future operations. The Company's ability to effectively manage its
recent growth and any future growth will require the Company to expand its
operating, manufacturing and financial procedures and controls, to improve
coordination among different operating functions, to replace or upgrade its
management information systems and telecommunications systems, and to continue
to hire additional personnel, particularly in the areas of engineering and sales
and marketing. There can be no assurance that the Company will be able to manage
these activities and implement these additional systems and controls
successfully, and any failure to do so could have a material adverse effect upon
the Company's business, financial condition and operating results.
RELIANCE ON INDEPENDENT FOUNDRIES AND MANUFACTURERS
The Company currently relies on independent foundries to manufacture,
assemble and test all of its semiconductor components and products. The
Company's primary foundries are SGS-Thomson Microelectronics, Inc.
("SGS-Thomson"), Micro Devices Technology, Inc. ("MDT") and TEMIC North America,
Inc. ("TEMIC"). These independent foundries fabricate products for other
companies and may also manufacture products of their own design. The Company
currently purchases products from all of its foundries pursuant to individually
negotiated purchase orders. The Company does not have a long-term supply
contract with any of
10
<PAGE>
these foundries, and, therefore, none of them is obligated to supply products to
the Company for any specific period, in any specific quantity or at any
specified price, except as may be provided in a particular purchase order.
The Company's reliance on independent foundries involves a number of risks,
including the inability to obtain adequate capacity, unavailability of or
interruption of access to certain process technologies, reduced control over
delivery schedules, quality assurance, manufacturing yields and cost, and
potential misappropriation of the Company's intellectual property. From time to
time, the semiconductor industry has experienced severe capacity constraints,
and this pattern is expected to continue. The Company obtains foundry capacity
through forecasts that are generated in advance of expected delivery dates, and
the Company places purchase orders up to six months prior to scheduled delivery.
The Company's ability to obtain the foundry capacity necessary to meet the
demand for its products is based in part on its ability to accurately forecast
demand. If the Company fails to accurately forecast its future demand, the
Company may be unable to obtain adequate supplies of integrated circuits on a
timely basis. There can be no assurance that the Company will be able to
accurately forecast the demand for its products or obtain sufficient foundry
capacity in the future. In addition, the Company's obligation to place purchase
orders in advance of delivery subjects the Company to inventory risks, including
the risk of obsolescence.
While the Company has not experienced any material disruptions in supply to
date, there can be no assurance that manufacturing problems will not occur in
the future. In the event that any of the Company's foundries are unable or
unwilling to produce sufficient supplies of the Company's products in required
volumes at acceptable costs, the Company will be required to reallocate
production among its other existing foundries or to identify and qualify
acceptable alternative foundries. This qualification process could take six
months or longer, and no assurance can be given that any additional source would
become available to the Company or would be in a position to satisfy the
Company's production requirements on a timely basis. The loss of any of the
Company's foundries as a supplier, the inability of the Company in a period of
increased demand for its products to expand supply or the Company's inability to
obtain timely and adequate deliveries from its current or future suppliers could
reduce or delay shipments of the Company's products. Any of these developments
could damage relationships with the Company's current and prospective customers
and could have a material adverse effect on the Company's business, financial
condition and operating results.
The Company subcontracts the manufacturing of its broadcast and TV products.
Bestronics, Inc. ("Bestronics") assembles more than 80% of the Company's circuit
boards and DC Electronics, Inc. ("DC Electronics") builds all of the Company's
wire and cable harnesses. The Company's reliance on third-party manufacturers
limits its control over delivery schedules, quality assurance and product cost.
Disruptions in the provision of services by the Company's assemblers or other
circumstances that would require the Company to seek alternative sources of
assembly could lead to supply constraints or delays in the delivery of the
Company's products. In addition, the need for high quality assurance by the
Company may increase costs paid by the Company to third parties for
manufacturing and assembly of the Company's products. These constraints or
delays could damage relationships with current and prospective customers and
could have a material adverse effect on the Company's business, financial
condition and operating results.
LIMITED PROTECTION OF PROPRIETARY RIGHTS; RISK OF THIRD PARTY INFRINGEMENT
The Company's future success depends in part upon its ability to protect its
proprietary technology and information. The Company seeks to protect its
intellectual property rights and to limit access to its proprietary information
through a combination of patents, trademarks, copyrights, trade secrets, and
nondisclosure and licensing arrangements, all of which afford only limited
protection. Yves Faroudja, the Company's founder and Chief Technical Officer,
personally holds or was assigned 44 U.S. and 6 foreign patents, and 6 U.S. and
20 foreign patent applications, which have been licensed to the Company, and on
which the Company depends for the enhancement of its current products and the
development of future products. Mr. Faroudja has granted the Company a
perpetual, royalty-free license to use patented and unpatented technologies
developed by him prior to January 20, 1997. See "Certain Transactions--Yves
Faroudja License Agreement." There can be no assurance
11
<PAGE>
that patents will issue from any pending applications or that any claims allowed
from pending applications will be of sufficient scope or strength, or be issued
in all countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. Also, competitors of the
Company may be able to design around the licensed patents. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's products or intellectual property rights to the same extent as the
laws of the United States, and thus, may increase the likelihood of piracy of
the Company's technology and products. There can be no assurance that the steps
taken by the Company to protect its intellectual property rights will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology.
There can be no assurance that the Company's intellectual property rights,
if challenged, will be upheld as valid, will be adequate to prevent
misappropriation of its technology or will prevent the development of
competitive products. Additionally, there can be no assurance that the Company
will be able to license or obtain patents or other intellectual property
protection in the future.
Substantially all of the intellectual property used by the Company is
licensed to the Company by Yves Faroudja. See "Certain Transactions--Yves
Faroudja License Agreement." The Company faces certain risks because the Company
is a licensee and not the owner of such intellectual property rights. Mr.
Faroudja has granted nonexclusive licenses to certain of his patents and
technologies to third parties. Under his agreement with the Company Mr. Faroudja
retains the exclusive right to license his patents and technologies to third
parties for use outside the Company's field of use. In the event that
preexisting licenses granted to third parties relate to the Company's field of
use, the Company may not be able to exclude such third parties from making,
using, selling, or importing devices or practicing methods, covered by such
patents or technologies. Third parties not so excluded may enter the market in
which the Company competes, and such entry could have a material adverse effect
on the Company's business, financial condition and operating results.
Additionally, third parties receiving licenses to patents and technologies
outside the Company's field of use may leverage their access to such technology
to develop additional technology or to obtain additional patents, which such
third parties may use to exclude the Company from marketplaces in which it
competes or intends to compete. Notwithstanding the particular terms of the
license agreement with Mr. Faroudja, the Company faces the risk that he may
attempt to terminate the granted licenses and that such an attempt may be
successful or that the response to such attempt may consume substantial
financial and personnel resources. In the event the Company's resources are so
consumed, such consumption may have a material adverse effect on the Company's
business, financial condition and operating results.
The video image enhancement and related industries are characterized by
vigorous protection and pursuit of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. Although to date the Company has received no notification of alleged
infringement of other companies' intellectual property rights, the Company may
from time to time be subject to proceedings alleging infringement by the Company
of intellectual property rights owned by third parties. If necessary or
desirable, the Company may seek licenses under such intellectual property
rights. However, there can be no assurance that such licenses will be offered or
that the terms of any offered license will be acceptable to the Company. The
failure to obtain such a license from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
or cease the manufacture of products requiring such technology.
The Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. For example, in January 1997 and May 1997, the
Company filed actions against DWIN and Snell & Wilcox, respectively, seeking
relief and damages for the infringement of US Patent Number 4,876,596 owned by
Yves Faroudja and licensed to the Company. DWIN and Snell & Wilcox have raised
defenses and counterclaims that the patent is invalid and not infringed.
12
<PAGE>
Litigation by or against the Company could result in significant expense to
the Company and could divert the efforts of the Company's technical and
management personnel, whether or not such litigation results in a favorable
determination for the Company and such diversion may have a material adverse
effect on the Company's business, financial condition and operating results. In
addition, such litigation could result in the assertion of counter claims
against the Company. In the event of an adverse result in any such litigation,
the Company could be required to pay substantial damages, attorney fees, costs
and expenses, to cease infringing a third-party's intellectual property rights
(including, marketing, using, selling and importing infringing products, and
employing infringing methods or processes), to expend significant resources to
develop non-infringing technology, or to obtain licenses to the technology
allegedly infringed. There can be no assurance that the Company would be
successful in such development or that any such license would be available on
reasonable terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. In the
event that any third party makes a successful intellectual property claim
against the Company or its customers, the Company's business, financial
condition and operating results could be materially adversely affected. See
"Business--Proprietary Rights and Licenses."
RISKS ASSOCIATED WITH EXPORT SALES AND OPERATIONS
For the year ended December 31, 1996, and for the six months ended June 30,
1997, export sales accounted for approximately 15.3% and 9.5%, respectively, of
the Company's total revenues. The Company intends to substantially expand its
export sales efforts. However, there can be no assurance that the Company will
be successful in increasing export sales. Export sales to international
customers entail a number of risks which include unexpected changes in, or
impositions of, legislative or regulatory requirements, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, quotas
and other trade barriers and restrictions, longer payment cycles, greater
difficulty in accounts receivable collection, potentially adverse taxes,
currency exchange fluctuations, the burdens of complying with a variety of
foreign laws and other factors beyond the Company's control. The Company would
also be subject to general geopolitical risks in connection with international
operations, such as political, social and economic instability, potential
hostilities and changes in diplomatic and trade relationships. Although the
Company has not to date experienced any material adverse effect on its
operations as a result of such regulatory, geopolitical and other factors, there
can be no assurance that such factors will not adversely affect the Company's
operations in the future or require the Company to modify its current business
practices. In addition, the laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. There can be no assurance that one or more of the
foregoing factors will not have a material adverse effect on the Company's
business, financial condition and operating results or require the Company to
modify its current business practices. See "Business--Sales and Marketing."
DEPENDENCE ON SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES; NEW MANAGEMENT
PERSONNEL
The Company's future success will depend to a significant extent upon the
continued service of members of senior management and other key employees of the
Company, particularly Yves Faroudja, the Company's founder and Chief Technical
Officer, and Michael Moone, the Company's President and Chief Executive Officer.
The loss of the service of any of these individuals could have a material
adverse effect on the Company. The Company does not maintain key man life
insurance on any of its employees. The Company believes that its future success
will depend to a significant extent upon its ability to attract, train and
retain highly skilled technical, management, sales, marketing and consulting
personnel. Competition for such personnel is intense, and the Company expects
that such competition will continue for the foreseeable future. The Company has
from time to time experienced difficulty in locating candidates with appropriate
qualifications. There can be no assurance that the Company will be successful in
attracting or retaining such personnel, and the failure to attract or retain
such personnel could have a material adverse effect on the Company's business,
financial condition and operating results. See "Management--Executive Officers
and Directors."
13
<PAGE>
The Company has recently effected significant changes in its management team
and key employees. In particular the Company's Chief Executive Officer, its
Chief Financial Officer and its Vice President--Engineering joined the Company
in June 1996, December 1996 and May 1996, respectively. Further, the Company
hired its General Counsel and Vice President--Business Development and its Vice
President--Sales and Marketing in June 1997. The Company's headcount has grown
from 39 at December 31, 1995, to 67 at June 30, 1997. There can be no assurance
that the Company's new management team can successfully manage the Company's
rapidly evolving business, and failure to do so would have a material adverse
effect upon the Company's business, financial condition and operating results.
See "--Management of Growth."
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS
While the Company expects that the proceeds from this Offering, its existing
cash balances and the amounts, if any, generated from operations will be
sufficient to meet its cash requirements for at least the next 12 months, the
Company is operating in a rapidly changing industry. There can be no assurance
that the Company will not seek to exploit business opportunities that will
require it to raise additional capital from equity or debt sources to finance
its growth and capital requirements. In particular, the development and
marketing of new products could require a significant commitment of resources,
which could in turn require the Company to obtain additional financing earlier
than otherwise expected. There can be no assurance that the Company will be able
to raise such capital on acceptable terms, if at all. If the Company is unable
to obtain such additional capital, the Company may be required to reduce the
scope of its planned product development and marketing, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering for general
corporate purposes, including an increase in the Company's research and
development activities, an expansion of its internal sales, marketing and
distribution operations and an increase in working capital. A significant
portion of the net proceeds to the Company from this Offering have not been
designated for specific uses. Accordingly, management of the Company will have
broad discretion with respect to the use of these funds. See "Use of Proceeds."
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon the consummation of this Offering, the current officers, directors and
major stockholders of the Company will own or control approximately % of the
outstanding shares of Common Stock (including outstanding options and warrants
to purchase Common Stock). Accordingly, these stockholders, if they were to act
as a group, would be able to control the Company's Board of Directors, increase
the authorized capital and otherwise control the policies of the Company. The
control of such stockholders could delay or prevent a change in control of the
Company, impede a merger, consolidation, takeover or other business combination
involving the Company, or discourage a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company. See
"Management," "Principal and Selling Stockholders" and "Description of Capital
Stock."
POTENTIAL ANTI-TAKEOVER EFFECTS OF CHARTER DOCUMENTS AND DELAWARE LAW
The Company's Certificate of Incorporation and By-Laws contain various
provisions, including a classified Board of Directors, and Delaware law contains
certain provisions that could delay or impede the removal of incumbent directors
and could make more difficult a merger, tender offer or proxy contest involving
the Company, even if such events would be beneficial to the interests of the
stockholders of the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock. In addition, the Company may issue shares of Preferred Stock
without stockholder approval on such terms as the Board of Directors may
determine. The rights of the holders of Common Stock
14
<PAGE>
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. Moreover, although the
ability to issue Preferred Stock may provide flexibility in connection with
possible acquisitions and other corporate purposes, such issuance may make it
more difficult for a third party to acquire, or may discourage a third party
from acquiring, a majority of the voting stock of the Company. The Company has
no current plans to issue any shares of Preferred Stock. The Company may in the
future adopt other measures that may have the effect of delaying, deferring or
preventing a change in control of the Company. Certain of such measures may be
adopted without any further vote or action by the stockholders, although the
Company has no present plans to adopt any such measures. See "Description of
Capital Stock."
NO PRIOR PUBLIC MARKET; POTENTIAL LIMITED TRADING MARKET; POSSIBLE VOLATILITY OF
STOCK PRICE
Prior to this Offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after this Offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial price to the public for the Common Stock offered hereby will
be determined by negotiation between the Company and the Representatives.
Factors such as announcements of developments related to the Company's business,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, sales of the Company's Common Stock into the
public market, developments in the Company's relationships with its customers,
distributors and suppliers, shortfalls or changes in total revenues, gross
margin, earnings or other financial results from analysts' expectations,
regulatory developments, fluctuations in results of operations and general
conditions in the Company's market or the market served by the Company's
customers or the economy could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of small capitalization and technology
stocks in particular, have experienced extreme price and volume fluctuations,
which have often been unrelated or disproportionate to the operating performance
of affected companies. Many technology companies have recently experienced
historic highs in the market price of their Common Stock. There can be no
assurance that the market price of the Company's Common Stock will not decline
substantially from the initial public offering price, or otherwise experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of outstanding options) in the public market after this Offering
could materially adversely affect the market price of the Common Stock. Such
sales might also make it more difficult for the Company to sell equity
securities or equity related securities in the future at a time and price that
the Company deems appropriate. In addition to the shares of Common Stock
offered hereby, as of the date of this Prospectus there will be 8,733,696 shares
of Common Stock outstanding, all of which are "restricted" shares under the
Securities Act of 1933, as amended (the "Securities Act"). Approximately
shares (which includes the shares offered and sold hereby and shares
available for sale in the public market on the date of this Prospectus) will be
available for sale in the public market on the date of this Prospectus and
approximately 6,669,880 shares will be available for sale in the public market
180 days after the date of this Prospectus upon expiration of certain lockup
agreements with the Underwriters or the Company and pursuant to Rules 144,
144(k) or 701 promulgated under the Securities Act, subject in some cases to
certain volume and other resale restrictions pursuant to Rule 144. In addition,
the Company is required to register for re-sale 180 days after the date of this
Prospectus an aggregate of 8,200,000 shares of Common Stock. The Company intends
to register on a registration statement on Form S-8, within 90 days after the
date of this Offering, a total of 2,442,620 shares of Common Stock for issuance
pursuant to the Company's 1995 Stock Option Plan (the "1995 Option Plan"), 1997
Performance Stock Option Plan (the "1997 Option Plan"), 1997 Directors Stock
Option Plan (the "Directors Plan") and the 1997 Employee Stock Purchase Plan
("Purchase Plan"). Robertson, Stephens & Company LLC in its sole discretion and
at any time without notice can release all or any portion of the securities
subject to lock-up agreements. See "Shares Eligible for Future Sale."
15
<PAGE>
DILUTION
Investors purchasing shares in this Offering will incur immediate and
substantial dilution in net tangible book value of $ per share, based upon an
assumed initial public offering price of $ per share. To the extent that
outstanding options to purchase the Company's Common Stock are exercised, there
will be further dilution to the new public investors. See "Dilution."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common
Stock offered by the Company hereby are estimated to be approximately $ ,
assuming an initial public offering price of $ per share and after deducting
the estimated underwriting discounts and commissions and the estimated offering
expenses payable by the Company.
The Company intends to use the net proceeds of this Offering for general
corporate purposes, including additions to working capital, an increase of
research and development activities through the hiring of additional personnel
and the acquisition of test equipment and design tools, and an expansion of the
Company's internal sales, marketing and distribution operations, with a
particular emphasis on international markets. The Company may also use a portion
of the net proceeds for the acquisition of technologies, businesses or products
that are complementary to those of the Company, although no such acquisitions
are planned or are being negotiated as of the date of this Prospectus, and no
portion of the net proceeds has been allocated for any specific acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Pending such uses, the Company
will invest the net proceeds of this Offering in short-term, interest-bearing
investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain any future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future. The Company's revolving credit facility
restricts the payment of dividends without the consent of the bank.
From its inception through March 1996, the Company was treated for federal
income tax purposes as an S Corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended (the "Code"). In connection with its status as
a S Corporation, the Company distributed a portion of its earnings to its
stockholders. As a result, the Company's earnings from its inception through
March 1996 (the "Termination Date") were for federal income tax purposes taxed
directly to the Company's stockholders, at their individual federal income tax
rate, rather than to the Company. Subsequent to the Termination Date, the
Company was no longer treated as an S Corporation and, accordingly, has been
subject to federal and state income taxes on its earnings after March 1996.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997 and (ii) as adjusted to give effect to the sale of shares
of Common Stock offered by the Company at an assumed initial public offering
price of $ per share (after deducting the estimated underwriting discounts
and commissions and the estimated offering expenses payable by the Company). See
"Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt............................................................................ $ -- $ --
--------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized; none issued and
outstanding, actual and as adjusted................................................... -- --
Common Stock, $.001 par value; 18,000,000 shares authorized; 8,733,696 shares issued and
outstanding actual; shares issued and outstanding, as adjusted(1).............. 9
Additional paid-in capital.............................................................. 13,307
Deferred compensation................................................................... (272)
Retained earnings (deficit)............................................................. (121)
---------
Total stockholders' equity............................................................ 12,923
---------
Total capitalization...................................................................... $ 12,923
---------
---------
</TABLE>
- ------------------------
(1) Based on shares outstanding as of June 30, 1997. Excludes (i) 1,578,349
shares of Common Stock issuable upon exercise of stock options outstanding
and (ii) an aggregate of 864,271 shares of Common Stock reserved for future
issuance pursuant to the Company's stock option and stock purchase plans,
and (iii) 179,601 shares of Common Stock issuable upon exercise of
outstanding warrants. See "Management-- Stock Plans," "Certain
Transactions," and Note 6 of Notes to Consolidated Financial Statements.
18
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $12,688,000 or $1.45 per share of Common Stock. "Net tangible book
value" per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the receipt of the net proceeds from the sale of shares
of Common Stock offered by the Company hereby (after deducting the estimated
underwriting discounts and commissions and the estimated offering expenses
payable by the Company), the Company's net tangible book value as of June 30,
1997 would have been $ or $ per share of Common Stock. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................... $
Net tangible book value per share as of June 30, 1997.... $ 1.45
Increase attributable to new investors...................
As adjusted net tangible book value per share after
Offering.................................................
---------
Dilution to new investors.................................. $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by new public investors purchasing shares in this
Offering (before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 8,733,696 % $ 12,623,450 % $ 1.45
New investors.......................
-- --
---------- -------------
Total.............................
-- --
-- --
---------- -------------
---------- -------------
</TABLE>
The foregoing computations assume no exercise of stock options or warrants
after June 30, 1997. As of June 30, 1997, there were outstanding options under
the 1995 Option Plan to purchase 1,217,019 shares of Common Stock at a weighted
average exercise price of $3.42 per share, outstanding options under the 1997
Option Plan to purchase 315,725 shares of Common Stock at a weighted average
exercise price of $7.44 per share, outstanding options under the Directors Plan
to purchase 45,605 shares of Common Stock at a weighted average exercise price
of $3.91 per share, and outstanding warrants to purchase 179,601 shares of
Common Stock at a weighted average exercise price of $4.50 per share. In
addition, as of June 30, 1997, 864,271 shares of Common Stock were reserved for
future issuance under the Company's stock option and stock purchase plans. To
the extent that any shares available for issuance upon exercise of outstanding
options, warrants or reserved for future issuance under the Company's stock
option plans are issued, there will be further dilution to new public investors.
See "Capitalization," "Management--Stock Plans," "Description of Capital Stock"
and Note 6 of Notes to Consolidated Financial Statements.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated balance sheet data as of December 31,
1993 and 1994, and the selected consolidated statement of operations data for
the year ended December 31, 1993, have been derived from consolidated financial
statements not included herein, which were audited by Ernst & Young LLP,
independent auditors. The selected consolidated statement of operations data for
each of the three years in the period ended December 31, 1996 and the six months
ended June 30, 1997, and the related consolidated balance sheet data as of
December 31, 1995 and 1996 and June 30, 1997, are derived from the consolidated
financial statements of the Company which have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this Prospectus. The
data should be read in conjunction with such consolidated financial statements.
The selected consolidated balance sheet data at December 31, 1992 and the
selected consolidated statement of operations data for the year ended December
31, 1992 have been derived from unaudited consolidated financial statements not
included herein. The consolidated statement of operations data for the six
months ended June 30, 1996 has been derived from unaudited consolidated
financial statements of the Company that include, in the opinion of management,
all adjustments, consisting only of normal and recurring adjustments, that
management considers necessary for a fair statement of the results for the
period. The operating results for the six months ended June 30, 1997 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1997 or any other interim period or future fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales................................ $ 3,437 $ 5,684 $ 8,065 $ 11,954 $ 12,626 $ 5,590 $ 6,864
License and royalty revenues................. -- -- -- -- 500 -- 1,000
--------- --------- --------- --------- --------- --------- ---------
Total revenues............................. 3,437 5,684 8,065 11,954 13,126 5,590 7,864
Cost of product sales.......................... 2,139 2,127 2,998 4,215 4,797 2,067 2,286
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................... 1,298 3,557 5,067 7,739 8,329 3,523 5,578
Operating expenses:
Research and development..................... 811 869 1,277 1,484 2,464 990 1,840
Sales and marketing.......................... 354 525 778 1,070 2,127 880 1,793
General and administrative................... 581 957 1,153 1,179 1,623 664 866
Financing expense............................ -- -- -- -- -- -- 312
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses................... 1,746 2,351 3,208 3,733 6,214 2,534 4,811
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)........................ (448) 1,206 1,859 4,006 2,115 989 767
Other income:
Interest income.............................. 60 39 69 82 83 38 48
Other, net................................... -- 20 14 5 -- -- 47
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes........................................ (388) 1,265 1,942 4,093 2,198 1,027 862
Provision for income taxes..................... 5 14 13 84 687 219 328
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).............................. $ (393) $ 1,251 $ 1,929 $ 4,009 $ 1,511 $ 808 $ 534
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share(1)........................ $ 0.05
---------
---------
Shares used in per share calculation........... 9,742
---------
---------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1996
------------- ---------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
PRO FORMA DATA (UNAUDITED)(2):
Historical income before provision for income taxes........................ $ 2,198 $ 1,027
Pro forma provision for income taxes....................................... 879 411
------ ------
Pro forma net income....................................................... $ 1,319 $ 616
------ ------
------ ------
Pro forma net income per share(1).......................................... $ 0.14 $ 0.07
------ ------
------ ------
Shares used in per share calculation....................................... 9,171 8,943
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments...................................... $ 1,215 $ 1,455 $ 1,064 $ 2,759 $ 3,083 $ 7,793
Working capital.................................... 1,824 2,599 2,223 4,744 5,861 11,185
Total assets....................................... 2,797 3,652 3,434 6,734 9,604 15,225
Total long-term debt............................... 457 996 -- -- -- --
Stockholders' equity............................... 1,882 2,166 2,826 5,515 7,245 12,923
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate net income per share.
(2) Reflects the pro forma effect of the Company being treated as a C
Corporation rather than an S Corporation for federal and state income tax
purposes, effective January 1, 1996 (at an effective tax rate of
approximately 40%). See "Certain Transactions--Subchapter S Distributions."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING
THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company began operations in 1971 through two related companies, Faroudja
Laboratories, Inc. ("FLI") and later Faroudja Research Enterprises, Inc.
("FRE"). The Company was incorporated in December 1996 under the laws of the
state of Delaware. Thereafter, FRE was merged into FLI with FLI surviving the
merger and FLI was subsequently merged into a newly-formed wholly-owned
subsidiary of the Company. From inception to 1988 the Company specialized in the
development, manufacturing and sale of products to the broadcast industry. In
1988 the Company introduced its initial product for the high-end home theater
market, a line multiplier. In 1996 and the first six months of 1997, sales of
products for the home theater and industrial markets comprised approximately 80%
and 81%, respectively, of the Company's total revenues.
The Company's total revenues increased sequentially on an annual basis from
1992 through 1996, primarily as a result of the introduction of a number of new
products for the home theater and industrial markets. Sales growth in 1996 was
limited from the prior year in part because of the diversion of management time
while the Company obtained external financing. Additionally, the Company
experienced an unexpected decline in sales of the Company's broadcast products
as a major customer began to develop products internally. In 1996, the Company
established an in-house very large scale integration ("VLSI") design department
to develop high performance application specific integrated circuits ("ASIC") to
enhance video image quality in the Company's traditional home theater market as
well as for use in the TV and PC industries. Net income declined in 1996 from
the prior year primarily as a result of increased research and development
expenses, as well as expenses relating to the expansion of the sales and
marketing staff and a provision for income taxes resulting from the termination
of the Company's status as an S Corporation in March 1996.
To maintain favorable margin levels on product sales, the Company must
introduce new products, must introduce enhanced versions of its products, and
must continue its cost reduction efforts. The Company anticipates that it will
incur lower overall gross margins in future periods as it introduces lower
margin products for consumer markets. The Company intends to increase both
engineering and sales and marketing efforts in the design, development and sale
of board and chip level products while continuing the sale of stand alone
products for the high-end home theater and industrial broadcast markets. As a
result, the Company anticipates that it will incur significant increases in
operating expenses in future periods.
In March 1997, the Company entered into a license agreement with S3, a
leading supplier of advanced graphics accelerators for use in mainstream
multimedia PC systems. Under the terms of the agreement, the Company and S3 are
working jointly to develop integrated circuits using the Company's video
processing technologies and S3's graphics technology for use in PCs. The Company
has granted S3 a worldwide license to certain technology, which is exclusive for
a period of five years as to such technology provided that performance criteria,
including minimum license fees, are satisfied. The Company is obligated to
negotiate with S3 to extend this five year period. The Company is to receive
certain per unit royalties for products sold incorporating the Company's
technology. In addition to other performance criteria, S3 must make minimum
royalty payments to maintain exclusivity. If royalties on product sales do not
reach prescribed minimum levels, S3 may maintain exclusivity by prepaying
royalties to prescribed levels, but there is no requirement for it to do so. S3
expects to ship products that incorporate the Company's technology in 1998.
There can be no assurance that S3 and the Company will develop products as a
result of the agreement or that future royalties will be received by the
Company. In June 1997, the Company sold a total of 526,316 shares of its Common
Stock to S3 for an aggregate
22
<PAGE>
purchase price of $5.0 million. The number of shares held by S3 may be subject
to adjustment based on the price to the public of the shares sold in this
Offering. S3 is also entitled to certain registration rights. See "Certain
Transactions--License Agreement with S3."
The Company's operating results have varied in the past and are likely to
vary significantly in the future from period to period as a result of a number
of factors, including the volume and timing of orders received during the
period, fluctuations in the amount and timing of license and royalty revenues,
the timing of new product introductions by the Company and its competitors,
demand for and market acceptance of the Company's products, product line
maturation, the impact of price competition on the Company's average selling
prices, delays encountered by the Company's strategic partners, the availability
and pricing of components for the Company's products, changes in product or
distribution channel mix and product returns from customers. Many of these
factors are beyond the Company's control. In addition, due to the short product
life cycles that characterize the markets for the Company's products, the
Company's failure to introduce new, competitive products consistently and in a
timely manner could materially adversely affect operating results for one or
more product cycles. See "Risk Factors--Potential Fluctuations in Future
Operating Results; Seasonality."
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of operations expressed as a percentage of total revenues for the
periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales.................................................. 100.0% 100.0% 96.2% 100.0% 87.3%
License and royalty revenues................................... -- -- 3.8 -- 12.7
--------- --------- --------- --------- ---------
Total revenues............................................... 100.0 100.0 100.0 100.0 100.0
Cost of product sales............................................ 37.2 35.3 36.5 37.0 29.1
--------- --------- --------- --------- ---------
Gross margin..................................................... 62.8 64.7 63.5 63.0 70.9
Operating expenses:
Research and development....................................... 15.8 12.3 18.8 17.7 23.4
Sales and marketing............................................ 9.7 9.0 16.2 15.7 22.7
General and administrative..................................... 14.3 9.9 12.4 11.9 11.0
Financing expense.............................................. -- -- -- -- 4.0
--------- --------- --------- --------- ---------
Total operating expenses..................................... 39.8 31.2 47.4 45.3 61.1
--------- --------- --------- --------- ---------
Operating income................................................. 23.0 33.5 16.1 17.7 9.8
Other income:
Interest income................................................ 0.9 0.7 0.6 0.7 0.6
Other, net..................................................... 0.2 -- -- -- 0.6
--------- --------- --------- --------- ---------
Income before provision for income taxes......................... 24.1 34.2 16.7 18.4 11.0
Provision for income taxes....................................... 0.2 0.7 5.2 3.9 4.2
--------- --------- --------- --------- ---------
Net income....................................................... 23.9% 33.5% 11.5% 14.5% 6.8%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
FISCAL 1994, 1995 AND 1996
TOTAL REVENUES. Total revenues increased 48.2% and 9.8%, respectively, for
1995 and 1996 from their respective prior years. The increase in 1995 was due
primarily to shipments of the VP400 NTSC line quadrupler, which was introduced
in 1995, and to increased customer acceptance of the Company's other consumer
products. The increase in 1996 was primarily due to the introduction of the
LD200 NTSC line doubler for the
23
<PAGE>
home theater market, increased shipments of the DFD-U PAL/NTSC digital decoder,
which was first introduced in 1995 for the direct broadcast satellite market,
fees on the license of the Company's technology for ASIC products for the PC
market and the expansion of the home theater dealer network. These factors were
partially offset by a reduction in sales in 1996 of the CFD decoder for the
broadcast market resulting from a sharp decline in sales to this product's
primary customer, which began developing its own products internally. Sales to
General Instrument Corporation ("GI"), accounted for 19.3% of total revenues in
1994. Sales to Hughes/JVC accounted for 13.0% of total revenues in 1995. Sales
to Vidikron accounted for 10.5% of total revenues in 1996.
Export sales, consisting primarily of VP400 and LD200 products shipped to
dealers and distributors in Asia and Europe, represented 16.9%, 13.2% and 15.3%
of total revenues in 1994, 1995 and 1996, respectively. All export sales are
denominated in U.S. dollars. The Company intends to pursue efforts to increase
its export sales in the future; however, there can be no assurance that any
growth in export sales will be achieved. Export sales are subject to a number of
risks. See "Risk Factors--Risks Associated with Export Sales and Operations."
The Company's future success will depend, in large part, on its ability to
continue to enhance its existing products and to develop new products and
features to meet changing customer requirements and evolving industry standards.
The Company anticipates that sales from its line multiplier product line will
experience limited growth, or may decline, in future periods. The Company
expects that approximately one-half of its total revenues in 1998 will be
derived from license and royalty revenues and from sales of new products. See
"Risk Factors--Dependence on New Product Development and Risk of Technological
Change."
GROSS PROFIT. Gross profit as a percentage of total revenues was 62.8% in
1994, 64.7% in 1995 and 63.5% in 1996. The increase in gross margin in 1995
compared to 1994 was primarily due to the introduction of new higher margin
products and product cost reduction efforts. The decline in gross margin in 1996
resulted from an increased proportion of sales to distributors and OEMs, who
typically receive higher discounts than dealers, increased dealer discounts, the
introduction of a new, lower margin product line and increased manufacturing
costs and expenses. The Company anticipates that it will incur lower overall
gross margins in future periods as it introduces lower margin products for high
volume markets. See "Risk Factors--Potential Fluctuations in Future Operating
Results; Seasonality."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $1.3 million in 1994 to $1.5 million in 1995 and to $2.5 million
in 1996. The increase in 1995 from the prior year was primarily due to fees
incurred by the Company for the development of ASIC components used in the full
range of the Company's products. Research and development expenses as a
percentage of total revenues declined from 15.8% in 1994 to 12.3% in 1995
primarily because of increased total revenue growth. Research and development
expenses increased as a percentage of total revenues to 18.8% in 1996 due to the
establishment in 1996 of a VLSI design department. The Company increased its
engineering and management personnel, and increased equipment depreciation, to
enable the ongoing development of its high performance VLSI design capability.
The Company intends to increase its engineering efforts in the design and
development of board and chip level products, and therefore expects that
research and development expenses will continue to increase in absolute dollars.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$778,000 in 1994 to $1.1 million in 1995 and to $2.1 million in 1996. The
increase in 1995 from the prior year was primarily due to the Company's
increased participation at trade shows. Sales and marketing expenses as a
percentage of total revenues decreased from 9.7% in 1994 to 9.0% in 1995 because
of the growth in total revenues. Sales and marketing expenses increased as a
percentage of total revenues to 16.2% in 1996 from the prior year primarily due
to increases in the Company's sales and marketing staff, including the addition
of sales executives and the development of a network of regional managers. The
Company intends to increase its sales and marketing efforts, and intends to
increase its international market presence. Accordingly, sales and marketing
expenses are expected to increase in absolute dollars in the future.
24
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1.2 million in 1994 and 1995 and increased to $1.6 million in 1996. Due to
the growth in total revenues, general and administrative expenses as a
percentage of total revenues decreased from 14.3% in 1994 to 9.9% in 1995.
General and administrative expenses increased as a percentage of total revenues
to 12.4% in 1996, primarily due to additions to the Company's general and
administrative staff, including the hiring of a new chief executive officer, and
an increase in professional fees. The Company anticipates that it will incur a
significant increase in general and administrative expenses in future periods
associated with legal, accounting and other expenses of being a public company.
OTHER INCOME. Interest and other income was $83,000 in 1994, $87,000 in
1995 and $83,000 in 1996. The amount of the securities investments has been
approximately equivalent during the periods.
PROVISION FOR INCOME TAXES. The Company's FLI subsidiary was an S
Corporation from inception until March 1996. As an S Corporation, FLI earnings
were taxed directly to its stockholders, and FLI's tax provision through March
1996 consisted solely of a California franchise fee. FRE was a C Corporation
since its inception. FRE had significant losses and its tax provision consisted
of alternative minimum taxes. The Company has incurred minimal foreign taxes.
The pro forma provision for income taxes, calculated assuming FLI's S
Corporation status terminated January 1, 1996, reflects an effective tax rate
for the year ended December 31, 1996 of 40%. The Company anticipates
implementing certain tax planning strategies to reduce the effective tax rate in
future periods.
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
TOTAL REVENUES. Total revenues increased from $5.6 million in the six
months ended June 30, 1996 to $7.9 million in the six months ended June 30,
1997. The growth in total revenues in the first six months of 1997 was due
primarily to increased shipments of products for the home theater, shipments of
the new VP100 decoder, and $1.0 million of license and royalty revenues. These
factors offset a reduction in sales to the broadcast market. Revenues from
Vidikron accounted for 10.5% of total revenues in the six months ended June 30,
1996. Revenues from S3 and Vidikron accounted for 14.9% and 11.4% respectively,
of total revenues in the six months ended June 30, 1997. Export sales,
consisting primarily of VP400 and LD200 products shipped to dealers and
distributors in Asia and Europe, represented 9.5% of total revenues in the six
months ended June 30, 1997. See "Risk Factors--Risks Associated with Export
Sales and Operations."
GROSS PROFIT. Gross profit as a percentage of total revenues was 63.0% in
the six months ended June 30, 1996 and 70.9% in the six months ended June 30,
1997. The increase in gross margin was primarily due to license and royalty
revenues and product cost reduction efforts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $990,000 in the six months ended June 30, 1996 to $1.8 million in
the six months ended June 30, 1997. The increase was primarily due to the
establishment of a VLSI design department. Consequently, research and
development expenses as a percentage of total revenues increased from 17.7% in
the six months ended June 30, 1996 to 23.4% in the six months ended June 30,
1997.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$880,000 in the six months ended June 30, 1996 to $1.8 million in the six months
ended June 30, 1997. The increase was primarily due to increases in the
Company's sales and marketing staff and increased participation in trade shows.
The Company hired sales executives and developed a network of regional managers
beginning in 1996 and developed a network of sales representatives in 1997.
Consequently, sales and marketing expenses as a percentage of total revenues
increased from 15.7% in the six months ended June 30, 1996 to 22.7% in the six
months ended June 30, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $664,000 in the six months ended June 30, 1996 to $867,000 in the
six months ended June 30, 1997. This increase was due to
25
<PAGE>
additions to the Company's administrative staff, including the hiring of a new
chief executive officer, chief financial officer and general counsel. Due to the
growth in total revenues, general and administrative expenses as a percentage of
total revenues decreased from 11.9% in the six months ended June 30, 1996 to
11.0% in the six months ended June 30, 1997.
FINANCING EXPENSE. The Company incurred $312,000 of expenses related to
financing activities in the first quarter of 1997.
OTHER INCOME. Interest and other income increased from $38,000 in the six
months ended June 30, 1996 to $95,000 in the six months ended June 30, 1997 as
the Company incurred a net realized gain of $83,000 on available-for-sale
securities in the first half of 1997.
PROVISION FOR INCOME TAXES. The Company's effective tax rate for the six
months ended June 30, 1997, was 38%. The provision for income taxes for the six
months ended June 30, 1997, is based on the estimated annual effective tax rate
for the year.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for the six quarters ended June 30, 1997. The Company believes that
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the selected
quarterly information when read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere herein. The operating
results for any quarter are not necessarily indicative of results for any
subsequent period or for the entire fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales............................ $ 2,837 $ 2,753 $ 3,662 $ 3,374 $ 2,835 $ 4,029
License and royalty revenues............. -- -- -- 500 750 250
----------- ----------- ----------- ----------- ----------- -----------
Total revenues......................... 2,837 2,753 3,662 3,874 3,585 4,279
Cost of product sales...................... 1,071 996 1,272 1,458 998 1,287
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................... 1,766 1,757 2,390 2,416 2,586 2,992
Operating expenses:
Research and development................. 455 535 686 788 899 941
Sales and marketing...................... 356 524 622 625 678 1,115
General and administrative............... 261 403 468 491 392 474
Financing expense........................ -- -- -- -- 312 --
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............... 1,072 1,462 1,776 1,904 2,281 2,530
----------- ----------- ----------- ----------- ----------- -----------
Operating income........................... 694 295 614 512 305 462
Other income (loss)........................ 19 19 27 18 97 (2)
----------- ----------- ----------- ----------- ----------- -----------
Income before provision for income taxes... 713 314 641 530 402 460
Provision for income taxes................. 93 126 256 212 153 175
----------- ----------- ----------- ----------- ----------- -----------
Net income................................. $ 620 $ 188 $ 385 $ 318 $ 249 $ 285
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
26
<PAGE>
The following table sets forth certain unaudited financial information as a
percentage of total revenues for the quarter represented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales............................ 100.0% 100.0% 100.0% 87.1% 79.1% 94.2%
License and royalty revenues............. -- -- -- 12.9 20.9 5.8
----- ----- ----- ----- ----- -----
Total revenues......................... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of product sales...................... 37.8 36.2 34.7 37.6 27.9 30.0
----- ----- ----- ----- ----- -----
Gross margin............................... 62.2 63.8 65.3 62.4 72.1 70.0
Operating expenses:
Research and development................. 16.0 19.4 18.7 20.3 25.1 22.0
Sales and marketing...................... 12.5 19.0 17.0 16.1 18.9 26.1
General and administrative............... 9.2 14.7 12.8 12.7 10.9 11.1
Financing expense........................ -- -- -- -- 8.7 --
----- ----- ----- ----- ----- -----
Total operating expenses............... 37.7 53.1 48.5 49.1 63.6 59.2
----- ----- ----- ----- ----- -----
Operating income........................... 24.5 10.7 16.8 13.3 8.5 10.8
Other income (loss)........................ 0.7 0.7 0.7 0.4 2.7 --
----- ----- ----- ----- ----- -----
Income before provision for income taxes... 25.2 11.4 17.5 13.7 11.2 10.8
Provision for income taxes................. 3.3 4.6 7.0 5.5 4.3 4.1
----- ----- ----- ----- ----- -----
Net income................................. 21.9% 6.8% 10.5% 8.2% 6.9% 6.7%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The Company's industry is subject to a high degree of seasonality, and
demand for the Company's products is highest in the third and fourth quarters of
each calendar year. As a result, sales are typically highest in these quarters
and may be lower in succeeding quarters.
The decrease in total revenues in the first quarter of 1997 as compared to
the fourth quarter of 1996 was due to seasonal factors and decreased sales of
the Company's broadcast products, which were partially offset by $750,000 of
license and royalty revenues. The increase in total revenues in the second
quarter of 1997 from prior quarters was due to sales to new customers under
co-branding agreements, an enlarged dealer network and sales of the new VP100
decoder.
The Company's gross margin in the fourth quarter of 1996 was adversely
affected by inventory write-downs and manufacturing consulting and other
manufacturing expenses. These factors were partially offset by $500,000 of
license and royalty revenues. The increase in gross margin in the first quarter
of 1997 as compared to the fourth quarter of 1996 was due to $750,000 of license
and royalty revenues. The decline in gross margin during the second quarter of
1997 as compared to the first quarter of 1997 was due primarily to the decline
in license and royalty revenues to $250,000 in the second quarter of 1997.
The sequential increase in quarterly research and development expenses in
1996 and the first half of 1997 was primarily due to the establishment and
expansion of the Company's VLSI department. The sequential increase in quarterly
sales and marketing expenses in 1996 and in the first half of 1997 was due to
the expansion of the sales and marketing staff, increased marketing activities,
and the establishment of a network of sales representatives in 1997.
27
<PAGE>
The Company realized $97,000 of other income in the first quarter of 1997
primarily due to the realization of gains on available-for-sale securities.
The Company's operating results have varied in the past and are likely to
vary significantly in the future from period to period as a result of a number
of factors. See "Risk Factors--Potential Fluctuations in Future Operating
Results; Seasonality" for a discussion of factors that could have a material
adverse effect on the Company's quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its capital requirements from its cash
flow from operations. Funding requirements in the past have been primarily
related to the growth in accounts receivable, inventories and capital equipment.
OPERATING ACTIVITIES. In 1994, net cash provided by operating activities
was $1.7 million, primarily composed of (i) $1.9 million of net income, (ii)
$172,000 of depreciation and amortization and (iii) a $165,000 increase in
accrued compensation and benefits. These were partially offset by (i) a $359,000
increase in accounts receivable, (ii) a $119,000 decrease in accounts payable
and (iii) a $100,000 decrease in other accrued liabilities.
In 1995, net cash provided by operating activities was $3.4 million,
primarily composed of (i) $4.0 million of net income, (ii) $224,000 of
depreciation and amortization, (iii) a $417,000 increase in accounts payable and
(iv) a $118,000 increase in accrued compensation and benefits. These were
partially offset by (i) a $793,000 increase in inventory and (ii) a $642,000
increase in accounts receivable.
In 1996, net cash provided by operating activities was $1.3 million,
primarily composed of (i) $1.5 million of net income, (ii) $422,000 of
depreciation and amortization, (iii) a $128,000 increase in accounts payable,
(iv) a $186,000 increase in accrued compensation and benefits, (v) a $258,000
increase in other liabilities and (vi) $500,000 of deferred revenues. These were
partially offset by a (i) a $96,000 increase in inventory, (ii) a $1.2 million
increase in accounts receivable primarily attributable to $1.0 million due from
a licensing customer from an agreement completed in December, 1996 and (iii) an
increase in deferred tax assets of $462,000.
For the six months ended June 30, 1996, net cash provided by operating
activities was $1.3 million, primarily composed of (i) $808,000 of net income,
(ii) a $559,000 decrease in accounts receivable, (iii) a $356,000 increase in
accounts payable, (iv) an increase in income taxes payable of $198,000 and (v)
$152,000 of depreciation and amortization. These were offset by a $412,000
increase in inventory.
For the six months ended June 30, 1997, net cash provided by operating
activities was $78,000, primarily composed of (i) $534,000 of net income, (ii)
$224,000 of depreciation and amortization, (iii) a $132,000 increase in other
accrued liabilities, (iv) a $123,000 decrease in accounts receivable and (v) a
$252,000 increase in income taxes payable. These were offset by (i) a $500,000
decrease in deferred revenues, (ii) a $411,000 increase in inventory, (iii) a
$139,000 increase in deferred tax assets and (iv) a $131,000 increase in other
current assets.
INVESTING ACTIVITIES. Capital equipment purchases in the six months ended
June 30, 1996 and 1997 were $347,000 in each six month period, and in 1994, 1995
and 1996 were $212,000, $392,000 and $967,000, respectively, primarily for
computer hardware and software used in research and development, engineering
test equipment and furniture and fixtures.
FINANCING ACTIVITIES. In June 1997, the Company received $5.0 million from
a private placement of 526,316 shares of Common Stock with S3. See "Certain
Transactions--License Agreement with S3 and--1996 Financing." The Company issued
$4.0 million of Common Stock in 1996. In connection with its status as a
Subchapter S Corporation, the Company distributed $1.5 million, $1.4 million and
$4.0 million to stockholders in 1994, 1995 and 1996 respectively. In 1994, the
Company repaid a $420,000 loan from a related party.
LIQUIDITY. At June 30, 1997, the Company's principal source of liquidity
consisted of cash, cash equivalents and short-term investments totaling $7.8
million, and a bank credit facility for $2.5 million. The Company's
28
<PAGE>
working capital at June 30, 1997 was $11.2 million. In April 1997, the Company
established a revolving line of credit with a bank. Borrowings are
collateralized by substantially all tangible assets, are limited to defined
percentages of eligible accounts receivable, and the Company must satisfy
certain financial covenants. In June 1997, the line of credit, which expires May
1998, was increased to $2.0 million. The Company also obtained a three year
equipment line of credit of up to $500,000 available through December 1997.
The Company's future capital requirements are expected to include (i)
supporting the expansion of the research and development and sales and marketing
departments, (ii) funding the acquisition of capital equipment, primarily for
research and development and consisting of such items as engineering equipment,
computers and furniture, and (iii) funding the growth of working capital items
such as receivables and inventory.
The Company may investigate means to acquire greater control over
semiconductor production, whether by joint venture, prepayments, equity
investments in or loans to wafer suppliers. In addition, as part of its business
strategy, the Company occasionally evaluates potential acquisitions of
businesses, products and technologies. Accordingly, a portion of its available
cash may be used for the acquisition of complementary products, technologies or
businesses or to assure foundry capacity. Such potential transactions may
require substantial capital resources, which may require the Company to seek
additional debt or equity financing. There can be no assurance that the Company
will consummate any such transactions.
The Company believes that its current cash, cash equivalents and short-term
investments and the anticipated net proceeds from this Offering will be
sufficient to support the Company's planned activities through at least the next
twelve months.
29
<PAGE>
BUSINESS
OVERVIEW
Faroudja is a leader in the video image enhancement field. The Company
designs, develops and markets a range of video image enhancement products that
significantly improve displayed images to achieve cinema-like quality. Through
more than 25 years of product development and technological advances, the
Company has established a reputation for excellence in video processing and
video signal image enhancement in the high-end home theater, industrial and
broadcast markets. The Company believes that its technology, experience and
reputation in these markets will enable it to address opportunities in the
emerging DTV and HDTV broadcast environment and to facilitate the convergence of
the PC and the TV.
INDUSTRY BACKGROUND
Video images are pervasive in today's society as sources of entertainment
and information. Since the introduction of motion pictures, cinema has evolved
from low resolution black and white pictures (such as the Charlie Chaplin movies
of the 1920s) to spectacular color movie productions (such as JURASSIC PARK).
Today, images are displayed on a variety of electronic media including color
TVs, projection systems and PCs. Historically, there has been a substantial
difference in the quality of these various media, ranging from low quality TV
pictures to very high quality cinema pictures. This difference resulted from a
host of technical issues related to the capture, transmission and display of
video images. Current technologies make it possible to replicate cinema quality
on TVs, projection systems and PCs.
With U.S. households owning approximately 250 million television sets, TV is
the dominant medium for viewing video images. While TV is an integral part of
modern life, it is optimized around image production, transmission and display
technology created more than 40 years ago. TV signals are produced in accordance
with the NTSC* standard developed in the 1940s for black and white programs.
This standard was last modified in the 1950s to make possible the compatible
transmission of black and white and color programs. Technical compromises
required to achieve compatibility introduce image degrading imperfections, known
as artifacts. Additionally, analog transmission introduces noise in the TV
image. While always present, these imperfections are less evident on TV screens
smaller than 25 inches in size than on larger screens. Over the last decade,
consumer interest in larger screen TVs has increased dramatically, fueled by
decreasing equipment prices and an ever expanding universe of movies, sporting
events and other programming available via cable TV, video cassette, direct
broadcast satellite, laser disc and, most recently, DVD. As TV screen sizes have
increased, impairments in the image, such as low resolution, artifacts and
noise, have become more readily apparent. The better quality images produced by
DVDs, digital satellite transmission and high resolution computer monitors have
made viewers more discriminating and have elevated their image quality
expectations.
The Company believes that this trend will accelerate with the announced
introduction of HDTV by some broadcasters in late 1998. HDTV images are expected
to incorporate cinema-like image quality in a wider screen format. The FCC
recently established standards for DTV broadcasting in the United States and
adopted rules mandating the gradual introduction of DTV broadcasting. The FCC
has targeted the eventual phase-out of analog (NTSC) broadcasting by the year
2006. Current analog broadcasting equipment is not compatible with the new DTV
standards. In order to transmit digital signals in accordance with the new DTV
standards, broadcasters will need to acquire new equipment, including digital
transmission equipment, at costs estimated to be as high as $10 million per
station. Broadcasters are seeking to reduce the costs of transitioning from
analog
- ------------------------
* NTSC is the current analog television system named for the National
Television Systems Committee, the industry group that developed the
monochrome (black and white) television standard in 1940-41 and the color
television standard in the 1950s. NTSC was developed in the United States
for 60 Hz, 525 line transmissions. PAL is the acronym for Phase Alternating
Line which was developed in Europe for 50 Hz, 625 line transmissions. PAL
uses many of the same coding techniques developed for NTSC resulting in
similar image imperfections.
30
<PAGE>
to digital broadcasting through strategies which will allow them to continue to
use much of their existing equipment.
Advances in microprocessors, the availability of low cost memory and
storage, high quality displays, sophisticated software and the emergence of the
World Wide Web have fueled the growth in multimedia applications on the PC. The
PC is increasingly being used to view video stored on hard disk, CD-ROM, DVD and
laser disc, and video over the Internet. The Company believes that the use of
the PC as an entertainment device in the future will depend in large part on the
PC's ability to display TV images. Since TV signals use an interlaced format
while PCs use a progressive scanning display format, a TV signal must be
converted before being displayed on a PC. Until now, the interlace/progressive
conversion, along with other steps in the conversion of the TV signal, has
caused color distortion, motion artifacts, noise and other imperfections, which
have resulted in poor video quality on the PC. Image problems become even more
apparent when TV signals are viewed on a PC, as PC users sit relatively close to
their screens and PC monitors have higher resolution than most TVs.
FAROUDJA SOLUTION
Faroudja designs, develops and markets video image enhancement products that
significantly improve images to achieve a cinema-like quality. The Company
believes that once viewers experience cinema quality displays in their homes and
offices, they will demand it from all video platforms. The Company believes that
its technology, experience and reputation will enable the Company to address
opportunities in the emerging DTV/ HDTV broadcast environment and to facilitate
the PC/TV convergence.
The Company's products for the TV market substantially reduce the
imperfections inherent in analog NTSC signals, which become increasingly
apparent on large screen TV displays. The Company's technology improves picture
quality by removing artifacts and noise, detecting and compensating for motion,
enhancing resolution, and multiplying the number of lines displayed. Faroudja's
product sales for the TV market include sales of stand alone products to home
and industrial consumers and board level products to OEM customers.
Faroudja intends to capitalize on its experience and core technologies to
develop products which support the transition from analog to DTV/HDTV
broadcasting. As broadcasters make significant investments to satisfy regulatory
requirements, the Company believes that product solutions which interface with
additional necessary digital transmission equipment and current studio equipment
will help broadcasters minimize transition costs and maintain flexibility in
responding to evolving regulatory and market requirements. The Company is
developing standards conversion and upscaling products which it believes will
enable broadcasters to use much of the equipment present in their existing
studios to produce programming in various DTV/HDTV video formats.
The Company is also developing products and technology that are intended to
solve the interlacing problem by significantly reducing the noise and artifacts
inherent in the display of high quality TV pictures on PC screens. In March
1997, the Company executed a license agreement with S3, a leading supplier of
advanced graphics accelerators for multimedia computer systems. The Company and
S3 are working jointly to develop integrated circuits that will enable the
display of near cinema quality images on PC screens.
STRATEGY
The Company's objective is to maintain and expand its position as the
industry standard of excellence for video image quality. Key elements of the
Company's strategy to achieve this objective include:
MAINTAIN AND EXTEND TECHNOLOGY LEADERSHIP. The Company intends to build
upon its technology leadership in video image processing by increasing its
investment in research and development. These efforts will focus on developing
patentable technology and innovative products for the TV and broadcast markets.
The Company also intends to leverage its image enhancement expertise in TV into
broadcast and PC products and applications.
31
<PAGE>
PENETRATE BROADER MARKET SEGMENTS. The Company has historically sold
products that addressed the needs of the industrial and high-end home theater
markets. The Company recently introduced a decoder and signal enhancer with
prices and capabilities appealing to broad segments of the consumer markets. The
Company intends to continue to seek opportunities in new and broader market
segments, such as the converging PC and TV markets and the emerging DTV/HDTV
markets.
INCREASE BRAND NAME AWARENESS. The Company has established a reputation for
excellence in video processing and video image enhancement in the commercial
broadcast, industrial and high-end home theater markets. The Company intends to
increase brand name awareness through increased advertising, the marketing of
stand alone image enhancement products and video source players carrying the
Company's trademarks, and co-branding agreements with OEM customers. The
distribution of Company-branded and co-branded products (particularly PC/TV
products) in new and broader market segments is also intended to increase
Faroudja brand awareness.
BUILD AND LEVERAGE STRATEGIC RELATIONSHIPS. The Company intends to
establish and maintain strategic relationships with companies whose technology,
products and product strategies complement those of the Company. Through
selective licensing of its patented technologies, the Company intends to
increase penetration and recognition of its capabilities in markets currently
served and to facilitate migration into new markets. The agreement with S3 and
the potential agreement with TI are examples of attempts to incorporate the
Company's technology into applications outside the Company's historical
products.
EXPAND INTERNATIONAL PRESENCE. The Company intends to expand its
international presence in order to increase its export sales. These efforts will
include establishing a sales force and marketing activities for the European and
Asian markets, expanding the Company's international network of distributors and
dealers, continuing the development of OEM relationships with customers serving
international markets, such as Hughes/JVC, Vidikron, Runco and NEC, and product
development that incorporates various international specifications.
32
<PAGE>
PRODUCTS
Faroudja designs, develops and markets a range of video image enhancement
products for the TV and broadcast markets. The following table sets forth
certain information regarding the Company's current stand alone industrial and
home products:
<TABLE>
<CAPTION>
SUGGESTED
MARKET PRODUCT DESCRIPTION RETAIL PRICE
<S> <C> <C> <C>
TV--Image Enhancement/ VP400A Line quadrupler and video processor for $24,000-$25,500
Line Multiplying VP400AU large screen high resolution video
projection systems.
VP250 Line doubler and video processor for $9,950-$13,500
LD200 large screen high resolution direct
LD200U view, front and rear screen projection
systems.
VP100 Video decoder with detail and color $799
VP100U enhancement.
TV--Source Players DV1000 DVD/CD player with detail and color $5,500
enhancement.
LD1000 Laser disc player with audio $5,500
enhancement.
Broadcast DFD-U Low noise video decoder/frame $12,400-$19,950
synchronizer with video adjustments.
Analog and digital red, green and blue
(RGB) outputs.
CFD Very low noise video decoder with video $6,550
adjustments and analog red, green and
blue (RGB) outputs.
</TABLE>
TV PRODUCTS
LINE QUADRUPLERS (VP400A (NTSC) AND VP400AU (NTSC/PAL)). Faroudja line
quadrupler video processors produce cinema-like images. The processors accept
input from sources formatted for conventional 525-line or 625-line TV standards,
and convert them into line-quadrupled, noticeably artifact-free, high resolution
signals for direct-view or projector TV screens. The processors are precision
instruments employing three complex digital signal processes utilizing patented
technology in the fields of decoding, scan conversion and detail enhancement.
These products substantially reduce color blurring, rainbow patterns, dot crawl
and visible scan lines, and deliver sharp image details.
LINE DOUBLING VIDEO PROCESSORS (VP250 (NTSC/PAL), LD200(NTSC), LD200U
(NTSC/PAL)). The Company's line doubling video processors utilize certain of
the same technologies as the Company's line quadruplers, and deliver similar
results for smaller direct-view or projector TV screens.
VP100 TV ENHANCER (NTSC) AND VP100U (NTSC/PAL). The VP100 and VP100U set
top components apply patented adaptive decoding, detail processing and color
alignment correction for use in standard and large screen S-video compatible
TVs. These products substantially reduce color decoding artifacts and greatly
33
<PAGE>
increase image detail and depth. These products offer consumers a moderately
priced video enhancement technology that plugs directly into the TV unit.
DV1000 HIGH DEFINITION DIGITAL VIDEO DISC AND CD PLAYER. The DV1000 applies
custom circuitry to both video and audio processing to provide significantly
enhanced image detail and depth exceeding what is expected to be available from
standard DVD players.
LD1000 HIGH DEFINITION LASER DISC AND CD PLAYER. The LD1000 applies custom
circuitry for audio enhancement to provide an experience exceeding what is
available from standard laser disc players.
BROADCAST PRODUCTS
DFD-U PAL/NTSC DIGITAL DECODER. The DFD-U uses 10-bit processing with
patented decoding and bandwidth expansion circuitry to convert PAL or NTSC
analog signals into the digital component data required for video compression.
Additional circuits include time base correction and full frame synchronization.
The combination results in a significantly artifact-free digital signal that
enables additional channel capacity with reduced noise levels and higher quality
video signals from MPEG video compression engines.
CFD. The CFD decodes NTSC signals into high quality, artifact-free
components prior to the time the signal is transmitted. The output signal is
used in applications such as studio manipulation, display and digital video
compression.
OEM PRODUCTS
The Company has designed and developed board level products incorporating
the Company's technologies for the OEM market. To date, sales from board level
products have not been material.
RESEARCH AND DEVELOPMENT; NEW PRODUCTS
The Company's research and development efforts are headed by Yves Faroudja,
the Company's founder and Chief Technology Officer. The Company has devoted, and
expects to continue to devote, significant resources to its research and
development efforts. In 1996, the Company established a VLSI design group to
develop high performance video ASICs. In June 1997, the Company expanded its
VLSI department by establishing a facility in Phoenix, Arizona with five
engineers. As of June 30, 1997, the Company had a staff of twenty-six full-time
and one part-time research and development personnel. During 1994, 1995 and 1996
and the first six months of 1997, the Company's research and development
expenses were approximately $1.3 million, $1.5 million, $2.5 million and $1.8
million, respectively. The Company anticipates that its research and development
expenses will increase in absolute dollars for the foreseeable future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
The Company has a number of products in development with introduction
planned during the next several years. For the TV market, the Company is
developing an advanced line multiplier and scaling video processor for very
large screen high resolution systems, a video processor for liquid crystal
display ("LCD") and Digital Light Processing-TM- based projector systems ("DLP")
products and a video processor for less sophisticated industrial applications.
The Company is also developing a rear screen projection TV incorporating the
Company's line multiplication and enhancement technology. For the OEM TV
projection market, the Company is developing a board level decoder with video
enhancement features.
For the broadcast market, the Company is developing an upconverter that
utilizes Faroudja technology to deliver HDTV quality video images from NTSC
sources. Field testing is planned for the fourth quarter of 1997 and, if such
testing is successful, the Company expects to begin sales of this product in the
first quarter of 1998. The upconverter is intended to provide broadcasters with
the ability to leverage their existing analog equipment and systems to meet FCC
DTV standards. The Company is also developing studio quality NTSC/PAL decoders
for broadcast and postproduction applications.
34
<PAGE>
For the PC/TV market, the Company is in the final stages of developing a
video decoder integrated circuit, which includes synchronization, time base
correction and detail enhancement. The Company is also developing "Presentation
Plus," a line multiplier and scaling video product for high resolution video
computer monitors that incorporates time base correction, image enhancement and
video synchronization.
The Company's other planned research products include expanded development
of line multipliers and compression pre-processors which include noise reduction
to increase compressor efficiency, and the extension of the Company's technology
to low bandwidth use for such applications as teleconferencing and video
telephones.
The markets for the Company's products are characterized by evolving
industry standards, rapid technological change, frequent new product
introductions and short product life cycles. The Company's future success will
depend, in large part, on its ability to continue to enhance its existing
products and to develop new products and features to meet changing customer
requirements and evolving industry standards. The Company anticipates that sales
from its line multiplier product lines will experience limited growth, or may
decline, in future periods. The Company expects that more than one-half of its
total revenues in 1998 will be derived from licensing revenue and sales of
recently introduced products, as well as products which the Company is
developing. The success of new products depends on a number of factors,
including proper selection and timely introduction of planned new products,
successful and timely completion of product development, accurate estimation of
demand for new products, market acceptance of new products of the Company and
its OEM customers, the Company's ability to offer new products at competitive
prices, the availability of adequate staffing to produce and sell such new
products, and competition from products introduced by competitors. Certain of
these factors are outside the control of the Company. See "Risk Factors--Risks
Associated with New Markets and Applications; Market Acceptance." For example,
to date sales of the Company's DVD players have been minimal, and initial sales
of the Company's rear projection TV are not expected until the fourth quarter of
1997. Sales of the Company's board level products, and future license and
royalty revenues, depend in part upon the ability of the Company's OEM customers
and licensees to successfully develop and market products incorporating the
Company's products or technology. The Company's products intended for the
digital broadcast market are not expected to be field tested until the fourth
quarter of 1997 and are not expected to be available for sale until 1998. There
can be no assurance that the Company's broadcast products, assuming timely
development and satisfactory completion of field tests, will be accepted by the
broadcast market. There can be no assurance as to the amount of royalties, if
any, to be paid to the Company under the S3 agreement because S3 is under no
obligation to maintain its exclusive license with the Company or to develop
products incorporating the Company's technology under the agreement.
The incorporation of the Company's products into its OEM customers' product
designs often requires significant expenditures by the Company, which
expenditures may precede volume sales of the Company's products, if any, by one
year or more. The introduction of new or enhanced products also requires the
Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, to avoid excessive levels of older
product inventories and to ensure that adequate supplies of new products can be
delivered to meet customer demand.
There can be no assurance that the Company will identify new product
opportunities, will successfully develop and bring to market new products, will
achieve design wins or will respond effectively to technological changes or
product announcements by others, or that the Company's new products will achieve
market acceptance. A failure in any of these areas would have a material adverse
effect on the Company's business, financial condition and operating results. See
"Risk Factors--Dependence on New Product Development and Risk of Technological
Change."
35
<PAGE>
TECHNOLOGY
The Company has significant expertise in a number of technologies relating
to video image enhancement.
ENCODING TECHNOLOGY. A NTSC or PAL signal consists of a luminance signal
and two color-difference signals. In a conventional NTSC or PAL encoder, the
color-difference signals are modulated on a subcarrier and added to the
luminance signal. In this case, the spectrum of both the luminance signal and
the modulated chrominance signal are mixed together, which generates "rainbow
patterns," "dot crawl" and other artifacts in TV receivers. Faroudja's patented
pre-filtered technology is applied to luminance and chrominance signals
separately so that they will not interfere with each other. The two signals are
added together without an overlaid spectrum, which significantly reduces rainbow
patterns and other artifacts.
DECODING TECHNOLOGY. The color section of the NTSC standard was originally
designed with severe bandwidth restrictions. This causes colors in various video
images to "blur" and "smear." These effects are aggravated by storage media,
such as VHS tapes, that further degrade the chroma or color signal. The Faroudja
decoder technology utilizes proprietary circuitry to recreate and correct color
details. This is accomplished by making use of the sharper black and white
transitions to develop a correction signal that is then used to sharpen the
color transitions. As a result, colors are restored with sharp details and video
images retain their original crisp image. Digital adaptive comb filter circuitry
eliminates decoding errors from imperfect separation of the luminance and
chrominance signals and enables the reproduction of sharper, cleaner color
images. The Company's decoder technology has two separate correction circuits
that create color transitions that are clear, sharp and natural by eliminating
dot crawl, a rapid upward movement of colored dots on sharp vertical
transitions, and hanging dots which lie underneath all the colored horizontal
transitions. Dot crawl and hanging dots are easily apparent with large, highly
saturated, stationary graphics such as titles and credits.
LINE MULTIPLIER TECHNOLOGY. The line multiplier technology reduces scan
line visibility resulting from utilizing a 525 line broadcast standard on
today's large screen TVs by changing the interlaced video signal to a
progressively scanned signal. The Company's line multiplier technology detects
motion and interpolates correctly to "fill in the blanks." This technology can
detect the difference between a film image that has been transferred to video or
a video image that emanates from a video camera. After detecting the image type,
the line multiplier technology selects its algorithm to compensate accordingly.
This is critical because today's home theaters are primarily used to show films
that were transferred to video, whether on tape, laser disc or off the air.
DETAIL ENHANCEMENT TECHNOLOGY. The best video sources such as DVD (if
properly recorded) provide good resolution while others such as digital
satellite reception and laser discs often provide acceptable resolution.
However, common sources such as broadcast or VHS tapes are noticeably deficient.
The problem is compounded when scan lines are doubled or quadrupled and when
other signal processing is applied. The resulting picture is free of artifacts
(including visible scan lines) but dull, with loss of definition and a general
blurriness. The Company's proprietary technology increases the visibility of
small image details, whether horizontal or vertical, without introducing ringing
or noise artifacts and without modifying large edge response. The Company's
technology also uses a form of non-linear processing similar to controlled
distortion. This technique expands the bandwidth of large edge signals without
introducing artifacts, such as ringing, in both the horizontal and vertical
domains. The combination of these two techniques results in a line doubled or
quadrupled image that gives a greater feeling of depth.
MOTION COMPENSATION TECHNOLOGY. The inherent scan and frame rate changes
that are required to display the enhanced video image makes motion compensation
necessary in the reconstruction of the enhanced picture. TV images are
transmitted in an interlaced fashion in which the picture is transmitted in two
parts, the first being the even lines of the picture, the second the odd lines.
This creates a time delay of 16 milliseconds between the odd and even lines of
the image. If motion is present, artifacts can be generated in the conversion to
a line doubled or quadrupled image. Also, while TV images are displayed at
approximately 60 frames per second, cinema film sources are displayed at 24
frames per second. To ensure an image noticeably free from artifacts, the motion
of the video has to be taken into account and identification of the source
material as video or film is necessary. The Company's motion and film detection
technology is used in most of its video enhancement products.
36
<PAGE>
NOISE REDUCTION. All analog video sources contain some degree of picture
noise. This is manifested as low level moving or shimmering artifacts, or an
excessive graininess in the picture. High quality digital sources such as DVDs
have much reduced noise content. Noise reduction processing is required to bring
analog sources, either existing archive material or new material from
traditional cameras, up to digital standards. Small static details in the
picture have to be distinguished from the moving noise artifacts so that correct
discrimination can be accomplished. The Company makes use of its motion
detection and adaptive video filtering technologies to optimize noise reduction
in the video images.
TIME BASE CORRECTION. Video sources which are being transmitted from a
broadcast studio or by a satellite or cable TV head end derive line and frame
scan rates from stable crystal controlled sources which are timing accurate.
Video produced by consumer video cassette recorders, camcorders and, to a lesser
extent, video discs are subject to timing errors, because the playback relies on
the mechanical rotation of the storage medium for timing accuracy. In the case
of VCRs, line lengths may vary causing color decoding and video picture
alignment problems. If a VCR source is to be transmitted in the industry
standard digital D1 format, this line timing variability is not permissible. The
Company's time base correction technology permits its decoders not only to
separate the luminance and chrominance components of the video source but to
re-lock the video to a crystal reference. This stabilizes the picture,
particularly when video is overlaid on other video sources, and makes it
compliant with digital studio transmission standards.
SCALING. As new video standards become available, the need to reformat the
video picture by scaling in both the horizontal and vertical domains becomes
more important. The Company currently produces line doublers and quadruplers
which scale the picture by a factor of two. The Company has under development
products which scale the picture by non-integer ratios. This will be required
for the Company's PC interface products, which will permit the adjustment of the
size of a video image in a window on the PC monitor. This is a completely
variable scaling application. LCD panels or TI's DLP mirror products have finite
numbers of pixels in the display format. At present, 800 horizontal pixels by
600 vertical pixels is a common size and was developed to match computer SVGA
display sizes. In the case of video being interfaced to pixel based displays to
ensure that video artifacts are not developed at the display device, the video
source is scaled to convert the original number of lines to the number of lines
in the display device. Non-integer scaling is employed in this transfer. Scaling
will also be used in the conversion of video between traditional sources and the
new DTV and HDTV formats.
STRATEGIC RELATIONSHIPS
The Company believes that strategic relationships with other manufacturers
will provide opportunities to facilitate the entry of video image enhancement
products into new markets.
In March 1997, the Company entered into a license agreement with S3, a
leading supplier of advanced graphics accelerators for use in mainstream
multimedia PC systems. Under the terms of the agreement, the Company and S3 are
working jointly to develop integrated circuits using the Company's video
processing technologies and S3's advanced graphics accelerators technology for
use in PCs. The Company has granted S3 a worldwide license to certain
technology, which is exclusive for a period of five years as to such technology
provided that performance criteria are satisfied. The Company is obligated to
negotiate with S3 to extend this five year period. The Company is to receive
certain per unit royalties for products sold incorporating the Company's
technology. In addition to other performance criteria, S3 must make minimum
royalty payments to maintain exclusivity. If royalties on product sales do not
reach prescribed minimum levels, S3 may maintain exclusivity by prepaying
royalties to prescribed levels, but there is no requirement for it to do so. S3
expects to ship products that incorporate the Company's technology in 1998.
There can be no assurance that S3 and the Company will develop products as a
result of the agreement or that future royalties will be received by the
Company.
In April 1997, the Company entered into a development agreement with TI.
Under the terms of the agreement, the Company and TI are working jointly to
enhance and improve the images displayed by TI's DLP.
37
<PAGE>
If TI is satisfied with the development related to the DLP, TI and the Company
may enter into a further agreement that would provide, among other things, that
the Company sell board level decoder products to TI, and/or license certain of
the Company's technology to TI. However, there can be no assurance that the
Company will develop any such improvements, that TI and the Company will enter
into any further agreement or that the Company will receive any royalty payments
from TI. See "Risk Factors--Dependence on Strategic Relationships" and "Certain
Transactions--License Agreement with S3."
SALES AND MARKETING
Faroudja markets its products for the TV market through a network of home
theater, industrial and commercial dealers as well as OEM customers. As of June
30, 1997, the Company maintained a sales force of eight persons at its
headquarters in Sunnyvale, California, and six employees in regional offices.
The Company's marketing programs include trade shows, training seminars, public
relations and advertising. Revenues from GI accounted for 19.3% of total
revenues in 1994. Revenues from Hughes/JVC accounted for 13.0% of total revenues
in 1995. Revenues from Vidikron accounted for 10.5% of total revenues in 1996.
The Company currently distributes its home theater products through
approximately 330 home theater dealers throughout the United States. This
distribution channel is managed by a Company national sales manager, four
regional managers, one field training manager, twelve independent sales
representatives and a customer service department. Through the recent
introduction of new, lower priced products for home theaters and the addition of
independent sales representatives, the Company intends to increase its home
theater dealer network locations in the U.S. over the next twelve months.
The Company services industrial applications, such as corporate board rooms,
executive conference centers and auditoriums, through a network of more than 70
industrial dealers. These dealers typically provide installation, product
integration, on site training and customer support. This network is managed
directly by a national sales manager and four regional managers.
For the broadcast market, the Company has relied, and expects to continue to
rely in the future, on direct sales marketing. The Company has three employees
who sell directly to the broadcast markets.
The Company has OEM relationships with Runco, Vidikron and Ampro. Vidikron
is also integrating the VP100 decoder into certain of its projection systems,
including the new Helios I projector based on TI's DLP. There can be no
assurance that the Company will continue to receive any revenues from any of
these relationships.
The Company has entered into co-branding arrangements with NEC and Runco
pursuant to which NEC and Runco have non-exclusive distribution rights to the
Company's line multiplier products. NEC and Runco are required to purchase a
certain minimum number of units per year to maintain their rights to co-brand
Company products. The Company has also entered into a co-branding arrangement
with Ampro for the development and sale of decoder boards for incorporation into
the Ampro three chip TI DLP product. There can be no assurance that the Company
will continue to receive any revenues from any of these arrangements.
In 1996 and in the six months ended June 30, 1997, the Company generated
approximately 15.3% and 9.5%, respectively, of its total revenues from export
sales. The Company intends to expand its international presence in order to
increase its export sales. The Company has a non-exclusive worldwide
distribution arrangement with Vidikron pursuant to which Vidikron distributes
the Company's line doublers and line quadruplers. Further, Faroudja has a
non-exclusive worldwide distribution arrangement with Hughes/JVC for the
industrial and consumer market. Hughes/JVC distributes Faroudja's line doublers,
quadruplers and broadcast products. In addition, Faroudja has distributors or
dealers in over 35 countries worldwide. Export sales to international customers
entail a number of risks, including unexpected changes in, or impositions of,
legislative or regulatory requirements, delays resulting from difficulty in
obtaining export licenses for certain technology, tariffs, quotas and other
trade barriers and restrictions, longer payment cycles, greater difficulty in
accounts receivable collection, potential adverse taxes, currency exchange
fluctuations, the burdens of complying with a variety of
38
<PAGE>
foreign laws and other factors beyond the Company's control. See "Risk
Factors--Risks Associated with Export Sales and Operations."
The Company's future success will depend, in large part, on the continued
efforts of its network of direct and indirect distributors and dealers. The loss
of, or reduction in sales to any of the Company's key customers could have a
material adverse effect on the Company's operating results. See "Risk
Factors--Distribution Risks; Diversification of Sales Channels."
The Company's business is characterized by short lead times and quick
delivery schedules. As a result, the Company does not believe that backlog at
any given time is a meaningful indication of future sales.
MANUFACTURING
TV AND BROADCAST PRODUCTS. The Company focuses its manufacturing efforts on
producing high quality products in a cost-effective manner. The Company's
manufacturing operations are located in Sunnyvale, California and consist mainly
of materials procurement, final assembly, testing, quality assurance and
shipping of products. The only product assembly performed by the Company is
final assembly, which consists of building chassis and installing circuit boards
and wires and cables. The Company performs testing and quality assurance of all
products at its Sunnyvale facilities and plans to expand its in-house automated
testing efforts as its product volume increases.
The Company subcontracts other manufacturing functions, including the
production of its printed circuit boards. Bestronics assembles more than 80% of
the Company's circuit boards. The Company's reliance on independent printed
circuit board assemblers limits its control over delivery schedules, quality
assurance and product cost. The Company also relies on suppliers for components,
such as DC Electronics which builds all of the Company's wire and cable
harnesses. Disruption in service by any of the Company's subcontractors or the
Company's suppliers could lead to supply constraints or delays in the delivery
of the Company's products. Such supply constraints or delays could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Reliance on Independent Foundries and
Manufacturers."
WAFER FABRICATION. The Company contracts all of its wafer fabrication,
assembly and testing to independent foundries and contractors, which enables the
Company to focus on its design strengths, minimize fixed costs and capital
expenditures and gain access to advanced manufacturing facilities. As the
Company continues to develop ASIC products, it will continue to contract out its
wafer production. The Company's engineers work closely with the Company's
foundries and subcontractors to increase yields, lower manufacturing costs and
assure quality. The Company's primary foundry is SGS-Thomson. In addition, MDT
and TEMIC have manufactured the Company's integrated circuits since 1993 and
1996, respectively. Most of the Company's devices are currently fabricated using
complementary metal oxide semiconductor ("CMOS") process technology with 0.8
micron feature sizes. New devices that are being designed are in 0.5 micron and
0.35 micron sizes. The Company currently purchases products from all of its
foundries under individually negotiated purchase orders. The Company does not
currently have a long-term supply contract with any of its wafer fabrication
foundries and, therefore, none are obligated to supply products to the Company
for any specific period, in any specific quantity or at any specified price,
except as may be provided in a particular purchase order. The Company's reliance
on independent foundries and assembly and testing houses involves a number of
risks. See "Risks Factors--Reliance on Independent Foundries and Manufacturers."
COMPETITION
The markets in which the Company competes are intensely competitive and are
characterized by rapid technological change, rapid product obsolescence and
price competition. The Company expects competition to increase in the future
from existing competitors and from other companies that may enter the Company's
existing or future markets with products or technologies which may be less
costly or provide higher performance or more desirable features than the
Company's products. The Company's existing and potential competitors
39
<PAGE>
include several large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources than the Company. In the market for TV video
processors, the Company's principal competitors are DWIN, Extron, NEC, Snell &
Wilcox, Sony and YEM. In the market for broadcast products, the Company's
principal competitors are Extron, Leitch, Matsushita, Snell & Wilcox, Sony
Broadcast and Vistek. As the Company's products penetrate broader markets and as
these markets become commercial markets, the Company expects to face competition
from diversified electronic and semiconductor companies.
Certain of the Company's principal competitors maintain their own
manufacturing facilities, including semiconductor foundries, and may therefore
benefit from certain capacity, cost and technical advantages. Since the Company
does not operate its own semiconductor manufacturing, assembly or testing
facilities, it may not be able to reduce its costs as rapidly as companies that
operate their own facilities. The failure of the Company to introduce lower cost
versions of its products in a timely manner or to successfully manage its
manufacturing, assembly and testing relationships would have a material adverse
effect on its business, operating results and financial condition.
The Company believes that its ability to compete successfully in the rapidly
evolving markets for high performance video image enhancement technology depends
on a number of factors, including protection of its proprietary technology and
information, the price, quality and performance of the Company's and its
competitors' products, the timing and success of new product introductions by
the Company, its customers and its competitors, the emergence of new industry
standards, the Company's ability to obtain adequate foundry capacity, the number
and nature of the Company's competitors in a given market and general market and
economic conditions. There can be no assurance that the Company will compete
successfully in the future with respect to these or any other competitive
factors. See "Risk Factors--Competition."
The Company has licensed and intends to continue to license its technologies
and intellectual property. The licenses may allow licensees to purchase from the
Company or the Company's suppliers, board level or chip level products,
developed by or for the Company, which implement certain of the Company's
technologies. The Company's licensees may be larger and have greater market
recognition and financial, technological, engineering, manufacturing and
distribution capabilities than the Company. In addition, such licensees may use
such technologies either alone or in combination with other technologies to
develop products which could compete with the Company's technologies and
products. While the Company may sell board level or chip level products to
licensees and receive royalties from such licensees, there can be no assurance
that the technologies and products offered by such licensees will not compete
directly with those of the Company, have performance, cost or other advantages
over those of the Company or have an adverse impact on the sales or other
licensing activities of the Company.
PROPRIETARY RIGHTS AND LICENSES
The Company's future success depends in part upon its ability to protect its
proprietary technology and information. Although the Company relies on a
combination of licensed patents, copyrights, trademarks, trade secrets and
licensing arrangements with third parties to protect certain of its intellectual
property, the Company believes that factors such as the technological and
creative skills of its personnel and the success of its ongoing product
development efforts are more important in maintaining its competitive position.
The Company generally enters into confidentiality or license agreements with its
employees, distributors, customers and potential customers and limits access to
its proprietary information. Yves Faroudja, the Company's founder and Chief
Technical Officer, personally holds or was assigned 44 U.S. and 6 foreign
patents, and 6 U.S. and 20 foreign patent applications, which have been licensed
to the Company, and on which the Company depends for the enhancement of its
current products and the development of future products. Mr. Faroudja has
granted the Company a perpetual, royalty-free, license to use patented and
unpatented technologies developed by him prior to January 20, 1997. See "Certain
Transactions--Yves Faroudja License Agreement." As the Company is a licensee of
such patents and applications, it is subject to risks not generally faced by
other companies which own the intellectual property upon which their businesses
rely. See "Risk Factors--Limited Protection of Proprietary
40
<PAGE>
Rights; Risk of Third Party Infringement." There can be no assurance that
patents will issue from any pending applications or that any claims allowed from
pending applications will be of sufficient scope or strength, or be issued in
all countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. Also, competitors of the
Company may be able to design around the licensed patents. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's products or intellectual property rights to the same extent as the
laws of the United States, and thus, may increase the likelihood of piracy of
the Company's technology and products. There can be no assurance that the steps
taken by the Company to protect its intellectual property rights will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology.
The video image enhancement and related industries are characterized by
vigorous protection and pursuit of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. Although to date the Company has received no notification of alleged
infringement of other companies' intellectual property rights, the Company may
from time to time be subject to proceedings alleging infringement by the Company
of intellectual property rights owned by third parties. If necessary or
desirable, the Company may seek licenses under such intellectual property
rights. However, there can be no assurance that such licenses will be offered or
that the terms of any offered license will be acceptable to the Company. The
failure to obtain such a license from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
or cease the manufacture of products requiring such technology. See "Risk
Factors--Limited Protection of Proprietary Rights; Risk of Third Party
Infringement."
The Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. For example, in January 1997 and May 1997, the
Company filed actions against DWIN and Snell & Wilcox, respectively, seeking
relief and damages for the infringement of US Patent Number 4876596 owned by
Yves Faroudja and licensed to the Company. DWIN and Snell & Wilcox have raised
defenses and counterclaims that the patent is invalid and not infringed.
EMPLOYEES
As of June 30, 1997, the Company had 67 full-time and six part-time and
contract employees, including 26 full-time employees primarily involved in
research and development activities, 14 in marketing and sales, 11 in finance
and administration and 16 in manufacturing and quality assurance. Most employees
are based at the Company's headquarters in Sunnyvale, California. The Company's
employees are not represented by any collective bargaining unit with respect to
their employment with the Company, and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good. The Company
intends to significantly expand its employee base in 1997, primarily in research
and development and sales and marketing, and believes that its future success
will depend largely on its ability to attract and retain highly-skilled
managerial, sales and marketing personnel. Competition for such personnel is
intense. The Company's future success will depend to a significant extent upon
the continued services of members of senior management and other key employees
of the Company. The loss of the service of any of these individuals could have a
material adverse effect on the Company. See "Risk Factors--Dependence on Senior
Management and Other Key Employees; New Management Personnel."
FACILITIES
The Company's headquarters is located in approximately 20,000 square feet of
space in Sunnyvale, California pursuant to a lease which expires September 30,
2003. In 1997, the Company also entered into a lease for approximately 2,000
square feet for a research and development facility in Phoenix, Arizona which
expires in June 1999. The aggregate annual gross rent for the Company's
facilities was approximately $172,000 in 1996. The Company intends to expand its
facilities in the second half of 1997.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of the date of this Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Michael J. Moone.......................... 51 President, Chief Executive Officer and Director
Yves C. Faroudja(3)....................... 63 Chief Technical Officer, Chairman of the Executive Committee,
Secretary and Director
Michael C. Hoberg......................... 45 Vice President--Finance and Chief Financial Officer
Donald S. Butler.......................... 51 Vice President--Engineering
Kenneth S. Boschwitz...................... 43 Vice President--Business Development and General Counsel
Thomas A. Harvey.......................... 48 Vice President--Sales and Marketing
William J. Turner(1)...................... 53 Chairman of the Board of Directors
Kevin B. Kimberlin(2)..................... 45 Director
Matthew D. Miller(3)...................... 50 Director
William N. Sick, Jr.(1)................... 62 Director
Stuart D. Buchalter(2).................... 59 Director
Merv L. Adelson(3)........................ 67 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Executive Committee
MICHAEL J. MOONE has served as President, Chief Executive Officer and a
director of the Company since joining the Company in July 1996. From February
1995 to June 1996, Mr. Moone was President, Chief Executive Officer and a
director of Healthrider, Inc., a home fitness equipment supplier. In June 1993,
he co-founded Kid One, Inc., a developer of electronic toys and games, and
served as its Chief Executive Officer and a director through February 1995. In
1985, Mr. Moone founded Merchantec International, a credit card processing
company, and served as its President, Chief Executive Officer and a director
through May 1993. In 1983 he founded Electronic Publishing Systems Inc., a
software development and marketing company and served as its President through
May 1985. From November 1979 to April 1983 he was President of Atari, Inc., a
developer and manufacturer of home video games and a subsidiary of Warner
Communications, Inc. From July 1978 to November 1979, he was Vice President and
General Manager of Milton Bradley Co. ("MBC"), a developer and manufacturer of
toys and games. Previously, he held a number of marketing and general management
positions with MBC. Mr. Moone holds a B.S. in Political Science and Economics
from Xavier University.
YVES C. FAROUDJA is co-founder of the Company and has served as a director
of the Company since its inception in 1971. Mr. Faroudja served as the Company's
President from 1971 to July 1996, has been the Company's Chief Technical Officer
since July 1996 and is currently Chairman of its Executive Committee of the
Board of Directors. Prior to founding the Company, Mr. Faroudja worked as a
research and development engineer at ITT Research Laboratories in France, as a
research scientist at the North Atlantic Treaty Organization in Italy and for
Memorex Corporation, a systems integrator and distributor of computer products,
in the United States. Mr. Faroudja holds a M.S.E.E. from Ecole Superieure
d'Electricite, Paris.
42
<PAGE>
MICHAEL C. HOBERG joined the Company in December 1996 as Vice
President--Finance and Chief Financial Officer. From March 1995 to December
1996, Mr. Hoberg was Principal Accounting Officer of DSP Group, Inc. ("DSP"), a
semiconductor company, and from January 1994 to March 1995 he was DSP's
Corporate Controller. From March 1992 to January 1994, Mr. Hoberg served as Vice
President of Finance and Chief Financial Officer at Arix Corporation ("Arix"), a
UNIX superminicomputer manufacturer, and from 1989 to March 1992 was Arix's
Corporate Controller. From 1986 to 1989, Mr. Hoberg was the Controller of the
Therapeutic Products Division of Diasonics, Inc., a manufacturer of therapeutic
medical equipment, and from 1983 to 1986 served as the Chief Financial Officer
of Technics, Inc., a semiconductor equipment manufacturer. Mr. Hoberg holds a
B.B.A. in Accounting from the University of Wisconsin at Madison and is a
Certified Public Accountant.
DONALD S. BUTLER joined the Company in May 1996 as Vice President and
General Manager of the VLSI Division. In October 1996, as Vice
President--Engineering, he assumed responsibility for all engineering functions
other than research and development. Prior to joining the Company, Mr. Butler
was Vice President of Engineering at the Integrated Systems Center of GI, a
manufacturer of satellite and cable TV equipment, a position he held from 1989
to May 1996. From 1974 to 1989, he held several engineering and engineering
management positions within GI's Microelectronics Division. Mr. Butler holds a
B.S. in Electrical Engineering from the University of Strathclyde, Glasgow,
Scotland.
KENNETH S. BOSCHWITZ joined the Company in June 1997 as Vice
President--Business Development and General Counsel. From May 1984 to September
1996, Mr. Boschwitz held various legal and management positions with GI,
including Vice President & General Counsel of GI's Communications Division. From
November 1979 to May 1984, Mr. Boschwitz practiced corporate and securities law
with several private law firms. From August 1977 to November 1979, Mr. Boschwitz
was a Staff Attorney at the Securities and Exchange Commission's Division of
Corporation Finance. Mr. Boschwitz holds a J.D. from Washington College of Law
at The American University and a B.A. from Rutgers College.
THOMAS A. HARVEY joined the Company in June 1997 as Vice President--Sales
and Marketing. From September 1990 to May 1997, Mr. Harvey was Senior Vice
President of the Western Zone Sales Consumer Products Group of Sony Electronics,
Inc. ("Sony Electronics"), a leading electronics supplier. From June 1989 to
August 1990, Mr. Harvey was the President of the Consumer Sales Company division
of Sony Electronics. From August 1987 to May 1989, he was the President of the
Consumer Audio Products group of Sony Electronics. Prior thereto, he held
numerous positions of increasing responsibility with various divisions of Sony
Electronics. Mr. Harvey holds a M.S. in Education and a B.S. in Education from
Northern Illinois University.
WILLIAM J. TURNER has served as Chairman of the Board of Directors of the
Company since December 1995. From November 1989 to the present, Mr. Turner has
been chairman of Turner & Partners, a management and financial consulting
company. In February 1997, Mr. Turner also became a co-founder and co-manager of
Signature Capital, LLC, a venture capital company ("Signature Capital"). From
1983 to 1989, Mr. Turner was the President, Chief Operating Officer and a
director of Automatic Data Processing, a computer and information services firm.
Mr. Turner is currently a director of Federal Home Loan Mortgage Corporation.
Mr. Turner holds a M.A. in Mathematics from the University of Maine and a M.B.A.
from Northeastern University.
KEVIN B. KIMBERLIN has served as a director of the Company since December
1995. Since 1991, Mr. Kimberlin has been Chairman of Spencer Trask Holdings,
Inc., an investment banking firm. Mr. Kimberlin is a co-founder of Ciena
Corporation, Myriad Genetics and The Immune Response Corporation. He has been a
director of The Immune Response Corporation since 1986. Mr. Kimberlin holds a
M.B.A. from Harvard Business School and a B.S. from Indiana University.
MATTHEW D. MILLER has served as a director of the Company since December
1995. Since July 1994, Mr. Miller has served as President of M-Squared Media and
Technology L.L.C., a venture capital investment and consulting firm focusing on
high technology companies ("M-Squared"). From January 1993 to December 1993, Mr.
Miller served as Chairman of the Center for Advanced TV Studies, a non-profit
research and development consortium. From August 1988 to July 1994, he served as
Vice President of Technology at GI, and from March 1984 to August 1988, he was
Vice President of Technology at Viacom Inc. ("Viacom"), a media and
43
<PAGE>
communications company. Before joining Viacom, he served as a technology manager
at both Perkin-Elmer Corporation and RCA Corporation's David Sarnoff Research
Center. Mr. Miller holds a M.A. and a Ph.D. in Physics from Princeton
University, and a B.A. in Physics from Harvard University. He is a director of
Lumisys Inc. and several private technology companies.
WILLIAM N. SICK has served as a director of the Company since December 1995.
Mr. Sick is Chairman and Chief Executive Officer of Business Resources
International, an investment services company he founded in 1989. In February
1997, Mr. Sick became a co-founder and co-manager of Signature Capital. In 1988
and 1989, he served as Chief Executive Officer and a director of American
National Can Company ("ANC"), a packaging company. During this period, he was
also Vice Chairman of Triangle Industries Inc., the owner of ANC. From 1958 to
1987, Mr. Sick was employed by Texas Instruments Incorporated ("TI") where he
served in several management capacities, including five years as President of TI
Semiconductor Group and Executive Vice President and a director of the Company.
Prior to that time, he was President of TI Asia in Tokyo and President of the TI
Europe Division. Mr. Sick is currently Chairman of the Board of Trustees of the
Shedd Aquarium in Chicago and a member of the Board of Governors of Rice
University. Mr. Sick holds a B.A. and a B.S. in Electrical Engineering from Rice
University.
STUART D. BUCHALTER has served as a director of the Company since April
1996. Mr. Buchalter has been of counsel with the law firm of Buchalter, Nemer,
Fields & Younger, a Professional Corporation, since August 1980. From August
1980 to June 1993, he served as Chairman of the Board of Directors and Chief
Executive Officer of Standard Brands Paint Company, a paint retailer and
manufacturer. Mr. Buchalter is a director of Authentic Fitness Corp., an
athletic apparel manufacturer, and City National Corp., the holding company for
City National Bank. He is also Vice-Chairman of the Board of Trustees of Otis
College of Art and Design. Mr. Buchalter holds a L.L.B. from Harvard Law School
and a B.A. from the University of California at Berkeley.
MERV L. ADELSON has served as a director of the Company since September
1996. Mr. Adelson has been Chairman of East-West Capital Associates, Inc., a
private investment banking company, since 1989. Previously, he was Chairman and
Chief Executive Officer of Lorimar Telepictures Corporation, an entertainment
firm. Mr. Adelson has been a director of Time Warner, Inc., a media and
communication corporation, since 1989. Mr. Adelson served as Vice Chairman of
Warner Communications, Inc. from January 1989 through August 1991. Mr. Adelson
is a director of 7th Level, Inc., a video graphics developer. Mr. Adelson has
served as a Managing Member of Adelson Investors, LLC, a private venture capital
fund, since February 1996.
The Company's Certificate of Incorporation provides for a classified Board
of Directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, approximately one-third of the Company's Board of
Directors will be elected each year. Yves Faroudja, Michael Moone and Stuart
Buchalter have been designated Class 1 directors with terms expiring at the 1997
Annual Meeting of Stockholders. Merv Adelson, Kevin Kimberlin and William Turner
have been designated Class 2 directors with terms expiring at the 1998 Annual
Meeting of Stockholders. William Sick and Matthew Miller have been designated as
Class 3 directors with terms expiring at the 1999 Annual Meeting of
Stockholders. See "Description of Capital Stock-- Delaware Law and Certain
Charter and By-Law Provisions."
BOARD COMMITTEES
EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors
reviews and monitors the Company's annual operating and capital expense budgets,
and acts as the Board of Directors' nominating committee with respect to the
selection of independent directors. Merv Adelson, Matthew Miller and Yves
Faroudja are the members of the Executive Committee and Yves Faroudja is its
chairman.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors (i) reviews
the results and scope of the annual audit and other services provided by the
Company's independent auditors, (ii) reviews and evaluates the Company's
internal audit and control functions and (iii) monitors transactions between the
Company and its employees, officers and directors. Kevin B. Kimberlin and Stuart
D. Buchalter are the members of the Audit Committee.
44
<PAGE>
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors administers the Company's stock option and stock purchase plans and
designates compensation levels for the Company's executive officers and
directors. William J. Turner and William N. Sick, Jr. are the members of the
Compensation Committee.
BOARD COMPENSATION
Directors received no fees for serving on the Board of Directors during 1996
but were reimbursed for all reasonable expenses incurred by them in attending
Board of Directors and Committee meetings. Commencing in August 1997,
non-employee directors will receive an annual retainer of $7,500, payable in
Common Stock on the day after the annual meeting of stockholders. In addition,
each non-employee director will receive $650 for each Board of Directors meeting
attended and $375 for each Committee meeting attended. Non-employee directors
are also eligible to participate in the Directors Plan. See "--Stock Plans--1997
Non-Employee Directors Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In January 1997, the Compensation Committee of the Board of Directors was
formed, consisting of William N. Sick, Jr. and William J. Turner. No member of
the Compensation Committee was or is an officer or employee of the Company or
any of its subsidiaries. No executive officer of the Company serves as a member
of the Board of Directors or Compensation Committee of any entity which has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth all compensation received for services
rendered to the Company and the Company's subsidiaries in all capacities during
the fiscal year ended December 31, 1996 by (i) the Company's Chief Executive
Officer and (ii) the Company's other executive officers whose total compensation
exceeded $100,000 during such fiscal year (together, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) -------------
------------------------------------- SECURITIES
OTHER UNDERLYING
ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS COMPENSATION (#)(2) COMPENSATION(3)
- ----------------------------------------- ---------- ---------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael J. Moone
President, Chief Executive
Officer and Director(4)................ $ 175,000 $ 150,000 -- 528,932 $ 4,750
Michael C. Hoberg
Vice President--Finance and Chief
Financial Officer(5)................... 135,000 -- -- 75,000 --
Yves C. Faroudja
Chief Technical Officer, Secretary and
Director(6)............................ 198,500 -- -- -- 2,464
Donald S. Butler
Vice President--Engineering(7)......... 200,000 30,512 -- 195,964 --
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer did not exceed the lesser of (i) $50,000 or (ii) 10% of
the total annual salary and bonus for such officer. The bonus for each
executive varies annually based on a variety of factors. Accordingly, the
bonus reported for each executive is the actual amount earned in 1996, not
an annualized amount.
45
<PAGE>
(2) These shares are issuable upon exercise of stock options granted under the
1995 Option Plan.
(3) Represents matching contributions by the Company under its 401(k) plan.
(4) Mr. Moone joined the Company in June 1996, and the amount reported
represents his salary in 1996 on an annual basis. Commencing in January
1997, Mr. Moone's base salary was increased to $250,000. Includes a grant of
options to purchase 456,432 shares under the 1995 Option Plan at an exercise
price of $3.83 and a grant of options to purchase 72,500 shares under the
1995 Option Plan at an exercise price of $3.91. The options vest over four
years.
(5) Mr. Hoberg joined the Company in December 1996, and the amount reported
represents his salary on an annual basis. He is eligible for a discretionary
bonus at the end of the year. Includes a grant of options to purchase 75,000
shares under the 1995 Option Plan at an exercise price of $3.91. The options
vest over four years.
(6) Mr. Faroudja served as the Company's President prior to June 1996, and
currently serves as the Company's Chief Technical Officer, Chairman of the
Executive Committee, Secretary and Director of the Board of Directors. Under
his employment agreement, Mr. Faroudja will receive a salary of up to
$200,000 for each of fiscal 1997 and fiscal 1998 depending on the amount of
time he devotes to the Company.
(7) Mr. Butler joined the Company in May 1996 and received an annualized salary
of $200,000. Commencing in May 1997, Mr. Butler's base salary was increased
to $220,000. He is eligible for a discretionary bonus at the end of the
year. Includes a grant of options to purchase 172,964 shares under the 1995
Option Plan at an exercise price of $3.83 and a grant of options to purchase
23,000 shares under the 1995 Option Plan at an exercise price of $3.91. The
options vest over four years.
Kenneth S. Boschwitz joined the Company in June 1997 as its Vice
President--Business Development and General Counsel, and will receive a
pro-rated annual salary of $150,000 in 1997. He is also eligible for a
discretionary bonus at the end of the year. He was granted options to purchase
80,000 shares under the 1997 Option Plan at an exercise price of $7.50. Mr.
Boschwitz's option vests over four years. If Mr. Boschwitz is terminated without
cause during his first year of employment with the Company, he will receive a
severance of $75,000. Thomas A. Harvey joined the Company in June 1997 as its
Vice President--Sales and Marketing and will receive a pro-rated salary of
$200,000 in 1997. In addition, he received a signing bonus of $50,000 in July
1997 and is eligible for a discretionary bonus at the end of the year. He was
granted options to purchase 100,000 shares under the 1997 Option Plan at an
exercise price of $7.50. Mr. Harvey's options vest over four years. If Mr.
Harvey is terminated without cause during his first year of employment with the
Company, he will receive a severance of $125,000 which will be paid over 12
months.
46
<PAGE>
STOCK OPTION GRANTS
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended December
31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS(1) ANNUAL RATES OF
---------------------------------------------------------- STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS EXERCISE OPTION TERM(2)
UNDERLYING GRANTED PRICE PER EXPIRATION ------------------------
NAME OPTIONS GRANTED TO EMPLOYEES SHARE DATE(4) 5% ($) 10% ($)
- -------------------------------- --------------- --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Moone................ 345,928 27.42% $ 3.83 06/24/06 $ 833,226 $ 2,111,556
Michael J. Moone................ 110,504 8.76 3.83 07/08/06 266,167 674,520
Michael J. Moone................ 72,500 5.75 3.91 12/31/06 178,276 451,786
Michael C. Hoberg............... 75,000 5.95 3.91 12/31/06 184,423 467,365
Donald S. Butler................ 172,964(3) 13.71 3.83 05/06/06 416,613 1,055,778
Donald S. Butler................ 23,000(3) 1.82 3.91 12/31/06 56,557 143,325
</TABLE>
- ------------------------
(1) Each of these options was granted pursuant to the 1995 Option Plan. These
options were granted at an exercise price equal to the fair market value of
the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant, and vest over a four year period at the rate
of 25% of the shares on the first anniversary of the date of grant and
1/48th of the shares each month thereafter. The term of each option is ten
years.
(2) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of the Company, overall
market conditions and the option holders' continued employment through the
vesting period.
(3) Mr. Butler entered into an agreement with the Company on March 6, 1996,
pursuant to which Mr. Butler will receive a bonus of $1.08 per each option
upon exercise of such options, up to an aggregate of 138,370 options, or
$150,000.
(4) Options become exercisable as to 25% of the option shares on the first
anniversary of the date of grant and as to 1/48th of the option shares each
month thereafter, with full vesting occurring on the fourth anniversary of
the date of grant.
47
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
There were no stock options exercised by Named Executive Officers during the
year ended December 31, 1996. The following table sets forth certain information
regarding stock options held as of December 31, 1996 by the Named Executive
Officers.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
--------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, 1996 IN-THE-MONEY OPTIONS
(#) DECEMBER 31, 1996 ($)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Michael J. Moone................. -- 456,432 -- $ 36,515
Michael J. Moone................. -- 72,500(2) -- --
Michael C. Hoberg................ -- 75,000(2) -- --
Donald S. Butler................. -- 172,964 -- 13,837
Donald S. Butler................. -- 23,000(2) -- --
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the exercise price of such
option and the fair market value of the Company's Common Stock at December
31, 1996, multiplied by the total number of shares subject to the option.
(2) As of December 31, 1996, the value of the Company's Common Stock was $3.91
per share. These options were granted at an exercise price of $3.91 per
share.
STOCK PLANS
1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN. The Directors Plan provides
for the grant of nonqualified stock options to non-employee directors of the
Company. The Directors Plan was adopted by the Company's Board of Directors in
December 1996 and approved by its stockholders in January 1997, at which time
100,000 shares of Common Stock were authorized for issuance thereunder. Under
the Directors Plan, each non-employee director is eligible to receive options
exercisable for the Company's Common Stock. As of June 30, 1997, there were
options to purchase 45,605 shares of Common Stock outstanding under the
Directors Plan. Unless terminated sooner the Directors Plan will terminate in
2007.
Options granted under the Directors Plan shall be exercisable in whole or in
part at all times during the period beginning on the date of grant until the
earlier of (i) ten years from the date of grant, and (ii) one year from the date
on which a grantee ceases to be a non-employee director, subject to certain
vesting requirements which may be imposed by the committee designated by the
Board of Directors to administer the Directors Plan or by the Board of Directors
if no such committee has been designated. No director option granted under the
Directors Plan is transferable by the optionee except by will or by the laws of
descent or distribution, and each director option is exercisable during the
lifetime of the optionee only by such optionee. The exercise price of each
director option is equal to the fair market value of the Common Stock on the
date of grant. In the event of a merger of the Company with or into another
corporation, or sale of substantially all of the assets of the Company, the
Directors Plan shall terminate and each director option issued thereunder shall
become fully exercisable.
1995 STOCK OPTION PLAN. On August 1, 1995, the Company's Board of Directors
and its stockholders approved the 1995 Option Plan to succeed the 1993 Stock
Option Plan. The 1995 Option Plan was amended on August 19, 1996, February 11,
1997, April 30, 1997 and June 13, 1997. The 1995 Option Plan provides for the
grant to employees of the Company of incentive stock options within the meaning
of Section 422 of the Code, and for the grant of nonstatutory stock options to
employees and consultants of the Company. A total of 1,217,620 shares of Common
Stock have been reserved for issuance under the 1995 Option Plan, excluding
options to purchase 7,380 shares which have been exercised. The exercise price
of all incentive stock options granted under the 1995 Option Plan must be at
least equal to the fair market value of the Common Stock on the date of grant.
The exercise price of all nonstatutory stock options granted under the 1995
Option Plan must be at least 85% of the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns
48
<PAGE>
stock possessing more than 10% of the voting power of all classes of stock of
the Company, the exercise price of any incentive or nonstatutory stock option
granted must equal at least 110% of the fair market per share value on the grant
date and the maximum term of the option may not exceed five years. The term of
all other options granted under the 1995 Option Plan may not exceed ten years.
Options granted under the 1995 Option Plan are not generally transferable by the
optionee except by will or by the laws of descent or distribution, and are
exercisable during the lifetime of the optionee only by such optionee. As of
June 30, 1997, options to purchase 1,217,019 shares of Common Stock were
outstanding. No additional options to purchase Common Stock will be issued under
the 1995 Option Plan.
The 1995 Option Plan is administered by the Board of Directors, or a
committee designated by the Board of Directors, which, among other things,
selects the optionees and interprets and implements the 1995 Option Plan. Most
options vest over three or four years. The 1995 Option Plan may be amended at
any time by the Board of Directors, although certain amendments require
stockholder approval.
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, the 1995 Option Plan
shall terminate and each option issued thereunder shall become fully
exercisable.
1997 PERFORMANCE STOCK OPTION PLAN. In January 1997, the Company's Board of
Directors adopted and its stockholders approved the 1997 Option Plan to succeed
the 1995 Option Plan. The 1997 Option Plan was amended on June 13, 1997. The
1997 Option Plan provides for the granting to employees (including officers and
employee directors) of incentive stock options within the meaning of Section 422
of the Code, and for the granting to employees (including officers and employee
directors) and consultants of nonstatutory stock options. Unless terminated
sooner, the 1997 Option Plan will terminate automatically in 2007. The Board of
Directors has authority to amend, suspend or terminate the 1997 Option Plan,
provided that no such action may affect any share of Common Stock previously
issued and sold or any option previously granted under the 1997 Option Plan. A
total of 725,000 shares of Common Stock have been reserved for issuance under
the 1997 Option Plan. As of June 30, 1997, there were options to purchase
315,725 shares of Common Stock outstanding under the 1997 Option Plan.
The 1997 Option Plan may be administered by the Board of Directors or a
committee designated by the Board (the "Administrator"), which committee is
required to be constituted to comply with Section 16(b) of the Securities
Exchange Act of 1934, as amended, and applicable laws. The Administrator has the
power to determine the terms of the options granted, including the exercise
price, the number of shares subject to the option and the exercisability
thereof, and the form of consideration payable upon exercise. Options granted
under the 1997 Option Plan are not transferable except by will or by the laws of
descent and distribution and may only be exercised by the holder of such options
or by the holder's legal representative. Options granted under the 1997 Option
Plan must be exercised within three months of the end of the optionee's status
as an employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option term. The exercise price of all nonstatutory stock
options granted under the 1997 Option Plan shall be determined by the
Administrator. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock (a "10% Stockholder"), the exercise price of any stock option granted to
such participant must equal at least 110% of the fair market value per share on
the date of grant. The exercise price of incentive stock options for all other
employees shall be no less than 100% of the fair market value per share on the
date of grant and no less than 85% of the fair market value per share on the
date of grant for nonstatutory stock options. The maximum term of an option
granted under the 1997 Option Plan may not exceed then years from the date of
grant (five years in the case of an incentive stock option granted to a 10%
Stockholder).
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, the 1997 Option Plan
shall terminate and each option issued thereunder shall become fully
exercisable.
49
<PAGE>
1997 EMPLOYEE STOCK PURCHASE PLAN. The Purchase Plan was approved by the
Company's Board of Directors and stockholders in January 1997. The Purchase Plan
is intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code. An aggregate of 400,000 shares of the Company's Common Stock are
reserved for offering under the Purchase Plan and are available for purchase
thereunder, subject to adjustment in the event of a stock split, stock dividend
or other similar change in the Common Stock or the capital structure of the
Company. Employees are eligible to participate if they are regularly employed by
the Company for at least 20 hours per week and more than five months per
calendar year.
Under the Purchase Plan, offering periods will commence on the first trading
day on or after June 15 and December 15 of each year and terminate on the last
trading day in periods ending 24 months later, except that the first offering
period shall begin on the effective date of this Offering and end on the last
trading day in the period ending June 15, 1999. Payroll deductions may be from
1% to 10% (in whole percentage increments) of a participant's compensation. The
per share price at which shares of Common Stock are to be purchased pursuant to
the Purchase Plan is an amount equal to 85% of the fair market value (as
defined) of a share of Common Stock on the first day of any offering period or
on an exercise date, whichever is lower. On the enrollment date of each offering
period, eligible employees are granted an option to purchase every six months
(an exercise date) during such offering period up to a number of shares of
Common Stock determined by dividing such employee's payroll deductions
accumulated prior to such exercise date by the applicable purchase price. In no
event shall an employee be permitted to purchase during each purchase period
more than a number of shares determined by dividing $12,500 by the fair market
value of a share of Common Stock on the enrollment date.
In the event of certain changes in control of the Company, the Purchase Plan
provides that each option under the Purchase Plan be assumed or an equivalent
option substituted by the successor corporation, unless the Board of Directors
decides to shorten the offering period or to cancel each outstanding option and
refund all sums collected from participants during the offering period then in
progress. Unless terminated sooner, the Purchase Plan will terminate ten years
from its effective date. The Board of Directors has authority to amend or
terminate the Purchase Plan, provided, however, no such action may adversely
affect the rights of any participant.
401(k) PLAN. The Company has adopted the Faroudja Laboratories 401(k) Plan
(the "401(k) Plan"), which is intended to qualify under Section 401(k) of the
Code. All employees of the Company and its subsidiaries who have attained 21
years of age and have met the plan's service requirements, including employment
with the Company for at least 1 year, are eligible to participate in the 401(k)
Plan. Each eligible employee may contribute to the 401(k) Plan, through payroll
deductions, up to $9,500 (adjusted annually after 1995 for cost-of-living
increases), subject to statutory limitations imposed by the Internal Revenue
Service. The Company has the discretion to match employee contributions under
the 401(k) Plan. Under Section 401(k) of the Code, contributions by employees or
by the Company to the 401(k) Plan, and income earned on plan contributions, are
not taxable to employees until withdrawn from the 401(k) Plan, and contributions
by the Company will be deductible by the Company when made. On April 19, 1996,
the 401(k) Plan was amended by the Board of Directors of the Company. Pursuant
to such amendment and effective as of January 1, 1996, the Company matches 50%
of employee contributions under the 401(k) Plan, matching contributions made by
the Company vest over 4 years, and the waiting period before which employees
become eligible to participate in the 401(k) Plan was decreased to 1 month.
50
<PAGE>
EMPLOYMENT AGREEMENTS
In March 1996, the Company entered into an employment agreement with Yves C.
Faroudja for a term of two years, pursuant to which Mr. Faroudja is to serve as
Chief Technical Officer of the Company at an annual base salary of $100,000 for
the first year and $66,600 for the second year. Under the agreement, the annual
base salary shall be increased proportionately if Mr. Faroudja contributes more
than one-half of his time to the Company during the first year and/or more than
one-third of his time to the Company during the second year of his employment
with the Company, with a maximum annual base salary during the first and second
years of $200,000 for each year. Mr. Faroudja is entitled under the agreement to
participate in all insurance and benefit plans generally available to the
employees of the Company. If Mr. Faroudja is terminated without cause (as
defined in the agreement), Mr. Faroudja will be entitled to receive his annual
base salary and continuation of his benefits through the term of the agreement.
If Mr. Faroudja is terminated for any other reason, he will be entitled only to
his accrued and annual unpaid base salary.
On July 8, 1996, the Company entered into an employment agreement with
Michael J. Moone for a term of four years, pursuant to which Mr. Moone is to
serve as President, Chief Executive Officer and a director of the Company at an
annual base salary of $175,000. Effective January 1, 1997, Mr. Moone's annual
base salary was increased to $250,000. Mr. Moone is entitled to receive an
annual bonus of up to 100% of his annual base salary at the discretion of the
Board of Directors. Mr. Moone is entitled to participate in all insurance and
benefit plans generally available to the employees of the Company. Mr. Moone was
granted options under the 1995 Option Plan to purchase 456,432 shares at an
exercise price of $3.83 per share and 72,500 shares at an exercise price of
$3.91 per share. If Mr. Moone's employment is terminated for any reason, he is
entitled to his accrued and unpaid annual base salary and bonus. However, if Mr.
Moone dies and the Company has not obtained life insurance for the benefit of
Mr. Moone's estate, the Company is required to pay his estate three month's
annual base salary and bonus.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company believes that the provisions in its Certificate of Incorporation
and By-Laws and the separate indemnification agreements outlined below are
necessary to attract and retain qualified persons as directors and officers.
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors except for liability (i) for any
breach of their duty of loyalty to the company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments or dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit.
The Company's By-Laws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted under Delaware Law, including in those circumstances where
indemnification would otherwise be discretionary. The Company believes that
indemnification under its By-Laws covers at least negligence and gross
negligence on the part of indemnified parties. The By-Laws authorize the use of
indemnification agreements, and the Company has entered into indemnification
agreements with each of its directors that are in some respects broader than the
specific indemnification provisions contained in Delaware Law. The
indemnification agreements may require the Company, among other things, to
indemnify such directors against certain liabilities that may arise by reason of
their status or service as directors (other than liabilities arising from
willful misconduct of a culpable nature) and to advance expenses reasonably
expected to be incurred in defending any proceeding against them for which they
would receive indemnification. The Company also plans to obtain directors and
officers liability insurance with respect to certain matters, including matters
arising under the Securities Act.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
51
<PAGE>
CERTAIN TRANSACTIONS
1996 FINANCING
In March 1996, (i) the Company issued 1,043,105 shares of Common Stock for
an aggregate purchase price of $4 million to Adelson Investors, LLC, a
predecessor of Faroudja Images Investors, LLC ("Investors LLC") and Images
Partners, L.P. ("Images") (collectively the "Investor Group"), of which 213,642
shares were issued to Adelson Investors, LLC, 682,153 shares were issued to
Investors LLC and 147,310 shares were issued to Images, (ii) the Investor Group
purchased a total of 3,569,395 shares of Common Stock from Yves and Isabell
Faroudja for an aggregate purchase price of $14 million, of which 731,062 shares
were purchased by Adelson Investors, LLC, 2,334,253 shares were purchased by
Investors LLC and 504,080 shares were purchased by Images, and (iii) Yves and
Isabell Faroudja granted the Investor Group an option to purchase 1,537,500
shares of the Company's Common Stock for an aggregate purchase price of $6
million (the "Faroudja Option"), of which Adelson Investors, LLC has an option
to purchase 486,875 shares of Common Stock for $1.9 million, Investors LLC has
an option to purchase 666,250 shares of Common Stock for $2.6 million and Images
has an option to purchase 384,375 shares of Common Stock for $1.5 million. The
Faroudja Option is expected to be exercised immediately preceding the
consummation of this Offering. The transactions described in (i) and (ii) above
are collectively referred to herein as the "Equity Purchase."
Kevin Kimberlin, a director of the Company, is a general partner of, and has
a beneficial interest in the shares held by, Images. Mr. Kimberlin has agreed to
provide a secured loan to Investors LLC to exercise that portion of the Faroudja
Option that Investors LLC holds. Spencer Trask Holdings, Incorporated, an
affiliate of Images, organized Investors LLC and served as the placement agent
for the Equity Purchase.
Merv Adelson and Stuart Buchalter, directors of the Company, are,
respectively, the managing member and an officer of Adelson Investors, LLC.
As part of the Equity Purchase, the Investor Group received certain
registration rights which provide that 180 days following the completion of an
initial public offering, the Company must file a registration statement under
the Securities Act, to register the shares held by members of the Investor
Group. Under this agreement the Company must pay for all of the expenses
incurred with the registration other than selling commissions and discounts. See
"Description of Capital Stock--Registration Rights."
SUBCHAPTER S DISTRIBUTIONS
One of the Company's predecessor entities elected to be taxed as an S
Corporation. Yves Faroudja and Isabell Faroudja, as stockholders of such
predecessor entity, received for 1994, 1995 and 1996 aggregate S Corporation
distributions of $1.5 million, $1.4 million and $4.0 million, respectively.
YVES FAROUDJA LICENSE AGREEMENT
On January 20, 1997 (the "Effective Date"), the Company entered into a
license agreement (the "License Agreement") with Yves Faroudja with respect to
certain intellectual property now used or proposed to be used by the Company,
including a portfolio of patents and patent applications, owned by him prior to
the Effective Date, pursuant to which (1) Yves Faroudja granted to the Company
(subject to (A) certain rights to such intellectual property previously granted
by Yves Faroudja to third parties and (B) certain rights to such intellectual
property retained by Yves Faroudja) a worldwide, perpetual, royalty-free,
exclusive, sublicensable license to exploit such intellectual property and (2)
Yves Faroudja assigned to the Company his rights in such intellectual property
first owned by him during the period commencing on the Effective Date and ending
on the date (the "Termination Date") Yves Faroudja ceases to be an employee of
the Company. The Company enjoys certain other rights pursuant to the License
Agreement, including the rights (1) to control the preparation, filing, and
prosecution of additional patent applications covering the licensed intellectual
property prior to the Termination Date and (2) with certain exceptions, to bring
actions against third parties that apparently infringe the licensed intellectual
property and to retain the recovery, if any, from such actions. As consideration
for the
52
<PAGE>
License Agreement, Yves Faroudja was granted a warrant to purchase 100,000
shares of Common Stock at an exercise price of $7.50 per share. The warrant
vests as to 1/36th of the total shares for each full month after January 20,
1997 provided that Yves Faroudja is then either (i) employed by the Company (as
a full or part-time employee), or (ii) acting as a member of the Board of
Directors of the Company. Certain registration rights and anti-dilution
provisions are provided to Yves Faroudja as contained therein.
CONSULTING AGREEMENTS
In September 1994, the Company entered into a six month consulting services
agreement with M-Squared. Matthew Miller, a director of the Company, is
president and the sole member of M-Squared. Pursuant to this agreement, (i) the
Company paid M-Squared $50,000 for consulting services, and (ii) Mr. Faroudja is
obligated to pay Mr. Miller the aggregate sum of $120,000, representing 2% of
the exercise price for the Faroudja Option, contingent upon the exercise of such
options.
In December 1996, the Company entered into a three year consulting agreement
with Merv Adelson, a director of the Company, pursuant to which Mr. Adelson
agreed to provide certain consulting services in the analysis and implementation
of potential strategic alliances in the field of TV signal enhancement. The
Company has agreed to compensate Mr. Adelson for any strategic alliance or
combination of strategic alliances during the term of the agreement in which the
Company receives consideration (as defined in the agreement) of at least $5
million, through the issuance of a three year warrant to Adelson Investors, LLC
for the purchase of 65,152 shares of Common Stock with an exercise price of
$0.15 per share ("Adelson Contingent Warrant"). During the term of the
Consulting Agreement, the Company also agreed to use its best efforts to cause
the election to the Board of Directors of Mr. Adelson (or a designee of Mr.
Adelson reasonably acceptable to the Board of Directors) and an additional
designee of Mr. Adelson reasonably acceptable to the Board of Directors. Mr.
Buchalter serves on the Board of Directors as Mr. Adelson's designee.
In July, 1997, the Company entered into a consulting services agreement with
Matthew D. Miller, which agreement supersedes all prior existing arrangements
among M-Squared, Mr. Miller and the Company. This agreement is for a term of one
year, is renewable upon the mutual consent of Mr. Miller and the Company's Board
of Directors and may be cancelled on four weeks notice if the Company's Board of
Directors is not satisfied with Mr. Miller's performance. Pursuant to this
agreement, Mr. Miller has agreed to advise the Company on strategic, technology
and communications matters. Under the agreement, the Company will pay Mr. Miller
a consulting fee of $7,000 per month until exercise and closing of the Faroudja
Option and, thereafter, $5,000 per month for the balance of the term of the
agreement. In the discretion of the Company's Board of Directors, Mr. Miller may
be entitled to a performance-based year-end bonus. The Company issued to Mr.
Miller an option to purchase 50,000 shares of Common Stock at an exercise price
of $9.50 per share (the "Miller Option") under the agreement. The Miller Option
has a term of three years and vests as to 1/24th of the option shares each month
during the first year after the date of grant and as to 1/2 of the option shares
one year after the date of grant.
LICENSE AGREEMENT WITH S3
In March 1997, the Company entered into a license agreement with S3, a
leading supplier of advanced graphics accelerators for use in mainstream
multimedia PC systems. Under the terms of the agreement, the Company and S3 are
working jointly to develop integrated circuits incorporating the Company's video
processing technologies for use in PCs. The Company granted to S3 a worldwide
license to certain technology which is exclusive for a period of five years as
to such technology provided that performance criteria, including minimum license
fees are satisfied. The Company is obligated to negotiate with S3 to extend the
five year period. See "Business--Strategic Relationships."
On June 30, 1997, the Company issued 526,316 shares of Common Stock to S3
for an aggregate purchase price of $5.0 million. Under the terms of the Stock
Purchase Agreement and an Investor's Rights Agreement, S3 is entitled to certain
anti-dilution, registration and board observation rights as described therein.
See "Description of Capital Stock--Registration Rights."
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of June 30,
1997 and as adjusted to reflect the sale of shares offered hereby by the Company
for (i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors, (iii)
each Named Executive Officer, (iv) all executive officers and directors as a
group and (v) the stockholder (the "Selling Stockholder") that has granted the
Underwriters an over-allotment option. A total of 8,733,696 shares of the
Company's Common Stock were issued and outstanding. Except as indicated in the
footnotes to the table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
Except as otherwise indicated, the address of each of the persons in this table
is as follows: c/o Faroudja, Inc., 750 Palomar Avenue, Sunnyvale, California,
94086.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING(1) AFTER OFFERING(1)
----------------------- SHARES -----------------------
BENEFICIAL OWNER SHARES PERCENT TO BE SOLD(2) SHARES PERCENT
- ----------------------------------------------- ---------- ----------- ----------------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Yves C. Faroudja(3) ........................... 2,069,444 23.64%
Adelson Investors, LLC(4) ..................... 1,431,579 16.39
10900 Wilshire Boulevard
Los Angeles, CA 90024
Faroudja Images Investors, LLC(5) ............. 3,682,656 42.17
c/o Spencer Trask Securities, Inc.
535 Madison Avenue
New York, New York 10022
Roger K. Baumberger(5) ........................ 3,682,656 42.17
Images Partners, L.P(6) ....................... 1,035,765 11.86
c/o Spencer Trask Securities, Inc.
535 Madison Avenue
New York, New York 10022
Michael J. Moone(7) ........................... 130,824 1.48%
Michael C. Hoberg(8) ..........................
Donald S. Butler(9) ........................... 54,051 *
William J. Turner(10) .........................
Kevin B. Kimberlin(6) ......................... 1,542,961 17.67
Matthew D. Miller(11) .........................
William N. Sick, Jr.(12) ......................
Merv L. Adelson(4)(13) ........................ 1,431,579 16.39
Stuart D. Buchalter(14) ....................... 9,447 *
S3 Incorporated ............................... 526,316 6.03
2801 Mission College Boulevard
Santa Clara, California 95052
All directors and executive officers as a group
(12 persons)(15) ............................ 5,418,306 59.42%
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of the date hereof are
deemed outstanding.
(2) Shares to be offered only if the Underwriters' over-allotment option is
exercised. See "Underwriting."
54
<PAGE>
(3) Mr. Faroudja holds the 2,050,000 shares jointly with Isabell Faroudja, his
wife. Includes 19,444 shares issuable upon exercise of warrants exercisable
within 60 days of June 30, 1997. Does not include rights to receive warrants
to purchase 80,556 shares pursuant to the Yves Faroudja Warrant. See
"Certain Transactions--Yves Faroudja License Agreement."
(4) Mr. Adelson is the Managing Member of Adelson Investors, LLC and exercises
sole voting and investment power over the shares held by that entity. Mr.
Buchalter is an officer of Adelson Investors, LLC and has an interest in the
profits of such firm, but does not exercise voting or investment power over
the shares held by the entity. Does not include rights to receive warrants
to purchase 65,152 shares pursuant to the Adelson Contingent Warrant. See
"Certain Transactions--Consulting Agreements."
(5) Roger K. Baumberger is the manager of Faroudja Images Investors, LLC. Mr.
Baumberger exercises voting and investment power over the shares held by
this entity, but disclaims beneficial ownership.
(6) Mr. Kimberlin is a general partner of Images and exercises voting and
investment power over the shares held by this entity. He also has a
beneficial interest in Faroudja Images Investors, LLC.
(7) Includes 130,824 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1997. Does not include 398,108 shares subject to
options granted to Mr. Moone, which options have not vested as of the date
hereof.
(8) Does not include 75,000 shares subject to options granted to Mr. Hoberg,
which options have not vested as of the date hereof.
(9) Includes 54,051 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1997. Does not include 141,953 shares subject to
options granted to Mr. Butler, which options have not vested as of the date
hereof.
(10) Mr. Turner is a limited partner of Images but he does not exercise voting
or investment power over the shares held by this entity. Mr. Turner also has
a beneficial interest in Faroudja Images Investors, LLC.
(11) Mr. Miller is a limited partner of Images, but he does not have voting or
investment power over the shares held by this entity. Does not include
56,515 shares subject to options granted to Mr. Miller, which options have
not vested as of the date hereof.
(12) Mr. Sick is a limited partner of Images, but he does not exercise voting or
investment power over the shares held by this entity. Does not include
26,060 shares subject to options granted to Mr. Sick, which options have not
vested as of the date hereof. Mr. Sick is the Chairman and Chief Executive
Officer of Business Resources International which has a beneficial interest
in Faroudja Images Investors, LLC.
(13) Does not include 6,515 shares subject to options granted to Mr. Adelson,
which options have not vested as of the date hereof.
(14) Does not include 6,515 shares subject to options granted to Mr. Buchalter,
which options have not vested as of the date hereof.
(15) All directors and executive officers as a group hold options and warrants
to purchase 1,029,642 shares of the Company, which options and warrants have
not vested as of the date hereof.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this Offering, the Company will be authorized to
issue 50,000,000 shares of Common Stock, par value $0.001 per share, and
5,000,000 shares of undesignated Preferred Stock, par value $0.001 per share.
COMMON STOCK
As of June 30, 1997, there were 8,733,696 shares of Common Stock
outstanding. As of June 30, 1997, options and warrants to purchase an aggregate
of 1,757,950 shares of Common Stock were also outstanding. See
"Management--Stock Plans."
Holders of Common Stock are entitled to receive such dividends as may from
time to time be declared by the Board of Directors of the Company out of funds
legally available therefor. Holders of Common Stock are entitled to one vote per
share on all matters on which the holders of Common Stock are entitled to vote
and do not have any cumulative voting rights. Holders of Common Stock have no
preemptive, conversion, redemption or sinking fund rights. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding Preferred Stock. The outstanding
shares of Common Stock are, and the shares of Common Stock offered by the
Company hereby when issued will be, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to any series
of Preferred Stock which the Company may issue in the future.
PREFERRED STOCK
The Company's Certificate of Incorporation permits the Company's Board of
Directors, without further vote or action by the stockholders, to issue shares
of the Preferred Stock in one or more series and to determine the designations,
preferences, voting powers, qualifications and special or relative rights or
privileges of the shares of each such series, including the dividend rights,
dividend rate, conversion rights, voting rights, terms of redemption (including
sinking fund provisions), redemption price or prices, liquidation preferences
and the number of shares constituting any series or the designations of such
series. These rights and privileges could limit the voting power of holders of
Common Stock and restrict their rights to receive dividends or liquidation
proceeds.
The Company has granted the Board of Directors authority to issue Preferred
Stock and to determine its rights and preferences, including the right to
eliminate delays associated with a stockholder vote on specific issuances. The
Company believes that this power to issue Preferred Stock will provide
flexibility in connection with possible corporate transactions. It could also
have the effect, however, of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. The Board of Directors could also utilize shares of Preferred Stock
in order to adopt a stockholders' rights plan which would have the effect of
further discouraging or delaying a takeover of the Company. The Company has no
present plans to issue any shares of Preferred Stock. See "Risk
Factors--Potential Anti-Takeover Effects of Charter Documents and Delaware Law."
WARRANTS
Yves Faroudja was granted a warrant to purchase 100,000 shares of Common
Stock at an exercise price of $7.50 per share. The warrant vests as to 1/36th of
the total shares for each full month after January 20, 1997 provided that Yves
Faroudja is then either (i) employed by the Company (as a full or part-time
employee), or (ii) acting as a member of the Board of Directors of the Company.
The warrant expires on January 20, 2002. Certain registration rights and
anti-dilution provisions are provided to Yves Faroudja as contained therein.
56
<PAGE>
Adelson Investors, LLC was granted a warrant to purchase 65,152 shares of
Common Stock at an exercise price of $0.15 per share. This Adelson Contingent
Warrant is fully exercisable upon the occurrence of certain events prior to
February 9, 1999, and expires on December 31, 1999. Certain registration rights
are provided to Adelson Investors, LLC as contained therein.
John Sie was granted warrants to purchase 14,449 shares of Common Stock at
an exercise price of $3.40 per share. These warrants are fully exercisable as of
the date of this Prospectus and expire upon the effective date of this Offering,
upon a sale of the Company or ten years from their date of issuance. Certain
anti-dilution provisions are provided to John Sie as contained therein.
REGISTRATION RIGHTS
Under the terms of the registration rights agreements entered into by each
of Adelson Investors, LLC, Images, Roger K. Baumberger as Liquidating Trustee of
Faroudja Images, Inc. and Faroudja Images Investors LLC (collectively the
"Holders" and individually referred to as a "Holder") and the Company, if the
Company registers its securities under the Securities Act prior to March 8, 1999
("Initial Registration"), the Company shall prepare and file, not later than 180
days after the closing date of such Initial Registration, a registration
statement under the Securities Act to permit resales of up to 4,612,500 shares
of Common Stock owned by the Holders; provided, however, that a Holder may elect
to exclude such Holder's shares of Common Stock from such registration. In
addition, if the Company does not register its securities prior to March 8,
1999, a majority of the Holders can demand that the Company file a registration
statement under the Securities Act to permit resales of up to 4,612,500 shares
of Common Stock owned by the Holders. However, the Holders may require the
Company on not more than one occasion to file a registration statement under the
Securities Act with respect to their shares.
Under the terms of the registration and stockholders' rights agreements
entered into by and among Yves Faroudja and Isabell Faroudja, Adelson Investors,
LLC, Images, Faroudja Images Investors LLC and the Company, if the Company
registers its securities under the Securities Act during the five-year period
commencing six months after the Initial Registration and any of the stockholders
of the Company are permitted to sell stock in such registered public offering,
Yves Faroudja and Isabell Faroudja, or any successor who purchases such shares
(including purchasers of the Faroudja Option), shall have the right to include
in such registration up to 3,587,500 shares of Common Stock that they own,
subject to certain limitations. Additionally, if any officers or directors are
permitted to sell any shares of Common Stock in the Initial Registration, Yves
Faroudja and Isabell Faroudja, or any successor who purchases such shares
(including purchasers of the Faroudja Option), will have the right to sell up to
3,587,500 shares of Common Stock that they own on the same basis.
Under the terms of the investor's rights agreements entered into by and
between S3 and the Company, if S3 owns at least 100,000 shares of Common Stock,
at any time after 12 months after the effective date of the Initial
Registration, S3 shall have the right to require the Company to file, not more
than twice, a registration statement under the Securities Act to permit resales
of up to 526,316 shares of Common Stock that it owns, subject to certain
limitations, and S3 shall have the right to require the Company to file a
registration statement not more than once on Form S-3 under the Securities Act
to permit resales of up to 526,316 shares of Common Stock that it owns, subject
to certain limitations. Further, if at any time after 12 months after the
Initial Registration the Company registers any of its Common Stock under the
Securities Act, S3 shall have the right to sell all of its 526,316 shares of
Common Stock pursuant to such registration, subject to certain limitations.
Also, under this agreement, there are indemnification provisions pursuant to
which the Company has agreed to indemnify S3 and the Company's underwriters.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Upon the consummation of the Offering made hereby, the Company will be
subject to the provisions of Section 203 of the Delaware General Corporation
Law. In general, Section 203 prohibits certain publicly-held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for a period
57
<PAGE>
of three years after the date of the transaction in which the person or entity
became an interested stockholder, unless, among other exceptions, (i) prior to
the date the interested stockholder attained such status the Board of Directors
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) the holder of
two-thirds of the outstanding voting stock not owned by the interested
stockholder approved the business combination, or (iii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes it an interested stockholder
(excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by certain employee stock ownership plans). For
purposes of Section 203, a "business combination" is defined broadly to include
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person or entity who, together with affiliates and associates,
owns, or within the three immediately preceding years of a business combination
did own, 15% or more of the corporation's outstanding voting stock.
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by the Delaware General Corporations Law.
Delaware law provides that the directors of a corporation will not be personally
liable to such corporation or its stockholders for monetary damages for breach
of fiduciary duties as directors, except for liability (i) for any breach of
their duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director derives an
improper personal benefit. The Company's Certificate of Incorporation and
By-Laws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by Delaware law and permit the Company to advance
expenses to such directors and officers to defend any action for which rights of
indemnification are provided in the By-Laws. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors and officers.
The Company's Board of Directors is classified into three classes, with the
initial terms of each class expiring at the 1997, 1998 and 1999 annual
stockholders' meetings, respectively. After the expiration of each initial term,
the directors in each class will be elected for three year terms. See
"Management." The Board of Directors is authorized to create new directorships
and to fill such positions so created. After the classification of the Board of
Directors, the Board of Directors will be permitted to specify to which class
such new position is assigned and the person filling such position will serve
for the term applicable to that class. The Board of Directors (or its remaining
members (even though less than a quorum)) is also empowered to fill vacancies on
the Board of Directors occurring for any reason for the remainder of the term of
the class of directors in which the vacancy occurred. The Company's Certificate
of Incorporation provides that directors may be removed with cause by the vote
of the holders of at least 66.66% of the voting power of the outstanding stock
of the Company. The likely effect of these provisions is that they will increase
the time required for the stockholders to change the composition of the Board of
Directors. For example, in general, at least two annual meetings of the
stockholders will be necessary for stockholders to effect a change in a majority
of the members of the Board of Directors.
The Company's By-Laws provide that for nominations for the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to the annual meeting. If the meeting is not an annual
meeting, the notice must generally be delivered not more than ninety days prior
to the special meeting and not later than the later of 60 days prior to the
special meeting or ten days following the day on which public announcement of
the meeting is first made by the Company. The notice must contain, among other
things, certain information about the stockholder delivering the notice and, as
applicable, background about the nominee or a description of the proposed
business to be brought before the meeting.
The Company's Certificate of Incorporation and By-Laws provide that any
action required or permitted to be taken by the stockholders of the Company
shall be taken only at a duly called annual or special meeting of the
stockholders and may not be taken by written consent. Special meetings may only
be called by the Board of
58
<PAGE>
Directors, the Chairman of the Board of Directors or the President of the
Company. These provisions could have the effect of delaying, until the next
annual stockholders' meeting, stockholder actions which are favored by the
holders of a majority of the outstanding voting securities of the Company. These
provisions may also discourage another person or entity from making a tender
offer for the Company's Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders' meeting, and not by
written consent.
The affirmative vote of the holders of at least 66.66% of the outstanding
voting stock of the Company is required to amend or repeal any of the foregoing
provisions in the Company's Restated Certificate of Incorporation, and to reduce
the number of authorized shares of Common Stock and Preferred Stock. Such 66.66%
vote is also required to amend or repeal the Company's By-Laws. The By-Laws may
also be amended or repealed by a majority vote of the Board of Directors. Such
66.66% stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any Preferred Stock
that might be outstanding at the time any such amendments are submitted to the
stockholders.
OTHER ATTRIBUTES OF THE STOCK OF THE COMPANY
The Company is a corporation organized under the laws of Delaware and
generally the laws of the state of incorporation govern the corporate operations
of a corporation and the right of its stockholders. Certain provisions of the
California Corporations Code become applicable to a corporation incorporated
outside of California, however, if (i) the corporation transacts intrastate
business in California and the average of its California property, payroll and
sales factors (as defined in the California Revenue and Taxation Code) with
respect to it is more than 50% during its latest fiscal year, (ii) more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California and (iii) the corporation is not otherwise
exempt. An exemption is provided if the corporation has outstanding securities
(x) listed on the New York Stock Exchange or the American Stock Exchange or (y)
qualified for trading as a national market security on the National Association
of Securities Dealers Automated Quotation System if such corporation has at
least 800 holders of its equity securities as of the record date of its most
recent annual meeting of stockholders (a "Listed Corporation").
Since approximately 50% of the Company's activities occur in California,
certain provisions of California corporate law may apply to the Company, as
described above.
Except as discussed herein, provisions of California law which could be
applicable to the Company if the Company meets these tests and is not exempt
include, without limitation, those provisions relating to the stockholders'
right to remove a director without cause, provide for a classified Board of
Directors, call special meetings, cumulative votes in elections of directors
(cumulative voting is mandatory under California law), and the Company's ability
to indemnify its officers, directors and employees (which is more limited in
California than in Delaware). Notwithstanding the foregoing, a corporation may
provide for a classified Board of Directors, eliminate cumulative voting or
both, if it is a Listed Corporation.
LISTING
The Company has made an application for listing the Company's Common Stock
on The Nasdaq National Market, subject to completion of the Offering, under the
symbol FDJA.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Trust Company of California, N.A.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have shares of
Common Stock outstanding assuming no exercise of stock options. Of this amount,
the shares offered hereby will be freely tradeable without restriction or
further registration under the Securities Act, unless such shares are purchased
by "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. Approximately additional shares will be available for
sale in the public market on the date of this Prospectus and approximately
6,669,880 additional shares will be available for sale in the public market
following the expiration of 180-day lockup agreements with the Representatives
of the Underwriters or the Company, subject in some cases to compliance with the
volume and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of Common Stock (approximately
shares immediately after this Offering) or (ii) the average weekly trading
volume during the four calendar weeks preceding such sale, subject to the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
"affiliate" of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned his or her shares for at least two years
is entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above. Therefore, unless otherwise restricted, "144(k)"
shares may be sold immediately upon completion of this Offering. Persons deemed
to be "affiliates" must always sell pursuant to Rule 144, even after the
applicable holding periods have been satisfied. The Company is unable to
estimate the number of shares that will be sold under Rule 144, since this will
depend on the market price for the Common Stock of the Company, the personal
circumstances of the sellers and other factors.
The Company, certain stockholders of the Company, and all executive officers
and directors of the Company have agreed that they will not directly or
indirectly, offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for such Common Stock or, in any manner,
transfer all or a portion of the economic consequences associated with the
ownership of the Common Stock, without the prior written consent of Robertson,
Stephens & Company LLC, for a period of 180 days from the date of this
Prospectus (the "Lockup Period"), except that the Company may, without such
consent, grant options and sell shares pursuant to the 1995 Option Plan, the
1997 Option Plan, the Directors Plan and the Purchase Plan.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permit nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permit "affiliates" to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case, subject to the contractual lock-up
restrictions described above, commencing 90 days after the date of this
Prospectus.
As of June 30, 1997, options to purchase a total of 1,217,019 shares of
Common Stock pursuant to the 1995 Option Plan were outstanding. As of June 30,
1997, options to purchase a total of 45,605 shares of Common Stock pursuant to
the Directors Plan were outstanding. As of June 30, 1997, options to purchase a
total of 315,725 shares of Common Stock pursuant to the 1997 Option Plan were
outstanding. An additional 409,275, 54,395 and 400,000 shares of Common Stock
are available for future option grants under the 1997 Option Plan, the Directors
Plan, and the Purchase Plan, respectively. No more options will be granted under
the 1995 Option Plan, even though 601 shares of Common Stock remain reserved
under the 1995 Option Plan. See "Management--Stock Plans."
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance under
the 1995 Stock Plan, the 1997 Stock Plan, the Directors
60
<PAGE>
Plan and the Purchase Plan within 90 days after the date of this Offering, thus
permitting the resale of shares issued pursuant to such plans by nonaffiliates
in the public market without restriction under the Securities Act.
Prior to this Offering, there has been no market for the Common Stock of the
Company. Therefore, future sales of substantial amounts of Common Stock in the
public market could materially adversely affect market prices prevailing from
time to time. Furthermore, since only a limited number of shares will be
available for sale shortly after this Offering because of certain contractual
and legal restrictions on resale (as described above), sales of a substantial
amount of Common Stock in the public market after the restrictions lapse could
materially adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
61
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC and Volpe Brown Whelan and Company, LLC (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
of Common Stock set forth opposite their names below. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC.................................................
Volpe Brown Whelan & Company, LLC.................................................
----------
Total...........................................................................
----------
----------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share of which
$ may be reallowed to other dealers. After the initial public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Selling Stockholder has granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to additional shares of Common Stock at the same price per
share as the Company will receive for the shares that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the shares are being sold.
The Underwriting Agreement contains certain covenants of indemnity among the
Underwriters, the Company and the Selling Stockholder against certain
liabilities, including liabilities under the Securities Act.
Each executive officer and director of the Company and the holders of
approximately shares of Common Stock of the Company have agreed with the
Underwriters for a period of 180 days from the date of this Prospectus, subject
to certain limited exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock, or any securities convertible into or exchangeable for shares of Common
Stock now owned or hereafter acquired directly by such holders or with respect
to which they have or hereafter acquire the power of disposition, without the
prior written consent of Robertson, Stephens & Company LLC which may, in its
sole discretion and at any time or from time to time, without notice, release
all or any portion of the securities subject to Lock-Up Agreements. In addition,
the Company has agreed that during the Lock-Up Period, the Company will not,
without the prior written consent of Robertson, Stephens & Company LLC, subject
to certain exceptions, issue, sell, contract to sell or otherwise dispose of any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into, exercisable for or exchangeable for
shares of Common Stock other than the issuance of Common Stock upon the exercise
of outstanding options and under the existing employee stock purchase plan and
the Company's issuance of options under existing employee stock option plans.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby was determined by negotiations among the Company and the
Representatives. Among the factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that
62
<PAGE>
the Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
The Representatives have advised the Company that, in accordance with Rule
103 under Regulation M, certain persons participating in the Offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the Common Stock on behalf of the Underwriters for the purpose
of fixing or maintaining the price of the Common Stock. A "syndicate covering
transaction" is the bid for or the purchase of the Common Stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with the Offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the Offering of the Common
Stock originally sold by such Underwriter or syndicate member in syndicate
covering transactions, in stabilizing transactions or otherwise. The
Representatives have advised the Company that such transactions may be affected
on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The Representatives have informed the Company that neither they, nor any
other member of the National Association of Securities Dealers, Inc.
participating in the distribution of this Offering, will make sales of the
Common Stock offered hereby to accounts over which they exercise discretionary
authority without the prior specific written approval of the customer.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Buchalter, Nemer, Fields & Younger, a Professional Corporation, Los
Angeles, California. Certain legal matters relating to this Offering will be
passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Stuart D. Buchalter, of counsel
to Buchalter, Nemer, Fields & Younger, is one of the Company's directors and
beneficially owns 9,447 shares of Common Stock and options to purchase 6,515
shares of Common Stock granted pursuant to the Directors Plan.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1996 and June 30, 1997, and for the years ended December 31, 1994, 1995 and
1996 and the six-month period ended June 30, 1997, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the shares
offered hereby. As used herein, the term "Registration Statement" means the
initial Registration Statement and any and all amendments thereto. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Shares, reference is hereby made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and in each instance, reference is made to
the copy of such contract or documents filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at certain regional offices of the Commission located at 75 Park
Place, 14th Floor,
63
<PAGE>
New York, New York 1007 and Northwest Atrium Center, 500 Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1025,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that filed electronically
with the Commission. Information concerning the Company is also available for
inspection at the offices of the Nasdaq National Market, Reports Section, 1735
"K" Street, N.W., Washington, D.C. 20006.
Upon completion of the this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, will file reports with the Commission. The Company intends
to furnish to its stockholders annual reports containing audited financial
statements of the Company audited by its independent accountants and quarterly
reports containing unaudited condensed financial statements for each of the
first three quarters of the fiscal year.
64
<PAGE>
FAROUDJA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Income..................................................... F-4
Consolidated Statement of Stockholders' Equity........................................ F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Faroudja, Inc.
We have audited the accompanying consolidated balance sheets of Faroudja,
Inc. as of December 31, 1995 and 1996 and June 30, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996 and for the six-month
period ended June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Faroudja, Inc.
at December 31, 1995 and 1996 and June 30, 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and for the six-month period ended June 30, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
July 18, 1997, except for Note 12
as to which the date is July 22, 1997
F-2
<PAGE>
FAROUDJA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 1,522,756 $ 1,215,591 $ 7,520,481
Short-term investments............................................... 1,235,960 1,867,896 272,227
Trade accounts receivable, less allowance for doubtful accounts of
$10,000 in 1995, $110,000 in 1996, and $181,000 in 1997............ 1,573,866 2,767,331 2,644,616
Inventories.......................................................... 1,587,070 1,683,550 2,093,922
Deferred tax assets.................................................. -- 461,519 600,048
Other current assets................................................. 43,252 224,426 355,160
------------ ------------ -------------
Total current assets................................................... 5,962,904 8,220,313 13,486,454
Property and equipment, net............................................ 771,053 1,383,807 1,503,404
Other assets........................................................... -- -- 235,137
------------ ------------ -------------
$ 6,733,957 $ 9,604,120 $ 15,224,995
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 601,206 $ 729,320 $ 695,068
Accrued compensation and benefits.................................... 485,936 671,863 765,217
Income taxes payable................................................. 48,593 116,602 368,187
Other accrued liabilities............................................ 83,069 341,444 473,433
Deferred revenue..................................................... -- 500,000 --
------------ ------------ -------------
Total current liabilities.............................................. 1,218,804 2,359,229 2,301,905
Commitments
Stockholders' equity:
Preferred Stock--$0.001 par value; 2,000,000 shares authorized, none
issued and outstanding............................................. -- -- --
Common Stock--$0.001 par value; 18,000,000 shares authorized;
7,156,895, 8,200,000, and 8,733,696 shares issued and outstanding
in 1995, 1996, and 1997, respectively.............................. 3,611,023 8,200 8,734
Additional paid-in capital........................................... -- 7,824,823 13,306,417
Unrealized gains on available-for-sale securities, net of tax
effect............................................................. 34,885 66,737 --
Deferred compensation................................................ -- -- (271,500)
Retained earnings (deficit).......................................... 1,869,245 (654,869) (120,561)
------------ ------------ -------------
Total stockholders' equity............................................. 5,515,153 7,244,891 12,923,090
------------ ------------ -------------
$ 6,733,957 $ 9,604,120 $ 15,224,995
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
FAROUDJA, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales.......................... $ 8,064,603 $ 11,953,658 $ 12,626,183 $ 5,589,570 $ 6,863,531
License and royalty revenues........... -- -- 500,000 -- 1,000,000
------------ ------------- ------------- ------------ ------------
Total revenues........................... 8,064,603 11,953,658 13,126,183 5,589,570 7,863,531
Cost of product sales.................... 2,998,262 4,214,753 4,797,516 2,066,843 2,285,785
------------ ------------- ------------- ------------ ------------
Gross profit............................. 5,066,341 7,738,905 8,328,667 3,522,727 5,577,746
Operating expenses:
Research and development............... 1,277,053 1,483,388 2,463,838 990,183 1,839,878
Sales and marketing.................... 777,643 1,070,045 2,126,686 880,150 1,793,062
General and administrative............. 1,152,968 1,178,990 1,623,453 664,149 866,565
Financing expense...................... -- -- -- -- 311,572
------------ ------------- ------------- ------------ ------------
Total operating expenses................. 3,207,664 3,732,423 6,213,977 2,534,482 4,811,077
------------ ------------- ------------- ------------ ------------
Operating income......................... 1,858,677 4,006,482 2,114,690 988,245 766,669
Other income:
Interest income........................ 69,118 81,746 83,179 38,522 48,299
Other, net............................. 14,391 4,986 -- -- 46,812
------------ ------------- ------------- ------------ ------------
Income before provision for income
taxes.................................. 1,942,186 4,093,214 2,197,869 1,026,767 861,780
Provision for income taxes............... 13,450 83,981 687,054 218,593 327,472
------------ ------------- ------------- ------------ ------------
Net income............................... $ 1,928,736 $ 4,009,233 $ 1,510,815 $ 808,174 $ 534,308
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Pro forma data (unaudited):
Historical income before provision for
income taxes......................... $ 2,197,869 $ 1,026,767
Pro forma provision for income taxes... 879,148 410,800
------------- ------------
Pro forma net income..................... $ 1,318,721 $ 615,967
------------- ------------
------------- ------------
Income per share data:
Net income per share................... $ 0.05
------------
------------
Pro forma net income per share
(unaudited).......................... $ 0.14 $ 0.07
------------- ------------
------------- ------------
Shares used in per share
computations......................... 9,170,655 8,943,393 9,741,698
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
FAROUDJA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS ON
COMMON STOCK ADDITIONAL AVAILABLE- RETAINED TOTAL
---------------------- PAID-IN FOR-SALE DEFERRED EARNINGS STOCKHOLDERS'
SHARES AMOUNTS CAPITAL SECURITIES COMPENSATION (DEFICIT) EQUITY
--------- ----------- ----------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993........................ 7,156,895 $ 3,611,023 $ -- $ -- $ -- $(1,228,778) $ 2,382,245
Net income.................... -- -- -- -- -- 1,928,736 1,928,736
Distribution to
stockholders................ -- -- -- -- -- (1,484,946) (1,484,946)
--------- ----------- ----------- ------------- ------------ ----------- -------------
Balance at December 31,
1994........................ 7,156,895 3,611,023 -- -- -- (784,988) 2,826,035
Net income.................... -- -- -- -- -- 4,009,233 4,009,233
Unrealized gain on
available-for-sale
securities.................. -- -- -- 34,885 -- -- 34,885
Distribution to
stockholders................ -- -- -- -- -- (1,355,000) (1,355,000)
--------- ----------- ----------- ------------- ------------ ----------- -------------
Balance at December 31,
1995........................ 7,156,895 3,611,023 -- 34,885 -- 1,869,245 5,515,153
Sale of Common Stock.......... 1,043,105 4,000,000 -- -- -- -- 4,000,000
Issuance of warrants to
purchase Common Stock for
future services............. -- -- 222,000 -- -- -- 222,000
Reincorporation in Delaware... -- (7,602,823) 7,602,823 -- -- -- --
Net income.................... -- -- -- -- -- 1,510,815 1,510,815
Change in unrealized gain on
available-for-sale
securities, net of tax...... -- -- -- 31,852 -- -- 31,852
Distributions to
stockholders................ -- -- -- -- -- (4,034,929) (4,034,929)
--------- ----------- ----------- ------------- ------------ ----------- -------------
Balance at December 31,
1996........................ 8,200,000 8,200 7,824,823 66,737 -- (654,869) 7,244,891
Sale of Common Stock, net of
issue costs................. 533,696 534 4,960,094 -- -- -- 4,960,628
Issuance of warrants to
purchase Common Stock for
technology acquired......... -- -- 250,000 -- -- -- 250,000
Deferred compensation on
employee stock option
grants...................... -- -- 271,500 -- (271,500) -- --
Net income.................... -- -- -- -- -- 534,308 534,308
Change in unrealized gain on
available for sale
securities, net of tax...... -- -- -- (66,737) -- -- (66,737)
--------- ----------- ----------- ------------- ------------ ----------- -------------
Balance at June 30, 1997...... 8,733,696 $ 8,734 $13,306,417 $ -- $(271,500) $ (120,561) $12,923,090
--------- ----------- ----------- ------------- ------------ ----------- -------------
--------- ----------- ----------- ------------- ------------ ----------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
FAROUDJA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $1,928,736 $4,009,233 $1,510,815 $ 808,174 $ 534,308
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 172,412 223,988 422,376 152,455 224,263
Loss on disposal of equipment........... -- -- -- -- 17,204
Gain on sales of short-term
investments........................... -- -- -- -- (83,456)
Changes in operating assets and
liabilities:
Trade accounts receivable............... (358,639) (642,490) (1,193,465) 558,910 122,715
Inventories............................. 50,111 (793,149) (96,480) (412,422) (410,372)
Deferred tax assets..................... -- -- (461,519) (148,993) (138,529)
Other current assets.................... (8,173) (1,513) (27,174) (74,552) (130,734)
Accounts payable........................ (118,969) 417,306 128,114 355,928 (34,252)
Accrued compensation and benefits....... 165,192 118,135 185,927 (32,895) 93,354
Income taxes payable.................... (5,012) 46,574 68,009 197,795 251,585
Other accrued liabilities............... (99,825) 29,058 258,375 (61,088) 131,989
Deferred revenue........................ -- -- 500,000 -- (500,000)
---------- ---------- ---------- ---------- ---------
Net cash provided by operating
activities.............................. 1,725,833 3,407,142 1,294,978 1,343,312 78,075
---------- ---------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment.................... (211,920) (391,907) (967,130) (347,148) (346,687)
Proceeds from sale of equipment........... -- -- -- -- 486
Purchases of short-term investments....... (200,000) (1,751,075) (1,061,000) (356,300) --
Sales of short-term investments........... -- -- -- -- 1,612,388
Maturities of short-term investments...... -- 750,000 460,916 -- --
---------- ---------- ---------- ---------- ---------
Net cash provided by (used in) investing
activities.............................. (411,920) (1,392,982) (1,567,214) (703,448) 1,266,187
---------- ---------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock.................. -- -- 4,000,000 4,000,000 4,960,628
Repayment of loan payable................. (420,000) -- -- -- --
Distribution to stockholders.............. (1,484,946) (1,355,000) (4,034,929) (4,000,000) --
---------- ---------- ---------- ---------- ---------
Net cash provided by (used in) financing
activities.............................. (1,904,946) (1,355,000) (34,929) -- 4,960,628
---------- ---------- ---------- ---------- ---------
Increase (decrease) in cash and cash
equivalents............................. (591,033) 659,160 (307,165) 639,864 6,304,890
Cash and cash equivalents at beginning of
period.................................. 1,454,629 863,596 1,522,756 1,522,756 1,215,591
---------- ---------- ---------- ---------- ---------
Cash and cash equivalents at end of
period.................................. $ 863,596 $1,522,756 $1,215,591 $2,162,620 $7,520,481
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for income
taxes................................... $ 17,531 $ 32,157 $1,116,656 $ 200,000 $ 226,600
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES
Issuance of warrants to acquire Common
Stock for future services............... $ -- $ -- $ 222,000 $ 222,000 $ --
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Issuance of warrants to acquire Common
Stock for technology acquired........... $ -- $ -- $ -- $ -- $ 250,000
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Faroudja, Inc. (the "Company") designs, develops and sells a range of video
image enhancement products and technology for the home television, professional
broadcast and personal computer markets. Although traditional business has been
directed to sales of complete subsystem units, the Company has recently expanded
its activities to include the design and development of board and chip level
products for applications in the television as well as the personal computer
markets.
The accompanying financial statements reflect the operations of Faroudja
Laboratories, Inc. ("FLI") and Faroudja Research Enterprises, Inc. ("FRE"), both
of which were California corporations. FLI and FRE, which were owned by common
stockholders, were merged in December 1996, with FLI surviving the merger.
Subsequently, in order to effect a reverse stock split and a reincorporation in
Delaware, FLI merged with a wholly owned subsidiary of a newly formed Delaware
corporation, Faroudja, Inc. In this transaction, the FLI stockholders received
0.69185 shares of the Company's Common Stock for each share of FLI Common Stock
held by them. All outstanding stock options and warrants to purchase FLI Common
Stock were assumed by the Company at the same exchange ratio. The effect of this
exchange on Common Stock, stock options and warrants has been reflected in the
accompanying financial statements on a retroactive basis. All intercompany
balances and transactions between the Company and FLI have been eliminated.
On December 30, 1996, FLI and FRE were merged through the exchange of
0.21258 shares of FLI Common Stock for each outstanding share of FRE Common
Stock. As the outstanding shares of both entities were held in the same
percentage by identical stockholders prior to the merger, this transaction was
accounted for as if it were a pooling-of-interests. Accordingly, the financial
statements have been retroactively restated to give effect to this transaction
as of the beginning of the earliest period presented.
Prior to March 1996, FRE and FLI were each owned 100% by two individuals
(the "Founders"). In March 1996, new investors acquired a 56.25% ownership
interest in both entities through the purchase of shares held by the Founders
($14,000,000) and newly issued FLI shares ($4,000,000). Simultaneous with this
transaction, the Founders received a distribution from FLI in the amount of
$4,000,000. The new investors also acquired an option from the Founders to
acquire an additional 1,537,500 shares held by the Founders for a total of
$6,000,000. Such option expires upon the earlier of (i) upon the close of an
initial public offering by the Company or (ii) September 5, 1997. Prior to the
March 1996 transaction, FLI had elected to be treated as an S Corporation for
income tax purposes. FRE was a C Corporation for income tax purposes.
INTERIM FINANCIAL INFORMATION
The financial information for the six months ended June 30, 1996 is
unaudited, but includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
operating results and cash flows for such period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
F-7
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOURCES OF SUPPLY
The Company currently relies on a limited number of independent foundries to
manufacture, assemble and test all of its semiconductor components and products.
In addition, the Company subcontracts the manufacturing of its broadcast and
television products with two principal suppliers. While alternate sources of
supply exist, in the event of the discontinuance of any of the above supplier
relationships, the Company would be required to locate and qualify new
suppliers, which could take up to several months.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less, when purchased, to be cash equivalents. Cash equivalents consist
primarily of bank deposits, money market account, and, in 1995, a U.S. Treasury
Bill.
SHORT-TERM INVESTMENTS
The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115").
Under SFAS 115, all affected debt and equity securities must be stated at
fair value and classified as held-to-maturity, trading or available-for-sale.
Management determines the appropriate classification of securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
At December 31, 1995 and 1996 and June 30, 1997, all debt and equity
securities were designated as available-for-sale. Available-for-sale securities
are carried at fair value, with unrealized gains and losses reported net of tax
as a separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other-than-temporary, if any, on
available-for-sale securities are included in other income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale is included in interest income.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily through a network of distributors
and through original equipment manufacturing ("OEM") arrangements. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. Uncollectible accounts receivable have not been significant
in any period presented.
At December 31, 1995, three customers accounted for 50% of the accounts
receivable balance. At December 31, 1996, two customers accounted for 48% of the
accounts receivable balance. At June 30, 1997, four customers accounted for 52%
of the accounts receivable balance. No other single customer accounted for more
than 10% of the Company's ending accounts receivable balances.
INVENTORIES
Inventories are carried at the lower of cost (determined on a first-in,
first-out basis) or market.
F-8
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the assets (ranging from three to seven years). Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life.
REVENUE RECOGNITION
Sales revenue is recognized upon shipment of products to customers. The
Company does not grant rights of return and customarily does not provide price
protection to distributors. Nonrefundable minimum royalties are recognized as
revenue in the period to which they relate.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense
amounted to $165,000, $204,155 and $394,578 in the years ended 1994, 1995 and
1996, respectively, and $233,339 and $233,936 in the six months ended June 30,
1996 (unaudited) and 1997, respectively.
FINANCING EXPENSE
In 1997, the Company incurred and expensed approximately $312,000 of
expenses related to financing activities.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), 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 and director stock option and purchase plans. Under APB 25, if the
exercise price of the Company's employee stock options is not less than the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
NET INCOME PER SHARE
Net income per share and pro forma net income per share were calculated by
dividing net income or pro forma net income by the weighted average number of
shares of Common Stock outstanding for the respective periods, adjusted for the
dilutive effect of common stock equivalents, which consist of stock options and
warrants, using the treasury stock method. Pursuant to the requirements of the
Securities and Exchange Commission ("SEC"), Common Stock and common stock
equivalents issued by the Company during the 12 months immediately preceding the
Company's proposed initial public offering have been included in the calculation
as if they were outstanding for all periods presented (using the treasury stock
method for common stock equivalents).
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options and
warrants will be excluded. The impact is expected to increase the income per
share
F-9
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts reported on the accompanying statements of income for the year ended
December 31, 1996, and the six-month period ended June 30, 1997 to $0.15 and
$0.06 per share, respectively (including common shares and equivalents mandated
by the SEC as discussed above). There will be no impact on the six-months ended
June 30, 1996 income per share as reported. The impact of SFAS 128 on the
calculation of fully diluted earnings per share for these years is not expected
to be material.
2. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities at December 31,
1995 and 1996 and June 30, 1997:
<TABLE>
<CAPTION>
UNREALIZED FAIR
GAINS MARKET
COST (LOSSES) VALUE
------------ ----------- ------------
<S> <C> <C> <C>
At December 31, 1995:
Mutual funds--principally emerging growth equities...................... $ 552,331 $ 15,825 $ 568,156
Other mutual funds...................................................... 400,000 16,727 416,727
Certificate of deposit.................................................. 250,000 1,077 251,077
U.S. Treasury Bill...................................................... 198,744 1,256 200,000
------------ ----------- ------------
$ 1,401,075 $ 34,885 $ 1,435,960
------------ ----------- ------------
------------ ----------- ------------
Reported as:
Cash equivalents........................................................ $ 198,744 $ 1,256 $ 200,000
Short-term investments.................................................. 1,202,331 33,629 1,235,960
------------ ----------- ------------
$ 1,401,075 $ 34,885 $ 1,435,960
------------ ----------- ------------
------------ ----------- ------------
At December 31, 1996:
Mutual funds--principally emerging growth equities...................... $ 900,000 $ 107,980 $ 1,007,980
Other mutual funds...................................................... 400,000 (3,084) 396,916
Certificate of deposit.................................................. 263,000 -- 263,000
U.S. Treasury Bill...................................................... 193,973 6,027 200,000
------------ ----------- ------------
$ 1,756,973 $ 110,923 $ 1,867,896
------------ ----------- ------------
------------ ----------- ------------
Reported as:
Short-term investments.................................................. $ 1,756,973 $ 110,923 $ 1,867,896
------------ ----------- ------------
------------ ----------- ------------
At June 30, 1997:
Certificate of deposit (reported as short-term investments)............. $ 272,227 $ -- $ 272,227
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
F-10
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SHORT-TERM INVESTMENTS (CONTINUED)
The estimated fair value amounts discussed above have been determined by the
Company using available market information and appropriate valuation
methodologies. Gross unrealized losses were not material and thus have not been
presented separately in the above table.
During the years ended December 31, 1995 and 1996, there were no gross
realized gains or losses. During the six months ended June 30, 1997, there were
$83,456 of net realized gains. As of December 31, 1996, the average portfolio
duration is approximately three months and the contractual maturity of the
investments does not exceed one year. At June 30, 1997 the average portfolio
duration is approximately three months and the contractual maturity of the
investments does not exceed six months.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials....................................... $ 596,049 $ 615,865 $ 678,282
Work-in-process..................................... 724,577 630,630 948,040
Finished goods...................................... 266,444 437,055 467,600
------------ ------------ ------------
$ 1,587,070 $ 1,683,550 $ 2,093,922
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Machinery and equipment........................... $ 1,377,953 $ 1,705,845 $ 1,970,375
Purchased computer software....................... -- 492,471 496,042
Office equipment.................................. 25,528 25,528 25,528
Furniture and fixtures............................ 160,510 209,448 251,219
Vehicles.......................................... 241,802 241,802 148,644
Leasehold improvements............................ 45,679 143,508 181,072
------------ ------------ ------------
1,851,472 2,818,602 3,072,880
Accumulated depreciation.......................... (1,080,419) (1,434,795) (1,569,476)
------------ ------------ ------------
$ 771,053 $ 1,383,807 $ 1,503,404
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
5. OPERATING LEASES
The Company leases its main facility under a lease agreement expiring
September 30, 2003. The lease agreement is cancelable at the Company's option
upon four months' notice. Payments are adjusted annually
F-11
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OPERATING LEASES (CONTINUED)
based on changes in the Consumer Price Index. At June 30, 1997, future estimated
minimum payments under this and other leases are approximately as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31,
-------------
<S> <C>
1997 (July 1 to December 31)................................................... $ 103,568
1998........................................................................... 207,088
1999........................................................................... 191,588
2000........................................................................... 176,088
2001........................................................................... 176,088
2002........................................................................... 176,088
Thereafter..................................................................... 132,066
-------------
Total minimum lease payments................................................... $ 1,162,569
-------------
-------------
</TABLE>
Rent expense under operating leases amounted to $167,997, $168,948 and
$185,709 in 1994, 1995 and 1996, respectively; and $110,669 for the six months
ended June 30, 1997.
6. STOCKHOLDERS' EQUITY
WARRANTS
In April 1992, the Company issued three warrants to purchase a total of
14,449 shares of common stock at a price of $3.40 per share to a consultant. The
warrants are fully exercisable and expire upon the consummation of the Company's
initial public offering a sale of the Company or ten years from the date of
issuance. The Company has reserved 14,449 shares of common stock for issuance
upon exercise of the warrants.
In 1996, the Company issued a warrant to purchase 65,152 shares of common
stock at an exercise price of $0.15 to a limited liability company in which a
member of the Company's Board of Directors has a substantial interest. The
warrant was issued in exchange for services to be performed by the Board of
Directors member. The warrant will be exercisable upon the occurrence of certain
defined events prior to February 1999. The warrant expires on December 31, 1999.
The Company is recognizing $222,000, the value of the warrant, over the related
service period.
In 1997, one of the Founders granted to the Company an exclusive (excluding
certain rights retained by the Founder), worldwide, perpetual, irrevocable and
royalty-free right and license to patents owned by him. The Founder has a
nonexclusive, nontransferable right to the patents for applications and uses
outside of the Company's business as defined in the license agreement. In
exchange for rights granted, the Founder received a warrant to purchase 100,000
shares of Common Stock at $7.50 a share. The warrant vests over a three-year
period and expires in January 2002. The Company is amortizing $250,000, the
value of the warrant, over the estimated useful economic life of the patents.
STOCK OPTION PLANS
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan"),
which superseded a 1993 stock option plan under which no options had been
granted. A total of 1,700,000 shares of Common Stock were reserved for issuance
under the 1995 Plan. Under the terms of the 1995 Plan, the Board of Directors
may grant options to directors, employees and consultants. Options may be either
incentive stock options or nonstatutory
F-12
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
stock options, at the discretion of the Board of Directors. Incentive stock
options may be granted to employees with exercise prices of no less than the
fair value, and nonstatutory options may be granted to employees, directors, and
consultants with exercise prices of no less than 85% of the fair value, of the
common stock on the date of grant, as determined by the Board of Directors. If,
at the time of grant, the optionee owns stock possessing 10% or more of the
voting power of all classes of stock, the option price shall be at least 110% of
the fair value, and the option shall not be exercised more than five years after
the date of grant. Except as noted above, options expire ten years after the
date of grant, or earlier if employment or service is terminated. Options become
exercisable as determined by the Board of Directors. Options generally vest over
three or four years.
In December 1996, the Board of Directors adopted, and in 1997 the
stockholders approved, the 1997 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). A total of 100,000 shares of Common Stock were reserved for
issuance pursuant to the terms of the Directors Plan, which provides for the
grant of nonqualified stock options to nonemployee directors of the Company. In
January 1997, the Board of Directors adopted, and the stockholders approved, the
1997 Employee Stock Purchase Plan (the "Purchase Plan") and the 1997 Performance
Stock Option Plan (the "1997 Plan"). The 1997 Plan succeeds the 1995 Plan and
has terms similar to that Plan. No additional options will be granted under the
1995 Plan and shares reserved for future option grants thereunder are available
for grant under the terms of the 1997 Plan. In June 1997, the Board of Directors
adopted an amendment to the 1997 Plan increasing the number of shares reserved
for issuance for the 1997 Plan by 250,000 shares, subject to stockholders'
approval. A total of 400,000 shares were reserved for future issuance under the
Purchase Plan. The Purchase Plan permits eligible employees to purchase common
stock through payroll deductions at a price equal to the lower of 85% of the
fair value of the Company's common stock at the beginning or end of the
applicable offering period. No shares have been issued under the Purchase Plan.
During 1996, the Company adopted SFAS 123. In accordance with the Statement,
the Company applies APB 25 in accounting for option grants to employees under
the Plan and, accordingly, does not recognize compensation expense for options
granted to employees at fair value on the date of grant. The effect of applying
the minimum value method of valuing options to options granted in 1995 and 1996
pursuant to SFAS 123 resulted in pro forma net income (after the effect of the
pro forma tax adjustment) of $1,168,364, or $0.13 per share, for the year ended
December 31, 1996 and pro forma net income of $325,519, or $0.03 per share, for
the six months ended June 30, 1997. The pro forma impact in reported results for
the year ended December 31, 1995 was not significant and has not been presented
herein. The minimum value method was applied using the following
weighted-average assumptions for 1995, 1996 and 1997, respectively: risk-free
interest rates of 6.09%, 6.35% and 6.17%; an expected option life of 72 months;
and no dividends. Future pro forma results of operations may be materially
different from actual amounts reported.
F-13
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------------------------------- -----------------------
1995 1996 JUNE 30, 1997
---------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1............... -- $ -- 180,576 $ 1.16 1,441,988 $ 3.46
Granted................................ 180,576 1.16 1,261,412 3.79 338,770 7.24
Exercised.............................. -- -- -- -- (7,380) 1.68
Canceled............................... -- -- -- -- (195,029) 3.79
--------- ----- ---------- ----- ---------- -----
Outstanding at end of period........... 180,576 $ 1.16 1,441,988 $ 3.46 1,578,349 $ 4.24
--------- ----- ---------- ----- ---------- -----
--------- ----- ---------- ----- ---------- -----
Weighted-average fair value of options
granted during the period............ .36 .23 .07
</TABLE>
Exercise prices of options outstanding and options exercisable were as
follows:
JUNE 30, 1997
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ------------------------------------------ --------- ------------- ----------- ----------- -----------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$1.16-$2.02............................... 204,791 8.29 $ 1.29 136,516 $ 1.26
$3.83-$3.91............................... 1,059,558 9.12 3.85 149,439 3.83
$7.00-$7.50............................... 314,000 9.89 7.46 -- --
--------- -----------
1,578,349 9.16 4.24 285,955 2.60
--------- -----------
--------- -----------
</TABLE>
DECEMBER 31, 1996
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ------------------------------------------ --------- ------------- ----------- ----------- -----------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$1.16..................................... 180,576 8.75 $ 1.16 95,165 $ 1.16
$2.02..................................... 41,512 9.08 2.02 -- --
$3.83-$3.91............................... 1,219,900 9.58 3.85 -- --
--------- -----------
1,441,988 9.50 3.46 95,165 1.16
--------- -----------
--------- -----------
</TABLE>
F-14
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1995, options to purchase 51,024 shares of Common Stock were
exercisable at a weighted-average exercise price of $1.16 per share.
Pursuant to APB 25, for certain options granted in June 1997, the Company
recognized as deferred compensation expense the excess of the deemed value for
financial reporting purposes of the common stock issuable upon the exercise of
such options over the aggregate exercise price of such options. The total
deferred compensation expense of $271,500 is being amortized over the vesting
period of such options.
RESERVED SHARES
As of June 30, 1997, the Company has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Warrants......................................................... 179,601
Stock purchase plan.............................................. 400,000
Stock option plans:
Outstanding options............................................ 1,578,349
Reserved for future grants..................................... 464,271
---------
2,622,221
---------
---------
</TABLE>
7. LICENSE AGREEMENT
In March 1997, the Company entered into a license agreement with S3
Incorporated ("S3"). Under the terms of the agreement, the Company and S3 are
working jointly to develop integrated circuits using the Company's video
processing technologies and S3's accelerated graphics technology for use in
personal computers and electronic games. The Company has granted S3 a worldwide
license to certain technology. The license has a term of approximately five
years and is exclusive provided that performance criteria, including minimum
license fees, are satisfied. The Company is to receive certain per unit
royalties for products sold incorporating the Company's technology. If royalties
on product sales do not reach the minimum levels necessary to maintain
exclusivity, S3 may elect to pay the required minimum amount. Such payments may
be offset against future royalties otherwise due.
In December 1996, S3 paid the Company $1 million, $500,000 of which was
refundable if a definitive license agreement between the parties was not
consummated. Accordingly, the Company recognized $500,000 of license and royalty
revenue in 1996 and the remaining $500,000 of license and royalty revenue in
March 1997.
On June 30, 1997, the Company sold a total of 526,316 shares of its Common
Stock to S3 pursuant to a Stock Purchase Agreement for $4,948,201, net of
expenses associated with the transaction. S3 is entitled to certain
anti-dilution, registration and other rights as set forth in the Stock Purchase
Agreement.
F-15
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provision for income taxes computed under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," consists of the
following:
<TABLE>
<CAPTION>
PRO FORMA SIX-MONTHS
DECEMBER 31, PRO FORMA SIX-MONTHS SIX-MONTHS ENDED
------------------------------- DECEMBER ENDED JUNE ENDED JUNE JUNE 30,
1994 1995 1996 31, 1996 30, 1996 30, 1996 1997
--------- --------- --------- ----------- ----------- ----------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Federal:
Current........... $ -- $ 23,000 $ 991,744 $1,157,285 $ 315,534 $ 540,765 $ 394,450
Deferred.......... -- -- (439,614) (455,627) (139,868) (212,901) (120,185)
--------- --------- --------- ----------- ----------- ----------- ---------
-- 23,000 552,130 701,658 175,666 327,864 274,625
State:
Current........... 13,450 60,981 201,016 247,312 63,955 115,562 71,551
Deferred.......... -- -- (66,092) (69,822) (21,028) (32,626) (18,344)
--------- --------- --------- ----------- ----------- ----------- ---------
13,450 60,981 134,924 177,490 42,927 82,936 53,207
--------- --------- --------- ----------- ----------- ----------- ---------
$ 13,450 $ 83,981 $ 687,054 $ 879,148 $ 218,593 $ 410,800 $ 327,472
--------- --------- --------- ----------- ----------- ----------- ---------
--------- --------- --------- ----------- ----------- ----------- ---------
</TABLE>
The following table reconciles the expected federal corporate income tax
expense (computed by multiplying the Company's income before taxes by the
federal statutory rate of 34%) to the Company's income tax expense for the
following periods ended:
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, PRO FORMA SIX-MONTHS SIX-MONTHS SIX-MONTHS
------------------------------- DECEMBER ENDED JUNE ENDED JUNE ENDED JUNE
1994 1995 1996 31, 1996 30, 1996 30, 1996 30, 1997
--------- --------- --------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Tax at U.S.
Statutory rate... $ 660,343 $1,391,693 $ 747,275 $ 747,275 $ 349,100 $ 349,100 $ 293,005
State income taxes,
net of federal
benefit.......... 13,450 60,981 78,615 106,709 36,726 49,851 31,766
S Corporation
earnings prior to
change in tax
status........... (630,765) (868,150) (251,758) -- (251,758) -- --
Deferred taxes
recorded due to
change in tax
status........... -- -- (148,993) -- (148,993) -- --
Net operating
losses
utilized......... (29,578) (500,543) -- -- -- -- --
Other.............. -- -- 261,915 25,164 233,518 11,849 2,701
--------- --------- --------- ----------- ----------- ----------- -----------
$ 13,450 $ 83,981 $ 687,054 $ 879,148 $ 218,593 $ 410,800 $ 327,472
--------- --------- --------- ----------- ----------- ----------- -----------
--------- --------- --------- ----------- ----------- ----------- -----------
</TABLE>
F-16
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The pro forma provision for income taxes in 1996 reflects the additional tax
expense which would have been incurred had FLI's status as an S Corporation
terminated on January 1, 1996, exclusive of the effects of the establishment of
deferred tax assets and liabilities at that date.
The provision for income taxes for the six months ended June 30, 1997 is
based on the estimated annual effective tax rate for the year.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1996 and
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Accrued liabilities......................................................... $ -- $ 354,284 $ 513,274
Other, net.................................................................. 11,992 208,954 175,863
Deferred tax liabilities:
Depreciation of property and equipment...................................... (11,992) (57,533) (89,089)
Valuation of investment portfolio........................................... -- (44,186) --
--------- ---------- ----------
Net deferred tax assets....................................................... $ -- $ 461,519 $ 600,048
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
Management has concluded that a valuation allowance for deferred tax assets
is not required based on its assessment that current levels of taxable income
and the reversal of taxable temporary differences will be sufficient to realize
the tax benefit.
9. EXPORT SALES AND SIGNIFICANT CUSTOMERS
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------------------- JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Revenues to customers:
Asia............................................... $ 878,000 $ 986,000 $ 1,115,000 $ 403,000
Europe............................................. 227,000 263,000 479,000 104,000
Canada............................................. 150,000 138,000 200,000 70,000
Latin America and other............................ 111,000 190,000 220,000 169,000
------------ ------------ ------------ --------
$ 1,366,000 $ 1,577,000 $ 2,014,000 $ 746,000
------------ ------------ ------------ --------
------------ ------------ ------------ --------
</TABLE>
In 1994, sales to one customer accounted for 19% of total revenues. In 1995,
sales to one customer accounted for 13% of total revenues. In 1996, sales to one
customer accounted for 11% of total revenues. In the six months ended June 30,
1997, sales to two customers accounted for 15% and 11% of total revenues,
respectively.
F-17
<PAGE>
FAROUDJA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 401(k) PLAN
During 1994, the Company adopted a defined contribution retirement plan
under Internal Revenue Service Code Section 401(k). Employees are eligible,
following one month of employment, to contribute a specified percentage of their
salary, not to exceed the statutory limit, to the plan. The Company matches a
percentage of employee contributions. The Company's contributions were
insignificant during the years ended December 31, 1994, 1995 and 1996, and were
$66,192 for the six months ended June 30, 1997.
11. CREDIT FACILITIES
In March 1997, the Company established a revolving line of credit with a
bank for borrowings of up to $1,000,000. In May 1997, the line was increased to
$2,000,000, including secured letters of credit. The line of credit agreement,
which includes certain financial covenants, expires on April 4, 1998. Borrowings
under the line of credit are collaterized by substantially all of the Company's
tangible assets and contract rights. Borrowings are limited to a defined
percentage of eligible accounts receivable. In June 1997, the Company also
established a $500,000 equipment loan facility secured by fixed assets. The
Company can draw against this line to December 1997 and to the extent drawn down
the loan must be fully repaid by December 2000. Borrowings against the line of
credit and the equipment loan bear interest at prime plus 1.5% (10.0% at June
30, 1997). At June 30, 1997, there were no borrowings against either the line of
credit or the fixed asset line, and the aggregate amount available under the
revolving line of credit was $1,886,000.
12. PROPOSED INITIAL PUBLIC OFFERING AND RELATED MATTERS
On July 22, 1997, the Board of Directors of the Company authorized
management to file a registration statement with the Securities and Exchange
Commission for the sale of Common Stock to the public. On the same date the
Board of Directors also approved an increase in the number of authorized shares
of common stock to 50,000,000 and an increase in the number of authorized shares
of Preferred Stock to 5,000,000.
F-18
<PAGE>
Back Cover
1. Diagram with "Faroudja" in the center and lines from "Faroudja to the
following:
"HDTV," "Home Theater," "PCTV," "Digital TV," "Digital Light Processing,"
"High-End Display," "Broadcast," and "DVD."
2. TEXT
FAROUDJA
When high quality video
images are required
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering are as follows:
<TABLE>
<CAPTION>
EXPENSE AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
The Commission's Registration Fee................................................. $ 10,455
NASD Filing Fee................................................................... 3,950
NASDAQ Listing Application........................................................ *
Blue Sky Fees and Expenses........................................................ *
Printing Expenses................................................................. *
Legal Fees and Expenses........................................................... *
Accounting Fees and Expense....................................................... *
Transfer Agent Fees............................................................... *
Miscellaneous Expenses............................................................ *
----------
Total........................................................................... *
----------
----------
</TABLE>
- ------------------------
* to be provided by amendment
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Certificate of Incorporation of the Company eliminates the liability of
the Company's directors for monetary damages arising from a breach of their
fiduciary duties to the Company and its stockholders, to the extent permitted by
the Delaware General Corporation Law. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's By-Laws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by applicable law. The Company has
entered into indemnification agreements with its directors and executive
officers containing provisions which are in some respects broader than the
specific indemnification provisions contained in the Delaware General
Corporation Law. Such agreements require the Company, among other things, (i) to
indemnify its officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers provided such
persons acted in good faith and in a manner reasonably believed to be in the
best interests of the Company and, with respect to any criminal action, had no
cause to believe their conduct was unlawful; (ii) to advance the expenses
actually and reasonably incurred by its officers and directors as a result of
any proceeding against them as to which they could be indemnified; and (iii) to
obtain directors' and officers' insurance if available on reasonable terms.
There is no action or proceeding pending or, to the knowledge of the Company,
threatened which may result in a claim for indemnification by any director,
officer, employee or agent of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 8, 1996 the Company issued 1,043,105 shares of Common Stock to a
group of investors for $4 million. The Company believes that because the
offering was made to sophisticated persons without the means of a general
solicitation, the offering was exempt from registration under Section 4(2) of
the Securities Act, and Regulation D promulgated thereunder.
The Company has issued options under its 1995 Option Plan, 1997 Option Plan
and Director's Plan to qualified employees, to purchase the Company's Common
Stock. The Company believes that the grant of options and their exercise
pursuant to the terms of these plans is exempt from registration under Rule 701
promulgated under the Securities Act.
II-1
<PAGE>
On June 30, 1997 the Company issued 526,316 shares of Common Stock to S3 for
$5.0 million. The Company believes that because the offering was made to a
sophisticated investor without the means of a general solicitation, the Company
was exempt from registration under Section 4(2) of the Securities Act.
The Company has issued options to purchase Common Stock pursuant to its
Director Plan to its directors. The Company believes the grant of option and
their exercise under this plan is exempt from registration under Rule 701
promulgated under the Securities Act.
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 The Company's Certificate of Incorporation
3.2 The Company's By-Laws
4.1 Warrants (1-3), dated July 16, 1993, for the purchase of Common Stock issued to John Sie
4.2 Warrant, dated January 20, 1997, for the purchase of Common Stock issued to Yves Faroudja
4.3 Warrant, dated December 31, 1996, for the purchase of Common Stock issued to Adelson Investors, LLC
5.1* Opinion of Buchalter, Nemer, Fields & Younger, a Professional Corporation, as to the validity of the
shares of Common Stock offered hereby
10.1 Consulting Services Agreement, dated September 21, 1994, between the Company and M-Squared and
Technology L.L.C.
10.2 Letter Agreement, dated December 31, 1996, between the Company and Merv L. Adelson for certain
consulting services.
10.3 Letter Agreement, dated November 13, 1995, by and among certain stockholders of the Company listed
therein and Spencer Trask Holdings, Inc.
10.4 Amendment to Letter Agreement, dated February 9, 1996, among certain stockholders of the Company listed
therein and Spencer Trask Holdings, Inc.
10.5 Lease Agreement, dated August 2, 1993, by and among the Company and the Landlords listed therein
10.6 The Company's 1995 Stock Option Plan, dated August 1, 1995 and amended on August 19, 1996, February 11,
1997, April 30, 1997 and June 13, 1997
10.7 The Company's 1997 Non-Employee Directors Stock Option Plan
10.8 The Company's 1997 Performance Stock Option Plan, dated January 2, 1997, and amended on June 13, 1997
10.9 The Company's 1997 Employee Stock Purchase Plan
10.10 Employment Agreement, dated as of July 8, 1996, between the Company and Michael J. Moone
10.11 Employment Agreement, dated March 8, 1996, between the Company and Yves C. Faroudja
10.12 Registration and Shareholders' Rights Agreement, dated March 7, 1997, among the Company and Yves &
Isabell Faroudja and certain Stockholders of the Company
10.13 Three (3) Registration Rights Agreements, dated December 31, 1996 among the Company and each of Adelson
Investors, LLC, Images Partners, LP and Roger K. Baumberger as Liquidating Trustee for Faroudja
Images, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.14 Registration Rights Agreement, dated March 7, 1997 among the Company and Faroudja Images Investors, LLC
10.15 Agreement, dated January 20, 1997 among Yves Faroudja and the Company for the transfer of intellectual
property to the Company
10.16** License Agreement, dated March 31, 1997, between the Company and S3 Incorporated
10.17 Stock Purchase Agreement, dated June 30, 1997, between the Company and S3 Incorporated
10.18 Investor's Rights Agreement, dated June 30, 1997, between the Company and S3 Incorporated
10.19 Business Loan Agreement, dated April 5, 1997, between the Company and Silicon Valley Bank
10.20 Commercial Guaranty, dated April 5, 1997, by the Company for the benefit of Silicon Valley Bank.
10.21 Commercial Security Agreement, dated April 5, 1997, by the Company for the benefit of Silicon Valley
Bank.
10.22 Promissory Note, dated April 5, 1997, by the Company for the benefit of Silicon Valley Bank.
10.23 Promissory Note, dated June 6, 1997, by the Company for the benefit of Silicon Valley Bank.
10.24 Loan Modification Agreement, dated June 6, 1997, by and between the Company and Silicon Valley Bank.
10.25 Three (3) Amended and Restated Options to Purchase Shares of Common Stock of the Company, dated March
7, 1997 among the Company, Yves Faroudja and Isabell Faroudja, Faroudja Images, Inc. and each of
Adelson Investors, LLC, Faroudja Images Investors, LLC and Images Partners, LP
10.26 Amended and Restated Option to Purchase Shares of Common Stock of the Company, dated December 31, 1996
among the Company, Yves Faroudja and Isabell Faroudja, Faroudja Images, Inc. and Roger K. Baumberger
as Liquidating Trustee of Faroudja Images, Inc.
10.27* Consulting Services Agreement, dated , 1997, between the Company and Matthew D. Miller
11.1 Statement of Computation of Net Income per share
21.1 List of the Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Buchalter, Nemer, Fields & Younger, a Professional Corporation (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-5)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
** Confidential treatment has been requested
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
Consolidated Financial Statements or Notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
17.1 The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
17.2 Insofar as indemnification for liabilities arising out of the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions or otherwise, the
registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense in any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
17.3 The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,
State of California on this 28th day of July, 1997.
FAROUDJA, INC.
By: /s/ MICHAEL J. MOONE
---------------------------------
Michael J. Moone
PRESIDENT
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Michael J. Moone and Michael C. Hoberg his
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him in his true name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, including a registration statement filed in accordance with Rule
462(b) of the Securities Act, and to file the same, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ ----------------------------------------- --------------
<C> <S> <C>
/s/ MICHAEL J. MOONE
------------------------------------------- Chief Executive Officer, President and July 28, 1997
Michael J. Moone Director
/s/ MICHAEL C. HOBERG
------------------------------------------- Vice President--Finance and Chief July 28, 1997
Michael C. Hoberg Financial Officer
/s/ YVES C. FAROUDJA Chief Technical Officer, Director and
------------------------------------------- Chairman of the Executive Committee, July 28, 1997
Yves C. Faroudja Secretary
/s/ MERV L. ADELSON
------------------------------------------- Director July 28, 1997
Merv L. Adelson
/s/ STUART D. BUCHALTER
------------------------------------------- Director July 28, 1997
Stuart D. Buchalter
/s/ KEVIN B. KIMBERLIN
------------------------------------------- Director July 28, 1997
Kevin B. Kimberlin
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ ----------------------------------------- --------------
<C> <S> <C>
/s/ MATTHEW D. MILLER
------------------------------------------- Director July 28, 1997
Matthew D. Miller
/s/ WILLIAM N. SICK
------------------------------------------- Director July 28, 1997
William N. Sick
/s/ WILLIAM J. TURNER
------------------------------------------- Director July 28, 1997
William J. Turner
</TABLE>
II-6
<PAGE>
FAROUDJA, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGE TO
BEGINNING OF COSTS AND OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Six-months ended June 30, 1997 deducted from
asset account:
Allowance for doubtful accounts............... $ 110 $ 71 $ -- $ -- $ 181
--- --- --- --- ---
--- --- --- --- ---
Year ended December 31, 1996 deducted from asset
account:
Allowance for doubtful accounts............... $ 10 $ 143 $ -- $ 43 $ 110
--- --- --- --- ---
--- --- --- --- ---
Year ended December 31, 1995 deducted from asset
account:
Allowance for doubtful account................ $ 10 $ -- $ -- $ -- $ 10
--- --- --- --- ---
--- --- --- --- ---
Year ended December 31, 1994 deducted from asset
account:
Allowance for doubtful accounts............... $ 10 $ -- $ -- $ -- $ 10
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 The Company's Certificate of Incorporation
3.2 The Company's By-Laws
4.1 Warrants (1-3), dated July 16, 1993, for the purchase of Common Stock issued to John Sie
4.2 Warrant, dated January 20, 1997, for the purchase of Common Stock issued to Yves Faroudja
4.3 Warrant, dated December 31, 1996, for the purchase of Common Stock issued to Adelson Investors, LLC
5.1* Opinion of Buchalter, Nemer, Fields & Younger, a Professional Corporation, as to the validity of the
shares of Common Stock offered hereby
10.1 Consulting Services Agreement, dated September 21, 1994, between the Company and M-Squared and
Technology L.L.C.
10.2 Letter Agreement, dated December 31, 1996, between the Company and Merv L. Adelson for certain
consulting services.
10.3 Letter Agreement, dated November 13, 1995, by and among certain stockholders of the Company listed
therein and Spencer Trask Holdings, Inc.
10.4 Amendment to Letter Agreement, dated February 9, 1996, among certain stockholders of the Company listed
therein and Spencer Trask Holdings, Inc.
10.5 Lease Agreement, dated August 2, 1993, by and among the Company and the Landlords listed therein
10.6 The Company's 1995 Stock Option Plan, dated August 1, 1995 and amended on August 19, 1996, February 11,
1997, April 30, 1997 and June 13, 1997
10.7 The Company's 1997 Non-Employee Directors Stock Option Plan
10.8 The Company's 1997 Performance Stock Option Plan, dated January 2, 1997, and amended on June 13, 1997
10.9 The Company's 1997 Employee Stock Purchase Plan
10.10 Employment Agreement, dated as of July 8, 1996, between the Company and Michael J. Moone
10.11 Employment Agreement, dated March 8, 1996, between the Company and Yves C. Faroudja
10.12 Registration and Shareholders' Rights Agreement, dated March 7, 1997, among the Company and Yves &
Isabell Faroudja and certain Stockholders of the Company
10.13 Three (3) Registration Rights Agreements, dated December 31, 1996 among the Company and each of Adelson
Investors, LLC, Images Partners, LP and Roger K. Baumberger as Liquidating Trustee for Faroudja
Images, Inc.
10.14 Registration Rights Agreement, dated March 7, 1997 among the Company and Faroudja Images Investors, LLC
10.15 Agreement, dated January 20, 1997 among Yves Faroudja and the Company for the transfer of intellectual
property to the Company
10.16** License Agreement, dated March 31, 1997, between the Company and S3 Incorporated
10.17 Stock Purchase Agreement, dated June 30, 1997, between the Company and S3 Incorporated
10.18 Investor's Rights Agreement, dated June 30, 1997, between the Company and S3 Incorporated
10.19 Business Loan Agreement, dated April 5, 1997, between the Company and Silicon Valley Bank
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.20 Commercial Guaranty, dated April 5, 1997, by the Company for the benefit of Silicon Valley Bank.
10.21 Commercial Security Agreement, dated April 5, 1997, by the Company for the benefit of Silicon Valley
Bank.
10.22 Promissory Note, dated April 5, 1997, by the Company for the benefit of Silicon Valley Bank.
10.23 Promissory Note, dated June 6, 1997, by the Company for the benefit of Silicon Valley Bank.
10.24 Loan Modification Agreement, dated June 6, 1997, by and between the Company and Silicon Valley Bank.
10.25 Three (3) Amended and Restated Options to Purchase Shares of Common Stock of the Company, dated March
7, 1997 among the Company, Yves Faroudja and Isabell Faroudja, Faroudja Images, Inc. and each of
Adelson Investors, LLC, Faroudja Images Investors, LLC and Images Partners, LP
10.26 Amended and Restated Option to Purchase Shares of Common Stock of the Company, dated December 31, 1996
among the Company, Yves Faroudja and Isabell Faroudja, Faroudja Images, Inc. and Roger K. Baumberger
as Liquidating Trustee of Faroudja Images, Inc.
10.27* Consulting Services Agreement, dated , 1997, between the Company and Matthew D. Miller
11.1 Statement of Computation of Net Income per share
21.1 List of the Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Buchalter, Nemer, Fields & Younger, a Professional Corporation (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-5)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
** Confidential treatment has been requested
<PAGE>
DRAFT
7/23/97
[____________] Shares1
FAROUDJA, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_______, 1997
ROBERTSON, STEPHENS & COMPANY LLC
VOLPE BROWN WHELAN & COMPANY
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
Faroudja, Inc., a Delaware corporation (the "COMPANY"), and certain
stockholders of the Company named in SCHEDULE B hereto (hereinafter called the
"SELLING STOCKHOLDERS") address you as the Representatives of each of the
persons, firms and corporations listed in SCHEDULE A hereto (herein collectively
called the "UNDERWRITERS") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
[_________] shares of its authorized and unissued Common Stock, $0.001 par value
per share, to the several Underwriters. The [_________] shares of Common Stock,
$0.001 par value per share, of the Company to be sold by the Company are
hereinafter called the "COMPANY SHARES." Certain Selling Stockholders also
propose to grant, severally and not jointly, to the Underwriters an option to
purchase up to [________] additional shares of the Company's Common Stock,
$0.001 par value per share (the "OPTION SHARES"), as provided in SECTION 7
hereof. As used in this Agreement, the term "SHARES" shall include the Company
Shares and the Option Shares. All shares of Common Stock, $0.001 par value per
share, of the Company to be
- --------------------------------
1 Plus an option to purchase up to [_____________] additional
shares from certain stockholders of the Company to cover over-allotments.
<PAGE>
outstanding after giving effect to the sales contemplated hereby, including the
Shares, are hereinafter referred to as "COMMON STOCK."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE
SELLING STOCKHOLDERS.
I. The Company represents and warrants to and agrees with each Underwriter
that:
(a) A registration statement on Form S-1 (File No. 333-_____) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "ACT"), and the applicable rules and regulations
(the "RULES AND REGULATIONS") of the Securities and Exchange Commission (the
"COMMISSION") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
as may hereafter be required. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the "PRELIMINARY
PROSPECTUSES"), and of any abbreviated registration statement pursuant to
Rule 462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "REGISTRATION STATEMENT"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
-2-
<PAGE>
amended, together with any such abbreviated registration statement. The term
"PROSPECTUS" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); PROVIDED,
HOWEVER, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of Robertson, Stephens & Company LLC, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "PROSPECTUS" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "PROSPECTUS" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to
Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent
or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the
term sheet, together, will not be materially different from the prospectus in
the Registration Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased,
(i) the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained and will contain all material information
required to be included therein by the Act and the Rules and Regulations and
will in all material respects conform to the requirements of the Act and the
Rules and Regulations, (ii) the Registration Statement, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; PROVIDED, HOWEVER, that none of the
representations and warranties contained in this subparagraph (b) shall apply to
information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter specifically for use in the preparation thereof.
-3-
<PAGE>
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; no proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; neither the
Company nor any of its subsidiaries is in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which it or any of its subsidiaries or their respective properties
may be bound; and neither the Company nor any of its subsidiaries is in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or over
their respective properties of which it has knowledge. The Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than those listed on EXHIBIT 21.1 to the Registration Statement.
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and
-4-
<PAGE>
the consummation by the Company or any of its subsidiaries of the transactions
herein contemplated, except such as may be required under the Act, the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") or under state
or other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company or any of its subsidiaries of a character required to
be described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement by the Act or the Rules and
Regulations which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the Company (including
the Option Shares) have been duly authorized and validly issued and are fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities, and
the authorized and outstanding capital stock of the Company is as set forth in
the Prospectus under the caption "CAPITALIZATION" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company); the Company
Shares and the Option Shares have been duly authorized for issuance and sale to
the Underwriters pursuant to this Agreement and, when issued and delivered by
the Company and the Selling Stockholders against payment therefor in accordance
with the terms of this Agreement, will be duly and validly issued and fully paid
and nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right,
co-sale right, registration right, right of first refusal or other similar right
of stockholders exists with respect to any of the Company Shares or the Option
Shares or the issuance and sale thereof other than those that have been
expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated on the Closing Date and any later date on which the Option Shares
are to be purchased. No further approval or authorization of any stockholder,
the Board of Directors of the Company or others is required for the issuance and
sale or transfer of the Shares except as may be required under the Act, or under
state or other securities or Blue Sky laws. All issued and outstanding shares
of capital stock of each subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and were not issued in
violation of or subject to any preemptive right, or other rights to subscribe
for or purchase shares and are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest.
Except as disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, neither the
Company nor any
-5-
<PAGE>
subsidiary has outstanding any options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans, arrangements,
options and rights.
(g) Ernst & Young LLP, which has examined the consolidated financial
statements of the Company, together with the related schedules and notes, as of
December 31, 1995, December 31, 1996 and June 30, 1997 and for each of the years
in the three (3) years ended December 31, 1996 and the six months ended June 30,
1997 filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are independent accountants within the meaning
of the Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information, filed
with the Commission as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein. The
selected and summary financial and statistical data included in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the audited financial statements presented therein. No
other financial statements or schedules are required to be included in the
Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.
(i) Except as set forth in the Registration Statement and Prospectus,
(i) each of the Company and its subsidiaries has good and marketable title to
all properties and assets described in the Registration Statement and Prospectus
as owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than such as would not have a
material adverse effect on the
-6-
<PAGE>
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise,
(ii) the agreements to which the Company or any of its subsidiaries is a party
described in the Registration Statement and Prospectus are valid agreements,
enforceable by the Company and its subsidiaries (as applicable), except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and, to the best
of the Company's knowledge, the other contracting party or parties thereto are
not in material breach or material default under any of such agreements, and
(iii) each of the Company and its subsidiaries has valid and enforceable leases
for all properties described in the Registration Statement and Prospectus as
leased by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and Prospectus,
the Company owns or leases all such properties as are necessary to its
operations as now conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise; and
all tax liabilities are adequately provided for on the books of the Company and
its subsidiaries.
(k) The Company and its subsidiaries maintain insurance with insurers
of recognized financial responsibility of the types and in the amounts generally
deemed adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company or its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(l) To the best of Company's knowledge, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
-7-
<PAGE>
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise; except as set forth in the Registration Statement and
Prospectus, the Company has not received any notice of, and has no knowledge of,
any infringement of or conflict with asserted rights of the Company by others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise.
(n) The Common Stock has been approved for quotation on The Nasdaq
National Market, subject to official notice of issuance.
(o) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 ACT"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "INVESTMENT
COMPANY" or a company "CONTROLLED" by an "INVESTMENT COMPANY" within the meaning
of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(q) Neither the Company nor any of its subsidiaries has at any time
during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company, each Selling
Stockholder and each beneficial owner of shares of Common Stock has agreed in
writing that such person will not, for a period of
-8-
<PAGE>
180 days after the date of the Prospectus (the "LOCK-UP PERIOD"), offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to (collectively, a "DISPOSITION") any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock
(collectively, "SECURITIES") now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction,
(ii) as a distribution to partners, limited liability company members or
stockholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of Robertson, Stephens & Company LLC. The foregoing restriction
has been expressly agreed to preclude the holder of the Securities from engaging
in any hedging or other transaction which is designed to or reasonably expected
to lead to or result in a Disposition of Securities during the Lock-up Period,
even if such Securities would be disposed of by someone other than such holder.
Such prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Furthermore, each such person
has also agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction. The Company has provided to
counsel for the Underwriters a complete and accurate list of all securityholders
of the Company and the number and type of securities held by each
securityholder. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to which its
officers, directors and stockholders have agreed to such or similar restrictions
(the "LOCK-UP AGREEMENTS") presently in effect or effected hereby. The Company
hereby represents and warrants that it will not release any of its officers,
directors or other stockholders from any Lock-up Agreements currently existing
or hereafter effected without the prior written consent of Robertson, Stephens &
Company LLC.
(t) Except as set forth in the Registration Statement and Prospectus,
(i) the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("ENVIRONMENTAL LAWS") which are applicable to its
business, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) to the best of the Company's knowledge, the Company will not
be required to make future material capital expenditures to comply with
Environmental Laws and (iv) to the best of the Company's knowledge, no property
which is owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. Section 9601, ET SEQ.), or
otherwise designated as a contaminated site under applicable state or local law.
(u) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain
-9-
<PAGE>
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
II. Each Selling Stockholder, severally and not jointly, represents and
warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date, and on
any later date on which Option Shares are purchased, will have valid marketable
title to the Option Shares to be sold by such Selling Stockholder, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest other than pursuant to this Agreement; and upon delivery of such Option
Shares hereunder and payment of the purchase price as herein contemplated, each
of the Underwriters will obtain valid marketable title to the Option Shares
purchased by it from such Selling Stockholder, free and clear of any pledge,
lien, security interest pertaining to such Selling Stockholder or such Selling
Stockholder's property, encumbrance, claim or equitable interest, including any
liability for estate or inheritance taxes, or any liability to or claims of any
creditor, devisee, legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the Representatives,
an irrevocable Power of Attorney (the "POWER OF ATTORNEY") appointing
[___________] and [___________] as attorneys-in-fact (collectively, the
"ATTORNEYS" and individually, an "ATTORNEY") and a Letter of Transmittal and
Custody Agreement (the "CUSTODY AGREEMENT") with
[______________________________], as custodian (the "CUSTODIAN"); each of the
Power of Attorney and the Custody Agreement constitutes a valid and binding
agreement on the part of such Selling Stockholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and each of such Selling Stockholder's Attorneys, acting alone, is
authorized to execute and deliver this Agreement and the certificate referred to
in Section 6(j) hereof on behalf of such Selling Stockholder, to determine the
purchase price to be paid by the several Underwriters to such Selling
Stockholder as provided in Section 3 hereof, to authorize the delivery of the
Option Shares to be sold by such Selling Stockholder under this Agreement and to
duly endorse (in blank or otherwise) the certificate or certificates
representing such Option Shares or a stock power or powers with respect thereto,
to accept payment therefor, and otherwise to act on behalf of such Selling
Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Stockholder of the Power of Attorney
and the Custody Agreement, the execution and delivery by or on behalf of such
Selling Stockholder of this Agreement and the sale and delivery of the Option
Shares to be sold by such Selling Stockholder under this Agreement (other than,
at the time of the execution
-10-
<PAGE>
hereof (if the Registration Statement has not yet been declared effective by the
Commission), the issuance of the order of the Commission declaring the
Registration Statement effective and such consents, approvals, authorizations or
orders as may be necessary under state or other securities or Blue Sky laws)
have been obtained and are in full force and effect; such Selling Stockholder,
if other than a natural person, has been duly organized and is validly existing
in good standing under the laws of the jurisdiction of its organization as the
type of entity that it purports to be; and such Selling Stockholder has full
legal right, power and authority to enter into and perform its obligations under
this Agreement and such Power of Attorney and Custody Agreement, and to sell,
assign, transfer and deliver the Option Shares to be sold by such Selling
Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up Period,
effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Stockholder or with respect to which such Selling
Stockholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners,
limited liability company members or stockholders of such Selling Stockholder,
provided that the distributees thereof agree in writing to be bound by the terms
of this restriction, or (iii) with the prior written consent of Robertson,
Stephens & Company LLC. The foregoing restriction is expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the Selling Stockholder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Such Selling Stockholder also agrees and
consents to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the securities held by such Selling Stockholder
except in compliance with this restriction.
(e) Certificates in negotiable form for all Option Shares to be sold
by such Selling Stockholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Selling Stockholder, have been placed in
custody with the Custodian for the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person; this Agreement has been duly executed
and delivered by or on behalf of such Selling Stockholder and is a valid and
binding agreement of such Selling Stockholder, enforceable in accordance with
its terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation of any
of the terms and provisions of or constitute a default under any bond,
debenture, note or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder, or any Option Shares to be sold by such Selling
Stockholder hereunder, may be bound
-11-
<PAGE>
or, to the best of such Selling Stockholders' knowledge, result in any violation
of any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over such Selling Stockholder or over the properties of such
Selling Stockholder, or, if such Selling Stockholder is other than a natural
person, result in any violation of any provisions of the charter, bylaws or
other organizational documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Shares that is
contained in the representations and warranties of such Selling Stockholder in
such Selling Stockholder's Power of Attorney or set forth in the Registration
Statement or the Prospectus is, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date, and on any later date on which Option
Shares are to be purchased, was or will be, true, correct and complete, and does
not, and at the time the Registration Statement became or becomes, as the case
may be, effective and at all times subsequent thereto up to and on the Closing
Date (hereinafter defined), and on any later date on which Option Shares are to
be purchased, will not, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make such
information not misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date, or
any later date on which Option Shares are to be purchased, as the case may be,
and will advise one of its Attorneys and Robertson, Stephens & Company LLC prior
to the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, if any statement to be made on behalf of such
Selling Stockholder in the certificate contemplated by Section 6(j) would be
inaccurate if made as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be.
(k) Such Selling Stockholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Shares that are to be sold by the
Company or any of the other Selling Stockholders to the Underwriters pursuant to
this Agreement; such Selling Stockholder does not have, or has waived prior to
the date hereof, any registration right or other similar right to participate in
the offering made by the Prospectus, other than such rights of participation as
have been satisfied by the participation of such Selling Stockholder in the
transactions to which this Agreement relates in accordance with the terms of
this Agreement; and such Selling Stockholder does not own any warrants, options
or similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus.
-12-
<PAGE>
(l) Such Selling Stockholder is not aware without having conducted
any investigation or inquiry that any of the representations and warranties of
the Company set forth in Section 2.I. above is untrue or inaccurate in any
material respect.
3. PURCHASE, SALE AND DELIVERY OF COMPANY SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $[_____] per share, the
respective number of Company Shares as hereinafter set forth opposite the name
of the Company in SCHEDULE B hereto. The obligation of each Underwriter to the
Company shall be to purchase from the Company that number of Company Shares
which is set forth opposite the name of such Underwriter in SCHEDULE A hereto
(subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Company Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in same-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the bank
on which it is drawn, and not to take any other action with the purpose or
effect of receiving immediately available funds, until the business day
following the date of its delivery to the Company and, in the event of any
breach of the foregoing, the Company shall reimburse the Underwriters for the
interest lost and any other expenses borne by them by reason of such breach), at
the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo
Alto, California 94304 (or at such other place as may be agreed upon among the
Representatives and the Company) at 7:00 A.M., San Francisco time (a) on the
third (3rd) full business day following the first day that Shares are traded,
(b) if this Agreement is executed and delivered after 1:30 P.M., San Francisco
time, the fourth (4th) full business day following the day that this Agreement
is executed and delivered or (c) at such other time and date not later than
seven (7) full business days following the first day that Shares are traded as
the Representatives and the Company may determine (or at such time and date to
which payment and delivery shall have been postponed pursuant to Section 10
hereof), such time and date of payment and delivery being herein called the
"CLOSING DATE;" PROVIDED, HOWEVER, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representatives. The certificates for the
Company Shares to be so delivered will be made available to you at such office
or such other location including, without limitation, in New York City, as you
may reasonably request for checking at least one (1) full business day prior to
the Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Company Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives of
the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
-13-
<PAGE>
Company Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Company Shares at an initial public
offering price of $[_____] per share. After the initial public offering, the
several Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), on the inside front
cover concerning stabilization and over-allotment by the Underwriters, and under
the [_____] and [_____] paragraphs under the caption "UNDERWRITING" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement, and you, on behalf of
the respective Underwriters, represent and warrant to the Company and the
Selling Stockholders that the statements made therein do not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of
Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if the Company files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the Company will provide
evidence satisfactory to you that the Prospectus and term sheet meeting the
requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations,
have been filed, within the time period prescribed, with the Commission pursuant
to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any
reason the filing of the final form of Prospectus is required under
Rule 424(b)(3) of the Rules and Regulations, it will provide evidence
satisfactory to you that the Prospectus contains such information and has been
filed with the Commission within the time period prescribed; it will notify you
promptly of any request by the Commission for the amending or supplementing of
the Registration Statement or the Prospectus or for additional information;
promptly upon your request, it will prepare and file with the
-14-
<PAGE>
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("UNDERWRITERS' COUNSEL"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations, and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
-15-
<PAGE>
(e) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the forty-fifth (45th)
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request
(i) concurrently with furnishing such reports to its stockholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's stockholders, (ii) concurrently with furnishing to
its stockholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of stockholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants,
(iii) as soon as they are available, copies of all reports (financial or other)
mailed to stockholders, (iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, any
securities exchange or the National Association of Securities Dealers, Inc.
("NASD"), (v) every material press release and every material news item or
article in respect of the Company or its affairs which was generally released to
stockholders or prepared by the Company or any of its subsidiaries, and (vi) any
additional information of a public nature concerning the Company or its
subsidiaries, or its business which you may reasonably request. During such
five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "USE OF
PROCEEDS" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) The Company will file Form SR as applicable in conformity with
the requirements of the Act and the Rules and Regulations.
(j) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or any
Selling Stockholder to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to
Section 11(a) hereof, or if the Underwriters shall terminate this Agreement
pursuant to Section 11(b)(i), the Company will reimburse the
-16-
<PAGE>
several Underwriters for all out-of-pocket expenses (including fees and
disbursements of Underwriters' Counsel) incurred by the Underwriters in
investigating or preparing to market or marketing the Shares.
(k) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(l) During the Lock-up Period, the Company will not, without the
prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Company Shares and the Option Shares; provided, however, that the Company
may grant options and issue shares thereunder pursuant to the Company's 1997
Non-Employee Directors Stock Option Plan, 1995 Stock Option Plan, 1997
Performance Stock Option Plan and Employee Stock Purchase Plan.
5. EXPENSES.
(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company and the Selling Stockholders will pay and bear
all costs and expenses in connection with the preparation, printing and filing
of the Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and
any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of
Attorney, and any instruments related to any of the foregoing; the issuance and
delivery of the Shares hereunder to the several Underwriters, including transfer
taxes, if any, the cost of all certificates representing the Shares and transfer
agents' and registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the sale
of the Shares by the Selling Stockholders will be borne collectively by the
Company and the Selling Stockholders. The provisions of this Section 5(a)(i)
are intended to relieve the Underwriters from the payment of the expenses and
costs which the Selling Stockholders and the Company hereby agree to pay, but
shall not affect any agreement between the Selling Stockholders and the Company
requiring the Company to pay for all such expenses and costs. Such
-17-
<PAGE>
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "PRIME RATE"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under Section 8(b)
hereof, each Selling Stockholder agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(b) hereof relating to such Selling Stockholder, it will
reimburse the Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of such
Selling Stockholder's obligation to reimburse the Underwriters for such expenses
and the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Selling Stockholders, together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c) hereof,
the Underwriters, severally and not jointly, agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(c) hereof, they will reimburse the Company and
each Selling Stockholder on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
-18-
<PAGE>
payments which are not made to the Company and each such Selling Stockholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii)
and 5(b) hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Code of Arbitration Procedure of the NASD.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate, therein electing the
arbitration tribunal. In the event the party demanding arbitration does not
make such designation of an arbitration tribunal in such demand or notice, then
the party responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim reimbursement
provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof and will
not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses which is created by the provisions of Sections 8(a), 8(b)
and 8(c) hereof or the obligation to contribute to expenses which is created by
the provisions of Section 8(e) hereof.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholders
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Stockholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole
-19-
<PAGE>
judgment, impracticable or inadvisable to proceed with the public offering of
the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of counsel for the Company dated the Closing Date or such later date on
which Option Shares are to be purchased addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters,
to the effect that:
(i) The Company and each "SIGNIFICANT SUBSIDIARY" (as that
term is defined in Regulation S-X of the Act) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction, if any, in which the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations
or business of the Company and its subsidiaries considered as one enterprise.
To such counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than those
subsidiaries listed on EXHIBIT 21.1 to the Registration Statement.
(iv) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption "CAPITALIZATION"
as of the dates stated therein, the issued and outstanding shares of capital
stock of the Company (including the Option Shares) have been duly and validly
issued and are fully paid and nonassessable, and, to such counsel's knowledge,
will not have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other similar
right;
(v) All issued and outstanding shares of capital stock of
each Significant Subsidiary of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and, to such counsel's knowledge,
have not been issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right and are
owned by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(vi) The Shares to be issued by the Company pursuant to the
terms of this Agreement have been duly authorized and, upon issuance and
delivery against payment therefor in accordance with the terms hereof, will be
duly and validly issued and fully paid and nonassessable, and will not have been
issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right.
-20-
<PAGE>
(vii) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and delivery
by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(ix) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the Act;
(x) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom, as to which such
counsel need express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations;
(xi) The information in the Prospectus under the caption
"DESCRIPTION OF CAPITAL STOCK," to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply with
Delaware law;
(xii) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xiii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which are
not described or referred to therein or filed as required;
(xiv) The performance of this Agreement and the consummation of
the transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the Company is a
party or by which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any order,
-21-
<PAGE>
writ or decree of any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations;
(xv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations is necessary in connection with the consummation by the
Company of the transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;
(xvi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations other than
those described therein;
(xvii) To such counsel's knowledge, neither the Company nor any
of its subsidiaries is presently (a) in material violation of its respective
charter or bylaws, or (b) in material breach of any order, writ or decree of any
court or governmental agency or body having jurisdiction over the Company or any
of its subsidiaries, or over any of their properties or operations; and
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities in
the offering contemplated by this Agreement, because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights or such rights have expired by reason
of lapse of time following notification of the Company's intent to file the
Registration Statement or have included securities in the Registration Statement
pursuant to the exercise of and in full satisfaction of such rights; and
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
-22-
<PAGE>
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of California and
the State of Delaware upon opinions of local counsel, and as to questions of
fact upon representations or certificates of officers of the Company, the
Selling Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of counsel for the Selling Stockholders, dated the Closing Date or such
later date on which Option Shares are to be purchased addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:
(i) Each Selling Stockholder which is not a natural person
has full right, power and authority to enter into and to perform its obligations
under the Power of Attorney and Custody Agreement to be executed and delivered
by it in connection with the transactions contemplated herein; the Power of
Attorney and Custody Agreement of each Selling Stockholder that is not a natural
person has been duly authorized by such Selling Stockholder; the Power of
Attorney and Custody Agreement of each Selling Stockholder has been duly
executed and delivered by or on behalf of such Selling Stockholder; and the
Power of Attorney and Custody Agreement of each Selling Stockholder constitutes
the valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(ii) Each of the Selling Stockholders has full right, power
and authority to enter into and to perform its obligations under this Agreement
and to sell, transfer, assign and deliver the Option Shares to be sold by such
Selling Stockholder hereunder;
(iii) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Stockholder; and
(iv) Upon the delivery of and payment for the Option Shares as
contemplated in this Agreement, each of the Underwriters will receive valid
marketable title to the Option Shares purchased by it from such Selling
Stockholder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest. In rendering such opinion, such counsel may assume
that the Underwriters are without notice of any defect in the title of the
Option Shares being purchased from the Selling Stockholders.
-23-
<PAGE>
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of California and
the State of Delaware upon opinions of local counsel, and as to questions of
fact upon representations or certificates of officers of the Company, the
Selling Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of the Company's intellectual property counsel (satisfactory to you and
the Underwriters), dated the Closing Date or such later date on which Option
Shares are to be purchased, addressed to the Underwriters and with reproduced
copies or signed counterparts thereof for each of the Underwriters, to the
effect that:
(i) The Company owns or has exclusive rights to all (1) patents,
(2) trademarks, trade names and service marks (and registrations therefor),
(3) copyrights, including rights in maskworks, (4) licenses, (5) ideas,
inventions, trade secrets, and know-how (whether or not patented or
patentable), (6) confidential information (7) all other personal and
proprietary rights and all other rights similar to or in the nature of any
of the foregoing rights (and applications for any of the above) described
in the Registration Statement or the Prospectus as being owned by or
exclusively licensed to the Company or necessary for or material to the
conduct of the Company's business, and (A) except as set forth in the
Registration Statement and the Prospectus, such counsel is not aware of any
claim to the contrary or any challenge by any other person to the ownership
or license rights of the Company with respect to the foregoing and (B) such
counsel is unaware of any contingency or circumstance that would cause any
such right to expire or to be modified, altered or terminated;
(ii) That certain license agreement between Yves Faroudja and the
Company dated January 20, 1997, including without limitation the grants of
exclusive licenses to the Company set forth therein, is enforceable by the
Company in accordance with its terms, and the rights granted to the Company
pursuant to such agreement are sufficient to permit the Company in
perpetuity to exclude all others from exploiting in any manner the
technology described therein;
(iii) No fact has come to such counsel's attention that would lead
such counsel to believe that the patents (or any other intellectual
property rights necessary for or material to the conduct of the Company's
business) presently issued to or held by (or exclusively licensed to) the
Company are not valid and enforceable by the Company;
(iv) Such counsel is not aware of any material fact with respect to
the patent applications of (or licensed to) the Company presently on file
that (a) would preclude the issuance of patents with respect to such
applications or (b) would lead such counsel to believe that such patents,
when issued, would not be valid or enforceable by the Company;
-24-
<PAGE>
(v) Such counsel is not aware of any legal actions, claims or
proceedings pending or threatened against the Company alleging that the
Company has infringed or currently is infringing or otherwise violating any
patent rights, trademark rights, service mark rights, trade name rights,
maskwork rights, copyrights, license rights, rights to inventions, trade
secret rights or any other personal or proprietary right or any right
similar to any of the foregoing (all such rights, "Intellectual Property
Rights") owned by any other person or entity, and no fact has come to such
counsel's attention indicating or tending to indicate that any of the
Company's present or proposed products or processes described in the
Registration Statement or the Prospectus have infringed or currently
infringe any Intellectual Property Rights of any other person or entity;
(vi) Such counsel has reviewed the descriptions of the Company's
intellectual property rights under the captions ["RISK FACTORS -- LIMITED
PROTECTION OF PROPRIETARY RIGHTS; RISK OF THIRD PARTY INFRINGEMENT,"
"BUSINESS -- PROPRIETARY RIGHTS AND LICENSES", "BUSINESS
--TECHNOLOGY,""BUSINESS -- NEW PRODUCT DEVELOPMENT," AND "CERTAIN
TRANSACTIONS -- YVES FAROUDJA LICENSE AGREEMENT"] in the Registration
Statement and Prospectus, and, to the extent that they constitute matters
of fact, matters of law or legal conclusions, these descriptions are true
and correct in all material respects and fairly present the intellectual
property situation of the Company; and
(vii) Nothing has come to such counsel's attention that causes such
counsel to believe that, as of the date on which the Registration Statement
became effective and as of the date of such opinion, the statements set
forth under the captions ["RISK FACTORS -- LIMITED PROTECTION OF
PROPRIETARY RIGHTS; RISK OF THIRD PARTY INFRINGEMENT," "BUSINESS --
PROPRIETARY RIGHTS AND LICENSES", "BUSINESS --TECHNOLOGY,""BUSINESS -- NEW
PRODUCT DEVELOPMENT," AND "CERTAIN TRANSACTIONS -- YVES FAROUDJA LICENSE
AGREEMENT"] in the Registration Statement and Prospectus contain any untrue
or misleading statement of a material fact or omit to state a material fact
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Wilson Sonsini Goodrich & Rosati, P.C., in form and substance satisfactory to
you, with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(h) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a letter
from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"ORIGINAL LETTER"), but carried out to a date not more than five (5) business
days prior to the Closing
-25-
<PAGE>
Date or such later date on which Option Shares are to be purchased, as the case
may be, (i) confirming, to the extent true, that the statements and conclusions
set forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be, and
(ii) setting forth any revisions and additions to the statements and conclusions
set forth in the Original Letter which are necessary to reflect any changes in
the facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise from that set
forth in the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse and that makes it, in your sole judgment, impracticable
or inadvisable to proceed with the public offering of the Shares as contemplated
by the Prospectus. The Original Letter from Ernst & Young LLP shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of December 31, 1995, December
31, 1996 and June 30, 1997 and related consolidated statements of operations,
stockholders' equity, and cash flows for the three (3) years in the period ended
December 31, 1996 and the six months ended June 30, 1997, (iii) state that Ernst
& Young LLP has performed the procedures set out in Statement on Auditing
Standards No. 71 ("SAS 71") for a review of interim financial information and
providing the report of Ernst & Young LLP as described in SAS 71 on the
financial statements for each of the quarters in the six-quarter period ended
June 30, 1997 (the "QUARTERLY FINANCIAL STATEMENTS"), (iv) state that in the
course of such review, nothing came to their attention that leads them to
believe that any material modifications need to be made to any of the Quarterly
Financial Statements in order for them to be in compliance with generally
accepted accounting principles consistently applied across the periods
presented, and (v) address other matters agreed upon by Ernst & Young LLP and
you. In addition, you shall have received from Ernst & Young LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of June 30, 1997 did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(i) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later date on which Option Shares are to be purchased, as the case may be, and
the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
-26-
<PAGE>
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto contained all material information required to be included therein by
the Act and the Rules and Regulations and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (b) any transaction that is material
to the Company and its subsidiaries considered as one enterprise, except
transactions entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(d) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (f) any loss or damage (whether or not insured) to the property
of the Company or any of its subsidiaries which has been sustained or will have
been sustained which has a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(j) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have NOT been
informed that:
(i) The representations and warranties made by such Selling
Stockholder herein are not true or correct in any material respect on the
Closing Date or on any later date on which Option Shares are to be purchased, as
the case may be; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be.
-27-
<PAGE>
(k) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each Selling
Stockholder and each beneficial owner of shares of Common Stock in writing prior
to the date hereof that such person will not, during the Lock-up Period, effect
the Disposition of any Securities now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires the
power of disposition, otherwise than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree in writing to be bound by this restriction,
(ii) as a distribution to partners, limited liability company members or
stockholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of Robertson, Stephens & Company LLC. The foregoing restriction
shall have been expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
such holder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction.
(l) The Company and the Selling Stockholders shall have furnished
to you such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Stockholders or
officers of the Selling Stockholders (when the Selling Stockholder is not a
natural person) as to the accuracy of the representations and warranties of the
Company and the Selling Stockholders herein, as to the performance by the
Company and the Selling Stockholders of their respective obligations hereunder
and as to the other conditions concurrent and precedent to the obligations of
the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
-28-
<PAGE>
7. OPTION SHARES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Selling Stockholders hereby grant to the several Underwriters, for the purpose
of covering over-allotments in connection with the distribution and sale of the
Company Shares only, a nontransferable option to purchase up to an aggregate of
[________] Option Shares at the purchase price per share for the Company Shares
set forth in Section 3 hereof. Such option may be exercised by the
Representatives on behalf of the several Underwriters on one (1) or more
occasions in whole or in part during the period of thirty (30) days after the
date on which the Company Shares are initially offered to the public, by giving
written notice to the Company and the Attorneys. The number of Option Shares to
be purchased by each Underwriter upon the exercise of such option shall be the
same proportion of the total number of Option Shares to be purchased by the
several Underwriters pursuant to the exercise of such option as the number of
Company Shares purchased by such Underwriter (set forth in SCHEDULE A hereto)
bears to the total number of Company Shares purchased by the several
Underwriters (set forth in SCHEDULE A hereto), adjusted by the Representatives
in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in same-day funds, payable to the order of the Custodian for the
respective accounts of the Selling Stockholders (and the Selling Stockholders
agree not to deposit and to cause the Custodian not to deposit any such check in
the bank on which it is drawn, and not to take any other action with the purpose
or effect of receiving immediately available funds, until the business day
following the date of its delivery to the Custodian). In the event of any
breach of the foregoing, the Selling Stockholders shall reimburse the
Underwriters for the interest lost and any other expenses borne by them by
reason of such breach. Such delivery and payment shall take place at the
offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo
Alto, California 94304 or at such other place as may be agreed upon among the
Representatives and the Attorneys (i) on the Closing Date, if written notice of
the exercise of such option is received by the Company and the Attorneys at
least two (2) full business days prior to the Closing Date, or (ii) on a date
which shall not be later than the third (3rd) full business day following the
date the Company and the Attorneys receive written notice of the exercise of
such option, if such notice is received by the Company and the Attorneys less
than two (2) full business days prior to the Closing Date.
The certificates in negotiable form for the Option Shares have been
placed in custody (for delivery under this Agreement) under the Custody
Agreement. Each Selling Stockholder agrees that the certificates for the Option
Shares of such Selling Stockholder so held in custody are subject to the
interests of the Underwriters hereunder, that the arrangements made by such
Selling Stockholder for such custody, including the Power of Attorney, is to
that extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated by the act of such Selling Stockholder or by
operation of law, whether by the death or incapacity of such Selling Stockholder
or the occurrence of any other event, except as specifically
-29-
<PAGE>
provided herein or in the Custody Agreement. If any Selling Stockholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Option Shares hereunder, the Option Shares
to be sold by such Selling Stockholder shall, except as specifically provided
herein or in the Custody Agreement, be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death, incapacity or
other event had not occurred, regardless of whether the Custodian shall have
received notice of such death or other event.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company and the Selling
Stockholders herein, to the accuracy of the statements of the Company, the
Selling Stockholders and officers of the Company made pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder, to the conditions set forth in Section 6
hereof, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be satisfactory in form and substance to you and to Underwriters' Counsel,
and you shall have been furnished with all such documents, certificates and
opinions as you may request in order to evidence the accuracy and completeness
of any of the representations, warranties or statements, the performance of any
of the covenants or agreements of the Company and the Selling Stockholders or
the satisfaction of any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "QUALIFIED INDEPENDENT
UNDERWRITER" within the meaning of SCHEDULE E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission
-30-
<PAGE>
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (iii) any untrue statement or
alleged untrue statement of any material fact contained in any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, PROVIDED FURTHER, that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject
(including, without limitation, in its capacity as an Underwriter or as a
"QUALIFIED INDEPENDENT UNDERWRITER" within the meaning of SCHEDULE E or the
Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Stockholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement provided in this Section 8(b) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of a material fact
or omission or alleged
-31-
<PAGE>
omission to state therein a material fact purchased Shares, if a copy of the
Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 4(d)
hereof.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Stockholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(c) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company and each such Selling Stockholder
for any legal or other expenses reasonably incurred by the Company and each such
Selling Stockholder in connection with investigating or defending any such loss,
claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Stockholder and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the
-32-
<PAGE>
defense thereof, with counsel reasonably satisfactory to such indemnified party;
PROVIDED, HOWEVER, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a),
8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; PROVIDED that such
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Stockholders are responsible for the remaining portion,
PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Stockholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
-33-
<PAGE>
(f) The liability of each Selling Stockholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the initial public offering price of the Option
Shares sold by such Selling Stockholder to the Underwriters minus the amount of
the underwriting discount paid thereon to the Underwriters by such Selling
Stockholder. The Company and such Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or
any of its officers, directors or controlling persons within the meaning of the
Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Shares
in accordance with the terms hereof, and if the aggregate number of Shares which
such defaulting Underwriter or Underwriters so agreed but failed to purchase
does not exceed ten percent (10%) of the Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Shares of such defaulting Underwriter or
Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed to take up and pay for exceeds ten percent (10%) of the Shares, the
remaining Underwriters shall have the right, but shall not be obligated, to take
up and pay for (in such proportions as may be agreed upon among them) the Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid by such postponed Closing
Date, the Closing Date may, at the option of the Company, be postponed for a
further twenty-four (24) hours, if necessary, to allow the Company the privilege
of finding another underwriter or underwriters, satisfactory to
-34-
<PAGE>
you, to purchase the Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Shares of
the defaulting Underwriter or Underwriters as provided in this Section 10,
(i) the Company shall have the right to postpone the time of delivery for a
period of not more than seven (7) full business days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement,
supplements to the Prospectus or other such documents which may thereby be made
necessary and (ii) the respective number of Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "UNDERWRITER" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
or any Selling Stockholder shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings,
-35-
<PAGE>
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if
additional material governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been suspended
on either such exchange or in the over the counter market by the NASD, or if a
banking moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or
(iv) if there shall have been a material adverse change in the general political
or economic conditions or financial markets as in your reasonable judgment makes
it inadvisable or impracticable to proceed with the offering, sale and delivery
of the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event
of termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in
Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to Faroudja, Inc., 750 Palomar, Sunnyvale,
CA 94086, fax number (408) , Attention: Michael J. Moone,
President; if sent to one or more of the Selling Stockholders, such notice shall
be sent mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to [NAME OF ATTORNEY-IN-FACT FOR SELLING
STOCKHOLDERS], as Attorney-in-Fact for the Selling Stockholders, at 750 Palomar,
Sunnyvale, CA 94086, fax number (408) .
13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being
-36-
<PAGE>
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors and assigns
and said controlling persons and said officers and directors, and for the
benefit of no other person or entity. No purchaser of any of the Shares from
any Underwriter shall be construed a successor or assign by reason merely of
such purchase.
In all dealings with the Company and the Selling Stockholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
Robertson, Stephens & Company LLC on behalf of you.
14. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
-37-
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
FAROUDJA, INC.
By
------------------------------------------
SELLING STOCKHOLDERS
By
------------------------------------------
Attorney-in-Fact for the Selling Stockholders
named in SCHEDULE B hereto
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
VOLPE BROWN WHELAN & COMPANY
On their behalf and on behalf of each of the
several Underwriters named in SCHEDULE A hereto.
By ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By
-------------------------------
Authorized Signatory
-38-
<PAGE>
SCHEDULE A
Number of
Company
Shares To Be
Underwriters Purchased
Robertson, Stephens & Company LLC . . . . . . . . . . .
Volpe Brown Whelan & Company. . . . . . . . . . . . . .
<PAGE>
SCHEDULE B
Number of
Company Shares
Faroudja, Inc. To Be Sold
Total . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Option Shares
Name of Selling Stockholder To Be Sold
Total . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
FAROUDJA, INC.
MICHAEL MOONE and YVES FAROUDJA certify that:
1. They are the President and Secretary, respectively, of FAROUDJA, INC., a
Delaware corporation.
2. The Certificate of Incorporation of this corporation is amended and
restated to read as follows:
ARTICLE I
The name of the Corporation is FAROUDJA, INC.
ARTICLE II
The registered office of the Corporation in the State of Delaware is
1013 Centre Road in the City of Wilmington, County of New Castle 19805. The
name of the registered agent of the Corporation at that address is Corporation
Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of stock, designated,
respectively, Common Stock and Preferred Stock. The aggregate number of shares
of all classes of capital stock which the Corporation shall have authority to
issue is twenty million (20,000,000) shares, of which eighteen million
(18,000,000) shares shall be Common Stock, par value $.001 per share, and two
million (2,000,000) of which shall be Preferred Stock, par value $.001 per
share, issuable in one or more series.
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized to fix by resolution
or resolutions the
<PAGE>
voting rights, designations, powers, preferences and the relative,
participating, optional or other rights, if any, and the qualifications,
limitations or restrictions thereof of any wholly unissued shares of Preferred
Stock; and to fix the number of shares constituting such series, and to increase
or decrease the number of shares of any such series, but not below the number of
shares thereof then outstanding.
ARTICLE V
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at an annual or special meeting of stockholders of
the Corporation and may not be effected by any consent in writing by such
stockholders. Special meetings of stockholders of the Corporation may be called
only by the Chairman of the Board if there be one, or by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), or by the President of the Corporation. Directors of
the Corporation may be removed by stockholders only for cause and by the
affirmative vote of the holders of sixty six and two-thirds percent (66.67%) of
the combined voting power of all of the then outstanding capital stock entitled
to vote generally in the election of directors, voting together as a single
class.
ARTICLE VI
All the powers of the Corporation, insofar as the same may be lawfully
vested by this Certificate of Incorporation in the Board of Directors, are
hereby conferred upon the Board of Directors. In furtherance and not in
limitation of such powers, the Board of Directors shall have the power to make,
adopt, alter, amend and repeal from time to time bylaws of the Corporation,
subject to the right of the stockholders entitled to vote with respect thereto
to adopt, alter, amend and repeal bylaws made by the Board of Directors;
provided, however, that bylaws shall not be adopted, altered, amended or
repealed by the stockholders of the Corporation except by the vote of the
holders of not less than sixty-six and two-thirds percent (66.67%) of the
combined voting power of all of the then outstanding capital stock entitled to
vote generally in the election of directors, voting together as a single class.
ARTICLE VII
To the fullest extent permitted by the General Corporation Law of the
State: of Delaware as the same exists or may hereafter be amended, the
Corporation shall indemnify and advance indemnification expenses on behalf of
all directors and officers of the Corporation. The Corporation shall indemnify
such other persons as may be required by statute or by the bylaws of the
Corporation.
2
<PAGE>
ARTICLE VIII
To the fullest extent permitted by the General Corporation Law of the State
of Delaware as the same exists or may hereafter be amended, a director of the
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for a breach of his\her fiduciary duty as a director. No
amendment to or repeal of this Article VIII shall apply to or have any effect on
the liability or alleged liability of a director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
ARTICLE IX
The Corporation reserves the right to amend, alter or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed herein or by statute, and all rights and powers conferred herein are
subject to this reserved power, provided, however, that subject to the powers
and rights provided for herein with respect to Preferred Stock issued by the
Corporation, if any, but notwithstanding anything else contained in this
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66.67%) of the combined
voting power of all of the then outstanding shares of capital stock entitled to
vote generally in the election of directors, voting together as a single class,
shall be required to amend, alter, repeal or adopt any provision inconsistent
with this Article IX or Articles V, VI, VII or VIII of this Certificate of
Incorporation or to add an article or provision imposing cumulative voting in
the election of directors or to reduce the number of authorized shares of Common
Stock and Preferred Stock Pursuant to Article IV.
ARTICLE X
The Corporation is to have perpetual existence.
ARTICLE XI
Election of directors of the Corporation need not be by written ballot
except and to the extent provided in the bylaws of the Corporation.
ARTICLE XII
The Board of Directors shall have the power to hold its meetings within or
outside the State of Delaware, at such place as from time to time may be
designated by the bylaws of the Corporation or by resolution of the Board of
Directors.
3. The foregoing amendment and restatement of Certificate of Incorporation has
been duly approved by the Board of Directors.
3
<PAGE>
4. The foregoing amendment and restatement of Certificate of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 245 of the Delaware General Corporation Law. The total number of
outstanding shares of the corporation was Eight Million Two Hundred
Thousand (8,200,000) Common Stock; and the number of shares voting in favor
of the amendment equaled or exceeded the vote required, such required vote
being a majority of the outstanding shares of Common Stock.
We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth in this certificate are true and correct of
our own knowledge.
Date: January 2, 1997
/s/ Michael Moone
-----------------------------
MICHAEL MOONE, President
/s/ Yves Faroudja
-----------------------------
YVES FAROUDJA, Secretary
4
<PAGE>
BYLAWS
OF
FAROUDJA, INC.
ARTICLE I.
OFFICES
Section 1.1 PRINCIPAL OFFICES.
The registered office of Faroudja, Inc. shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 1.2 OTHER OFFICES.
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 2.1 PLACE OF MEETINGS.
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
Section 2.2 ANNUAL MEETINGS OF STOCKHOLDERS.
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At each annual meeting, directors
shall be elected and any other proper business may be transacted.
Section 2.3 SPECIAL MEETINGS.
A special meeting of stockholders may be called at any time by the board of
directors, or by the chairman of the board, or by the president.
<PAGE>
Section 2.4 NOTICE OF STOCKHOLDERS' MEETINGS.
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.5 of this Article II not less than ten (10) nor more
than sixty (60) days before the date of the meeting being noticed. The notice
shall specify the place, date and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted, or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the
stockholders. The notice of any meeting at which directors are to be elected
shall include the name of any nominee or nominees which, at the time of the
notice, the board of directors intends to present for election. No business may
be transacted at an annual or special meeting of stockholders, other than
business that is (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the board of directors (or any duly
authorized committee thereof), (b) otherwise properly brought before the annual
or special meeting by or at the direction of the board of directors (or any duly
authorized committee thereto) or (c) otherwise properly brought before the
annual or special meeting by any stockholder. In addition to any other
applicable requirements, for business to be properly brought before an annual or
special meeting by a stockholder such stockholder must (i) be a stockholder of
record on the date of the giving of the notice provided for in this Section 2.4
of this Article II and on the record date for the determination of stockholders
entitled to vote at such annual or special meeting and (ii) provide timely
notice in proper form to the secretary pursuant to the procedures set forth in
this Section 2.4 of this Article II.
To be timely, a stockholder's notice to the secretary (other than a request
for inclusion of a proposal in the corporation's proxy statement pursuant to
Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) must be delivered to or mailed and received at the principal executive
offices of the corporation, in the case of an annual meeting, not less than
sixty (60) days nor more than ninety (90) days prior to the anniversary date of
the immediately preceding annual meeting of stockholders, and in the case of a
special meeting, not more than ninety (90) days prior to such meeting and not
later than the later of sixty (60) days prior to the special meeting or ten (10)
days following the day on which public announcement of the meeting is first made
by the Company; provided, however, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the secretary must
set forth as to each matter such stockholder proposes to bring before the annual
or special meeting (a) a brief description of the business desired to be brought
before the annual or special meeting and the reasons for conducting such
business at the annual or special meeting, (b) the name and record address of
such stockholder, (c) the class or series and number of shares of capital stock
of the corporation which are owned beneficially or of record by such
2
<PAGE>
stockholder, (d) a description of all arrangements or understandings between
such stockholder and any other person or persons (including their names) in
connection with the proposal of such business by such stockholder and any
material interest of such stockholder in such business and (e) a representation
that such stockholder intends to appear in person or by proxy at the annual or
special meeting to bring such business before the meeting.
No business shall be conducted at the annual or special meeting of
stockholders except business brought before the annual or special meeting in
accordance with the procedures set forth in this Section 2.4 of this Article II,
provided, however, that, once business has been properly brought before the
annual or special meeting in accordance with such procedures, nothing in this
Section 2.4 of this Article II shall be deemed to preclude discussion by any
stockholder of any such business. If the chairman of an annual or special
meeting determines that business was not property brought before such meeting in
accordance with the foregoing procedures, the chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
Section 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
Notice of any meeting of stockholders shall be given either personally or
by first-class mail, telegraphic, facsimile, or other written communication,
charges prepaid, addressed to the stockholder at the address of such stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent by first-class mail or telegram to the corporation's principal executive
office, or if published at least once in a newspaper of general circulation in
the county where this office is located. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram, facsimile, or other means of written communication.
If any notice addressed to a stockholder at the address of such stockholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the stockholder at such address, all
future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the stockholder upon written
demand of the stockholder at the principal executive office of the corporation
for a period of one year from the date of the giving of such notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the corporation giving such notice, and shall be filed and
maintained in the minute book of the corporation.
3
<PAGE>
Section 2.6 QUORUM.
The presence in person or by proxy of the holders of a majority of the
shares of all classes of stock entitled to vote at a meeting of stockholders
shall constitute a quorum for the transaction of business. The stockholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 2.7 ADJOURNED MEETING AND NOTICE THEREOF.
Any stockholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at such meeting, either in person or by proxy, but in the
absence of a quorum, no other business may be transacted at such meeting, except
as provided in Section 2.6 of this Article II.
When any meeting of stockholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at a meeting at which the adjournment is
taken, unless a new record date for the adjourned meeting is fixed, or unless
the adjournment is for more than forty-five (45) days from the date set for the
original meeting, in which case the board of directors shall set a new record
date. Notice of any such adjourned meeting shall be given to each stockholder
of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of this Article II. At any adjourned meeting
the corporation may transact any business which might have been transacted at
the original meeting.
Section 2.8 VOTING.
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of this Article II.
Voting at meetings of Stockholders need not be by written ballot unless the
holders of a majority of the outstanding shares of all classes of stock entitled
to vote thereon present in person or by proxy at such meeting shall so
determine. Any stockholder entitled to vote on any matter (other than elections
of directors) may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
stockholder fails to specify the number of shares such stockholder is voting
affirmatively, it will be conclusively presumed that the stockholder's approving
vote is with respect to all shares such stockholder is entitled to vote. Except
as provided in Section 2.6 of this Article II, the affirmative vote of a
majority of the shares represented and voting at a duly held meeting at which a
quorum is present (which shares voting affirmatively also constitute at least a
majority of the required quorum) shall be the act of the stockholders, unless
the vote
4
<PAGE>
of a greater number or voting by classes is required by the Corporations Code of
Delaware or the certificate of incorporation or these Bylaws.
Section 2.9 WAIVER OF NOTICE OR CONSENT BY ABSENT STOCKHOLDER.
The transactions at any meeting of stockholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though had
at a meeting duly held after regular call and notice, if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each
person entitled to vote, not present in person or by proxy, signs a written
waiver of notice or a consent to a holding of the meeting, or an approval of the
minutes thereof. The waiver of notice, consent to the holding of the meeting or
approval of the minutes thereof need not specify either the business to be
transacted or the purpose of any annual or special meeting of stockholders. All
such waivers, consents or approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of and presence at such meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required by
the Corporations Code of Delaware to be included in the notice but which were
not included in the notice, if such objection is expressly made at the meeting.
Section 2.10 LIST OF STOCKHOLDERS ENTITLED TO VOTE.
The secretary shall prepare and make, or cause to be prepared and made, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least then (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, such place to
be specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list of stockholders required by this Section 2.10 of Article II or the
books of the corporation, or to vote in person or by proxy at any meeting of
stockholders.
5
<PAGE>
Section 2.11 RECORD DATE FOR STOCKHOLDER NOTICE, VOTING, AND GIVING
CONSENTS.
For purposes of determining the stockholders entitled to notice of any
meeting or to vote, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days prior
to the date of any such meeting and in such case only stockholders at the close
of business on the record date so fixed are entitled to notice and to vote,
notwithstanding any transfer of any shares on the books of the corporation after
the record date fixed as aforesaid, except as otherwise provided in the
Corporations Code of Delaware.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held.
Section 2.12 PROXIES.
Every person entitled to vote for directors or on any other matter shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the stockholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the stockholder or the stockholder's attorney in fact. A
validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) revoked by the person executing it,
prior to the vote pursuant thereto, by a writing delivered to the corporation
stating that the proxy is revoked or by a subsequent proxy executed by the
person executing the prior proxy and presented to the meeting, or as to any
meeting by attendance at such meeting and voting in person by the person
executing the proxy; or (ii) written notice of the death or incapacity of the
maker of such proxy is received by the corporation before the vote pursuant
thereto is counted; provided, however, that no such proxy shall be valid after
the expiration of eleven (11) months from the date of such proxy, unless
otherwise provided in the proxy.
Section 2.13 INSPECTORS OF ELECTION.
Before any meeting of stockholders, the board of directors may appoint any
persons other than nominees for office to act as inspectors of election at the
meeting or its adjournment. If no inspectors of election are so appointed, the
chairman of the meeting may, and on the request of any stockholder or a
stockholder's proxy shall, appoint inspectors of election at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting on the request of one or more stockholders or proxies,
the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
the chairman of the
6
<PAGE>
meeting may, and upon the request of any stockholder or a stockholder's proxy
shall, appoint a person to fill such vacancy.
The duties of these inspectors shall be as follows:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all stockholders.
ARTICLE III.
DIRECTORS
Section 3.1 POWERS.
Subject to the provisions of the Corporations Code of Delaware and any
limitations in the certificate of incorporation and these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
Without prejudice to such general powers, but subject to the same
limitations, it is hereby expressly declared that the directors shall have the
power and authority to:
(a) Select and remove all officers, agents, and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the articles of incorporation or these bylaws, fix
their compensation, and require from them security for faithful service.
7
<PAGE>
(b) Change the principal executive office or the principal business office
in the State of Delaware from one location to another; cause the corporation to
be qualified to do business in any other state, territory, dependency, or
foreign country and conduct business within or outside the State of Delaware;
designate any place within or without the State of Delaware for the holding of
any stockholders' meeting, or meetings, including annual meetings; adopt, make
and use a corporate seal, and prescribe the forms of certificates of stock, and
alter the form of such seal and of such certificates from time to time as in
their judgment they may deem best, provided that such forms shall at all times
comply with the provisions of law.
(c) Authorize the issuance of shares of stock of the corporation from time
to time, upon such terms as may be lawful, in consideration of money paid, labor
done or services actually rendered, debts or securities cancelled or tangible or
intangible property actually received.
(d) Borrow money and incur indebtedness for the purposes of the
corporation, and cause to be executed and delivered therefor, in the corporate
name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges,
hypothecations, or other evidences of debt and securities therefor.
Section 3.2 NUMBER.
The board of directors shall consist of nine (9) members.
Section 3.3 TERMS.
The board of directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
board of directors. Initially, Class I directors shall be elected for a term to
expire at the 1997 annual meeting of stockholders, Class II directors for a term
to expire at the 1998 annual meeting of stockholders and Class III directors for
a term to expire at the 1999 annual meeting of stockholders. Beginning with the
1997 annual meeting of stockholders and at each annual meeting thereafter,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors has changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class but in no case will a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and until
his successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
8
<PAGE>
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of preferred stock issued by the corporation, if any, shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by the
terms of the certificate of incorporation, and such directors so elected shall
not be divided into classes pursuant to this Section 3.3 of this Article III
unless expressly provided by such terms.
Section 3.4 REMOVAL.
At any meeting of stockholders properly called for such purpose and with
prior notice thereof, all the directors, or all the directors of a particular
class, or any individual director, may be removed only for cause and only by the
affirmative vote of sixty six and two-thirds percent (66.67%) of the combined
voting power of all of the then outstanding capital stock of the corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class).
Section 3.5 NOMINATION OF DIRECTORS.
Following the consummation of an underwritten firm commitment initial
public offering declared effective by the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended, only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors of the corporation, except as may be otherwise provided in
the certificate of incorporation with respect to the right of holders of
preferred stock of the corporation to nominate and elect a specified number of
directors in certain circumstances. Nominations of persons for election to the
board of directors may be made at any annual meeting of stockholders, or at any
special meeting of stockholders called for the purpose of electing directors,
(a) by or at the direction of the board of directors (or any duly authorized
committee thereof) or (b) by any stockholder of the corporation (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 3.5 of this Article III and on the record date of the determination
of stockholders entitled to vote at such meeting and (ii) who complies with the
notice procedures set forth in this Section 3.5 of this Article III.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder, such stockholder must have given timely notice thereof in
proper written form to the secretary of the corporation.
To be timely, a stockholder's notice to the secretary must be delivered to
or mailed and received at the principal executive offices of the corporation
(a) in the case of annual meeting, not less than sixty (60) days nor more than
ninety (90) days prior to the anniversary date of the immediately preceding
annual meeting of stockholders; provided, however, that in the event that the
annual meeting is called for a date that is not within thirty (30) days before
or after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the close of business on the tenth (10th) day
9
<PAGE>
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs; and (b) in the case of a special meeting of stockholders
called for the purpose of electing directors, not more than ninety (90) days
prior to such meeting and not later than the later of sixty (60) days prior to
the special meeting or ten (10) days following the day on which public
announcement of the meeting is first made by the Company.
To be in proper written form, a stockholder's notice to the secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal occupation or employment of the person,
(iii) the class or series and number of shares of capital stock of the
corporation which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act, and the rules and regulations promulgated thereunder; and (b) as
to the stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the corporation which are owned beneficially or of record by such stockholder,
(iii) a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or persons (including
their names) pursuant to which the nomination(s) are to be made by such
stockholder, (iv) a representation that such stockholder intends to appear in
person or by proxy at the meeting to nominate the person(s) named in his notice
and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitation of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to be named as nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the corporation
unless nominated in accordance with the procedures set forth in this Section 3.5
of this Article III. If the chairman of the meeting determines that a
nomination was not made in accordance with the foregoing procedures, the
chairman shall declare to the meeting that the nomination was defective and such
defective nomination shall be disregarded.
Section 3.6 VACANCIES.
Any vacancy on the board of directors that results from an increase in the
number of directors shall be filled by a majority of the board of directors then
in office, and any other vacancy occurring in the board of directors shall be
filled by a majority of the directors then in office, even if less than a
quorum, or by a sole remaining director. Any director of any class elected to
fill a vacancy resulting from an increase in the number of directors in such
class shall hold office for a term that shall coincide with the remaining term
of that class. Any director elected to fill a vacancy not resulting from an
increase in the number of directors shall have the same remaining term as that
of his predecessor.
10
<PAGE>
A vacancy or vacancies in the board of directors shall be deemed to exist
in the case of the death, resignation or removal of any director, or if the
board of directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or convicted of a felony,
or if the authorized number of directors be increased, or if the stockholders
fail at any meeting of stockholders at which any director or directors are
elected, to elect the full authorized number of directors to be voted for at
that meeting.
Subject to Section 3.17 hereof, the stockholders may elect a director or
directors at any time to fill any vacancy or vacancies not filled by the
directors.
Any director may resign effective upon giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation of a director is effective at a future time,
the board of directors may, subject to Section 3.17, elect a successor to take
office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of his term of office.
Section 3.7 PLACE OF MEETINGS AND TELEPHONIC MEETINGS.
Regular meetings of the board of directors may be held at any place within
or without the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board shall be held at any place within or without the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or there is no notice, at the principal executive office of the
corporation. Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in such meeting can hear one another, and all such directors shall
be deemed to be present in person at such meeting.
Section 3.8 ANNUAL MEETING.
Immediately following each annual meeting of stockholders, the board of
directors shall hold a regular meeting for the purpose of organization, any
desired election of officers and the transaction of other business. Notice of
this meeting shall not be required.
Section 3.9 OTHER REGULAR MEETINGS.
Other regular meetings of the board of directors shall be held without call
at such time as shall from time to time be fixed by the board of directors.
Such regular meetings may be held without notice.
11
<PAGE>
Section 3.10 SPECIAL MEETINGS.
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board or the president or any vice
president or the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges pre-paid, addressed to each director at his or her address as
it is shown upon the records of the corporation. In case such notice is mailed,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours prior to
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated to either the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
Section 3.11 QUORUM.
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as hereinafter provided.
Every act or decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present shall be regarded as the act of
the board of directors. A meeting at which a quorum is initially present may
continue to transact business notwithstanding the withdrawal of directors, if
any action taken is approved by at least a majority of the required quorum for
such meeting.
Section 3.12 WAIVER OF NOTICE.
Notice of a meeting need not be given to any director who signs a waiver of
notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents and approvals shall be filed with the corporate records
or made a part of the minutes of the meeting.
Section 3.13 ADJOURNMENT.
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
12
<PAGE>
Section 3.14 NOTICE OF ADJOURNMENT.
Notice of the time and place of holding an adjourned meeting need not be
given, unless the meeting is adjourned for more than twenty-four hours, in which
case notice of such time and place shall be given prior to the time of the
adjourned meeting, in the manner specified in Section 3.10 of this Article III,
to the directors who were not present at the time of the adjournment.
Section 3.15 ACTION WITHOUT MEETING.
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, if all members of the board shall individually or
collectively consent in writing to such action. Such action by written consent
shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent or consents shall be filed with the minutes of
the proceedings of the board.
Section 3.16 FEES AND COMPENSATION OF DIRECTORS.
Directors and members of committees may receive such compensation, if any,
for their services, and such reimbursement of expenses, as may be fixed or
determined by resolution of the board of directors. Nothing contained herein
shall be construed to preclude any director from serving the corporation in any
other capacity as an officer, agent, employee, or otherwise, and receiving
compensation for such services.
Section 3.17 PREFERRED DIRECTORS.
Notwithstanding anything contained herein to the contrary, whenever the
holders of one or more classes or series of preferred stock shall have the
right, voting separately as a class or series, to elect directors, the election,
term of office, filling of vacancies, removal and other features of such
directorships shall be governed by the terms of the certificate of incorporation
and such directors so elected shall not be subject to the provisions of
Sections 3.2, 3.3, 3.5 and 3.6 of this Article III unless otherwise specifically
provided therein.
ARTICLE IV.
COMMITTEES
Section 4.1 COMMITTEES OF DIRECTORS.
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent member at
13
<PAGE>
any meeting of the committee. The appointment of members or alternate members
of a committee requires the vote of a majority of the authorized number of
directors. Any such committee, to the extent provided in the resolution of the
board, shall have all the authority of the board, except with respect to:
(a) the approval of any action which, under the Corporations Code of
Delaware or in the certificates of incorporation, also requires stockholders'
approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the board
or on any committee;
(d) the amendment or repeal of bylaws or the adoption of new bylaws;
(e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
(f) a distribution to the stockholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors or
the members thereof.
Section 4.2 MEETINGS AND ACTION OF COMMITTEES.
Meetings and action of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Sections 3.7
(place of meetings), 3.9 (regular meetings), 3.10 (special meetings and notice),
3.11 (quorum), 3.12 (waiver of notice), 3.13 (adjournment), 3.14 (notice of
adjournment) and 3.15 (action without meeting), with such changes in the context
of those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members, except that the time of regular meetings
of committees may be determined by resolution of the board of directors as well
as by resolution of the committee; special meetings of committees may also be
called by resolution of the board of directors; and notice of special meetings
of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
14
<PAGE>
ARTICLE V.
OFFICERS
Section 5.1 OFFICERS.
The officers of the corporation shall be a president, a secretary and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice-presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of
Section 5.3 of this Article V. Any number of offices may be held by the same
person.
Section 5.2 ELECTION OF OFFICERS.
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of this Article
V, shall be chosen by the board of directors, and each shall serve at the
pleasure of the board, subject to the rights, if any, of an officer under any
contract of employment.
Section 5.3 SUBORDINATE OFFICERS, ETC.
The board of directors may appoint, and may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority and perform
such duties as are provided in the bylaws or as the board of directors may from
time to time determine.
Section 5.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors, at any regular or special meeting thereof, or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. Any such resignation is without prejudice to the rights, if
any, of the corporation under any contract to which the officer is a party.
15
<PAGE>
Section 5.5 VACANCIES IN OFFICES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to such office.
Section 5.6 CHAIRMAN OF THE BOARD.
The chairman of the board, if such an officer be elected, shall, if
present, preside at all meetings of the board of directors and exercise and
perform such other powers and duties as may be from time to time assigned to him
by the board of directors or prescribed by the bylaws. If there is no
president, the chairman of the board shall in addition be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of this Article V.
Section 5.7 PRESIDENT.
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. The
president shall preside at all meetings of the stockholders and, in the absence
of the chairman of the board, or if there be none, at all meetings of the board
of directors. The president shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the board of directors
or the bylaws.
Section 5.8 VICE PRESIDENTS.
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president, and when so acting shall have all the powers of, and be
subject to all restrictions upon, the president. The vice presidents shall have
such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors or the bylaws, the
president or the chairman of the board.
Section 5.9 SECRETARY.
The secretary shall keep or cause to be kept, at the principal executive
office or such other place as the board of directors may order, a book of
minutes of all meetings and actions of directors, committees of directors and
stockholders, with the time and place of holding, whether regular or special,
and, if special, how authorized, the notice thereof given, the names of those
present at directors' and committee meetings, the number of shares present or
represented at stockholders' meetings, and the proceedings thereof.
16
<PAGE>
The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the board of directors, a share register, or a
duplicate share register, showing the names of all stockholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required by the bylaws or by law
to be given, and the secretary shall keep the seal of the corporation, if one be
adopted, in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by the bylaws.
Section 5.10 CHIEF FINANCIAL OFFICER.
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. The chief financial officer shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president and directors, whenever they request
it, an account of all transactions as chief financial officer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the board of directors or the
bylaws.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
Section 6.1 INDEMNIFICATION - THIRD PARTY PROCEEDINGS.
The corporation shall indemnify any person (the "Indemnitee") who is or
was a party or is threatened to be made a party to any proceeding (other than
an action by or in the right of the corporation to procure a judgment in its
favor) by reason of the fact that Indemnitee is or was a director or officer
of the corporation, or any subsidiary of the corporation, and the corporation
may indemnify a person who is or was a party or is threatened to be made a
party to any proceeding (other than an action by or in the right of the
corporation to procure a judgment in its favor) by reason of the fact that
such person is or was an employee or other agent of the corporation (the
"Indemnitee Agent") by reason of any action
17
<PAGE>
or inaction on the part of Indemnitee or Indemnitee Agent while an officer,
director or agent or by reason of the fact that Indemnitee or Indemnitee Agent
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including subject to Section 6.19,
attorneys' fees and any expenses of establishing a right to indemnification
pursuant to this Article VI or under Delaware law), judgments, fines,
settlements (if such settlement is approved in advance by the corporation, which
approval shall not be unreasonably withheld) and other amounts actually and
reasonably incurred by Indemnitee or Indemnitee Agent in connection with such
proceeding if Indemnitee or Indemnitee Agent acted in good faith and in a manner
Indemnitee or Indemnitee Agent reasonably believed to be in or not opposed to
the best interests of the corporation and, in the case of a criminal proceeding,
if Indemnitee or Indemnitee Agent had no reasonable cause to believe
Indemnitee's or Indemnitee Agent's conduct was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that
Indemnitee or Indemnitee Agent did not act in good faith and in a manner which
Indemnitee or Indemnitee Agent reasonably believed to be in or not opposed to
the best interests of the corporation, or with respect to any criminal
proceedings, would not create a presumption that Indemnitee or Indemnitee Agent
had reasonable cause to believe that Indemnitee's or Indemnitee Agent's conduct
was unlawful.
Section 6.2 INDEMNIFICATION - PROCEEDINGS BY OR IN THE RIGHT OF THE
CORPORATION.
The corporation shall indemnify Indemnitee and may indemnify Indemnitee
Agent if Indemnitee, or Indemnitee Agent, as the case may be, was or is a party
or is threatened to be made a party to any proceeding in the right of the
corporation or any subsidiary of the corporation to procure a judgment in its
favor by reason of the fact that Indemnitee or Indemnitee Agent is or was a
director, officer, employee or other agent of the corporation, or any subsidiary
of the corporation, by reason of any action or inaction on the part of
Indemnitee or Indemnitee Agent while an officer, director or agent or by reason
of the fact that Indemnitee or Indemnitee Agent is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including subject to Section 6.19, attorneys' fees and any expenses of
establishing a right to indemnification pursuant to this Article VI or under
Delaware law) and, to the fullest extent permitted by law, amounts paid in
settlement, in each case to the extent actually and reasonably incurred by
Indemnitee or Indemnitee Agent in connection with the defense or settlement of
the proceeding if Indemnitee or Indemnitee Agent acted in good faith and in a
manner Indemnitee or Indemnitee Agent believed to be in or not opposed to the
best interests of the corporation and its stockholders, except that no
indemnification shall be made with respect to any claim, issue or matter to
which Indemnitee or Indemnitee Agent shall have been adjudged to have been
liable to the corporation in the performance of Indemnitee's or Indemnitee
Agent's duty to the corporation and its stockholders, unless and only to the
extent that the court in which such proceeding is or was pending shall determine
upon application that, in view of all the
18
<PAGE>
circumstances of the case, Indemnitee or Indemnitee Agent is fairly and
reasonably entitled to indemnity for expenses and then only to the extent that
the court shall determine.
Section 6.3 SUCCESSFUL DEFENSE ON MERITS.
To the extent that Indemnitee or Indemnitee Agent without limitation has
been successful on the merits in defense of any proceeding referred to in
Sections 6.1 or 6.2 above, or in defense of any claim, issue or matter therein,
the corporation shall indemnify Indemnitee and may indemnify Indemnitee Agent
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee or Indemnitee Agent in connection therewith. An Indemnitee shall be
deemed to have been successful on the merits, if the Plaintiff in the action
does not prevail in obtaining the relief sought in the suit or action or
demanded in the claim.
Section 6.4 CERTAIN TERMS DEFINED.
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans, references to "fines" shall include any excise
taxes assessed on Indemnitee or Indemnitee Agent with respect to an employee
benefit plan, and references to "proceeding" shall include any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative. References to "corporation" include all
constituent corporations absorbed in a consolidation or merger as well as the
resulting or surviving corporation, so that any person who is or was a director,
officer, employee, or other agent of such a constituent corporation or who,
being or having been such a director, officer, employee or other agent of
another corporation, partnership, joint venture, trust or other enterprise shall
stand in the same position under the provisions of this Article VI with respect
to the resulting or surviving corporation as such person would if he or she had
served the resulting or surviving corporation in the same capacity.
Section 6.5 ADVANCEMENT OF EXPENSES.
The corporation shall advance all expenses incurred by Indemnitee and may
advance all or any expenses incurred by Indemnitee Agent in connection with the
investigation, defense, settlement (excluding amounts actually paid in
settlement of any action, suit or proceeding) or appeal of any civil or criminal
action, suit or proceeding referenced in Sections 6.1 or 6.2 hereof. Indemnitee
or Indemnitee Agent hereby undertakes to repay such amounts advanced only if,
and to the extent that, it shall be determined ultimately that Indemnitee or
Indemnitee Agent is not entitled to be indemnified by the corporation as
authorized hereby. The advances to be made hereunder shall be paid by the
corporation (i) to Indemnitee within twenty (20) days following delivery of a
written request therefor by Indemnitee to the corporation; and (ii) to
Indemnitee Agent within twenty (20) days following the later of a written
request therefor by Indemnitee Agent to the corporation and determination by the
corporation to advance expenses to Indemnitee Agent pursuant to the
corporation's discretionary authority hereunder.
19
<PAGE>
Section 6.6 NOTICE OF CLAIM.
Indemnitee shall, as a condition precedent to his or her right to be
indemnified under this Article VI, and Indemnitee Agent shall, as a condition
precedent to his or her ability to be indemnified under this Article VI, give
the corporation notice in writing as soon as practicable of any claim made
against Indemnitee or Indemnitee Agent, as the case may be, for which
indemnification will or could be sought under this Article VI; PROVIDED,
HOWEVER, that the failure to give such notice shall not affect the Indemnitee's
rights hereunder except and only to the extent such failure prejudiced the
corporation's ability to successfully defend the matter subject to such notice.
Notice to the corporation shall be directed to the president and secretary of
the corporation at the principal business office of the corporation with copies
to Buchalter, Nemer, Fields & Younger, 601 South Figueroa Street, Suite 2400,
Los Angeles, California 90017, Attention: Mark A. Bonenfant, Esq. (or such
other address as the corporation shall designate in writing to Indemnitee). In
addition, Indemnitee or Indemnitee Agent shall give the corporation such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's or Indemnitee Agent's power.
Section 6.7 ENFORCEMENT RIGHTS.
Any indemnification provided for in Sections 6.1 or 6.2 or 6.3 shall be
made no later than sixty (60) days after receipt of the written request of
Indemnitee. If a claim or request under this Article VI, under any statute, or
under any provision of the corporation's certificate of incorporation providing
for indemnification is not paid by the corporation, or on its behalf, within
sixty (60) days after written request for payment thereof has been received by
the corporation, Indemnitee may, but need not, at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim or request,
and subject to Section 6.19, Indemnitee shall also be entitled to be paid for
the expenses (including attorneys' fees) of bringing such action. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in connection with any action, suit or proceeding in advance
of its final disposition) that Indemnitee has not met the standards of conduct
which make it permissible under applicable law for the corporation to indemnify
Indemnitee for the amount claimed, but the burden of proving such defense shall
be on the corporation, and Indemnitee shall be entitled to receive interim
payments of expenses pursuant to Section 6.5 unless and until such defense may
be finally adjudicated by court order or judgment for which no further right of
appeal exists. The parties hereto intend that if the corporation contests
Indemnitee's right to indemnification, the question of Indemnitee's right to
indemnification shall be a decision for the court, and no presumption regarding
whether the applicable standard has been met will arise based on any
determination or lack of determination of such by the corporation (including its
Board or any subgroup thereof, independent legal counsel or its stockholders).
The board of directors may, in its discretion, provide by resolution for similar
or identical enforcement rights for any Indemnitee Agent.
20
<PAGE>
Section 6.8 ASSUMPTION OF DEFENSE.
In the event the corporation shall be obligated to pay the expenses of any
proceeding against the Indemnitee or Indemnitee Agent, as the case may be, the
corporation, if appropriate, shall be entitled to assume the defense of such
proceeding with counsel approved by Indemnitee or Indemnitee Agent, which
approval shall not be unreasonably withheld, upon the delivery to Indemnitee or
Indemnitee Agent of written notice of its election so to do. After delivery of
such notice, approval of such counsel by Indemnitee or Indemnitee Agent and the
retention of such counsel by the corporation, the corporation will not be liable
to Indemnitee or Indemnitee Agent under this Article VI for any fees of counsel
subsequently incurred by Indemnitee or Indemnitee Agent with respect to the same
proceeding, unless (i) the employment of counsel by Indemnitee or Indemnitee
Agent is authorized by the corporation, (ii) Indemnitee or Indemnitee Agent
shall have reasonably concluded, based upon written advice of counsel, that
there may be a conflict of interest of such counsel retained by the corporation
between the corporation and Indemnitee or Indemnitee Agent in the conduct of
such defense, or (iii) the corporation ceases or terminates the employment of
such counsel with respect to the defense of such proceeding, in any of which
events then the fees and expenses of Indemnitee's or Indemnitee Agent's counsel
shall be at the expense of the corporation. At all times, Indemnitee or
Indemnitee Agent shall have the right to employ other counsel in any such
proceeding at Indemnitee's or Indemnitee Agent's expense, and to participate in
the defense of the proceeding or claim through such counsel.
Section 6.9 APPROVAL OF EXPENSES.
No expenses for which indemnity shall be sought under this Article VI,
other than those in respect of judgments and verdicts actually rendered, shall
be incurred without the prior consent of the corporation, which consent shall
not be unreasonably withheld.
Section 6.10 SUBROGATION.
In the event of payment under this Article VI, the corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Indemnitee or Indemnitee Agent, who shall do all things that may be necessary to
secure such rights, including the execution of such documents necessary to
enable the corporation effectively to bring suit to enforce such rights.
Section 6.11 EXCEPTIONS.
Notwithstanding any other provision herein to the contrary, the corporation
shall not be obligated pursuant to this Article VI:
(a) EXCLUDED ACTS. To indemnify Indemnitee (i) as to circumstances in
which indemnity is expressly prohibited pursuant to Delaware law, (ii) for any
acts or omissions
21
<PAGE>
or transactions from which a director may not be relieved of liability pursuant
to Delaware law; or (iii) any act or acts of bad faith or willful misconduct; or
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Article VI or any other statute or law or as otherwise required under the
Corporations Code of Delaware, but such indemnification or advancement of
expenses may be provided by the corporation in specific cases if the board of
directors has approved the initiation or bringing of such suit; or
(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses incurred
by the Indemnitee with respect to any proceeding instituted by Indemnitee to
enforce or interpret this Article VI, if a court of competent jurisdiction
determines that such proceeding was not made in good faith or was frivolous; or
(d) INSURED CLAIMS. To indemnify Indemnitee for expenses or liabilities
of any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes or penalties, and amounts paid in settlement) which have been paid
directly to Indemnitee by an insurance carrier under a policy of officers' and
directors' liability insurance maintained by the corporation; or
(e) BREACHES OF AGREEMENTS. To indemnify Indemnitee for expenses or
liabilities (including indemnification obligations of Indemnitee) of any type
whatsoever arising from his breach of an employment agreement with the
corporation (if any) or any other agreement with the corporation or any of its
subsidiaries; or
(f) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Exchange Act, as amended, or any
similar successor statute.
Section 6.12 PARTIAL INDEMNIFICATION.
If Indemnitee is entitled under any provision of this Article VI to
indemnification by the corporation for some or a portion of the expenses,
judgments, fines or penalties actually or reasonably incurred by the Indemnitee
in the investigation, defense, appeal or settlement of any civil or criminal
action, suit or proceeding, but not, however, for the total amount thereof, the
corporation shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
Section 6.13 COVERAGE.
All rights to indemnification under this Article VI shall be deemed to be
provided by a contract between the corporation and the Indemnitee in which the
corporation hereby
22
<PAGE>
agrees except as expressly provided in these bylaws to indemnify Indemnitee to
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the corporation's certificate of
incorporation, these bylaws or by statute. Any repeal or modification of these
bylaws, the Corporations Code of Delaware or any other applicable law shall not
affect any rights or obligations then existing under this Article VI. The
provisions of this Article VI shall continue as to Indemnitee and Indemnitee
Agent for any action taken or not taken while serving in an indemnified capacity
even though the Indemnitee or Indemnitee Agent may have ceased to serve in such
capacity at the time of any action, suit or other covered proceeding. This
Article VI shall be binding upon the corporation and its successors and assigns
and shall inure to the benefit of Indemnitee and Indemnitee Agent and
Indemnitee's and Indemnitee Agent's estate, heirs, legal representatives and
assigns.
Section 6.14 NON-EXCLUSIVITY.
Nothing herein shall be deemed to diminish or otherwise restrict any rights
to which Indemnitee or Indemnitee Agent may be entitled under the corporation's
certificate of incorporation, any agreement, any vote of stockholders or
disinterested directors, or, except as expressly provided herein, under the laws
of the State of Delaware.
Section 6.15 SEVERABILITY.
Nothing in this Article VI is intended to require or shall be construed as
requiring the corporation to do or fail to do any act in violation of applicable
law. If this Article VI or any portion hereof shall be invalidated on any
ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify Indemnitee or Indemnitee Agent to the fullest extent
permitted by any applicable portion of this Article VI that shall not have been
invalidated.
Section 6.16 MUTUAL ACKNOWLEDGMENT.
Both the corporation and Indemnitee acknowledge that in certain instances,
Federal law or applicable public policy may prohibit the corporation from
indemnifying its directors and officers under this Article VI or otherwise.
Indemnitee understands and acknowledges that the corporation has undertaken or
may be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the corporation's right under public policy
to indemnify Indemnitee.
Section 6.17 OFFICER AND DIRECTOR LIABILITY INSURANCE.
The corporation shall, from time to time, make the good faith determination
whether or not it is practicable for the corporation to obtain and maintain a
policy or policies of insurance with reputable insurance companies providing the
officers and directors of the corporation with coverage for losses from wrongful
acts, or to ensure the corporation's
23
<PAGE>
performance of its indemnification obligations under this Article VI. Among
other considerations, the corporation will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage.
Notwithstanding the foregoing, the corporation shall have no obligation to
obtain or maintain such insurance if the corporation determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the corporation.
Section 6.18 NOTICE TO INSURERS.
If, at the time of the receipt of a notice of a claim pursuant to
Section 6.6 hereof, the corporation has director and officer liability insurance
in effect, the corporation shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The corporation shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
Section 6.19 ATTORNEYS' FEES.
In the event that any action is instituted by Indemnitee under this Article
VI to enforce or interpret any of the terms hereof, Indemnitee shall be entitled
to be paid all court costs and expenses, including reasonable attorneys' fees,
incurred by Indemnitee with respect to such action, unless as a part of such
action, the court of competent jurisdiction determines that the action was not
instituted in good faith or was frivolous. In the event of an action instituted
by or in the name of the corporation under this Article VI, or to enforce or
interpret any of the terms of this Article VI, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that Indemnitee's defenses to such action were not
made in good faith or were frivolous. The board of directors may, in its
discretion, provide by resolution for payment of such attorneys' fees to any
Indemnitee Agent.
Section 6.20 NOTICE.
All notices, requests, demands and other communications under this Article
VI shall be in writing and shall be deemed duly given (i) if delivered by hand
and receipted for by the addressee, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked.
24
<PAGE>
ARTICLE VII.
RECORDS AND REPORTS
Section 7.1 MAINTENANCE OF SHARE REGISTER.
The corporation shall keep at its principal executive office, or at the
office of its transfer agent or registrar, if either be appointed and as
determined by resolution of the board of directors, a record of its
stockholders, giving the names and addresses of all stockholders and the number
and class of shares held by each stockholder.
Section 7.2 MAINTENANCE AND INSPECTION OF BYLAWS.
The corporation shall keep at its principal executive office, or if its
principal executive office is not in the State of Delaware at its principal
business office in California, the original or a copy of the bylaws as amended
to date, which shall be open to inspection by the stockholders at all reasonable
times during office hours. If the principal executive office of the corporation
is outside California, and the corporation has no principal business office in
California, the secretary shall, upon the written request of any stockholder,
furnish to such stockholder a copy of the bylaws as amended to date.
Section 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.
The accounting books and records and minutes of proceedings of the
stockholders and the board of directors and any committee or committees of the
board of directors shall be kept at such place or places designated by the board
of directors, or, in the absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form. Such minutes and
accounting books and records shall be open to inspection upon the written demand
of any stockholder or holder of a voting trust certificate, at any reasonable
time during usual business hours, for a purpose reasonably related to such
holder's interests as a stockholder or as the holder of a voting trust
certificate. Such inspection may be made in person or by an agent or attorney,
and shall include the right to copy and make extracts. The foregoing rights of
inspection shall extend to the records of each subsidiary of the corporation.
Section 7.4 INSPECTION BY DIRECTORS.
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind and the physical
properties of the corporation and each of its subsidiary corporations. This
inspection by a director may be made in person or by an agent or attorney and
the right of inspection includes the right to copy and make extracts of
documents.
25
<PAGE>
ARTICLE VIII.
GENERAL CORPORATE MATTERS
Section 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
stockholders by written consent without a meeting), the board of directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
prior to any such action, and in such case only stockholders of record on the
date so fixed are entitled to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date
fixed as aforesaid, except as otherwise provided in the Corporations Code of
Delaware.
If the board of directors does not so fix a record date, the record date
for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the resolution relating thereto,
or the sixtieth (60th) day prior to the date of such action, whichever is later.
Section 8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS.
All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness, issued in the name of or payable to the corporation,
shall be signed or endorsed by such person or persons and in such manner as,
from time to time, shall be determined by resolution of the board of directors.
Section 8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED.
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, agent or agents, to enter into any contract
or execute any instrument in the name of and on behalf of the corporation, and
such authority may be general or confined to specific instances; and, unless so
authorized or ratified by the board of directors or within the agency power of
an officer, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount.
Section 8.4 CERTIFICATES FOR SHARES.
A certificate or certificates for shares of the capital stock of the
corporation shall be issued to each stockholder when any such shares are fully
paid, and the board of directors may authorize the issuance of certificates for
shares as partly paid provided that such
26
<PAGE>
certificates shall state the amount of the consideration to be paid therefor and
the amount paid thereon. All certificates shall be signed in the name of the
corporation by the chairman of the board or vice chairman of the board or the
president or a vice president and by the chief financial officer or an assistant
treasurer or the secretary or any assistant secretary, certifying the number of
shares and the class or series of shares owned by the stockholder. Any or all
of the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
Section 8.5 LOST CERTIFICATES.
Except as hereinafter in this Section 8.5 provided, no new certificates for
shares shall be issued in lieu of an old certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors shall in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of a new
certificate in lieu thereof, upon such terms and conditions as the board may
reasonably require including provision for indemnification of the corporation
secured by a bond or other adequate security sufficient to protect the
corporation against any claim that may be made against it, including any expense
or liability, on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate.
Section 8.6 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
The chairman of the board, the president, or any vice president, or any
other person authorized by resolution of the board of directors by any of the
foregoing designated officers, is authorized to vote on behalf of the
corporation any and all shares of any other corporation or corporations, foreign
or domestic, standing in the name of the corporation. The authority herein
granted to said officers to vote or represent on behalf of the corporation any
and all shares held by the corporation in any other corporation or corporations
may be exercised by any such officer in person or by any person authorized to do
so by proxy duly executed by said officer.
Section 8.7 CONSTRUCTION AND DEFINITIONS.
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Corporations Code of Delaware shall govern
the construction of these bylaws. Without limiting the generality of the
foregoing, the singular number includes the plural, the plural number includes
the singular, and the term "person" shall be construed broadly and shall include
a natural person, corporation or other entity.
27
<PAGE>
Section 8.8 AMENDMENTS.
Except as otherwise provided in the certificate of incorporation, these
bylaws (including this Section 8.8) may be altered, amended or repealed in whole
or in part, or new bylaws may be adopted, by the stockholders or by the board of
directors. Except as otherwise provided in the certificate of incorporation,
all such amendments must be approved by either the holders of at least sixty six
and two-thirds percent (66.67%) of the combined voting power of all of the then
outstanding capital stock entitled to vote generally in the election of
directors, voting together as a single class, or by a majority of the board of
directors.
28
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of FAROUDJA, INC., a
Delaware corporation; and
(2) That the foregoing bylaws, comprising of twenty-eight (28) pages,
constitute the bylaws of such corporation, as duly adopted by the board of
directors of this corporation dated January 2, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal
of such corporation this 2nd day of January, 1997.
/s/ Yves Faroudja
--------------------------------------------
Yves Faroudja, Secretary
29
<PAGE>
THIS WARRANT AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS WARRANT MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF THIS WARRANT, A COPY OF WHICH
IS ON FILE WITH THE SECRETARY OF THE COMPANY.
Warrant Number: WC-1
Void after
------------
WARRANT TO PURCHASE COMMON STOCK OF
FAROUDJA RESEARCH ENTERPRISES, INC.
This certifies that, for value received, John Sie is entitled, subject to
the terms set forth below, to purchase from Faroudja Research Enterprises, Inc.
(the "Company"), a California corporation, up to 58,950 shares (the "Shares") of
fully paid and non-assessable shares of Common Stock of the Company at the price
of $.50 per share (the "Exercise Price") at the times and subject to the
conditions hereafter stated, such price and number of Shares being subject to
adjustment as herein provided in this Warrant.
1. DEFINITIONS.
As used in this Warrant, the following terms, unless the context
otherwise requires, have the following meanings:
(a) "COMPANY" includes any corporation which shall succeed to or
assume the obligations of the Company under this Warrant.
(b) "COMMON STOCK", when used with reference to stock of the Company,
means all shares, now or hereafter authorized, of the class of the Common Stock
of the Company presently authorized and stock of any other class into which
those shares may hereafter be changed.
<PAGE>
(c) "WARRANTHOLDER", "holder of Warrant", "holder", or similar terms
when the context refers to the original holder of this Warrant.
2. EXERCISE CONDITIONS.
(a) EXERCISABILITY. This Warrant shall be vested and exercisable,
cumulatively, during its term only in accordance with the terms and conditions
herein, as to one-forty-eighth (1/48th) of the Shares for each full calendar
month after the Vesting Commencement Date set forth on the signature page of
this Warrant.
(b) TERMINATION OF STATUS. This Warrant is exercisable only for the
number of shares which become exercisable during the period Warrantholder
continues to provide services as requested by the Company and as determined in
the Company's discretion.
(c) NO CONSULTING AGREEMENT. This Warrant, and the issuance thereof
shall not be construed and is not an agreement to retain Warrantholder as a
consultant to the Company.
(d) ACCELERATION OF EXERCISABILITY. During the period this Warrant
is exercisable, in the event that (i) the Company shall consolidate with or
merge into any other corporation, or sell all or substantially all of its assets
to another corporation (unless after the completion of such transaction the
shareholders of the Company immediately prior to the transaction own at least
fifty percent (50%) of the surviving corporation), or (ii) the Company registers
its securities on a Form S-1 registration statement and such registration
statement is declared effective by the Securities and Exchange Commission (an
"IPO"), this Warrant shall accelerate and become fully exercisable as to all
Shares, notwithstanding the provisions of Section 2.
3. EXERCISE PROVISIONS.
(a) EXERCISE OF WARRANT. The holder of this Warrant may exercise it
in whole or in part to the extent then exercisable by surrender of this Warrant,
with the form of subscription at the end of this Warrant duly executed by the
holder, to the Company at its principal office, accompanied by payment in the
amount obtained by multiplying the Exercise Price by the number of shares of
Common Stock designated in the subscription at the end of this Warrant.
(b) PAYMENT OF EXERCISE PRICE. Payment shall be made by cash or by
check payable to the order of the Company.
(c) PARTIAL EXERCISE. On partial exercise, the Company shall
promptly issue and deliver to the holder of this Warrant a new Warrant or
Warrants of like tenor in the name of the holder providing for the right to
purchase the number of shares of Common Stock as to which this Warrant has not
been exercised.
2
<PAGE>
(d) RESTRICTIONS ON EXERCISE. This Warrant may not be exercised if
the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations.
As a condition to the exercise of this Warrant, the Company may require the
Warrantholder to make any representation and warranty to the Company as may be
required by any applicable law or regulation.
4. STOCK ISSUANCE.
(a) DELIVERY OF STOCK CERTIFICATES. As soon as possible after full
or partial exercise of this Warrant, the Company at its expense will cause to be
issued in the name of and delivered to the holder of this Warrant, a certificate
or certificates for the number of fully paid and nonassessable shares of Common
Stock to which that holder shall be entitled upon such exercise, together with
any other securities and property to which that holder is entitled upon such
exercise under the terms of this Warrant. No fractional shares will be issued
upon exercise of rights to purchase under this Warrant. If upon any exercise of
this Warrant a fraction of a share results, the Company will pay the cash value
of that fractional share, calculated on the basis of the market price as of the
date of exercise as determined by the Company's Board of Directors.
(b) STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants
and agrees that all Shares will, upon issuance and payment in accordance
herewith, be fully paid, validly issued and nonassessable. The Company further
covenants and agrees that the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of this Warrant, at least
the maximum number of Shares as are issuable upon the exercise of this Warrant.
(c) NO RIGHTS AS SHAREHOLDER. Warrantholder, as such, shall not be
entitled to vote or receive dividends or be considered a shareholder of the
Company for any purpose, nor shall anything in this Warrant be construed to
confer on Warrantholder, as such, any rights of a shareholder of the Company or
any right to vote, give or withhold consent to any corporate action, to receive
notice of meetings of shareholders, to receive dividends or subscription rights
or otherwise.
5. ADJUSTMENT PROVISIONS.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Exercise Price shall be subject to adjustment from time to
time upon the happening of certain events, as follows:
(a) RECLASSIFICATION. If the Company at any time while this Warrant
remains outstanding shall reclassify or in any manner change the securities then
purchasable upon the exercise of this Warrant (a "Reorganization"), then lawful
and adequate provision shall be made whereby this Warrant shall thereafter
evidence the
3
<PAGE>
right to purchase such number and kind of securities and other property as would
have been issuable or distributable on account of such reorganization upon or
with respect to the securities which were purchasable or would have become
purchasable under this Warrant immediately prior to such Reorganization.
(b) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the Exercise Price shall be adjusted to that price determined
by multiplying the Exercise Price in effect immediately prior to such
subdivision or combination by a fraction (i) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
subdivision or combination and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such subdivision
or combination.
(c) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Company at any time
while this Warrant is outstanding and unexpired shall take a record of the
holders of its Common Stock for the purpose of:
(i) STOCK DIVIDENDS. Entitling them to receive a dividend
payable in, or other distribution without consideration of, Common Stock, then
the Exercise Price shall be adjusted to that price determined by multiplying the
Exercise Price in effect immediately prior to each dividend or distribution by a
fraction (A) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution and
(B) the denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution; or
(ii) DISTRIBUTION OF ASSETS; SECURITIES; ETC. Making any
distribution without consideration with respect to its Common Stock (other than
a cash dividend) payable otherwise than in its Common Stock, the Warrantholder
shall, upon the exercise thereof, be entitled to receive, in addition to the
number of Shares receivable thereupon, and without payment of any additional
consideration therefor, such assets or securities as would have been payable to
him as owner of that number of Shares receivable by exercise of this Warrant had
Warrantholder been the holder of record of such Shares on the record date for
such distribution; and an appropriate provision therefor shall be made a part of
any such distribution.
(d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the
Exercise Price pursuant to Section 5(b) or (c)(i), the number of Shares
purchasable hereunder shall be adjusted to that number determined by multiplying
the number of Shares purchasable upon the exercise of this Warrant immediately
prior to such adjustment by a fraction, the numerator of which shall be the
Exercise Price immediately prior to such adjustment and the denominator of which
shall be the Exercise Price immediately following such adjustment.
4
<PAGE>
(e) NOTICE OF ADJUSTMENTS. The Company shall give notice of each
adjustment or readjustment of the Exercise Price or the number of shares of
Common Stock or other securities issuable upon Exercise of this Warrant to the
registered holder of this Warrant at that holder's address as shown on the
Company's books.
(f) NO CHANGE NECESSARY. The form of this Warrant need not be
changed because of any adjustment in the Exercise Price or in the number of
shares of Common Stock purchasable upon its exercise. A Warrant issued after
any adjustment upon any partial exercise or in replacement may continue to
express the same Exercise Price and the same number of shares of Common Stock
(appropriately reduced in the case of partial exercise) as are stated on the
face of this Warrant as initially issued, and that Exercise Price and that
number of shares shall be considered to have been so changed at the close of
business on the date of adjustment.
6. SECURITIES LAW RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. In connection with the acquisition
of this Warrant, the Warrantholder represents and warrants that the
Warrantholder is acquiring this Warrant, and upon exercise of this Warrant the
Warrantholder will be acquiring the Shares, for investment for Warrantholder's
own account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof. The Warrantholder, by reason of
Warrantholder's business or financial experience, has the capacity to evaluate
the merits and risks of purchasing Common Stock of the Company and to make an
informed investment decision with respect thereto and to protect Warrantholder's
interests in connection with the acquisition of this Warrant and the Shares.
Warrantholder will execute any investment representation statement requested by
the Company.
(b) LEGENDS. Any certificate representing any Shares issued
hereunder shall have endorsed thereon legends in substantially the following
form (in addition to any legends required by any state securities laws):
THIS WARRANT AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS WARRANT MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE
5
<PAGE>
TERMS OF THIS WARRANT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
7. NONTRANSFERABILITY OF WARRANT.
This Warrant may not be sold, pledged, assigned, hypothecated, gifted,
transferred or disposed of in any manner either voluntarily or involuntarily by
operation of law, other than by will or by the laws of descent or distribution,
and may be exercised during the lifetime of the Warrantholder only by such
Warrantholder. Subject to the foregoing, the terms of this Warrant shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Warrantholder.
8. LIMITATIONS ON TRANSFER OF SHARES.
In addition to any other limitation on the transfer of the Shares
created by applicable securities laws, Warrantholder shall not assign, encumber
or dispose of any interest in such Shares except as provided in this Section 8:
(a) RIGHT OF FIRST REFUSAL. If Warrantholder desires (or is
required) to sell or transfer in any manner the Shares, Warrantholder shall
first offer such Shares for sale to the Company at the same price, and upon the
same terms (or terms as similar as reasonably possible) as those upon which he
is dispose of such Shares ("Right of First Refusal"). If the transfer does not
involve a bona fide price freely set by Warrantholder, the price shall be
determined as set forth in Section 8(c) below. The Company (or its assignee)
shall notify Warrantholder as to whether the Company wishes to purchase the
Shares pursuant to the Right of First Refusal within forty-five (45) days
following the setting of a price under Section 8(c) (when the price is
determined under Section 8(c). If the Company (or its assignee) elects to
purchase such Shares hereunder, it shall set a date for the closing of the
transaction at a place specified by the Company not later than 30 days from the
date of such notice. At such closing, the Company (or its assignee) shall
tender payment for the Shares and the certificates representing the Shares so
purchased shall be cancelled. Warrantholder hereby authorizes and directs the
Secretary or Transfer Agent of the Company to transfer the Shares as to which
the Right of First Refusal has been exercised from optionee to the Company. The
Warrantholder further authorizes the Company to refuse or to cause its Transfer
Agent to refuse, to transfer or record any Shares to be transferred in violation
of this Agreement. In the event the Shares are not disposed of by the
Warrantholder within forty-five (45) days following lapse of the period of the
Right of First Refusal provided to the Company, the Shares shall once again be
subject to the Right of First Refusal herein provided.
(b) INVOLUNTARY TRANSFER. In the event of any transfer by operation
of law or other involuntary transfer, of all, or a portion, of the Shares, the
Company shall have an option to purchase all of the Shares transferred (the
"Involuntary Transfer Option"). Upon such transfer, the person acquiring the
Shares shall promptly notify the Secretary of the Company of such transfer. The
Company (or its assignee) shall notify
6
<PAGE>
Warrantholder and the person acquiring the Shares as to whether the Company
wishes to purchase the Shares pursuant to the Involuntary Transfer Option within
forty-five (45) days following the setting of a price under Section 8(c) of this
Agreement. If the Company (or its assignee) elects to purchase such Shares
hereunder, it shall set a date for the closing of the transaction at a place
specified by the Company not later than 30 days from the date of such notice.
At such closing, the Company (or its assignee) shall tender payment for the
Shares and the certificates representing the Shares so purchased shall be
cancelled. Warrantholder hereby authorizes and directs the Secretary or
Transfer Agent of the Company to transfer the Shares as to which the Involuntary
Transfer Option has been exercised from the Warrantholder to the Company.
Warrantholder further authorizes the Company to refuse or to cause its Transfer
Agent to refuse, to transfer or record any Shares to be transferred in violation
of this Agreement.
(c) DETERMINATION OF PRICE. With respect to the Shares to be
transferred pursuant to the Right of First Refusal where the price is not a bona
fide price set by the Warrantholder under Section 8(a) or the Involuntary
Transfer Option, the price per share shall be a price set by the Board of
Directors of the Company that will reflect the current value of the Shares. The
Company shall notify Warrantholder, his representative or the person acquiring
the Shares under Section 8(b) of the price so determined within forty-five (45)
days after receipt by it of written notice of the transfer or proposed transfer
of the Shares.
(d) ASSIGNMENT BY COMPANY. The Company's Right of First Refusal and
Involuntary Transfer Option may be assigned in whole or in part to any
shareholder or shareholders of the Company.
(e) OBLIGATIONS BINDING UPON TRANSFEREES. All transferees of Shares
or any interest therein will receive and hold such Shares or interests subject
to the provisions of this Warrant, including the Company's Right of First
Refusal and Involuntary Transfer Option. Any sale or transfer of the Shares
shall be void unless the provisions of this Option are met.
(f) TERMINATION OF RIGHTS. The Right of First Refusal and the
Involuntary Transfer Option granted the Company by this Section 8 shall
terminate at such time as a public market exists for the Company's Common Stock
(or any other stock issued to Warrantholder in exchange for the Shares acquired
upon exercise pursuant to this Warrant). For the purpose of this Agreement, a
"public market" shall be deemed to exist if the Common Stock is listed on a
national securities exchange (as that term is used in the Securities Exchange
Act of 1934), or the Common Stock is traded on the over-the-counter market and
prices are published on business days in a recognized financial journal.
(g) EXCLUDED TRANSFERS. The restrictions on transfer if this Section
8 shall not apply to an inter-vivos transfer to Warrantholder's ancestors or
descendants or spouse or to a Trustee for their benefit, provided that such
transferee shall take such
7
<PAGE>
Shares subject to all of the terms of this Warrant, including restrictions on
further transfer.
9. TERMINATION.
The right to exercise this Warrant shall expire upon the earlier of
the following: (i) the close of business on the date set forth on the first
page of this Warrant, (ii) the effective date of a firm commitment underwritten
public offering pursuant to a registration statement filed under the Securities
Act of 1933, as amended, covering the offer and sale of the Company's Common
Stock or (iii) upon the consolidation or merger of the Company into any other
corporation or the sale of all or substantially all of its assets to another
corporation, unless after the completion of the transaction the shareholders of
the Company immediately prior to the transaction own at least fifty percent
(50%) of the shares of the surviving corporation.
10. GENERAL.
(a) ENTIRE AGREEMENT. The Company and the holder agree that this
Warrant amends and supersedes any prior agreement or understanding of the holder
with the Company, Sunsteam, Ltd., or any officers, directors, partners or agents
of the foregoing relating to the acquisition of securities in the Company and
supersedes any financial obligations of the Company to the holder.
(b) AMENDMENT. The holder of this Warrant agrees that any provision
of this Warrant may be amended, waived or modified upon the written approval of
the Company and the holder of this Warrant.
(c) REPLACEMENT. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction, or mutilation of this Warrant and,
in the case of loss, theft, or destruction, on delivery of any indemnity
agreement or bond reasonably satisfactory in form and amount to the Company or,
in the case of mutilation, on surrender and cancellation of this Warrant, the
Company at its expense will execute and deliver, in lieu of this Warrant, a new
Warrant of like tenor.
(d) NOTICES. Any notices to Warrantholder shall be delivered
personally or sent by first class mail, postage prepaid, to Warrantholder's
address on the records of the Company and shall be effective upon deposit in the
mail.
8
<PAGE>
(e) GOVERNING LAW. This Warrant shall be governed by and construed
and enforced in accordance with the laws if the State of California.
Dated: July 16, 1993 FAROUDJA RESEARCH ENTERPRISES, INC.
By: /s/ Yves Faroudja
--------------------------------------------
Yves Faroudja
President
ACCEPTED:
HOLDER:
John Sie
- ------------------------------
Name
/s/ John Sie
- ------------------------------
Signature
Date:
---------------------------
9
<PAGE>
SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
TO: Faroudja Research Enterprises, Inc.
675 Palomar Avenue
Sunnyvale, CA 94086
The undersigned, the holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by that Warrant for, and to
purchase under that Warrant, __________* shares of Common Stock of Faroudja
Research Enterprises, Inc. and herewith makes payment of $__________ for those
shares, and requests that the certificates for those shares be issued in the
name of, and delivered to, ____________________, whose address is
______________________________.
Dated: __________, 19__
(Signature must conform in all respects to name of
holder as specified on the face of the attached
Warrant.)
-----------------------------------
Signature
-----------------------------------
Address
-----------------------------------
- ----------------
* Insert here the number of Shares called for on the face of the Warrant (or,
in the case of partial exercise, the portion as to which the Warrant is being
exercised), without making any adjustment for additional Shares or any other
securities or property which, under the adjustment provisions of the Warrant,
may be deliverable upon exercise.
10
<PAGE>
THIS WARRANT AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS WARRANT MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF THIS WARRANT, A COPY OF WHICH
IS ON FILE WITH THE SECRETARY OF THE COMPANY.
Warrant Number: WC-2
Void after
------------
WARRANT TO PURCHASE COMMON STOCK OF
FAROUDJA RESEARCH ENTERPRISES, INC.
This certifies that, for value received, John Sie is entitled, subject to
the terms set forth below, to purchase from Faroudja Research Enterprises, Inc.
(the "Company"), a California corporation, up to 19,648 shares (the "Shares") of
fully paid and non-assessable shares of Common Stock of the Company at the price
of $.50 per share (the "Exercise Price") at the times and subject to the
conditions hereafter stated, such price and number of Shares being subject to
adjustment as herein provided in this Warrant.
1. DEFINITIONS.
As used in this Warrant, the following terms, unless the context
otherwise requires, have the following meanings:
(a) "COMPANY" includes any corporation which shall succeed to or
assume the obligations of the Company under this Warrant.
(b) "COMMON STOCK", when used with reference to stock of the Company,
means all shares, now or hereafter authorized, of the class of the Common Stock
of the Company presently authorized and stock of any other class into which
those shares may hereafter be changed.
<PAGE>
(c) "WARRANTHOLDER", "holder of Warrant", "holder", or similar terms
when the context refers to the original holder of this Warrant.
2. EXERCISE CONDITIONS.
(a) EXERCISABILITY. This Warrant shall be vested and exercisable,
cumulatively, during its term only in accordance with the terms and conditions
herein, as to one-forty-eighth (1/48th) of the Shares for each full calendar
month after the Vesting Commencement Date set forth on the signature page of
this Warrant.
(b) TERMINATION OF STATUS. This Warrant is exercisable only for the
number of shares which become exercisable during the period Warrantholder
continues to provide services as requested by the Company and as determined in
the Company's discretion.
(c) NO CONSULTING AGREEMENT. This Warrant, and the issuance thereof
shall not be construed and is not an agreement to retain Warrantholder as a
consultant to the Company.
(d) ACCELERATION OF EXERCISABILITY. During the period this Warrant
is exercisable, in the event that (i) the Company shall consolidate with or
merge into any other corporation, or sell all or substantially all of its assets
to another corporation (unless after the completion of such transaction the
shareholders of the Company immediately prior to the transaction own at least
fifty percent (50%) of the surviving corporation), or (ii) the Company registers
its securities on a Form S-1 registration statement and such registration
statement is declared effective by the Securities and Exchange Commission (an
"IPO"), this Warrant shall accelerate and become fully exercisable as to all
Shares, notwithstanding the provisions of Section 2.
3. EXERCISE PROVISIONS.
(a) EXERCISE OF WARRANT. The holder of this Warrant may exercise it
in whole or in part to the extent then exercisable by surrender of this Warrant,
with the form of subscription at the end of this Warrant duly executed by the
holder, to the Company at its principal office, accompanied by payment in the
amount obtained by multiplying the Exercise Price by the number of shares of
Common Stock designated in the subscription at the end of this Warrant.
(b) PAYMENT OF EXERCISE PRICE. Payment shall be made by cash or by
check payable to the order of the Company.
(c) PARTIAL EXERCISE. On partial exercise, the Company shall
promptly issue and deliver to the holder of this Warrant a new Warrant or
Warrants of like tenor in the name of the holder providing for the right to
purchase the number of shares of Common Stock as to which this Warrant has not
been exercised.
2
<PAGE>
(d) RESTRICTIONS ON EXERCISE. This Warrant may not be exercised if
the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations.
As a condition to the exercise of this Warrant, the Company may require the
Warrantholder to make any representation and warranty to the Company as may be
required by any applicable law or regulation.
4. STOCK ISSUANCE.
(a) DELIVERY OF STOCK CERTIFICATES. As soon as possible after full
or partial exercise of this Warrant, the Company at its expense will cause to be
issued in the name of and delivered to the holder of this Warrant, a certificate
or certificates for the number of fully paid and nonassessable shares of Common
Stock to which that holder shall be entitled upon such exercise, together with
any other securities and property to which that holder is entitled upon such
exercise under the terms of this Warrant. No fractional shares will be issued
upon exercise of rights to purchase under this Warrant. If upon any exercise of
this Warrant a fraction of a share results, the Company will pay the cash value
of that fractional share, calculated on the basis of the market price as of the
date of exercise as determined by the Company's Board of Directors.
(b) STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants
and agrees that all Shares will, upon issuance and payment in accordance
herewith, be fully paid, validly issued and nonassessable. The Company further
covenants and agrees that the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of this Warrant, at least
the maximum number of Shares as are issuable upon the exercise of this Warrant.
(c) NO RIGHTS AS SHAREHOLDER. Warrantholder, as such, shall not be
entitled to vote or receive dividends or be considered a shareholder of the
Company for any purpose, nor shall anything in this Warrant be construed to
confer on Warrantholder, as such, any rights of a shareholder of the Company or
any right to vote, give or withhold consent to any corporate action, to receive
notice of meetings of shareholders, to receive dividends or subscription rights
or otherwise.
5. ADJUSTMENT PROVISIONS.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Exercise Price shall be subject to adjustment from time to
time upon the happening of certain events, as follows:
(a) RECLASSIFICATION. If the Company at any time while this Warrant
remains outstanding shall reclassify or in any manner change the securities then
purchasable upon the exercise of this Warrant (a "Reorganization"), then lawful
and adequate provision shall be made whereby this Warrant shall thereafter
evidence the
3
<PAGE>
right to purchase such number and kind of securities and other property as would
have been issuable or distributable on account of such reorganization upon or
with respect to the securities which were purchasable or would have become
purchasable under this Warrant immediately prior to such Reorganization.
(b) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the Exercise Price shall be adjusted to that price determined
by multiplying the Exercise Price in effect immediately prior to such
subdivision or combination by a fraction (i) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
subdivision or combination and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such subdivision
or combination.
(c) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Company at any time
while this Warrant is outstanding and unexpired shall take a record of the
holders of its Common Stock for the purpose of:
(i) STOCK DIVIDENDS. Entitling them to receive a dividend
payable in, or other distribution without consideration of, Common Stock, then
the Exercise Price shall be adjusted to that price determined by multiplying the
Exercise Price in effect immediately prior to each dividend or distribution by a
fraction (A) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution and
(B) the denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution; or
(ii) DISTRIBUTION OF ASSETS; SECURITIES; ETC. Making any
distribution without consideration with respect to its Common Stock (other than
a cash dividend) payable otherwise than in its Common Stock, the Warrantholder
shall, upon the exercise thereof, be entitled to receive, in addition to the
number of Shares receivable thereupon, and without payment of any additional
consideration therefor, such assets or securities as would have been payable to
him as owner of that number of Shares receivable by exercise of this Warrant had
Warrantholder been the holder of record of such Shares on the record date for
such distribution; and an appropriate provision therefor shall be made a part of
any such distribution.
(d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the
Exercise Price pursuant to Section 5(b) or (c)(i), the number of Shares
purchasable hereunder shall be adjusted to that number determined by multiplying
the number of Shares purchasable upon the exercise of this Warrant immediately
prior to such adjustment by a fraction, the numerator of which shall be the
Exercise Price immediately prior to such adjustment and the denominator of which
shall be the Exercise Price immediately following such adjustment.
4
<PAGE>
(e) NOTICE OF ADJUSTMENTS. The Company shall give notice of each
adjustment or readjustment of the Exercise Price or the number of shares of
Common Stock or other securities issuable upon Exercise of this Warrant to the
registered holder of this Warrant at that holder's address as shown on the
Company's books.
(f) NO CHANGE NECESSARY. The form of this Warrant need not be
changed because of any adjustment in the Exercise Price or in the number of
shares of Common Stock purchasable upon its exercise. A Warrant issued after
any adjustment upon any partial exercise or in replacement may continue to
express the same Exercise Price and the same number of shares of Common Stock
(appropriately reduced in the case of partial exercise) as are stated on the
face of this Warrant as initially issued, and that Exercise Price and that
number of shares shall be considered to have been so changed at the close of
business on the date of adjustment.
6. SECURITIES LAW RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. In connection with the acquisition
of this Warrant, the Warrantholder represents and warrants that the
Warrantholder is acquiring this Warrant, and upon exercise of this Warrant the
Warrantholder will be acquiring the Shares, for investment for Warrantholder's
own account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof. The Warrantholder, by reason of
Warrantholder's business or financial experience, has the capacity to evaluate
the merits and risks of purchasing Common Stock of the Company and to make an
informed investment decision with respect thereto and to protect Warrantholder's
interests in connection with the acquisition of this Warrant and the Shares.
Warrantholder will execute any investment representation statement requested by
the Company.
(b) LEGENDS. Any certificate representing any Shares issued
hereunder shall have endorsed thereon legends in substantially the following
form (in addition to any legends required by any state securities laws):
THIS WARRANT AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS WARRANT MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE
5
<PAGE>
TERMS OF THIS WARRANT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
7. NONTRANSFERABILITY OF WARRANT.
This Warrant may not be sold, pledged, assigned, hypothecated, gifted,
transferred or disposed of in any manner either voluntarily or involuntarily by
operation of law, other than by will or by the laws of descent or distribution,
and may be exercised during the lifetime of the Warrantholder only by such
Warrantholder. Subject to the foregoing, the terms of this Warrant shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Warrantholder.
8. LIMITATIONS ON TRANSFER OF SHARES.
In addition to any other limitation on the transfer of the Shares
created by applicable securities laws, Warrantholder shall not assign, encumber
or dispose of any interest in such Shares except as provided in this Section 8:
(a) RIGHT OF FIRST REFUSAL. If Warrantholder desires (or is
required) to sell or transfer in any manner the Shares, Warrantholder shall
first offer such Shares for sale to the Company at the same price, and upon the
same terms (or terms as similar as reasonably possible) as those upon which he
is dispose of such Shares ("Right of First Refusal"). If the transfer does not
involve a bona fide price freely set by Warrantholder, the price shall be
determined as set forth in Section 8(c) below. The Company (or its assignee)
shall notify Warrantholder as to whether the Company wishes to purchase the
Shares pursuant to the Right of First Refusal within forty-five (45) days
following the setting of a price under Section 8(c) (when the price is
determined under Section 8(c). If the Company (or its assignee) elects to
purchase such Shares hereunder, it shall set a date for the closing of the
transaction at a place specified by the Company not later than 30 days from the
date of such notice. At such closing, the Company (or its assignee) shall
tender payment for the Shares and the certificates representing the Shares so
purchased shall be cancelled. Warrantholder hereby authorizes and directs the
Secretary or Transfer Agent of the Company to transfer the Shares as to which
the Right of First Refusal has been exercised from optionee to the Company. The
Warrantholder further authorizes the Company to refuse or to cause its Transfer
Agent to refuse, to transfer or record any Shares to be transferred in violation
of this Agreement. In the event the Shares are not disposed of by the
Warrantholder within forty-five (45) days following lapse of the period of the
Right of First Refusal provided to the Company, the Shares shall once again be
subject to the Right of First Refusal herein provided.
(b) INVOLUNTARY TRANSFER. In the event of any transfer by operation
of law or other involuntary transfer, of all, or a portion, of the Shares, the
Company shall have an option to purchase all of the Shares transferred (the
"Involuntary Transfer Option"). Upon such transfer, the person acquiring the
Shares shall promptly notify the Secretary of the Company of such transfer. The
Company (or its assignee) shall notify
6
<PAGE>
Warrantholder and the person acquiring the Shares as to whether the Company
wishes to purchase the Shares pursuant to the Involuntary Transfer Option within
forty-five (45) days following the setting of a price under Section 8(c) of this
Agreement. If the Company (or its assignee) elects to purchase such Shares
hereunder, it shall set a date for the closing of the transaction at a place
specified by the Company not later than 30 days from the date of such notice.
At such closing, the Company (or its assignee) shall tender payment for the
Shares and the certificates representing the Shares so purchased shall be
cancelled. Warrantholder hereby authorizes and directs the Secretary or
Transfer Agent of the Company to transfer the Shares as to which the Involuntary
Transfer Option has been exercised from the Warrantholder to the Company.
Warrantholder further authorizes the Company to refuse or to cause its Transfer
Agent to refuse, to transfer or record any Shares to be transferred in violation
of this Agreement.
(c) DETERMINATION OF PRICE. With respect to the Shares to be
transferred pursuant to the Right of First Refusal where the price is not a bona
fide price set by the Warrantholder under Section 8(a) or the Involuntary
Transfer Option, the price per share shall be a price set by the Board of
Directors of the Company that will reflect the current value of the Shares. The
Company shall notify Warrantholder, his representative or the person acquiring
the Shares under Section 8(b) of the price so determined within forty-five (45)
days after receipt by it of written notice of the transfer or proposed transfer
of the Shares.
(d) ASSIGNMENT BY COMPANY. The Company's Right of First Refusal and
Involuntary Transfer Option may be assigned in whole or in part to any
shareholder or shareholders of the Company.
(e) OBLIGATIONS BINDING UPON TRANSFEREES. All transferees of Shares
or any interest therein will receive and hold such Shares or interests subject
to the provisions of this Warrant, including the Company's Right of First
Refusal and Involuntary Transfer Option. Any sale or transfer of the Shares
shall be void unless the provisions of this Option are met.
(f) TERMINATION OF RIGHTS. The Right of First Refusal and the
Involuntary Transfer Option granted the Company by this Section 8 shall
terminate at such time as a public market exists for the Company's Common Stock
(or any other stock issued to Warrantholder in exchange for the Shares acquired
upon exercise pursuant to this Warrant). For the purpose of this Agreement, a
"public market" shall be deemed to exist if the Common Stock is listed on a
national securities exchange (as that term is used in the Securities Exchange
Act of 1934), or the Common Stock is traded on the over-the-counter market and
prices are published on business days in a recognized financial journal.
(g) EXCLUDED TRANSFERS. The restrictions on transfer if this Section
8 shall not apply to an inter-vivos transfer to Warrantholder's ancestors or
descendants or spouse or to a Trustee for their benefit, provided that such
transferee shall take such
7
<PAGE>
Shares subject to all of the terms of this Warrant, including restrictions on
further transfer.
9. TERMINATION.
The right to exercise this Warrant shall expire upon the earlier of
the following: (i) the close of business on the date set forth on the first
page of this Warrant, (ii) the effective date of a firm commitment underwritten
public offering pursuant to a registration statement filed under the Securities
Act of 1933, as amended, covering the offer and sale of the Company's Common
Stock or (iii) upon the consolidation or merger of the Company into any other
corporation or the sale of all or substantially all of its assets to another
corporation, unless after the completion of the transaction the shareholders of
the Company immediately prior to the transaction own at least fifty percent
(50%) of the shares of the surviving corporation.
10. GENERAL.
(a) ENTIRE AGREEMENT. The Company and the holder agree that this
Warrant amends and supersedes any prior agreement or understanding of the holder
with the Company, Sunsteam, Ltd., or any officers, directors, partners or agents
of the foregoing relating to the acquisition of securities in the Company and
supersedes any financial obligations of the Company to the holder.
(b) AMENDMENT. The holder of this Warrant agrees that any provision
of this Warrant may be amended, waived or modified upon the written approval of
the Company and the holder of this Warrant.
(c) REPLACEMENT. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction, or mutilation of this Warrant and,
in the case of loss, theft, or destruction, on delivery of any indemnity
agreement or bond reasonably satisfactory in form and amount to the Company or,
in the case of mutilation, on surrender and cancellation of this Warrant, the
Company at its expense will execute and deliver, in lieu of this Warrant, a new
Warrant of like tenor.
(d) NOTICES. Any notices to Warrantholder shall be delivered
personally or sent by first class mail, postage prepaid, to Warrantholder's
address on the records of the Company and shall be effective upon deposit in the
mail.
8
<PAGE>
(e) GOVERNING LAW. This Warrant shall be governed by
and construed and enforced in accordance with the laws if the
State of California.
Dated: July 16, 1993 FAROUDJA RESEARCH ENTERPRISES,
INC.
By: /s/ Yves Faroudja
--------------------------------
Yves Faroudja
President
ACCEPTED:
HOLDER:
John Sie
- --------------------------
Name
/s/ John Sie
- --------------------------
Signature
Date:
---------------------
9
<PAGE>
SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
TO: Faroudja Research Enterprises, Inc.
675 Palomar Avenue
Sunnyvale, CA 94086
The undersigned, the holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by that Warrant for, and to
purchase under that Warrant, __________* shares of Common Stock of Faroudja
Research Enterprises, Inc. and herewith makes payment of $__________ for
those shares, and requests that the certificates for those shares be issued
in the name of, and delivered to, ____________________, whose address is
______________________________.
Dated: __________, 19__
(Signature must conform in all respects to name
of holder as specified on the face of the
attached Warrant.)
-----------------------------------------------
Signature
-----------------------------------------------
Address
-----------------------------------------------
- ----------------
* Insert here the number of Shares called for on the face of the Warrant
(or, in the case of partial exercise, the portion as to which the Warrant is
being exercised), without making any adjustment for additional Shares or any
other securities or property which, under the adjustment provisions of the
Warrant, may be deliverable upon exercise.
10
<PAGE>
THIS WARRANT AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS WARRANT MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF THIS WARRANT, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
Warrant Number: WC-3
Void after
----------------
WARRANT TO PURCHASE COMMON STOCK OF
FAROUDJA RESEARCH ENTERPRISES, INC.
This certifies that, for value received, John Sie is entitled, subject to
the terms set forth below, to purchase from Faroudja Research Enterprises, Inc.
(the "Company"), a California corporation, up to 19,648 shares (the "Shares") of
fully paid and non-assessable shares of Common Stock of the Company at the price
of $.50 per share (the "Exercise Price") at the times and subject to the
conditions hereafter stated, such price and number of Shares being subject to
adjustment as herein provided in this Warrant.
1. DEFINITIONS.
As used in this Warrant, the following terms, unless the context
otherwise requires, have the following meanings:
(a) "COMPANY" includes any corporation which shall succeed to or
assume the obligations of the Company under this Warrant.
(b) "COMMON STOCK", when used with reference to stock of the Company,
means all shares, now or hereafter authorized, of the class of the Common Stock
of the Company presently authorized and stock of any other class into which
those shares may hereafter be changed.
<PAGE>
(c) "WARRANTHOLDER", "holder of Warrant", "holder", or similar terms
when the context refers to the original holder of this Warrant.
2. EXERCISE CONDITIONS.
(a) EXERCISABILITY. This Warrant shall be vested and exercisable,
cumulatively, during its term only in accordance with the terms and conditions
herein, as to one-forty-eighth (1/48th) of the Shares for each full calendar
month after the Vesting Commencement Date set forth on the signature page of
this Warrant.
(b) TERMINATION OF STATUS. This Warrant is exercisable only for the
number of shares which become exercisable during the period Warrantholder
continues to provide services as requested by the Company and as determined in
the Company's discretion.
(c) NO CONSULTING AGREEMENT. This Warrant, and the issuance thereof
shall not be construed and is not an agreement to retain Warrantholder as a
consultant to the Company.
(d) ACCELERATION OF EXERCISABILITY. During the period this Warrant
is exercisable, in the event that (i) the Company shall consolidate with or
merge into any other corporation, or sell all or substantially all of its
assets to another corporation (unless after the completion of such
transaction the shareholders of the Company immediately prior to the
transaction own at least fifty percent (50%) of the surviving corporation),
or (ii) the Company registers its securities on a Form S-1 registration
statement and such registration statement is declared effective by the
Securities and Exchange Commission (an "IPO"), this Warrant shall accelerate
and become fully exercisable as to all Shares, notwithstanding the provisions
of Section 2.
3. EXERCISE PROVISIONS.
(a) EXERCISE OF WARRANT. The holder of this Warrant may exercise
it in whole or in part to the extent then exercisable by surrender of this
Warrant, with the form of subscription at the end of this Warrant duly
executed by the holder, to the Company at its principal office, accompanied
by payment in the amount obtained by multiplying the Exercise Price by the
number of shares of Common Stock designated in the subscription at the end of
this Warrant.
(b) PAYMENT OF EXERCISE PRICE. Payment shall be made by cash or by
check payable to the order of the Company.
(c) PARTIAL EXERCISE. On partial exercise, the Company shall
promptly issue and deliver to the holder of this Warrant a new Warrant or
Warrants of like tenor in the name of the holder providing for the right to
purchase the number of shares of Common Stock as to which this Warrant has
not been exercised.
2
<PAGE>
(d) RESTRICTIONS ON EXERCISE. This Warrant may not be exercised if
the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations.
As a condition to the exercise of this Warrant, the Company may require the
Warrantholder to make any representation and warranty to the Company as may be
required by any applicable law or regulation.
4. STOCK ISSUANCE.
(a) DELIVERY OF STOCK CERTIFICATES. As soon as possible after full
or partial exercise of this Warrant, the Company at its expense will cause to
be issued in the name of and delivered to the holder of this Warrant, a
certificate or certificates for the number of fully paid and nonassessable
shares of Common Stock to which that holder shall be entitled upon such
exercise, together with any other securities and property to which that
holder is entitled upon such exercise under the terms of this Warrant. No
fractional shares will be issued upon exercise of rights to purchase under
this Warrant. If upon any exercise of this Warrant a fraction of a share
results, the Company will pay the cash value of that fractional share,
calculated on the basis of the market price as of the date of exercise as
determined by the Company's Board of Directors.
(b) STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants
and agrees that all Shares will, upon issuance and payment in accordance
herewith, be fully paid, validly issued and nonassessable. The Company
further covenants and agrees that the Company will at all times have
authorized, and reserved for the purpose of the issue upon exercise of this
Warrant, at least the maximum number of Shares as are issuable upon the
exercise of this Warrant.
(c) NO RIGHTS AS SHAREHOLDER. Warrantholder, as such, shall not be
entitled to vote or receive dividends or be considered a shareholder of the
Company for any purpose, nor shall anything in this Warrant be construed to
confer on Warrantholder, as such, any rights of a shareholder of the Company
or any right to vote, give or withhold consent to any corporate action, to
receive notice of meetings of shareholders, to receive dividends or
subscription rights or otherwise.
5. ADJUSTMENT PROVISIONS.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Exercise Price shall be subject to adjustment from time
to time upon the happening of certain events, as follows:
(a) RECLASSIFICATION. If the Company at any time while this Warrant
remains outstanding shall reclassify or in any manner change the securities then
purchasable upon the exercise of this Warrant (a "Reorganization"), then lawful
and adequate provision shall be made whereby this Warrant shall thereafter
evidence the
3
<PAGE>
right to purchase such number and kind of securities and other property as
would have been issuable or distributable on account of such reorganization
upon or with respect to the securities which were purchasable or would have
become purchasable under this Warrant immediately prior to such
Reorganization.
(b) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the Exercise Price shall be adjusted to that price determined
by multiplying the Exercise Price in effect immediately prior to such
subdivision or combination by a fraction (i) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
subdivision or combination and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such subdivision
or combination.
(c) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Company at any time
while this Warrant is outstanding and unexpired shall take a record of the
holders of its Common Stock for the purpose of:
(i) STOCK DIVIDENDS. Entitling them to receive a
dividend payable in, or other distribution without consideration of, Common
Stock, then the Exercise Price shall be adjusted to that price determined by
multiplying the Exercise Price in effect immediately prior to each dividend
or distribution by a fraction (A) the numerator of which shall be the total
number of shares of Common Stock outstanding immediately prior to such
dividend or distribution and (B) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such dividend
or distribution; or
(ii) DISTRIBUTION OF ASSETS; SECURITIES; ETC. Making any
distribution without consideration with respect to its Common Stock (other
than a cash dividend) payable otherwise than in its Common Stock, the
Warrantholder shall, upon the exercise thereof, be entitled to receive, in
addition to the number of Shares receivable thereupon, and without payment of
any additional consideration therefor, such assets or securities as would
have been payable to him as owner of that number of Shares receivable by
exercise of this Warrant had Warrantholder been the holder of record of such
Shares on the record date for such distribution; and an appropriate provision
therefor shall be made a part of any such distribution.
(d) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the
Exercise Price pursuant to Section 5(b) or (c)(i), the number of Shares
purchasable hereunder shall be adjusted to that number determined by
multiplying the number of Shares purchasable upon the exercise of this
Warrant immediately prior to such adjustment by a fraction, the numerator of
which shall be the Exercise Price immediately prior to such adjustment and
the denominator of which shall be the Exercise Price immediately following
such adjustment.
4
<PAGE>
(e) NOTICE OF ADJUSTMENTS. The Company shall give notice of each
adjustment or readjustment of the Exercise Price or the number of shares of
Common Stock or other securities issuable upon Exercise of this Warrant to the
registered holder of this Warrant at that holder's address as shown on the
Company's books.
(f) NO CHANGE NECESSARY. The form of this Warrant need not be
changed because of any adjustment in the Exercise Price or in the number of
shares of Common Stock purchasable upon its exercise. A Warrant issued after
any adjustment upon any partial exercise or in replacement may continue to
express the same Exercise Price and the same number of shares of Common Stock
(appropriately reduced in the case of partial exercise) as are stated on the
face of this Warrant as initially issued, and that Exercise Price and that
number of shares shall be considered to have been so changed at the close of
business on the date of adjustment.
6. SECURITIES LAW RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. In connection with the acquisition
of this Warrant, the Warrantholder represents and warrants that the
Warrantholder is acquiring this Warrant, and upon exercise of this Warrant the
Warrantholder will be acquiring the Shares, for investment for Warrantholder's
own account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof. The Warrantholder, by reason of
Warrantholder's business or financial experience, has the capacity to evaluate
the merits and risks of purchasing Common Stock of the Company and to make an
informed investment decision with respect thereto and to protect Warrantholder's
interests in connection with the acquisition of this Warrant and the Shares.
Warrantholder will execute any investment representation statement requested by
the Company.
(b) LEGENDS. Any certificate representing any Shares issued
hereunder shall have endorsed thereon legends in substantially the following
form (in addition to any legends required by any state securities laws):
THIS WARRANT AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS WARRANT MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE
5
<PAGE>
TERMS OF THIS WARRANT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
7. NONTRANSFERABILITY OF WARRANT.
This Warrant may not be sold, pledged, assigned, hypothecated, gifted,
transferred or disposed of in any manner either voluntarily or involuntarily by
operation of law, other than by will or by the laws of descent or distribution,
and may be exercised during the lifetime of the Warrantholder only by such
Warrantholder. Subject to the foregoing, the terms of this Warrant shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Warrantholder.
8. LIMITATIONS ON TRANSFER OF SHARES.
In addition to any other limitation on the transfer of the Shares
created by applicable securities laws, Warrantholder shall not assign, encumber
or dispose of any interest in such Shares except as provided in this Section 8:
(a) RIGHT OF FIRST REFUSAL. If Warrantholder desires (or is
required) to sell or transfer in any manner the Shares, Warrantholder shall
first offer such Shares for sale to the Company at the same price, and upon
the same terms (or terms as similar as reasonably possible) as those upon
which he is dispose of such Shares ("Right of First Refusal"). If the
transfer does not involve a bona fide price freely set by Warrantholder, the
price shall be determined as set forth in Section 8(c) below. The Company
(or its assignee) shall notify Warrantholder as to whether the Company wishes
to purchase the Shares pursuant to the Right of First Refusal within
forty-five (45) days following the setting of a price under Section 8(c)
(when the price is determined under Section 8(c). If the Company (or its
assignee) elects to purchase such Shares hereunder, it shall set a date for
the closing of the transaction at a place specified by the Company not later
than 30 days from the date of such notice. At such closing, the Company (or
its assignee) shall tender payment for the Shares and the certificates
representing the Shares so purchased shall be cancelled. Warrantholder
hereby authorizes and directs the Secretary or Transfer Agent of the Company
to transfer the Shares as to which the Right of First Refusal has been
exercised from optionee to the Company. The Warrantholder further authorizes
the Company to refuse or to cause its Transfer Agent to refuse, to transfer
or record any Shares to be transferred in violation of this Agreement. In
the event the Shares are not disposed of by the Warrantholder within
forty-five (45) days following lapse of the period of the Right of First
Refusal provided to the Company, the Shares shall once again be subject to
the Right of First Refusal herein provided.
(b) INVOLUNTARY TRANSFER. In the event of any transfer by
operation of law or other involuntary transfer, of all, or a portion, of the
Shares, the Company shall have an option to purchase all of the Shares
transferred (the "Involuntary Transfer Option"). Upon such transfer, the
person acquiring the Shares shall promptly notify the Secretary of the
Company of such transfer. The Company (or its assignee) shall notify
6
<PAGE>
Warrantholder and the person acquiring the Shares as to whether the Company
wishes to purchase the Shares pursuant to the Involuntary Transfer Option
within forty-five (45) days following the setting of a price under Section
8(c) of this Agreement. If the Company (or its assignee) elects to purchase
such Shares hereunder, it shall set a date for the closing of the transaction
at a place specified by the Company not later than 30 days from the date of
such notice. At such closing, the Company (or its assignee) shall tender
payment for the Shares and the certificates representing the Shares so
purchased shall be cancelled. Warrantholder hereby authorizes and directs
the Secretary or Transfer Agent of the Company to transfer the Shares as to
which the Involuntary Transfer Option has been exercised from the
Warrantholder to the Company. Warrantholder further authorizes the Company
to refuse or to cause its Transfer Agent to refuse, to transfer or record any
Shares to be transferred in violation of this Agreement.
(c) DETERMINATION OF PRICE. With respect to the Shares to be
transferred pursuant to the Right of First Refusal where the price is not a
bona fide price set by the Warrantholder under Section 8(a) or the
Involuntary Transfer Option, the price per share shall be a price set by the
Board of Directors of the Company that will reflect the current value of the
Shares. The Company shall notify Warrantholder, his representative or the
person acquiring the Shares under Section 8(b) of the price so determined
within forty-five (45) days after receipt by it of written notice of the
transfer or proposed transfer of the Shares.
(d) ASSIGNMENT BY COMPANY. The Company's Right of First Refusal
and Involuntary Transfer Option may be assigned in whole or in part to any
shareholder or shareholders of the Company.
(e) OBLIGATIONS BINDING UPON TRANSFEREES. All transferees of
Shares or any interest therein will receive and hold such Shares or interests
subject to the provisions of this Warrant, including the Company's Right of
First Refusal and Involuntary Transfer Option. Any sale or transfer of the
Shares shall be void unless the provisions of this Option are met.
(f) TERMINATION OF RIGHTS. The Right of First Refusal and the
Involuntary Transfer Option granted the Company by this Section 8 shall
terminate at such time as a public market exists for the Company's Common
Stock (or any other stock issued to Warrantholder in exchange for the Shares
acquired upon exercise pursuant to this Warrant). For the purpose of this
Agreement, a "public market" shall be deemed to exist if the Common Stock is
listed on a national securities exchange (as that term is used in the
Securities Exchange Act of 1934), or the Common Stock is traded on the
over-the-counter market and prices are published on business days in a
recognized financial journal.
(g) EXCLUDED TRANSFERS. The restrictions on transfer if this
Section 8 shall not apply to an inter-vivos transfer to Warrantholder's
ancestors or descendants or spouse or to a Trustee for their benefit,
provided that such transferee shall take such
7
<PAGE>
Shares subject to all of the terms of this Warrant, including restrictions on
further transfer.
9. TERMINATION.
The right to exercise this Warrant shall expire upon the earlier of
the following: (i) the close of business on the date set forth on the first
page of this Warrant, (ii) the effective date of a firm commitment
underwritten public offering pursuant to a registration statement filed under
the Securities Act of 1933, as amended, covering the offer and sale of the
Company's Common Stock or (iii) upon the consolidation or merger of the
Company into any other corporation or the sale of all or substantially all of
its assets to another corporation, unless after the completion of the
transaction the shareholders of the Company immediately prior to the
transaction own at least fifty percent (50%) of the shares of the surviving
corporation.
10. GENERAL.
(a) ENTIRE AGREEMENT. The Company and the holder agree that this
Warrant amends and supersedes any prior agreement or understanding of the
holder with the Company, Sunsteam, Ltd., or any officers, directors, partners
or agents of the foregoing relating to the acquisition of securities in the
Company and supersedes any financial obligations of the Company to the holder.
(b) AMENDMENT. The holder of this Warrant agrees that any
provision of this Warrant may be amended, waived or modified upon the written
approval of the Company and the holder of this Warrant.
(c) REPLACEMENT. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction, or mutilation of this Warrant
and, in the case of loss, theft, or destruction, on delivery of any indemnity
agreement or bond reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense will execute and deliver, in lieu of this Warrant,
a new Warrant of like tenor.
(d) NOTICES. Any notices to Warrantholder shall be delivered
personally or sent by first class mail, postage prepaid, to Warrantholder's
address on the records of the Company and shall be effective upon deposit in
the mail.
8
<PAGE>
(e) GOVERNING LAW. This Warrant shall be governed by and construed
and enforced in accordance with the laws if the State of California.
Dated: July 16, 1993 FAROUDJA RESEARCH ENTERPRISES, INC.
By: /s/ Yves Faroudja
---------------------------------
Yves Faroudja
President
ACCEPTED:
HOLDER:
John Sie
- --------------------------------
Name
/s/ John Sie
- --------------------------------
Signature
Date:
---------------------------
9
<PAGE>
SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
TO: Faroudja Research Enterprises, Inc.
675 Palomar Avenue
Sunnyvale, CA 94086
The undersigned, the holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by that Warrant for, and to
purchase under that Warrant, __________* shares of Common Stock of Faroudja
Research Enterprises, Inc. and herewith makes payment of $__________ for
those shares, and requests that the certificates for those shares be issued
in the name of, and delivered to, ____________________, whose address is
______________________________.
Dated:___________, 19__
(Signature must conform in all respects to name of
holder as specified on the face of the attached
Warrant.)
-----------------------------------
Signature
-----------------------------------
Address
-----------------------------------
- ----------------
* Insert here the number of Shares called for on the face of the Warrant (or,
in the case of partial exercise, the portion as to which the Warrant is being
exercised), without making any adjustment for additional Shares or any other
securities or property which, under the adjustment provisions of the Warrant,
may be deliverable upon exercise.
10
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT OR THE RULES AND
REGULATIONS THEREUNDER.
WARRANT TO PURCHASE
SHARES OF
FAROUDJA, INC.
COMMON STOCK
Faroudja, Inc., a Delaware corporation (the "Company") hereby issues to
Yves Faroudja (the "Holder") this Warrant to purchase from the Company, at any
time or from time to time on or before the fifth anniversary of the date of this
Warrant (or any earlier date specified by the Company in a written notice given
by the Company to the Holder), for an exercise price (the "Exercise Price")
equal to $7.50 per share, 100,000 shares of common stock of the Company (the
"Shares").
This Warrant is subject to the following terms and conditions:
1. VESTING. This Warrant shall be vested and exercisable, cumulatively,
only in accordance with the terms and conditions herein, as to one-thirty sixth
(1/36) of the Shares for each full month after the date of this Warrant provided
that during such vesting period Holder is then either (i) employed by the
Company (as a full or part-time employee), or (ii) acting as a member of the
Board of Directors of the Company.
2. EXERCISE. The rights represented by this Warrant may be exercised, at
any time or from time to time in whole or in part to the extent then
exercisable, by (a) the surrender of this Warrant, along with the purchase form
attached as exhibit A-1 (the "Purchase Form"), properly executed, to the address
of the Company set forth in section 8.2 (or such other address as the Company
may designate by notice in writing to the Holder at its address set forth in
section 8.2) and (b) the payment to the Company of the Exercise Price by check,
payable to the order of the Company, for the number of shares specified in the
Purchase Form, together with any applicable stock transfer taxes. A certificate
representing the shares so purchased and, in the event of an exercise of fewer
than all the rights then exercisable which are represented by this Warrant, a
new warrant in the form of this Warrant issued in the name of the Holder or its
designee(s) and representing a new warrant, on the same terms, conditions and
vesting schedule as this Warrant, to purchase a number of shares equal to the
number of shares as to which this Warrant was theretofore exercisable less the
number of shares as to which this Warrant shall theretofore have been
<PAGE>
exercised, shall be delivered to the Holder or such designee(s) as promptly as
practicable, but in no event later than three business days, after this Warrant
shall have been so exercised.
3. ADJUSTMENT OF THE NUMBER OF SHARES. If the Company shall (a) pay a
dividend in common stock or make a distribution in common stock, (b) subdivide
its outstanding common stock, (c) combine its outstanding common stock into a
smaller number of shares of common stock or (d) issue by reclassification of its
common stock, spin-off, split-up, recapitalization, merger, consolidation or any
similar corporate event or arrangement other securities of the Company, the kind
and number of shares of common stock purchasable upon exercise of this Warrant
shall be adjusted immediately prior to the exercise of this Warrant so that the
Holder shall be entitled to receive the kind and number of shares or other
securities of the Company to which the Holder would have been entitled to
receive after the happening of any of the events described above had this
Warrant been exercised immediately prior to the happening of such event or the
record date with respect to such event.
4. RESERVATION OF SHARES. From and after the date of this Warrant, the
Company shall at all times reserve and keep available for issuance upon the
exercise of this Warrant a number of its authorized but unissued shares of
common stock sufficient to permit the exercise in full of this Warrant.
5. EXERCISE; NON-TRANSFER OF WARRANT. This Warrant may be exercised by
Holder at any time during the term hereof, or from time to time, subject to the
vesting provisions hereof. This Warrant may not be transferred by Holder, in
whole or in part, to any entity, entities, person or persons other than in the
event of the death of the Holder by will or by the laws of descent and
distribution.
6. PAYMENT OF TAXES. The Company shall cause all shares of common stock
issued upon the exercise of this Warrant to be validly issued, fully paid and
nonassessable and not subject to preemptive rights. The Company shall pay all
expenses in connection with, and all taxes and other governmental charges that
may be imposed with respect to, the issuance or delivery of the shares of common
stock upon exercise of this Warrant, unless such tax or charge is imposed by law
upon the Holder.
7. PIGGYBACK REGISTRATION.
7.1 INCLUSION IN REGISTRATION. If at any time after the date of this
Warrant until the expiration of this Warrant, the Company proposes to register
any of its shares of common stock under the Securities Act of 1933 (including a
registration on Form S-8 but excluding a registration on Form S-4 or comparable
registration statement), it will promptly give notice to the Holder of its
intention to do so. If the Holder notifies the Company within twenty (20) days
after receipt of any such notice of its desire to include any Warrant Shares (as
defined in section 7.3) in such proposed registration, the Company shall afford
2
<PAGE>
the Holder the opportunity to have such Warrant Shares registered under such
registration statement.
Notwithstanding anything in this section 7 to the contrary, the Company
shall have the right at any time after it shall have given any notice pursuant
to this section 7 (irrespective of whether a written request for inclusion of
any Warrant Shares shall have been made), to elect to postpone or not to file
such proposed registration statement or to withdraw the same after filing but
prior to the effective date thereof.
7.2 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares being sold by the Company, the Company shall
not be required under this section 7 to include any Warrant Shares in such
underwriting unless the Holder accepts the terms of the underwriting as agreed
upon between the Company and the underwriters selected by it, and then only in
such quantity as will not, in the opinion of the underwriters, jeopardize the
success of the offering by the Company. If the total number of shares,
including the Warrant Shares, requested by shareholders, including the Holder,
to be included in the offering exceeds the number of shares sold other than by
the Company that the underwriters reasonably believe compatible with the success
of the offering, then the number of selling shareholders' shares that may be
included in the offering shall be apportioned pro rata among the selling
shareholders according to the total number of shares entitled to be included in
the offering owned by each selling shareholder or in such other proportions as
shall mutually be agreed to by the selling shareholders.
7.3 DEFINITION. As used in this section 7, the term "Warrant Shares"
means shares of common stock of the Company issued or issuable upon the exercise
of this Warrant to the extent then exercisable.
8. MISCELLANEOUS.
8.1 SECURITIES ACT RESTRICTIONS. The Holder acknowledges that this
Warrant and/or the Warrant Shares may not be sold, transferred or otherwise
disposed of without registration under the Securities Act of 1933 (the "Act") or
an applicable exemption from the registration requirements of the Act and,
accordingly, this Warrant and all certificates representing the common stock and
any other securities issuable upon the exercise of this Warrant shall bear a
legend in the form set forth on the top of page one of this Warrant.
8.2 NOTICES. All notices and other communications under this
agreement shall be in writing and may be given by any of the following methods:
(a) personal delivery; (b) facsimile transmission; (c) registered or certified
mail, postage prepaid, return receipt requested; or (d) overnight delivery
service. Notices shall be sent to the appropriate party at its, his or her
address or facsimile number given below (or at such other address or facsimile
number for that party as shall be specified by notice given under this
section 8.2):
3
<PAGE>
if to the Holder, to him at:
Yves Faroudja
c/o Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Fax: (408) 735-8571
with a copy to:
Coudert Brothers
4 Embarcadero Center, Suite 3300
San Francisco, CA 94111
Attention: Greg L. Pickrell, Esq.
Fax: (415) 986-0320
if to the Company, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Hoberg, CFO
Fax: (408) 735-8571
with a copy to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or
(c) in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming that the
number of pages constituting the notice have been transmitted without error. In
the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
8.3 AMENDMENT. This Warrant may be modified or amended or the
provisions of this Warrant may be waived only with the written consent of the
Company and the Holder.
4
<PAGE>
8.4 GOVERNING LAW. This Warrant shall be governed by the law of the
state of Delaware, without regard to the provisions thereof relating to
conflicts of laws.
January 20, 1997
FAROUDJA, INC.
By: /s/ Michael Moone
-----------------------------------
Michael Moone,
President and CEO
5
<PAGE>
EXHIBIT A-1
PURCHASE FORM
[To be executed only upon exercise of warrant]
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for the purchase of ________________ shares of common stock of
Faroudja, Inc. and herewith makes payment therefor, all at the price and on
the terms and conditions specified in this Warrant and requests that
certificates for the shares of common stock hereby purchased be issued in the
name of and delivered to _________________________________ whose address is __
_____________________________ and, if such shares of common stock shall not
include all of the shares of common stock issuable as provided in this
Warrant, that a new warrant of like tenor and date for the balance of the
shares of common stock issuable hereunder be delivered to the undersigned.
Dated:
------------------------
-------------------------------------------------
(Name of Registered Owner)
-------------------------------------------------
(Signature of Registered Owner)
-------------------------------------------------
(Street Address)
-------------------------------------------------
(City) (State) (Zip Code)
6
<PAGE>
EXHIBIT A-2
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby
sells, assigns and transfers to the assignee named below all of the rights of
the undersigned under this Warrant with respect to the number of shares of
common stock set forth below:
No. of shares
Name and Address of Assignee Common Stock
- ---------------------------- ------------
and does hereby irrevocably constitute and appoint ____________________________
attorney-in-fact to register such transfer on the books of Faroudja, Inc.
maintained for the purpose, with full power of substitution in the premises.
Dated: Print Name:
------------------ ---------------------------------
Signature:
---------------------------------
Witness:
-----------------------------------
7
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT OR THE RULES AND
REGULATIONS THEREUNDER.
WARRANT TO PURCHASE
SHARES OF
FAROUDJA, INC.
COMMON STOCK
Faroudja, Inc., a Delaware corporation (the "Company") hereby issues to
Adelson Investors, LLC (the "Holder") this warrant to purchase from the Company,
at any time or from time to time on or before the third anniversary of the date
of this warrant (or any earlier date specified by the Company in a written
notice given by the Company to the Holder), for a price per share equal to $.15,
65,152 shares of common stock of the Company.
This warrant is subject to the following terms and conditions:
1. EXERCISE. The rights represented by this warrant may be exercised, at
any time or from time to time in whole or in part, by (a) the surrender of this
warrant, along with the purchase form attached as exhibit A-1 (the "Purchase
Form"), properly executed, at the address of the Company set forth in
section 8.2 (or such other address as the Company may designate by notice in
writing to the Holder at its address set forth in section 8.2) and (b) the
payment to the Company of the exercise price by check, payable to the order of
the Company, for the number of shares specified in the Purchase Form, together
with any applicable stock transfer taxes. A certificate representing the shares
so purchased and, in the event of an exercise of fewer than all the rights
represented by this warrant, a new warrant in the form of this warrant issued in
the name of the Holder or its designee(s) and representing a new warrant to
purchase a number of shares equal to the number of shares as to which this
warrant was theretofore exercisable less the number of shares as to which this
warrant shall theretofore have been exercised, shall be delivered to the Holder
or such designee(s) as promptly as practicable, but in no event later than three
business days, after this warrant shall have been so exercised.
2. ADJUSTMENT OF THE NUMBER OF SHARES. If the Company shall (a) pay a
dividend in common stock or make a distribution in common stock, (b) subdivide
its outstanding common stock, (c) combine its outstanding common stock into a
smaller number of shares of common stock or (d) issue by reclassification of its
common stock, spin-off, split-up, recapitalization, merger, consolidation or any
similar corporate event or
<PAGE>
arrangement other securities of the Company, the kind and number of shares of
common stock purchasable upon exercise of this warrant shall be adjusted
immediately prior to the exercise of this warrant so that the Holder shall be
entitled to receive the kind and number of shares or other securities of the
Company to which the Holder would have been entitled to receive after the
happening of any of the events described above had this warrant been exercised
immediately prior to the happening of such event or the record date with respect
to such event.
3. RESERVATION OF SHARES. From and after the date of this warrant, the
Company shall at all times reserve and keep available for issuance upon the
exercise of this warrant a number of its authorized but unissued shares of
common stock sufficient to permit the exercise in full of this warrant.
4. TRANSFER. Subject to applicable law, this warrant may be transferred
at any time, in whole or in part, to any entity, entities, person or persons.
Any transfer shall be effected by the surrender of this warrant, along with the
form of assignment attached as exhibit A-2, properly executed, at the address of
the Company set forth in section 7.2 (or such other address as the Company may
designate by notice in writing to the Holder at its address set forth in
section 7.2). Thereupon, the Company shall issue in the name or names specified
by the Holder a new warrant or warrants of like tenor and representing a warrant
or warrants to purchase in the aggregate a number of shares equal to the number
of shares to which this warrant was theretofore exercisable less the number of
shares as to which this warrant shall theretofore have been exercised.
5. PAYMENT OF TAXES. The Company shall cause all shares of common stock
issued upon the exercise of this warrant to be validly issued, fully paid and
nonassessable and not subject to preemptive rights. The Company shall pay all
expenses in connection with, and all taxes and other governmental charges that
may be imposed with respect to, the issuance or delivery of the shares of common
stock upon exercise of this warrant, unless such tax or charge is imposed by law
upon the Holder.
6. PIGGYBACK REGISTRATION.
6.1 INCLUSION IN REGISTRATION. If at any time after the date of this
warrant until the expiration of this warrant, the Company proposes to register
any of its shares of common stock under the Securities Act of 1933 (other than
in connection with a merger or pursuant to Form S-8 or S-4 or a comparable
registration statement) it will promptly give notice to the Holder of its
intention to do so. If the Holder notifies the Company within twenty (20) days
after receipt of any such notice of its desire to include any Warrant Shares (as
defined in section 6.3) in such proposed registration, the Company shall afford
the Holder the opportunity to have such Warrant Shares registered under such
registration statement.
2
<PAGE>
Notwithstanding anything in this section 6 to the contrary, the Company
shall have the right at any time after it shall have given any notice pursuant
to this section 6 (irrespective of whether a written request for inclusion of
any Warrant Shares shall have been made), to elect to postpone or not to file
such proposed registration statement or to withdraw the same after filing but
prior to the effective date thereof.
6.2 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares being sold by the Company, the Company shall
not be required under this section 6 to include any Warrant Shares in such
underwriting unless the Holder accepts the terms of the underwriting as agreed
upon between the Company and the underwriters selected by it, and then only in
such quantity as will not, in the opinion of the underwriters, jeopardize the
success of the offering by the Company. If the total number of shares,
including the Warrant Shares, requested by shareholders, including the Holder,
to be included in the offering exceeds the number of shares sold other than by
the Company that the underwriters reasonably believe compatible with the success
of the offering, then the number of selling shareholders' shares that may be
included in the offering shall be apportioned pro rata among the selling
shareholders according to the total number of shares entitled to be included in
the offering owned by each selling shareholder or in such other proportions as
shall mutually be agreed to by the selling shareholders.
6.3 DEFINITION. As used in this section 6, the term "Warrant Shares"
means shares of common stock of Faroudja issued or issuable upon the exercise of
this warrant.
7. MISCELLANEOUS.
7.1 SECURITIES ACT RESTRICTIONS. The Holder acknowledges that this
warrant may not be sold, transferred or otherwise disposed of without
registration under the Securities Act of 1933 (the "Act") or an applicable
exemption from the registration requirements of the Act and, accordingly, this
warrant and all certificates representing the common stock and any other
securities issuable upon the exercise of this warrant shall bear a legend in the
form set forth on the top of page one of this warrant.
7.2 NOTICES. All notices and other communications under this
agreement shall be in writing and may be given by any of the following methods:
(a) personal delivery; (b) facsimile transmission; (c) registered or certified
mail, postage prepaid, return receipt requested; or (d) overnight delivery
service. Notices shall be sent to the appropriate party at its, his or her
address or facsimile number given below (or at such other address or facsimile
number for that party as shall be specified by notice given under this
section 7.2):
3
<PAGE>
if to the Holder, to it at:
Adelson Investors, LLC
10900 Wilshire Boulevard, Suite 750
Los Angeles, California 90024
Attention: Merv Adelson
Fax: (310) 209-6160
with a copy to:
East-West Capital Associates
10900 Wilshire Boulevard, Suite 750
Los Angeles, California 90024
Attention: Paul J. Nadel
Fax: (310) 209-6160
if to the Company, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Hoberg, CFO
Fax: (408) 735-8571
with a copy to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017
Attention: Stuart D. Buchalter, Esq.
Fax: (213) 896-0400
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or (c)
in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming that the
number of pages constituting the notice have been transmitted without error. In
the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
7.3 AMENDMENT. This warrant may be modified or amended or the
provisions of this warrant may be waived only with the written consent of the
Company and the Holder.
4
<PAGE>
7.4 GOVERNING LAW. This warrant shall be governed by the law of the
state of Delaware, without regard to the provisions thereof relating to
conflicts of laws.
December 31, 1996
FAROUDJA, INC.
By: /s/ Michael Moone
----------------------------------------------------
Michael Moone,
President and CEO
5
<PAGE>
EXHIBIT A-1
PURCHASE FORM
[To be executed only upon exercise of warrant]
The undersigned registered owner of this warrant irrevocably exercises this
warrant for the purchase of ________________ shares of common stock of Faroudja,
Inc. and herewith makes payment therefor, all at the price and on the terms and
conditions specified in this warrant and requests that certificates for the
shares of common stock hereby purchased be issued in the name of and delivered
to _________________________________ whose address is
________________________________________________________ and, if such shares of
common stock shall not include all of the shares of common stock issuable as
provided in this warrant, that a new warrant of like tenor and date for the
balance of the shares of common stock issuable hereunder be delivered to the
undersigned.
Dated:
-------------------------
----------------------------------------
(Name of Registered Owner)
----------------------------------------
(Signature of Registered Owner)
----------------------------------------
(Street Address)
----------------------------------------
(City) (State) (Zip Code)
A-1
-1-
<PAGE>
EXHIBIT A-2
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this warrant hereby
sells, assigns and transfers to the assignee named below all of the rights of
the undersigned under this warrant with respect to the number of shares of
common stock set forth below:
No. of shares
Name and Address of Assignee Common Stock
- ---------------------------- --------------
and does hereby irrevocably constitute and appoint ___________________________
attorney-in-fact to register such transfer on the books of Faroudja, Inc.
maintained for the purpose, with full power of substitution in the premises.
Dated: Print Name:
------------------ ------------------------
Signature:
--------------------------
Witness:
----------------------------
A-2
-1-
<PAGE>
CONSULTING SERVICES AGREEMENT
M-Squared and Technology L.L.C. ("Consultant") and Faroudja Laboratories,
Inc. ("Client") make this Agreement this 21st day of September, 1994.
The parties agree as follows:
1. SERVICES. Consultant agrees to render consulting services to Client
in connection with (i) specific projects requested by Client and (ii) the
proposed acquisition of Client or one or more of its businesses, including, but
not limited to, a sale of substantially all of the assets of Client or one or
more of its businesses, a sale by Client or Client's shareholders of the stock
of the Client, or merger or other method of acquisition of Client or one or more
of its businesses, ("Acquisition Transaction"). The term "Acquisition
Transaction" also shall include a proposed acquisition of Faroudja Research,
Inc. or one or more of its businesses (determined as in the preceding sentence).
2. SCOPE OF SERVICES. Consultant's services will include all services
reasonably requested by the Client during the term of this Agreement to assist
Client with its business, strategy or acquisition, including the following:
(i) the projects listed on Exhibit A; and
(ii) assistance relating to one or more Acquisition Transactions,
including review and finalization of the Information Memorandum (in
coordination with Catherine Goodrich), selection of potential
acquiring companies, identification of the specific persons to be
approached and strategies to be utilized for presentations, arranging
and participating in presentations, follow up to presentations and
discussions, and negotiation of the terms of the acquisition.
3. ACCESSIBILITY. Consultant agrees to promptly respond to Client's
requests for assistance, to be easily accessible by telephone and fax facilities
and to periodically inform Client of place of contact during travel. Consultant
agrees to consult with Client at Client's facility in California on a monthly
basis if requested by Client.
4. COMPENSATION.
(a) As payment for Consultant's services under this Agreement, Client
agrees to pay Consultant the amount of $8,333 on the last day of each month
during the term of this Agreement.
(b) Unless this Agreement is terminated by Client for breach by
Consultant pursuant to paragraph 5, Consultant will also receive, conditioned
upon the
<PAGE>
completion of one or more Acquisition Transactions during the term of this
Agreement, or within 180 days thereafter, an amount equal to two percent (2%) of
the aggregate proceeds paid by the acquirer(s) in connection with each such
Acquisition Transaction (whether or not paid during such period). If the
proceeds of any Acquisition Transaction include stock of the acquiring company,
(i) the value of such stock shall be the fair market value of the stock at the
time of payment by the acquiring company (determined without regard to any
restrictions on such stock), and (ii) at the option of Client, Consultant may be
paid such compensation in stock of the acquiring company, based on such fair
market value. The portion of the fee payable in stock shall not exceed the
portion of the aggregate proceeds of the Acquisition Transaction which are paid
in stock. The fee shall be paid within fifteen (15) days after receipt of the
proceeds of the Acquisition Transaction or, if the proceeds are payable in
installments, a pro rata portion of the fee shall be paid within fifteen (15)
days after receipt of each installment.
(c) Client will reimburse Consultant for reasonable out-of-pocket
costs incurred in the performance of this Agreement (including travel outside
the New York/Connecticut area), upon submission of receipts therefor.
5. TERM OF SERVICES. Consultant will render the services herein to be
provided for a period of six (6) months, commencing upon the date of this
Agreement. This Agreement may be terminated at the option of Client upon 90
days written notice to Consultant. Either party may at its option terminate
this Agreement if the other party defaults in the performance of a material
obligation and such default has not been cured within ten (10) days after
receipt of written notice thereof (an "Uncured Default"). In the event that the
Client terminates this Agreement other than by reason of an Uncured Default on
the part of Consultant, (i) the Client shall continue to pay Consultant the
monthly consulting fee through the effective date of such termination (but in no
event shall the total monthly payments to Client under this Agreement be less
than $33,333), and (ii) solely for purposes of determining whether the
Consultant is entitled to the fee described in Section 4(b), the term of this
Agreement shall be determined without regard to such termination.
6. INDEPENDENT CONTRACTOR. Consultant and Client agree that services
will be furnished by Consultant as an independent contractor. Unless authorized
in writing by Client, Consultant has no general power or authority to act for,
represent, or contractually bind Client.
7. CONFIDENTIAL INFORMATION. Consultant acknowledges execution of the
Client's Confidential Nondisclosure Agreement [Acquisition Discussions] which
shall apply to the transactions under this Agreement and shall survive any
termination hereof.
8. CONFLICTING ACTIVITIES.
(a) During the term of this Agreement and for a period of six (6)
months thereafter, Consultant agrees not to represent any potential purchaser in
connection with an Acquisition Transaction, or provide any services relating to
the areas of line doubling,
2
<PAGE>
image enhancement, or PAL or NTSC encoding and decoding to, or acquire any
equity or other financial interest (directly or indirectly) in, any competitor
of Client that competes with Client in the areas of line doubling, image
enhancement, or PAL or NTSC encoding and decoding.
(b) Client acknowledges that Matthew D. Miller, the principal of the
Consultant, is subject to certain contractual restrictions on his activities in
connection with the termination of his employment by General Instrument
Corporation ("GI"). In the event that Consultant reasonably determines that
services to be performed by Consultant hereunder could result in a violation of
such contractual restrictions, Miller shall notify the Client and shall attempt
in good faith to obtain a waiver of such contractual restrictions from GI. In
the event that Miller is unable to timely obtain such a waiver, Consultant shall
not be obligated to perform such potentially-conflicting services unless Client
agrees in writing to indemnify Miller against all damages, liabilities, costs
and expenses (including attorneys' fees) arising out of the performance of such
services without a waiver from GI. In the event that Consultant does not
perform services under the circumstances described in this Section 8(b), (i) it
shall not constitute a default under this Agreement, and (ii) the amount of the
fees payable hereunder shall not be reduced as a result thereof.
(c) The Consultant represents and warrants that the services
described in Section 2(ii) and Exhibit A of this Agreement (other than those
described in Section 2(a) of Exhibit A) do not result in a violation of the GI
contractual restrictions referred to in Section 8(b).
9. NO GUARANTY OF RESULTS. The Client acknowledges that the Consultant
does not warrant, represent or guarantee the results of the services rendered to
Client hereunder. The Client also acknowledges that any reports and
recommendations made by the Consultant under this Agreement will be based in
part upon assumptions and subjective data not readily subject to verification.
The Client agrees that the Consultant shall not be liable, in breach of contract
or otherwise, for direct or indirect damages arising from any decisions made or
actions taken (or omitted) by the Client based upon the Consultant's reports or
recommendations. The Client hereby waives any claims against the Consultant for
any loss, injury or damage of any kind (including consequential damage) arising
out of the performance of services by the Consultant under this Agreement. The
Client hereby agrees to indemnify the Consultant against any claims against the
Consultant for any loss, injury or damage of any kind (including consequential
damages) arising out of the performance of services by the Consultant under this
Agreement in connection with an Acquisition Transaction; provided, however, that
the Consultant shall not be entitled to such indemnity in the event that it is
determined that such claims resulted from the negligence or willful misconduct
of the Consultant.
10. ARBITRATION. In the event of any dispute between the parties to this
Agreement, the parties agree to submit such dispute to binding arbitration
before the American Arbitration Association in Palo Alto, California. The costs
of such arbitration will be borne equally between the parties.
3
<PAGE>
11. GENERAL. This Agreement shall be governed by the laws of the State of
California. This Agreement represents that entire agreement between the
parties, supersedes all prior agreements and understandings with respect to the
matters covered in this Agreement and may only be amended in a writing signed by
both parties. All notices shall be provided in writing to the address set forth
below (or to such other address which a party may provide notice) and shall be
given by personal delivery, certified or registered mail (return receipt
requested), nationally-utilized overnight delivery service or confirmed
facsimile transmission and shall be considered given when received.
IN WITNESS WHEREOF, the parties below have signed this Agreement as of the
date set forth above.
M-SQUARED MEDIA AND TECHNOLOGY L.L.C.
By: /s/ Matthew D. Miller
----------------------------------------------------
Matthew D. Miller
Address: 16 Eleven O'Clock Road
Weston, CT 06883
Fax No.: (203) 226-1590
FAROUDJA LABORATORIES, INC.
By: /s/ Yves Faroudja
----------------------------------------------------
Yves Faroudja, President
Address: 750 Palomar Avenue
Sunnyvale, CA 94086
Fax No.: (415) 941-3310
4
<PAGE>
EXHIBIT A
1) Review of Client technological options and assistance towards the
establishment of a business plan.
2) Assistant Client in the following specific projects:
a) Negotiations with General Instrument on patents No. 4,876,596 (YF) and
4,881,125, 4,998,287 (GI).
b) Negotiations with C-Cube for use of Client technology within MPEG
process.
c) Gathering information on NTV status and business approach.
d) Interface with Zilog, Inc. and Q.D. Technology, Inc to resolve the
potentially competitive and infringing activities of such companies.
e) Optimization of Faroudja Research Enterprises situation and
presentation.
A-1
<PAGE>
December 31, 1996
Merv L. Adelson
c/o East-West Capital Associates
10900 Wilshire Boulevard,
Suite 750
Los Angeles, California 90024
Dear Mr. Adelson:
This letter agreement is entered into by and among Faroudja, Inc., a
Delaware corporation ("FI"), Faroudja Laboratories, Inc., a California
corporation and wholly-owned subsidiary of FI ("FLI") and you to confirm your
prior agreement and our understanding that Merv L. Adelson will serve FI and
its subsidiary, FLI, as a consultant in the matter of the analysis and
implementation of potential strategic alliances ("Proposed Strategic
Alliances") in the specific field of television signal enhancement for
television, cable TV, satellite TV and digital video disks ("Signal
Enhancement") and that Mr. Adelson shall not provide consulting services in
the field of Signal Enhancement to any other entity or person, except for Mr.
Adelson's activities on behalf of Time Warner or its subsidiaries or
controlled affiliates.
Accordingly, the parties agree as follows:
1. SERVICES PROVIDED. Mr. Adelson will provide such reasonable
assistance (at no cost to Mr. Adelson) and advice as FLI may reasonably
request, specifically limited to the following (some of which may have been
previously performed during the period from February 9, 1996 to December 31,
1996):
(a) providing to FLI a list of possible corporate investors,
partners, customers, buyers, lenders and joint venturers for FLI's review and
reasonable approval (each, a "Proposed Strategic Alliance Partner");
(b) revising an executive summary regarding FLI's business (based on
detailed information supplied by FLI to Mr. Adelson) to be provided to
Proposed Strategic Alliance Partners;
(c) coordinating and making approaches to Proposed Strategic
Alliance Partners, after due consultation with FLI as to the prioritization
of approaching Proposed Strategic Alliance Partners; and
1
<PAGE>
(d) assisting (at no cost to Mr. Adelson) in the negotiation of the
principal terms of the Proposed Strategic Alliance and preparation of all
contracts, documents, approvals and related matters necessary to consummate a
Proposed Strategic Alliance with a Proposed Strategic Alliance Partner.
2. COMPENSATION. If FLI consummates a Proposed Strategic Alliance (or a
combination of Proposed Strategic Alliances), during the Term of this
agreement, as a result of which FLI receives Consideration (as defined below)
(in the aggregate) of at least $5,000,000, FI shall immediately grant to
Adelson Investors, LLC an additional warrant to purchase from FI at $.15 per
share, 65,152 shares of Common Stock of FI, which warrant shall be in the
form of Exhibit A attached hereto.
For purposes of this section, the term "Consideration" shall mean:
(a) in relation to any product-specific transaction (or combination
of transactions), the total of (i) all up-front license payments, PLUS (ii)
all payments by the Proposed Strategic Alliance Partner to FLI for research
and development PLUS (iii) the net present value of the estimated value of
all royalty payments in the seven-year period starting on the date of the
launch of each product, using 10% as the discount rate and using FLI's own
reasonable sales forecast for each product to estimate the annual royalties
payable; or
(b) in relation to an equity or debt investment (or series of such
investments) in FLI, the total cash paid by the Proposed Strategic Alliance
Partner(s), PLUS the fair market value of any equity or debt securities or
other consideration transferred by the Proposed Strategic Alliance Partner(s)
to FLI, PLUS any long-term debt or other obligations of FLI explicitly
assumed or refinanced by the approved Strategic Alliance Partner(s) in
connection with the Proposed Strategic Alliance; or
(c) in relation to both an equity or debt investment in FLI and a
product-specific transaction, the sum of the amounts calculated pursuant to
paragraphs (a) and (b) above; or
(d) the relationship with the Proposed Strategic Alliance Partner(s)
is expected, in the sole determination of the board of directors of FLI, to
result in FLI or a subsidiary or affiliate or parent of FLI receiving at
least $5,000,000 of revenues (or other consideration or value) attributable
to the relationship with the Proposed Strategic Alliance Partner(s).
3. ELECTION OF DIRECTORS. During the term of this agreement, FI shall
use its best efforts to cause Mr. Adelson (or a designee of Mr. Adelson who
is reasonably acceptable to the board of directors of FI) (the "First
Director"), and, in addition to the First Director, a designee of Mr. Adelson
who is reasonably acceptable to the board of directors of FI, to be elected
to the board of directors of FI, and, if so elected, the First Director and
the designee shall serve, at their discretion, on the board of directors of
FI.
2
<PAGE>
4. CERTAIN ADDITIONAL MATTERS. Notwithstanding anything to the contrary
in this agreement, FLI shall have no obligation to consummate any Proposed
Strategic Alliance, and FLI and FI shall have no liability or obligation to
Mr. Adelson or Adelson Investors, LLC for any failure by FLI to consummate
any Proposed Strategic Alliance for any reason. In addition, nothing in this
agreement, shall be deemed to authorize Mr. Adelson to commit or bind FLI to
enter into any Proposed Strategic Alliance or otherwise to act as FLI's agent
or representative.
5. TERM. Mr. Adelson shall serve as consultant for FI and its
subsidiary, FLI, until February 9, 1999 (the "Term").
6. INDEMNIFICATION. FLI agrees to indemnify and hold harmless Mr.
Adelson against and from any and all losses, claims, damages, liabilities and
expenses (including reasonable attorneys' fees and disbursements and other
expenses incurred by Mr. Adelson in connection with the preparation for, or
defense of, any claim, action or proceeding, whether or not resulting in any
liability) to which Mr. Adelson may become liable arising out of Mr.
Adelson's acting for FLI pursuant to this agreement; provided, that, FLI
shall not be liable hereunder to the extent any loss, claim, damage,
liability or expense is found to have resulted from Mr. Adelson's gross
negligence, bad faith or material breach of this agreement.
The provisions of this section 6 shall remain operative and in full force
and effect regardless of any termination of this agreement.
7. MISCELLANEOUS
7.1 GOVERNING LAW. This agreement shall be governed by and
construed in accordance with the law of the State of California applicable to
agreements made and to be performed wholly in California.
7.2 ARBITRATION. Any dispute arising under or in connection with
this agreement shall be resolved by binding arbitration in Los Angeles,
California in accordance with the rules and procedures of the American
Arbitration Association by a single neutral arbitrator appointed by the
American Arbitration Association or its president. Judgement upon the
arbitrator's award may be entered in any court having jurisdiction. Each
party shall bear its or his own costs of any arbitration or litigation,
including, without limitation, attorneys' fees and expenses, and the costs of
the arbitration itself and of the arbitrator shall be borne equally by each
party, in each case unless determined otherwise by the arbitrator.
7.3 ENTIRE AGREEMENT; AMENDMENT. This agreement contains a complete
statement of all the arrangements between the parties with respect to its
subject matter, supersedes all existing agreements between them with respect
to that subject matter, and may not be changed or terminated orally. Any
amendment or modification must be in writing and signed by the party to be
charged.
3
<PAGE>
If you are in agreement with the foregoing, please sign in the space
provided below, and the foregoing shall then become a binding agreement among
us.
Very truly yours,
FAROUDJA, INC.
By:/s/ Michael Moone
-------------------------------------
Michael Moone,
President and CEO
FAROUDJA LABORATORIES, INC.
By:/s/ Michael Moone
-------------------------------------
Michael Moone,
President and CEO
Agreed and Accepted:
/s/ Merv Adelson
- -------------------------------------
Merv Adelson
4
<PAGE>
November 13, 1995
Mr. Yves C. Faroudja
Mrs. Isabell Faroudja
Faroudja Laboratories, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Re: Purchase of Shares of Common Stock of Faroudja
Laboratories, Inc. ("FLI") and Faroudja Research
Enterprises Inc. ("FRE") (collectively, the
"Companies") by Spencer Trask Holdings, Inc. (the
"Buyer") from Yves C. Faroudja and Isabell
Faroudja (collectively, the "Sellers")
Dear Mr. and Mrs. Faroudja:
Set forth below is our mutual agreement regarding our audit and due
diligence examination of the Companies, the terms of the purchase of shares of
common stock of the Companies, the option to purchase shares of common stock of
the Companies and certain other matters.
1. AUDIT AND DUE DILIGENCE
The Buyer shall conduct an audit and due diligence examination of
the Companies beginning as promptly as practicable after the execution and
delivery of this agreement. In that connection, the Sellers shall cause the
Companies to give the Buyer and its representatives full access during normal
business hours to the Companies' books, records, properties, employees and
professional advisors during the period (the "Audit and Due Diligence period")
beginning immediately after the execution and delivery of this agreement and
continuing until the close of business on February 9, 1996 (with a 28-day grace
period, if requested by the Sellers or the Buyer). During the Audit and Due
Diligence Period, the Sellers shall, and shall cause the Companies to, cooperate
with the Buyer and its representatives in that audit and due diligence
examination, and shall permit a firm of independent accountants selected by the
Buyer (the fees and expenses of which shall be borne by the Buyer) to audit the
financial statements of the Companies, on behalf of and for the
<PAGE>
Mr. and Mrs. Faroudja
November 13, 1995 Page 2
benefit of the Companies, for the two years ended December 31, 1994 and the nine
months ended September 30, 1995.
2. CONFIDENTIALITY
During the Audit and Due Diligence period, the Buyer shall
maintain the confidentiality of all non-public information it receives regarding
the Companies, pursuant to the Confidentiality Agreement executed between the
Buyer and FLI on August 8, 1995 (which the parties agree shall be amended to add
FRE as a party, to be treated the same as FLI), and thereafter, prior to the
Closing, the Buyer shall afford the Sellers the opportunity to review any
offering materials the Buyer intends to furnish to prospective investors prior
to furnishing such materials; provided that Sellers assume no responsibility or
liability for such materials.
3. STOCK PURCHASE; OPTIONS; PURCHASE PRICE
(a) FRE. The Sellers agree to sell and the Buyer agrees to
purchase, for a total purchase price of $750,000 payable by Cashier's check at
the end of the Audit and Due Diligence Period ("Closing"), and "Closing Date"
being defined as the date of the Cashiers' check:
(i) 960,490 shares of common stock in FRE (which will
comprise 37.5% of the FRE common stock, without giving effect to shares which
are issuable or which may be issued pursuant to the Stock Plans); and
(ii) an option (with the shares purchasable under the option
to be held in escrow by attorneys for the Sellers on mutually agreed upon terms)
(the "FRE Options"), exercisable not later than twelve months after the Closing,
to purchase or cause to be purchased from the Sellers an additional 960,491
shares of common stock in FRE (which will comprise an additional 37.5% of the
FRE common stock, without giving effect to shares which are issuable or which
may be issued pursuant to the Stock Plans) for $750,000 payable by Cashier's
check structured to avoid the possibility of such payment being treated as a
dividend.
At the Closing, and, in the event of the exercise of the FRE Option,
upon the exercise of the FRE Option, the Sellers shall deliver to the Buyer,
free and clear of all liens, encumbrances, security interests and other adverse
claims and agreements of any kind, stock certificates representing the shares
being sold. Sellers currently own 1,964,812 shares of
<PAGE>
Mr. and Mrs. Faroudja
November 13, 1995 Page 3
common stock and 596,496 shares of preferred stock in FRE. Prior to the
Closing, Sellers will convert each share of preferred stock into a share of
common stock. There also is outstanding a warrant issued to a consultant for
the purchase of 98,246 shares of common stock of FRE, the exercise of which will
dilute proportionately the Buyer and the Sellers.
(b) FLI. The capitalization of FLI immediately prior to the
Closing will consist of 9,800,000 shares of Common Stock, all owned by Sellers,
and a $4,000,000 demand note held by Sellers (the "Note"). In addition, stock
options to purchase up to 1,000,000 shares of common stock in FLI (which number
includes those already granted), and other mutually acceptable arrangements for
new employees ("Stock Plans"), will dilute proportionately all parties. At the
Closing and thereafter, the Stock Plans will remain in effect.
(i) FLI agrees to sell and the Buyer agrees to purchase,
for a total purchase price of $4,000,000 payable by Cashier's Check at the
Closing, an aggregate of 1,507,692 newly issued shares of Common Stock of FLI.
(ii) FLI agrees to discharge the Note in full to Sellers
immediately following the Closing.
(iii) The Sellers agree to sell and the Buyer agrees to
purchase, for a total purchase price of $7,250,000, payable by Cashier's check
at the Closing, an aggregate of 2,732,692 shares of Common Stock of FLI
currently held by the Sellers.
(iv) The 4,240,384 shares of Common Stock of FLI to be held
by Buyer following its purchases, under clauses (i) and (iii) above will
represent 37.5% of the FLI common stock, without giving effect to shares which
are issuable or which may be issued pursuant to the Stock Plans.
(v) The Sellers also agree to grant to Buyer an option
(with the shares purchasable under the option to be held in escrow by attorneys
for the Sellers on mutually agreed upon terms) (the "FLI Option"), exercisable
not later than twelve months after the Closing, to purchase or cause to be
purchased from the Sellers an additional 4,240,385 shares of common stock in FLI
(which will comprise an additional 37.5% of the FLI common stock without giving
effect to shares which are issuable or which may be issued pursuant to the Stock
Plans) for $11,250,000 payable by Cashier's check structured to avoid the
possibility of such payment being treated as a dividend.
<PAGE>
Mr. and Mrs. Faroudja
November 13, 1995 Page 4
At the Closing, and, in the event of the exercise of the FLI Option,
upon the exercise of the FLI Option, the Sellers shall deliver to the Buyer,
free and clear of all liens, encumbrances, security interest and other adverse
claims and agreements of any kind, stock certificates representing the shares
being sold.
(c) The FRE Option and the FLI Option are only exercisable
together and in full, on an all or nothing basis.
(d) The parties agree to cooperate in structuring the payment
terms in the most tax advantageous manner for the Sellers, provided that such
does not significantly alter the assets or liabilities of the Companies.
4. CONDITIONS
The Closing is subject to the following conditions: The Buyer
must be satisfied in its sole discretion from its review of the completed audit
and its due diligence examination that there are not material adjustments to be
made to the balance sheets or the income statements of the Companies (as
presented by the Seller), that there are not material adverse facts about the
Companies or their businesses or prospects, the Buyer has obtained financing
satisfactory to it to close, and the Buyer is satisfied that no material adverse
changes in the Companies' operations or prospects have occurred or can
reasonably be foreseen.
5. DUTIES AND OBLIGATIONS OF SELLERS
During the Audit and Due Diligence Period, and thereafter
following the Closing until the earlier of the expiration or exercise of the
Option referred to in paragraph 3 above, the Seller shall ensure that the
Companies comply with the following provisions (any of which may be waived with
the prior written consent of the Buyer):
(a) The Companies shall operate their businesses in the ordinary
course.
(b) The Sellers shall promptly notify the Buyer of, and furnish
it any information it may reasonably request with respect to the occurrence or
existence of, any event or facts that could reasonably be expected to result in
a material adverse change in the Companies' businesses or prospects.
<PAGE>
Mr. and Mrs. Faroudja
November 13, 1995 Page 5
(c) Other than in the ordinary course of business and consistent
with past practice, the Companies will not grant or agree to grant any bonus to
any current employee, any general increase in the rates of salaries or
compensation of its current employees or any specific increase to any current
employee, or provide for any new employment benefits to any of its current
employees or any increase in any existing benefits without the prior written
consent of the Buyer and such consent shall not be unreasonably withheld. The
foregoing shall not restrict use of the Stock Plans by the Companies.
(d) The Companies will not declare, set aside or pay any
dividends or other distributions in respect of their capital stock or their
securities, redeem, purchase or otherwise acquire any of their capital stock or
their securities, issue sell or encumber any shares of their capital stock or
other securities (except pursuant to the Stock Plans or as contemplated in
paragraph 3), enter into any merger or consolidation agreement or change their
authorized capital stock.
(e) The Companies will not sell, assign, voluntarily encumber,
grant a security interest in or license with respect to, or dispose of, any of
their assets or properties, tangible or intangible, or agree to incur any
liabilities, except for sales and dispositions made or liabilities incurred in
the ordinary course of their businesses.
6. OTHER MATTERS
It is understood that additional management of the Companies will
be recruited by the Buyer, subject to the Sellers' approval, including a
Marketing Manager and eventually a CEO, to ensure that Isabell and Yves may be
able to spend no less than 1/4 and 1/2 of their time, respectively, during 1996
and 1/8 and 1/3 of their time, respectively, during 1997 working in the
Companies' interest either at the Sunnyvale facility or from an office to be
established abroad. Sales and research efforts will be carried out by the
Sellers from an office to be established in France once the Sellers are
comfortable with the additional management team.
Compensation for Yves' and Isabell's services will be as follows:
1996: Yves $100,000
Isabell $ 18,750
1997: Yves $ 66,600
Isabell $ 10,000
<PAGE>
Mr. and Mrs. Faroudja
November 13, 1995 Page 6
In addition, two company cars will be at Yves' and Isabell's
disposal for the duration of the employment period, which shall be sold to the
Faroudja family at blue book value at the end of the employment period. The
medical and dental group insurance will cover the Faroudja family during that
period and Yves and Isabell will be entitled to continue to participate in other
employee benefits.
In the event the Buyer does not exercise the Option and a new
buyer offers to purchase all or part of the Sellers' remaining capital stock in
the Companies, the Buyer shall have the right to "tag along" on a pro rata basis
with respect to such sale. Furthermore, in the event the Buyer receives any
offer to sell all or part of its capital stock in the Companies, the Sellers
shall have a similar right to "tag along" on a pro rata basis with respect to
any such sale.
It is agreed that royalties being received by the Sellers for
license agreements signed prior to December 31, 1990 and relating to inventions
by the Sellers are not assets of the Companies. The license agreements
underlying these royalties shall be enumerated in the Closing documents. The
Companies will have a royalty-free license with respect to those inventions and
all future inventions made by the Sellers prior to December 31, 1997 relevant to
the Companies' businesses. In addition, the Companies shall have a right of
first refusal to license or otherwise use and acquire inventions by the Sellers
which are relevant to the Companies' businesses and that arise within 5 years of
the Closing. A renewable year-to-year Consulting Agreement containing a right
of first offer concerning future inventions by the Seller and an appropriate
consultant fee will be negotiated.
The Buyer shall use all reasonable efforts to effect a registered
public offering of the Companies' stock.
7. OTHER TRANSACTIONS
During the Audit and Due Diligence Period, and thereafter
following the Closing until the earlier of the expiration or exercise of the
Option, the Sellers shall not, and shall not authorize or permit any of their
representatives or agents or representatives or agents of the Companies to,
directly or indirectly, (a) initiate contact with any other person or entity in
an effort to solicit any financing, acquisition or similar transaction with
respect to the Companies, (b) cooperate with, or furnish or cause to be
furnished any non-public information concerning the Companies to any other
person or entity in connection with any financing, acquisition or similar
transaction with respect to the Companies, (c) negotiate with any other person
or entity with respect to any financing, acquisition or similar transaction
<PAGE>
Mr. and Mrs. Faroudja
November 13, 1995 Page 7
with respect to the Companies or (d) enter into any agreement or understanding
with the intent to effect any financing, acquisition or similar transaction with
respect to the Companies. The Sellers shall immediately give written notice to
the Buyer of the details of any such proposed transaction by any other person or
entity of which they become aware.
8. BOARD OF DIRECTORS
At the Closing, the Sellers shall cause Kevin Kimberlin to be
elected to the board of directors of each of the Companies. Following the
Option exercise, the Buyer shall take all necessary action to cause Yves
Faroudja to continue to be a director of each of the Companies. The preceding
sentences shall remain in effect until the tenth anniversary of the Closing as
long as the Buyer and the Sellers continue to own shares in the Companies
sufficient to effect the foregoing sentences.
9. FURTHER ASSURANCES
The Buyer and Sellers shall take such further action, and execute
and deliver such further documents, as either party may reasonably request to
carry out the specific purposes of the agreement.
10. TERMINATION
If the Closing does not occur by February 9, 1996 (or within the
28-day grace period referred to in paragraph 1), unless such date is mutually
extended in writing by the Buyer and the Sellers, this agreement and all rights
and obligations (other than pursuant to paragraph 2) shall terminate (but no
such termination shall relieve a party of liability for any breach prior to
termination).
11. ASSIGNMENT
This agreement and the rights and obligations hereunder may not
be assigned or transferred in any manner, except that the Buyer may assign this
agreement to an affiliated company controlled by the Buyer, which shall be bound
by all of the terms of this agreement (but no such assignment shall relieve the
Buyer of its liability and obligations under this agreement).
<PAGE>
Mr. and Mrs. Faroudja
November 13, 1995 Page 8
12. GENERAL
(a) With respect to compliance with the Securities Act of
1933, as amended (the "Act"), the Buyer represents that the shares of the
Companies at the Closing and Option exercise will be acquired by the Buyer in
compliance with the Act and without any intention of reselling or
distributing any of such shares, except in accordance with the provisions of
the Act and the applicable rules and regulations promulgated thereunder.
(b) This agreement constitute the full and entire understanding
and agreement between the parties with respect to the subject hereof. This
agreement and any term may only be amended or waived by a written instrument
signed by all parties.
(c) This agreement shall be governed by and interpreted in
accordance with the laws of the State of California.
(d) All notices permitted or required under this agreement shall
be in writing and shall be delivered in person, or, if mailed, by first class,
registered or certified mail, postage pre-paid, or sent by courier, to the
address of the party specified at the beginning or end of this agreement or such
other address as a party may specify in writing.
If the foregoing accurately reflects our mutual agreement, please
indicate by signing below.
Executed this 16 day of November, 1995.
THE BUYER:
SPENCER TRASK HOLDINGS, INC.
By: /s/ Kevin B. Kimberlin
------------------------------------
Kevin B. Kimberlin
<PAGE>
Mr. and Mrs. Faroudja
November 13, 1995 Page 9
Executed this 16 day of November, 1995.
THE SELLERS:
/s/ Yves C. Faroudja
----------------------------------------
/s/ Isabell Faroudja
----------------------------------------
<PAGE>
AMENDMENT TO LETTER AGREEMENT
Yves C. Faroudja and Isabell Faroudja (the "Sellers") and Spencer
Trask Holdings, Inc. (the "Buyer") hereby agree to amend the letter agreement
(the "Letter Agreement") dated November 13, 1995 between the Sellers and the
Buyer as follows:
1. The Sellers currently own 1,964,912 shares of common stock and
596,496 shares of preferred stock of Faroudja Research Enterprises Inc. ("FRE").
Accordingly, section 3(a)(i) of the Letter Agreement shall be amended to provide
that, at the Closing (as defined in the Letter Agreement), the Buyer shall
purchase 960,528 shares of common stock of FRE (which will comprise 37.5% of the
total number of issued and outstanding shares of FRE's common stock, without
giving effect to shares that are issued or issuable pursuant to the Stock Plans
(as defined in the Letter Agreement)).
2. The Sellers hereby grant the Buyer an option (the "First Closing
Option") to purchase from the Sellers up to 480,264 shares of common stock of
FRE and 2,120,192 shares of common stock of Faroudja Laboratories, Inc. ("FLI"),
in addition to the shares the Buyer shall purchase pursuant to the Letter
Agreement. The Buyer may exercise the First Closing Option, in whole or in
part, by giving written notice to the Sellers at any time on or before the
Closing Date (as defined in the Letter Agreement); PROVIDED that, if the Buyer
exercises the First Closing Option in part, the Buyer shall purchase a number of
shares of Common Stock of FLI equal to the number of shares of common stock of
FRE to be purchased upon that exercise of the First Closing Option multiplied by
4.4146.
3. If the Buyer exercises the First Closing Option in full, the
exercise price of the First Closing Option shall be $6 million. If the Buyer
exercises the First Closing Option in part, the exercise price of the First
Closing Option shall be an amount equal to the total number of shares of common
stock of FLI and FRE to be purchased upon that exercise of the First Closing
Option multiplied by a fraction, the numerator of which is $12 million and the
denominator of which is 5,200,912.
4. If the Buyer delivers an aggregate of $18 million of purchase
price in cash to the Sellers and FLI at the Closing (as defined in the Letter
Agreement), the Sellers shall grant the Buyer an option (the "Second Option"),
exercisable not later than 18 months after the Closing, to purchase, for an
aggregate purchase price of $6 million, 480,264 shares of common stock of FRE
and 2,120,193 shares of common stock of FLI (each, as defined in the Letter
Agreement). If the Buyer delivers to the Sellers and FLI an aggregate of less
than $18 million of purchase price, the number of shares purchasable upon
exercise of the Second Option and the exercise price of the
1
<PAGE>
Second Option shall be adjusted proportionally, and the Second Option shall
expire on the first anniversary of the Closing Date.
5. Except as expressly provided in this agreement, the Letter
Agreement shall remain in full force and effect in accordance with its terms.
6. This agreement may be executed in any number of counterparts,
each of which shall be identical and all of which, taken together, shall
constitute on e and the same document.
Dated: February 9, 1996
SPENCER TRASK HOLDINGS, INC.
for Faroudja Images, Inc.
By:/s/ Kevin B. Kimberlin
------------------------------------
Name: Kevin B. Kimberlin
Title:
/s/ Yves C. Faroudja
------------------------------------
Yves C. Faroudja
/s/ Isabell Faroudja
------------------------------------
Isabell Faroudja
2
<PAGE>
LEASE AGREEMENT
THIS LEASE, made this 2nd day of August, 1993 between THE ARRILLAGA
FOUNDATION AND RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated
7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST), as amended, and NANCY
MARRIOTT, hereinafter called Landlord, and FAROUDJA LABORATORIES, INC., a
California Corporation, hereinafter called Tenant.
W I T N E S S E T H:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "A,"
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
All of that certain 20,000+ square foot building located at
750 Palomar Avenue, Sunnyvale, California. Said Premises is
more particularly shown within the area outlined in Red on
EXHIBIT A attached hereto. The entire parcel, of which the
Premises is a part, and exclusive parking appurtenant
thereto, is shown within the area outlined in Green on
EXHIBIT A attached hereto. The Premises shall be improved
as shown on EXHIBIT B attached hereto, and is leased in its
present condition, and in the configuration as shown in Red
on EXHIBIT B.
The word "Premises" as used throughout this lease is hereby defined to
include the nonexclusive use of sidewalks and driveways in front of or adjacent
to the Premises, and the nonexclusive use of the area directly underneath or
over such sidewalks and driveways. The leased area of the Premises shall be
measured from outside of exterior walls to outside of exterior walls, and shall
include any atriums, covered entrances or egresses and covered loading areas.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
office, light manufacturing, research and development, and storage and other
uses necessary for Tenant to conduct Tenant's business in accordance with all
applicable government laws and ordinances and for no other purpose. Tenant
shall not do or permit to be done in or about the Premises anything which is
prohibited by or will in any way increase the existing rate of (or otherwise
affect) fire or any insurance covering the Premises or any part thereof, or any
of its contents, or will cause a cancellation of any insurance covering the
Premises or any part thereof, or any of its contents. Tenant shall not do or
permit to be done anything in, on or about the Premises which will in any way
obstruct or interfere with the rights of other tenants or occupants of the
Premises or neighboring premises or injure or annoy them, or use or allow the
Premises to be used for any improper, immoral, unlawful or objectionable
purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about
the Premises. No sale by auction shall be permitted on the Premises. Tenant
shall not place any loads upon the floors, walls, or ceiling which endanger the
structure, or place any harmful fluids or other materials in the drainage system
of the building, or overload existing electrical or other mechanical systems.
No waste materials or refuse shall be dumped upon or permitted to remain upon
any part of the Premises or outside the building in which the Premises are a
part, except in trash containers placed inside exterior enclosures designated by
Landlord for that purpose or inside the building proper where designated by
Landlord. No materials, supplies, equipment, finished products or semi-finished
products, raw materials or articles of any nature shall be stored upon or
permitted to remain outside the Premises. Tenant shall not place anything or
allow anything to be placed near the glass of any window, door partition or wall
which may appear unsightly from outside the Premises. No loudspeaker or other
device, system or apparatus which can be heard outside the Premises shall be
used in or at the Premises without the prior written consent of Landlord.
Tenant shall not commit or suffer to be committed any waste in or upon the
Premises. Tenant shall indemnify, defend and hold Landlord harmless against any
loss, expense, damage, reasonable attorneys' fees, or liability arising out of
failure of Tenant to comply with any applicable law. Tenant shall comply with
any covenant, condition, or restriction ("CC&R's") affecting the Premises. The
provisions of this paragraph are for the benefit of Landlord only and shall not
be construed to be for the benefit of any tenant or occupant of the Premises.
2. TERM
A. The term on this Lease shall be for a period of TEN (10) years (unless
sooner terminated as hereinafter provided) and, subject to Paragraphs 2B and 3,
shall commence on the 1st day of October, 1993 and end on the 30th day of
September, 2003.
B. Possession of the Premises shall be deemed tendered and the term of
the Lease shall commence when the first of the following occurs:
(a) One day after a Certificate of Occupancy is granted by the proper
governmental agency, or, if the governmental agency having jurisdiction over the
area in which the Premises are situated does not issue certificates of
occupancy, then the same number of days after certification by Landlord's
architect or contractor that Landlord's construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's operating
personnel; or
(c) When the Tenant Improvements have been substantially completed
for Tenant's use and occupancy, in accordance and compliance with EXHIBIT B of
this Lease Agreement; or
(d) As otherwise agreed in writing.
3. POSSESSION If landlord, for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of the said term, as
hereinbefore specified, this Lease shall not be void or voidable; no obligation
of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be
liable to Tenant for any loss of damage resulting therefrom; but in that event
the commencement and termination dates of the Lease, and all other dates
affected thereby shall be revised to conform to the date of Landlord's delivery
of possession, as specified in Paragraph 2B, above. The above, is however,
subject to the provision that the period of delay of delivery of the Premises
shall not exceed 60 days from the commencement date herein (except those delays
caused by Acts of God, strikes, war, utilities, governmental bodies, weather,
unavailable materials, and delays beyond Landlord's control shall be excluded in
calculating such period) in which instance Tenant, at its option, may, by
written notice to Landlord, terminate this lease.
4. RENT (subject to the provisions of Paragraph 40 "Basic Rent Adjustment")
A. BASIC RENT. Tenant agrees to pay to Landlord at such place as
Landlord may designate without deduction, offset, prior notice, or demand, and
Landlord agrees to accept as Basic Rent for the lease Premises the total sum of
ONE MILLION SIX HUNDRED EIGHTY THOUSAND AND NO/100 DOLLARS ($1,680,000.00) in
lawful money of the United States of America, payable as follows:
SEE PARAGRAPH 39 FOR BASIC RENT SCHEDULE
It is agreed that, as the Basic Rent provided for herein is adjusted according
to Paragraph 35, the total Basic Rent and schedule of payments described above
shall be adjusted accordingly.
B. TIME FOR PAYMENT. Full monthly rent is due in advance on the first
day of each calendar month. In the event that the term of this Lease commences
on a date other than the first day of calendar month, on the date of
commencement of the term hereof Tenant shall pay to Landlord as rent for the
period
- -----------------
* It is agreed in the event said Lease commenced on a date other than the
first day of the month the term of the Lease will be extended to account for
the number of days in the partial month. The Basic Rent during the resulting
partial month will be pro-rated (for the number of days in the partial month)
at the Basic Rent rate scheduled for the projected commencement date as shown
in Paragrah 39.
1
<PAGE>
from such date of commencement to the first day of the next succeeding calendar
month that proportion of the monthly rent hereunder which the number of days
between such date of commencement and the first day of the next succeeding
calendar month bears to thirty (30). In the event that the term of this Lease
for any reason ends on a date other than the last day of a calendar month, on
the first day of the last calendar month of the term hereof Tenant shall pay to
Landlord as rent for the period from said first day of said last calendar month
to and including the last day of the term hereof that proportion of the monthly
rent hereunder which the number of days between said first day of said last
calendar month and the last day of the term hereof bears to thirty (30).
C. LATE CHARGE. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as set forth in this Paragraph 4
when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten (10)
days. Said late charge shall equal ten percent (10%) of each rental payment so
in default.
D. ADDITIONAL RENT. Beginning with the commencement date of the term of
this Lease, Tenant shall pay to Landlord or to Landlord's designated agent in
addition to the Basic Rent and as Additional Rent the following:
(a) All Taxes relating to the Premises as set forth in Paragraph 9,
and
(b) All insurance premiums relating to the Premises, as set forth in
Paragraph 12, and
(c) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including reasonable attorneys' fees and legal expenses, that may accrue thereto
in the event of Tenant's failure to pay such amounts, and all damages,
reasonable costs and expenses which Landlord may incur by reason of default of
Tenant or failure on Tenant's part to comply with the terms of this Lease. In
the event of nonpayment by Tenant of Additional Rent, Landlord shall have all
the rights and remedies with respect thereto as Landlord has for nonpayment of
rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's
agent (i) within five days after presentation of invoice from Landlord of
Landlord's agent setting forth such Additional Rent and/or (ii) at the option of
Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata
share of any amount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimated amount shall
be reconciled at the end of each calendar year as compared to Landlord's actual
expenditure for said Additional Rent items, with Tenant paying to Landlord, upon
demand, any amount of actual expenses expending by Landlord in excess of said
estimated amount, or Landlord refunding to Tenant (providing Tenant is not in
default in the performance of any of the terms, covenants and conditions of this
Lease) any amount of estimated payments made by Tenant in excess of Landlord's
actual expenditures for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph
shall survive the expiration or other termination of the term of this Lease, and
if the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
E. PLACE OF PAYMENT OF RENT AND ADDITIONAL RENT. All Basic Rent
hereunder and all payments hereunder for Additional Rent shall be paid to
Landlord at the office of Landlord at THE ARRILLAGA FOUNDATION AND
PEERY/MARRIOTT, c/o PEERY ARRILLAGA, 2560 MISSION COLLEGE BLVD., SUITE 101,
SANTA CLARA, CA 95054 or to such other person or to such other place as Landlord
may from time to time designate in writing.
F. SECURITY DEPOSIT. Concurrently with Tenant's execution of this
Lease, Tenant shall deposit with Landlord the sum of TWENTY EIGHT THOUSAND
AND NO/100 DOLLARS ($28,000.00). Said sum shall be held by Landlord as a
Security Deposit for the faithful performance by Tenant of all of the terms,
covenants, and conditions of the Lease to be kept and performed by Tenant
during the term hereof. If Tenant defaults with respect to any provision of
this Lease, including, but not limited to, the provisions relating to the
payment of rent and any of the monetary sums due herewith, Landlord may (but
shall not be required to) use, apply or retain all or any part of this
Security Deposit for the payment of any other amount which Landlord may spend
by reason of Tenant's default or to compensate Landlord for any other loss or
damage which Landlord may suffer by reason of Tenant's default. If any
portion of said Deposit is so used or applied, Tenant shall, within ten (10)
days after written demand therefor, deposit cash with Landlord in the amount
sufficient to restore the Security Deposit to its original amount. Tenant's
failure to do so shall be a material breach of this Lease. Landlord shall
not be required to keep this Security Deposit separate from its general
funds, and Tenant shall not be entitled to interest on such Deposit. If
Tenant fully and faithfully performs every provision of this Lease to be
performed by it, the Security Deposit or any balance thereof shall be
returned to Tenant (or at Landlord's option, to the last assignee of Tenant's
interest hereunder) at the expiration of the Lease term and after Tenant has
vacated the Premises. In the event of termination of Landlord's interest in
this Lease, Landlord shall transfer said Deposit to Landlord's successor in
interest whereupon Tenant agrees to release Landlord from liability for the
return of such Deposit or the accounting therefor.
5. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts
the Premises as being in good and sanitary order, condition and repair and
accepts the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. An
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replace, if damaged; all floors cleaned
and waxed; all carpets cleaned and shampooed; all broken, marred or
nonconforming acoustical ceiling tiles replaced; all windows washed; the
airconditioning and heating systems serviced by a reputable and licensed service
firm and in good operating condition and repair; the plumbing and electrical
systems and lighting in good order and repair, including replacement of any
burned out or broken light bulbs or ballasts; the lawn and shrubs in good
condition including the replacement of any dead or damaged plantings; the
sidewalk, driveways and parking areas in good order, condition and repair;
together with all alterations, additions, and improvements which may have been
made in, to, or on the Premises (except moveable trade fixtures installed at the
expense of Tenant) except that Tenant shall ascertain from Landlord with thirty
(30) days before the end of the term of this Lease whether Landlord desires to
have the Premises or any part or parts thereof restored to their condition and
configuration as when the Premises were delivered to Tenant and if Landlord
shall so desire, then Tenant shall restore said Premises or such part or parts
thereof before the end of this Lease at Tenant's sole cost and expense. Tenant,
on or before the end of the term or sooner termination of this Lease shall
remove all of Tenant's personal property and trade fixtures from the Premises,
and all property not so removed on or before the end of the term or sooner
termination of this Lease shall be deemed abandoned by Tenant and title to same
shall thereupon pass to Landlord without compensation to Tenant. Landlord may,
upon termination of this Lease, remove all moveable furniture and equipment so
abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such
removal at Tenant's sole cost. If the Premises be not surrendered at the end of
the term or sooner termination of this Lease, Tenant shall indemnify Landlord
against loss or liability resulting from the delay by Tenant in so surrendering
the Premises including, without limitation, any claims made by any succeeding
tenant founded on such delay. Nothing contained herein shall be construed as an
extension of the term hereof or as a consent of Landlord to any holding over by
Tenant. The voluntary or other surrender of this Lease or the Premise by Tenant
or a mutual cancellation of this Lease shall not work as a merger and, at the
option of Landlord, shall either terminate all or any existing subleases or
subtenancies or operate as an assignment to Landlord of all or any such
subleases or subtenancies.
6. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made,
any alteration or addition to the Premises, or any part thereof, without the
written consent of Landlord first had and obtained by Tenant (such consent not
to be unreasonably withheld), but at the cost of Tenant, and any addition to, or
alteration of, the Premises, except moveable furniture and trade fixtures, shall
at once become a part of the Premises and belong to Landlord. Landlord reserves
the right to approve all contractors and mechanics proposed by Tenant to make
such alterations and additions. Tenant shall retain title to all moveable
furniture and trade fixtures placed in the Premises. All heating, lighting,
electrical, airconditioning, partitioning, drapery, carpeting, and floor
installations made by Tenant, together with all property that has become an
integral part of the Premises, shall not be deemed trade fixtures. Tenant
agrees that it will not proceed to make such alteration or additions, without
having obtained consent from Landlord to do so, and until five (5) days from the
receipt of such consent, in order that Landlord may post appropriate notices to
avoid any liability to contractors or material suppliers for payment for
Tenant's improvements. Tenant will at all times permit such notices to be
posted and to remain posted until the completion of work. Tenant shall, if
required by Landlord, secure at Tenant's own cost and expense, a completion and
lien indemnity bond, satisfactory to Landlord, for such work. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises for
work claimed to have been done for, or materials claimed to have been furnished
to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10)
days after the filing thereof, at the cost and expense of Tenant. Any exception
to the foregoing must be made in writing and executed by both Landlord and
Tenant.
7. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, or replacement, and in good and sanitary
condition. Tenant's maintenance and repair responsibilities herein referred to
include, but are not limited to, janitorization, all windows (interior and
exterior), window frames, plate glass and glazing (destroyed by accident or act
of third
2
<PAGE>
parties), truck doors, plumbing systems (such as water and drain lines, sinks,
toilets, faucets, drains, showers and water fountains), electrical systems (such
as panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes and
ballasts), heating and airconditioning systems (such as compressors, fans, air
handlers, ducts, mixing boxes, thermostats, time clocks, boilers, heaters,
supply and return grills), structural elements and exterior surfaces of the
building, store fronts, roofs, downspouts, all interior improvements within the
Premises including but not limited to wall coverings, window coverings, carpet,
floor coverings, partitioning, ceilings, doors (both interior and exterior),
including closing mechanisms, latches, locks, skylights (if any), automatic fire
extinguishing systems, and elevators and all other interior improvements of any
nature whatsoever, and all exterior improvements including but not limited to
landscaping, sidewalks, driveways, parking lots including striping and sealing,
sprinkler systems, lighting, ponds, fountains, waterways, and drains. Tenant
agrees to provide carpet shields under all rolling chairs or to otherwise be
responsible for wear and tear of the carpet caused by such rolling chairs if
such wear and tear exceeds that caused by normal foot traffic in surrounding
areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon
Lease termination. Tenant hereby waives all rights under, and benefits of,
Subsection 1 of Section 1932 and Section 1941 of the California Civil Code and
under any similar law, statute or ordinance now or hereafter in effect. In the
event any of the above maintenance responsibilities apply to any other tenant(s)
of Landlord where there is common usage with other tenant(s), such maintenance
responsibilities and charges shall be allocated to the leased Premises by square
footage or other equitable basis as calculated and determined by Landlord.
8. UTILITIES Tenant shall pay promptly, as the same become due, all charges
for water, gas, electricity, telephone, telex and other electronic communication
service, sewer service, waste pick-up and any other utilities, materials or
services furnished directly or used by Tenant on or about the Premises during
the term of this Lease, including, without limitation, any temporary or
permanent utility surcharge or other exaction whether or not hereinafter
imposed. In the even the above charges apply to any other tenant(s) of Landlord
where there is common usage with other tenant(s), such charges shall be
allocated to the leased Premises by square footage or other equitable basis as
calculated and determined by Landlord.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
9. TAXES
A. As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to Landlord, or if Landlord so directs, directly to the Tax
Collector, all Real Property taxes relating to the Premises. In the even the
Premises leased hereunder consist of only a portion of the entire tax parcel,
Tenant shall pay to Landlord Tenant's proportionate share of such real estate
taxes allocated to the leased Premises by square footage or other reasonable
basis as calculated and determined by Landlord. If the tax billing pertains
100% to the lease Premises, and Landlord chooses to have Tenant pay said real
estate taxes directly to the Tax Collector, then in such event it shall be the
responsibility of Tenant to obtain the tax and assessment bills and pay, prior
to delinquency, the applicable real property taxes and assessments pertaining to
the leased Premises, and failure to receive a bill for taxes and/or assessment
shall not provide a basis for cancellation of or nonresponsibility for payment
of penalties for nonpayment or late payment by Tenant. The term "Real Property
Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other
charges of any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all installments of principal and interest required to pay
any general or special assessments for public improvements and any increases
resulting from assessments caused by any change in ownership of the Premises)
now or hereafter imposed by any governmental or quasi-governmental authority or
special district having the direct or indirect power to tax or levy assessments,
which are levied or assessed against, or with respect to the value, occupancy or
use of, all or any portion of the Premises (as now constructed or as may at any
time hereafter be constructed, altered, or otherwise changed) or Landlord's
interest therein; any improvements located within the Premises (regardless of
ownership); the fixtures, equipment and other property of Landlord, real or
personal, that are an integral part of and located in the Premises; or parking
areas, public utilities, or energy with the Premises; (ii) all charges, levies
or fees imposed by reason of environmental regulation or other governmental
control of the Premises; and (iii) all costs and fees (including reasonable
attorneys' fees) incurred by Landlord in reasonably contesting any Real Property
Tax and in negotiating with public authorities as to any Real Property Tax. If
at any time during the term of this Lease the taxation or assessment of the
Premises prevailing as of the commencement date of this Lease shall be allotted
so that in lieu of or in addition to any Real Property Tax described above there
shall be levied, assessed or imposed (whether by reason of a change in the
method of taxation or assessment, creation of a new tax or charge, or any other
cause) an alternate or additional tax or charge (i) on the value, use or
occupancy of the Premises or Landlord's interest therein or (ii) on or measured
by the gross receipts, income or rentals from the Premises, on Landlord's
business of leasing the Premises, or computed in any manner with respect to the
operation of the Premises, then any such tax or charge, however designated,
shall be included within the meaning of the term "Real Property Taxes" for
purposes of this Lease. If any Real Property Tax is based upon property or
rents unrelated to the Premises, then only that part of such Real Property Taxes
that is fairly allocable to the Premises shall be included within the meaning of
the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real
Property Taxes" shall not include estate, inheritance, gift or franchise taxes
of Landlord of the federal or state net income tax imposed on Landlord's income
from all sources.
B. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for and shall pay
ten days before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice to Tenant, pays the
taxes based on such increased assessment, which Landlord shall have the right to
do regardless of the validity thereof, but only under proper protest if
requested by Tenant. Tenant shall upon demand, as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such event
Tenant shall have the right, in the name of Landlord and with Landlord's full
cooperation, to bring suit in any court of competent jurisdiction to recover the
amount of such taxes so paid under protest, and any amount so recovered shall
belong to Tenant.
10. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of comprehensive general liability
insurance for bodily injury and property damage occurring in, on or about the
Premises, including parking and landscaped areas, in the amount of $2,000,000
combined single limit. Such insurance shall be primary and noncontributory as
respects any insurance carried by Landlord. The policy or policies effecting
such insurance shall name Landlord as additional insureds, and shall insure any
liability of Landlord, contingent or otherwise, as respects acts or omissions of
Tenant, its agents, employees or invitees or otherwise by any conduct or
transactions of any of said persons in or about or concerning the Premises,
including any failure of Tenant to observe or perform any of its obligations
hereunder, shall be issued by an insurance company admitted to transact business
in the State of California; and shall provide that the insurance effected
thereby shall not be canceled, except upon thirty (30) days' prior written
notice to Landlord. A copy of said policy shall be delivered to Landlord. If,
during the term of this Lease, in the considered opinion of Landlord's Lender,
insurance advisor, or counsel, the amount of insurance described in this
Paragraph 10 is not adequate, Tenant agrees to increase to such reasonable
amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate.
11. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE
Tenant shall maintain a policy or policies of fire and property damage
insurance in "all risk" form with a sprinkler leakage endorsement insuring the
personal property, inventory, trade fixtures, and leasehold improvements within
the leased Premises for the full replacement value thereof. The proceeds from
any of such policies shall be used for the repair or replacement of such items
so insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with all
laws.
12. PROPERTY INSURANCE Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord Tenant's proportionate share (allocated to the leased Premises
by square footage or other equitable basis as calculated and determined by
Landlord) of the cost of, policy or policies of insurance covering loss or
damage to the Premises (excluding routine maintenance and repairs and incidental
damage or destruction caused by accidents or vandalism for which Tenant is
responsible under Paragraph 7) in the amount of the full replacement value
thereof, providing protection against those perils included within the
classification of "all risks" insurance and flood and/or earthquake insurance,
if available, plus a policy of rental income insurance in the amount of one
hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as
Additional Rent. If such insurance cost is increased due to Tenant's use of the
Premises, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Premises.
Landlord and Tenant do each hereby respectively release the other, to the
extent of insurance coverage of the releasing party, from any liability for loss
or damage caused by fire or any of the extended coverage casualties included in
the releasing party's insurance policies, irrespective of the cause of such fire
or casualty; provided, however, that if the insurance policy of either releasing
party prohibits such waiver, then this waiver shall not take effect until
consent to such waiver is obtained. If such waiver is so prohibited, the
insured party affected shall promptly notify the other party thereof.
3
<PAGE>
13. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant
hereby waives all claims against Landlord for any injury to or death of any
person or damage to or destruction of property in or about the Premises by or
from any cause whatsoever, including, without limitation, gas, fire, oil,
electricity or leakage of any character from the roof, walls, basement or other
portion of the Premises but excluding, however, the negligence of Landlord, its
agents, servants, employees, invitees, or contractors of which negligence
Landlord has knowledge and reasonable time to correct. Except as to injury to
persons or damage to property the principal cause of which is the negligence of
Landlord, Tenant shall hold Landlord harmless from and defend Landlord against
any and all expenses, including reasonable attorneys' fees, in connections
therewith, arising out of any injury to or death of any person or damage to or
destruction of property occurring in, on or about the Premises, or any part
thereof, from any cause whatsoever.
14. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations of
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that not such failure shall be deemed a breach of
the provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction of
the admission of Tenant in any action against Tenant, whether Landlord be a part
thereto or not, that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall, at its
sole cost and expense, comply with any and all requirements pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering
requirements pertaining to said Premises, of any insurance organization or
company, necessary for the maintenance of reasonable fire and public liability
insurance covering the Premises.
15. LIENS Tenant shall keep the Premises free from any liens arising out of
any work performed, materials furnished or obligation incurred by Tenant. In
the event that Tenant shall not, within ten (10) days following the imposition
of such lien, cause the same to be released of record, Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
16. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest therein, and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent will not be unreasonably withheld. As a
condition for granting this consent to any assignment, transfer, or subletting,
Landlord may require that Tenant agrees to pay to Landlord, as additional rent,
all rents or additional consideration received by Tenant from its assignees,
transferees, or subtenants in excess of the rent payable by Tenant to Landlord
hereunder. Tenant shall, by one hundred twenty (120) days written notice,
advise Landlord of its intent to assign or transfer Tenant's interest in the
Lease or sublet the Premises or any portion thereof for any part of the term
hereof. Within thirty (30) days after receipt of said written notice, Landlord
may, in its sole discretion, elect to terminate this Lease as to the portion of
the Premises described in Tenant's notice on the date specified in Tenant's
notice by giving written notice of such election to terminate. If no such
notice to terminate is given to Tenant within said thirty (30) day period,
Tenant may proceed to locate an acceptable sublessee, assignee, or other
transferee for presentment to Landlord for Landlord's approval, all in
accordance with the terms, covenants, and conditions of this paragraph 16. If
Tenant intends to sublet the entire Premises and Landlord elects to terminate
this Lease, this Lease shall be terminated on the date specified in Tenant's
notice. If, however, this Lease shall terminate pursuant to the foregoing with
respect to less than all the Premises, the rent, as defined and reserved
hereinabove shall be adjusted on a pro rata basis to the number of square feet
retained by Tenant, and this lease as so amended shall continue in full force
and effect. In the event Tenant is allowed to assign, transfer or sublet the
whole or any part of the Premises, with the prior written consent of Landlord,
so assignee, transferee or subtenant shall assign or transfer this Lease, either
in whole or in part, or sublet the whole or part of the Premises, without also
having obtained the prior written consent of Landlord. A consent of Landlord to
one assignment, transfer, hypothecation, subletting, occupation or use by any
other person shall not release Tenant from any of Tenant's obligations hereunder
or be deemed to be a consent to any subsequent similar or dissimilar assignment,
transfer, hypothecation, subletting, occupation or use of any other person. Any
such assignment, transfer, hypothecation, subletting, occupation or use without
such consent shall be void and shall constitute a breach of this Lease by Tenant
and shall, at the option of Landlord exercised by written notice of Tenant,
terminate this Lease. Leasehold estate under this Lease shall not, nor shall
any interest therein, be assignable for any purpose by operation of law without
the written consent of Landlord. As a condition of its consent, Landlord may
require Tenant to pay all expenses in connection with the assignment, and
Landlord may require Tenant's assignee or transferee (or other assignees or
transferees) to assume in writing all the obligations under this Lease to remain
liable to Landlord under the Lease.
17. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Tenant hereby irrevocably appoints Landlord the attorney in fact of
Tenant to execute, deliver and record any such instrument or instruments for and
in the name and on the behalf of Tenant. Notwithstanding any such
subordination, Tenant's possession under this Lease shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay all rent and observe
and perform all of the provisions set forth in this Lease.
18. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times
have, the right to enter the premises to inspect them; to perform any services
to be provided by Landlord hereunder; to make repairs or provide any services to
a contiguous tenant(s); to submit the Premises to prospective purchasers,
mortgagees or tenants; to post notices of nonresponsibility; and to alter,
improve or repair the Premises or other parts of the building, all without
abatement of rent, and may erect scaffolding and other necessary structures in
or through the Premises where reasonably required by the character of the work
to be performed; provided, however that the business of Tenant shall be
interfered with to the least extent that is reasonably practical. Any entry to
the Premises by Landlord for the purposes provided for herein shall not under
any circumstances be construed or deemed to be a forcible or unlawful entry into
or a detainer of the Premises or an eviction, actual or constructive, of Tenant
from the Premises or any portion thereof.
19. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action of
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during the bankruptcy, liquidation, reorganization,
insolvency or similar action elects to reject Tenant's unexpired Lease, the
trustee or receiver shall notify Landlord in writing of its election within
thirty (30) days after an order for relief in a liquidation action or within
thirty (30) days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this
Lease, the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord
adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent, and other
consideration due under this lease; (ii) assurance that the assumption or
assignment of this Lease will not breach substantially any provision, such as
radius location, use, or exclusivity provision, in any agreement relating to the
above described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in connection
with a bankruptcy, liquidation, reorganization or insolvency action or an
assignment of Tenant for the benefit of creditor or other similar act. Nothing
contained in this Lease shall be construed as giving or granting or creating an
equity in the demised Premises to Tenant. In no event shall the leasehold
estate under the Lease, or any interest therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of Landlord.
In no event shall this Lease or any right or privileges hereunder be an asset of
Tenant under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or representation
made under this Lease shall constitute a default hereunder by Tenant upon
expiration of the appropriate grace period hereinafter provided. Tenant shall
have a period of five (5) days from the date of written notice from Landlord
within which to cure any default in the payment of rental or adjustment thereto.
Tenant shall have a period of ten (10) days from the date of written notice from
Landlord within which to cure any other default under this Lease. Upon an
uncured default of this Lease by Tenant, Landlord shall have the following right
and remedies in addition to any other rights or remedies available to Landlord
at law or in equity:
(a) The rights and remedies provided for by California Civil Code
Section 1951.2, including but not limited to, recovery of the worth at the time
of award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of rental loss for the same period
4
<PAGE>
the Tenant provides could be reasonably avoided, as computed pursuant to
subsection (b) of said Section 1951.2. Any proof by Tenant under
subparagraph (2) and (3) of Section 1951.2 of the California Civil Code of the
amount of rental loss that could be reasonably avoided shall be made in the
following manner. Landlord and Tenant shall each select a licensed real estate
broker in the business of renting property of the same type and use as the
Premises and in the same geographic vicinity. Such two real estate brokers
shall select a third licensed real estate broker, and the three licensed real
estate brokers so selected shall determine the amount of the rental loss that
could be reasonably avoided from the balance of the term of this Lease after the
time of award. The decision of the majority of said licensed real estate
brokers shall be final and binding upon the parties hereto.
(b) The rights and remedies provided by California Civil Code Section
which allows Landlord to continue the Lease in effect and to enforce all of its
rights and remedies under this Lease, including the right to recover rent as it
becomes due, for so long as Landlord does not terminate Tenant's right to
possession; acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver upon Landlord's initiative to protect its
interests under this Lease shall not constitute a termination of Tenant's right
to possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) The right and power, as attorney-in-fact for Tenant, to enter the
Premises and remove therefrom all persons and property, to store such property
in a public warehouse or elsewhere at the cost of and for the account of Tenant,
and to sell such property and apply such proceeds therefrom pursuant to
applicable California law. Landlord, as attorney-in-fact for Tenant, may from
time to time sublet the Premises or any part thereof for such term or terms
(which may extend beyond the term of this Lease) and at such rent and such terms
as Landlord in its reasonable sole discretion amy deem advisable, with its right
to make alterations and repairs to the Premises. Upon each subletting,
(i) Tenant shall be immediately liable to pay Landlord, in addition to
indebtedness other than rent due hereunder, the reasonable cost of such
subletting, including, but not limited to, reasonable attorneys' fees, and any
real estate commission actually paid, and the cost of such reasonable
alternation s and repairs incurred by Landlord and the amount, if any, by which
the rent hereunder for the period of such subletting (to the extent such period
does not exceed the term hereof) exceeds the amount to be paid as rent for the
Premises for such period or (ii) the option of Landlord, rents received from
such subletting shall be applied first to payment of indebtedness other than
rent due hereunder from Tenant, Landlord; second, to the payment of any costs of
such subletting and of such alterations and repairs; third to payment of rent
due and unpaid hereunder; all the residue, if any, shall be held by Landlord and
applied in payment of future rent as the same becomes due hereunder. If Tenant
has been credited with all rent to be received by such subletting under
option (i) and such rent shall not be promptly paid to Landlord by the
subtenant(s), or if such rentals received from such subletting under option (ii)
during any month be less than that to be paid during that month by Tenant
hereunder, Tenant shall pay and any such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly. For all purposes set forth in
this subparagraph (d), Landlord is hereby irrevocably appointed attorney-in-fact
for Tenant, with power of substitution. No taking possession of the Premises by
Landlord, as attorney-in-fact for Tenant, shall be construed as an election on
its part to terminate this Lease unless a written notice of such intention be
given to Tenant. Notwithstanding any such subletting without termination,
Landlord may at any time hereafter elect to terminate this Lease for such
previous breach.
(e) The right to have a receiver appointed for Tenant upon
application by Landlord, to take possession of the Premises and to apply any
rents collected from the premises and to exercise all other rights and remedies
granted to Landlord as attorney-in-fact for Tenant pursuant to subparagraph
above.
20. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease; and if Tenant shall abandon, vacate surrender
said Premises, or be dispossessed by the process of law, or otherwise, any
personal property belonging to Tenant and left on the Premises shall be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord.
21. DESTRUCTION In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental damage
and destruction caused from vandalism and accidents for which Tenant is
responsible under Paragraph 7, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction, or
(b) Terminate this Lease.
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, promptly to rebuild or restore the Premises to their condition prior to
the damage or destruction. Tenant shall be entitled to a reduction in rent
while such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises.
If Landlord does not complete the rebuilding or restoration within one hundred
eighty (180) days following the date of destruction (such period of time to be
extended for delays caused by the fault or neglect of Tenant or because of Acts
of God, acts of public agencies, labor disputes, strikes, fires, freight
embargos, rainy or stormy weather, inability to obtain materials, supplies or
fuels, acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the
California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than 33 1/3% of the replacement
cost thereof, Landlord may elect to terminate this Lease, whether the Premises
be injured or not. In the event the destruction of the Premises is caused by
Tenant, Tenant shall pay the deductible portion of Landlord's insurance
proceeds.
22. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill, shall be and remain
the property of Tenant.
If any action or proceeding is commenced for such taking of the Premises or
any part thereof, or if Landlord is advised in writing by any entity or body
having the right or power of condemnation of its intention to condemn the
premises or any portion thereof, then Landlord shall have the right to terminate
this Lease by giving Tenant written notice thereof within sixty (60) days of the
date of receipt of said written advice, or commencement of said action or
proceeding, or taking conveyance, which termination shall take place as of the
first to occur of the last day of the calendar month next following the month in
which such notice is given or the date on which title to the Premises shall vest
in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant can
no longer reasonably conduct its business, Tenant shall have the privilege of
terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the last day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
herein, this Lease shall continue in full force and effect as to the part of the
Premises not so taken or conveyed, and the rent herein shall be apportioned as
of the date of such taking or conveyance so that thereafter the rent to be paid
by Tenant shall be in the ratio that the area of the portion of the Premises not
so taken or conveyed bears to the total area of the Premises prior to such
taking.
23. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or conveyance of
the Premises or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any further
liability upon any of the terms, covenants or conditions (express or implied)
herein contained in favor of Tenant, and in such event, insofar as such transfer
is concerned, Tenant agrees to look solely to the responsibility of the
successor in interest of such transferor in and to the Premises and this Lease.
This Lease shall not be affected by any such sale or conveyance, and Tenant
agrees to attorn to the successor in interest of such transferor, provided that
the transferee assumes all of Landlord's obligations in writing under the Lease.
24. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to attorn to the
purchaser at
5
<PAGE>
any such foreclosure sale and to recognize such purchaser as the Landlord under
this Lease. In the event the lien of the deed of trust securing the loan from a
Lender to Landlord is prior and paramount to the Lease, this Lease shall
nonetheless continue in full force and effect for the remainder of the unexpired
term hereof, at the same rental herein reserved and upon all the other terms,
conditions and covenants herein contained.
25. HOLDING OVER. Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of
the term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred twenty-five (125%) percent of the month Basic
Rent required during the last month of the Lease term.
26. CERTIFICATE OF ESTOPPEL. Tenant shall at any time upon not less than ten
(10) days prior written notice to Landlord execute, acknowledge and deliver to
Landlord a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance, and that not more than one month's rent has been paid in
advance.
27. CONSTRUCTION CHANGES. It is understood that the description of the
Premises and the location of ductwork, plumbing and other facilities therein are
subject to such minor changes as Landlord or Landlord's architect determines to
be desirable in the course of construction of the Premises, and no such changes
shall affect this Lease or entitle Tenant to any reduction of rent hereunder or
result in any liability of Landlord to Tenant. Landlord does not guarantee the
accuracy of any drawings supplied to Tenant and verification of the accuracy of
such drawings rests with Tenant.
28. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder or shall fail to perform any other term or covenant hereunder on
its part to be performed, and such failure shall continue for five (5) days
after written notice thereof by Landlord, Landlord, without waiving or releasing
Tenant from any obligation of Tenant hereunder, may, but shall not be obliged
to, make any such payment or perform any such other term or covenant on Tenant's
part to be performed. All sums so paid by Landlord and all necessary costs of
such performance by Landlord together with interest thereon at the rate of the
prime rate of interest per annum as quoted by the Bank of America from the date
of such payment on performance by Landlord, shall be paid (and Tenant covenants
to make such payment) to Landlord on demand by Landlord, and Landlord shall have
(in addition to any other right or remedy of Landlord) the same rights and
remedies in the event of nonpayment by Tenant as in the case of failure by
Tenant in the payment of rent hereunder.
29. ATTORNEYS' FEES.
A. In the event that Landlord should bring suit for the possession of the
Premises, for the recovery of any sum due under this Lease, or because of the
breach of any provision of this Lease, or for any other relief against Tenant
hereunder, then all costs and expenses, including reasonable attorneys' fees,
incurred by the prevailing party therein shall be paid by the other party, which
obligation on the part of the other party shall be deemed to have accrued on the
date of the commencement of such action and shall be enforceable whether or not
the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
30. WAIVER. The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect, the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
31. NOTICES. All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demands, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises of if sent by United States certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, requests, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered mail, postage prepaid,
addressed to Landlord at its offices at The Arrillaga Foundation and
Peery/Marriott, c/o Peery/Arrillaga, 2560 Mission College Boulevard, Suite 101,
Santa Clara, CA 95054. Each notice, request, demand, advice or designation
referred to in this paragraph shall be deemed received on the date of the
personal service or mailing thereof in the manner herein provided, as the case
may be.
32. EXAMINATION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
33. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord within a reasonable time, but
in no event earlier than (30) days after written notice by Tenant to Landlord
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have heretofore been furnished to Tenant in
writing, specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligations is such that
more than thirty (30) days are required for performance, then Landlord shall not
be in default if Landlord commences performance within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
34. CORPORATE AUTHORITY. If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the
by-laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms. If Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
35. BASIC RENT ADJUSTMENT. See Paragraph 40.
36. LIMITATION OF LIABILITY. In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(a) the sole and exclusive remedy shall be against Landlord and
Landlord's assets;
(b) no partner of Landlord shall be sued or named as a party in any
suit or action (except as may be necessary to secure jurisdiction of the
partnership);
(c) no service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the partnership);
(d) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(e) no judgment will be taken against any partner of Landlord;
(f) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
(g) no writ of execution will ever by levied against the assets of
any partner of Landlord;
(h) these covenants and agreements are enforceable both by Landlord
and also by any partner of Landlord.
6
<PAGE>
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law.
37. SIGNS. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door partition or wall which may appear unsightly from
outside the Premises.
38. MISCELLANEOUS AND GENERAL PROVISIONS.
A. USE OF BUILDING NAME. Tenant shall not, without the written consent
of Landlord, use the name of the building for any purpose other than as the
address of the business conducted by Tenant in the Premises.
B. CHOICE OF LAW; SEVERABILITY. This Lease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any provision of this Lease shall be invalid, unenforceable or
ineffective for any reason whatsoever, all other provisions hereof shall be and
remain in full force and effect.
C. DEFINITION OF TERMS. The term "Premises" includes the space leased
hereby and any improvements now or hereafter installed therein or attached
thereto. The term "Landlord" or any pronoun used in place thereof includes the
plural as well as the singular and the successors and assigns of Landlord. The
term "Tenant" or any pronoun used in place thereof includes the plural as well
as the singular and individuals, firms, associations, partnerships and
corporations, and their and each of their respective heirs, executors,
administrators, successors and permitted assigns, according to the context
hereof, and the provisions of this Lease shall inure to the benefit of and bind
such heirs, executors, administrators, successors and permitted assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words used in
any gender include other genders. If there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph headings
of this Lease are for convenience of reference only and shall have no effect
upon the construction or interpretation of any provision hereof.
D. TIME OF ESSENCE. Time is of the essence of this Lease and of each and
all of its provisions.
E. QUITCLAIM. At the expiration or earlier termination of this Lease,
Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days
after written demand from Landlord to Tenant, any quitclaim deed or other
document required by any reputable title company, licensed to operate in the
State of California, to remove the cloud or encumbrance created by this Lease
from the real property of which Tenant's Premises are a part.
F. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This instrument along
with any exhibits and attachments hereto constitutes the entire agreement
between Landlord and Tenant relative to the Premises and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
agree hereby that all prior or contemporaneous oral agreements between and among
themselves and their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this agreement.
G. RECORDING. Neither Landlord nor Tenant shall record this Lease or a
short form memorandum hereof without the consent of the other.
H. AMENDMENTS FOR FINANCING. Tenant further agrees to execute any
amendments required by a lender to enable Landlord to obtain financing, so long
as Tenant's rights hereunder are not substantially affected.
I. ADDITIONAL PARAGRAPHS. Paragraphs ____ through ____ are added hereto
and are included as a part of this lease.
J. CLAUSES, PLATS AND RIDERS. Clauses, plats and riders, if any, signed
by Landlord and Tenant and endorsed on or affixed to this Lease are a part
hereof.
K. DIMINUTION OF LIGHT, AIR OR VIEW. Tenant covenants and agrees that no
diminution or shutting off of light, air or view by any structure which may be
hereafter erected (whether or not by Landlord) shall in any way affect his
Lease, entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year first above written.
LANDLORD: TENANT:
THE ARRILLAGA FOUNDATION FAROUDJA LABORATORIES, INC.
a California corporation
By: /s/ John Arillaga
-------------------------------------- By: /s/ Yves Faroudja
John Arrillaga -------------------------------------
RICHARD T. PEERY SEPARATE PROPERTY TRUST Title: President
-------------------------------------
By: /s/ Richard T. Peery
- -----------------------------------------
Richard T. Peery, Trustee
NANCY MARRIOTT
By: /s/ Nancy Marriott by Richard T. Peery, her attorney-in-fact
---------------------------------------------------------------
Nancy Marriott
7
<PAGE>
Paragraph 39 through 48 to Lease Agreement Dated August 2, 1993, By and Between
THE ARRILLAGA FOUNDATION AND THE RICHARD T. PROPERTY TRUST AND NANCY MARRIOTT,
as Landlord, and Faroudja Laboratories, Inc., a California corporation, as
Tenant for 20,000 Square Feet of Space Located at 750 Palomar Avenue, Sunnyvale
California.
39. BASIC RENT: In accordance with Paragraph 4(A) herein, the total aggregate
sum of ONE MILLION SIX HUNDRED EIGHTY THOUSAND AND NO/100 DOLLARS
($1,680,000.00), shall be payable as follows:
On October 1, 1993, the sum of FOURTEEN THOUSAND AND NO/100 DOLLARS
($14,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including September 1, 1995.
On October 1, 1995, the sum of FOURTEEN THOUSAND AND NO/100 DOLLARS
($14,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through the remaining term of this Lease; provided, however, that
the monthly rental has not been increased as provided for in Paragraphs 4(A) and
40 hereof, in which event the monthly and aggregate rentals shall be adjusted
accordingly.
40. BASIC RENT ADJUSTMENT: It is hereby agreed that commencing October 1,
1995, and on each successive one (1) year period thereafter, the Basic Rent (as
provided for in Paragraphs 4 and 35) for each succeeding one (1) year period of
the Lease Term, shall be increased over the monthly rental in effect at the
expiration of the one (1) year period of the Lease Term immediately preceding by
an amount equivalent to the percentage increase in the Consumer Price Index from
the commencement of the one (1) year period of the Lease Term immediately
preceding to the expiration of the one (1) year period of the Lease Term
immediately preceding; that is, from 10/94 to 10/95 to 10/96, 10/96 to 10/97,
10/97 to 10/98, 10/98 to 10/99, 10/99 to 10/00, 10/00 to 10/01, 10/01 to 10/02;
provided, however, that in no event shall the monthly Basic Rental increase for
any one (1) year period of the Lease Term, after adjustment, be more than five
percent (5%) per month each year. The Basic Rent shall be subject to a CPI
adjustment on the first day of the following months: 10/95, 10/96, 10/97, 10/98,
10/99, 10/00, 10/01, 10/02.
The Lease Basic Rent shall be adjusted in accordance with the following
formula based on the Consumer Price Index ("CPI") for all urban Consumers,
subgroup "All Items", San Francisco-Oakland, California Metropolitan Area
(1982-84 = 100) published by the Bureau of Labor Statistics, U.S. Department of
Labor (the "Index") published nearest October 1, 1994 (the "Beginning Index")
and the Index which is published nearest but prior to each and every anniversary
of the October 1, 1994 date (the "Adjustment Index"). The initial "CPI"
adjusted Basic Rent shall be calculated by multiplying the monthly Basic Rent of
$14,000.00 provided for in Paragraphs 4A and 39 of the Lease by the percent
increase in the Consumer Price Index, subject to a maximum increase of five
percent (5%) per month. The Basic Rent for each succeeding one year period will
be determined by using the same formula applied to the prior year's adjusted
monthly Basic Rent.
Landlord will notify Tenant in writing of each CPI increase and the
adjusted Basic Rent, and Tenant will make payment on the adjusted amount. If
the Index is changed so that the Base Year of the Index differs from that used
as of the month immediately preceding the month in which the term commences, the
Index shall be converted in accordance with the conversion factor published by
the United States Department of Labor, Bureau of Labor Statistics. If the Index
is discontinued or revised during the term, such other government index or other
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the Index had not been
discontinued or revised. Each annual increase in the Basic Rent will be
calculated as shown below in the example displayed:
CPI CALCULATION EXAMPLE
-----------------------
CPI ANNUAL
EXAMPLE CPI CHANGE INCREASE %
- ------- ---------- ----------
CPI increase 145.7* 10/95 8%
------------
(as max. incr. 134.9* 10/94
is limited to 5%/mo
the 8% increase would be
reduced to 5%)
example is calculated at the max, incr. of 5%/mo
(increase based on CPI for this example:
$14,000.00 x 8% = $1,120.00)
Current Basic Rent $14,000.00
Max. Increase Adj.
to 5% 700.00
-----------
New Adjusted Basic Rent $14,700.00
commencing 10/1/95
CPI increase is less 145.7* 10/95 2.6%
------------
than 5% 141.9* 10/94
Current Basic Rent $14,000.00
Increase of 2.6% 364.00
------------
New Adjusted Basic Rent $14,364.00
commencing 10/1/95
(* factors used for example only)
41. "AS-IS" BASIS: Except as provided for in Paragraph 48 of this Lease, it is
hereby agreed that the Premises leased hereunder is leased strictly on an
"as-is" basis and in its present condition, and in the configuration as shown on
EXHIBIT B to be attached hereto, and by reference made a part hereof. Except
for those interior improvements as shown on EXHIBIT B, Landlord shall not be
required to make, nor be responsible for any cost, in connection with any other
repair, restoration, and/or improvement to the Premises in order for this Lease
to commence. Landlord makes no warranty or representation of any kind or nature
whatsoever as to the condition or repair of the Premises, nor as to the use or
occupancy which may be made thereof.
42. TENANTS FIRST OPTION TO TERMINATE LEASE: Providing Tenant is not in
default in any of the terms, covenants and conditions of this Lease Agreement
and any Amendments thereto, Landlord hereby grants Tenant the right to terminate
this Lease Agreement without penalty by giving Landlord sixty (60) days written
notice of its election to so terminate, in the event: (i) a civil, criminal or
administrative complaint is filed against Tenant by any governmental agency,
relating to Hazardous Materials contamination of the Property not caused by
Tenant, its employees, contractors, invitees, agents or future subtenants and/or
assignees (if any); and (ii) provided that Tenant is not dismissed from such
civil or criminal action or administrative proceeding within sixty (60) days
after Landlord receives (a) a copy of the governmental notice to Tenant stating
that such civil or criminal action or administrative proceeding has been filed
against Tenant and (b) Tenant's notice to terminate. Tenant shall not have the
right to terminate this Lease Agreement if: (i) Tenant fails to exercise its
right to terminate within 30 days following the date such civil, criminal or
administrative complaint is filed against Tenant by any governmental agency; and
(ii) Tenant is dismissed from said civil, criminal action or administrative
complaint within the aforementioned 60 day period. Tenant agrees to cooperate
with Landlord and the governing agency by providing whatever information is
necessary to obtain a dismissal from the civil, criminal or administrative
governmental complaint.
43. TENANT'S SECOND OPTION TO TERMINATE LEASE: Providing Tenant is not in
default in any of the terms, covenants and conditions of this Lease Agreement
and any Amendments thereto, Tenant shall, twenty four (24) months after
occupancy of the Leased Premises, have the option to terminate this Lease
Agreement, subject to the following terms and conditions:
8
<PAGE>
A. Tenant shall execute this Option by giving Landlord four (4) months
written notice of Tenant's intent to terminate. Tenant WILL NOT have the right
to exercise its Option to Terminate prior to completing twenty-four months of
the Lease Term; therefore, the minimum Lease Term shall be no less than two (2)
years and four (4) months.
B. In the event Tenant timely exercises Tenant's Option to Terminate as
set forth herein, this Lease shall terminate and be of no further force and
effect four (4) months from the date of said written notice and Tenant will be
responsible for the full performance of all terms, covenants, and conditions
herein contained through the effective date of termination as set forth above.
C. In the event Tenant exercises Tenant's Option to Terminate as set
forth herein, Tenant agrees to surrender the Leased Premises to Landlord, free
and clear of Tenant's occupancy or the occupancy of any subtenants, as of the
effective date of termination, and shall comply with all clean-up requirements
as outlined in Paragraph 5 "Acceptance and Surrender of Premises" of this Lease.
D. The Option rights of Tenant under this Paragraph 43 are granted for
Tenant's personal benefit and may not be assigned or transferred by Tenant,
either voluntarily or by operation of law, in any manner whatsoever. In the
event that Landlord consents to a sublease or assignment under Paragraph 16, the
Option granted herein shall be void and of no force and effect as related to
said subtenant whether or not Tenant shall have purported to exercise such
Option prior to such assignment or sublease.
44. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consents shall not be unreasonably withheld.
45. LANDLORD'S CORPORATE AUTHORITY: If Landlord is a corporation (or
partnership or trust), each individual executing this Lease on behalf of said
corporation (or partnership or trust) represents and warrants that he is duly
authorized to execute this Lease on behalf of said corporation (or partnership
or trust) in accordance with the bylaws of said corporation (or partnership in
accordance with the partnership agreement, or trust in accordance with the trust
indenture) and that this Lease is binding upon said corporation (or partnership
or trust) in accordance with its terms. If Landlord is a corporation, Landlord
shall in thirty (30) days after execution of this Lease deliver to Tenant a
certified copy of the resolution of the Board of Directors of said corporation
authorizing or ratifying the execution of this Lease.
46. ASSIGNMENT AND SUBLETTING CONTINUED: Notwithstanding anything stated in
Paragraph 16 of this Lease, Tenant shall be entitled to assign or sublet without
Landlord's consent (but shall still give Landlord notice thereof) to any parent
or subsidiary corporation, or related corporation which Yves and/or Isabelle
Faroudja (or their heirs) have more than a fifty-one percent (51%) interest in,
provided however, Tenant shall remain liable for 100% of the terms and
conditions and obligations of Tenant under this Lease.
47. LANDLORD'S REPRESENTATIONS: Landlord represents to the best of Landlord's
knowledge that, as of the commencement date of the Lease, all HVAC, plumbing and
plumbing fixtures, electrical and electrical fixtures, loading and man doors
serving the Premises are in good working order. Landlord assigns (during the
term of the Lease) to Tenant all of Landlord's Contractors' and equipment
warranties and shall cooperate with Tenant in enforcing any of such warranties
except that Landlord shall not be required to pay any legal fees or incur any
expenses in this regard.
48. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises
(hereinafter collectively referred to as the "Property"):
As used herein, the term "Hazardous Materials" shall mean any hazardous or
toxic substance, material or waste which is or becomes subject to or regulated
by any local governmental authority, the State of California, or the United
States Government. The term "Hazardous Materials" includes, without limitation
any material or hazardous substance which is (i) listed under Article 9 or
defined as "hazardous" or "extremely hazardous" pursuant to Article 11 of
Title 22 of the California Administrative Code, Division 4, Chapter 30,
(ii) listed or defined as a "hazardous waste" pursuant to the Federal Resource
Conservation and Recovery Act, Section 42 U.S.C. Section 6901 et. seq.,
(iii) listed or defined as a "hazardous substance" pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601
et. seq. (42 U.S.C. Section 9601), (iv) petroleum or any derivative of
petroleum, or (v) asbestos.
Tenant shall have no obligation to "clean up", reimburse, release,
indemnify, or defend Landlord with respect to any Hazardous Materials or wastes
which Tenant, (prior to and during the term of the Lease) its employees,
contractors, invitees, or other parties (excluding Landlord, its employees,
agents and/or contractors) on the Property did not store, dispose, or transport
in, use, or cause to be on the Property in violation of applicable law.
Subject to the entire provisions of Paragraph 45 ("Hazardous Materials")
Landlord agrees to be 100 percent liable and responsible for, and shall
indemnify, defend, protect and hold Tenant harmless from and against all
liabilities, damages, costs, and expenses, excepting the costs identified above
(including, without limitation, attorney's fees) arising from any hazardous
contamination or toxic waste cleanup not related to Tenant (and not caused by
Tenant's activities prior to Tenant's occupancy of said Property), on or about
the Premises or the real property on which the Premises is located, and Landlord
agrees to be 100 percent liable and responsible for and indemnify Tenant for any
Hazardous Materials contamination or toxic waste cleanup or cost of testing
related thereto, and any claims by third parties (excluding claims, if any, from
Tenant's employees) resulting from such Hazardous Materials contamination,
caused by Landlord or third parties not related to Tenant, and not caused by
Tenant's activities, prior to and during the term of Tenant's Lease, provided
however, Landlord will not be responsible for any disruption to Tenant's
business as a result of any such cleanup.
Tenant will be 100 percent liable and responsible for: (i) any and all
"cleanup" of said toxic waste and/or Hazardous Materials contamination which
Tenant, its agents, employees, contractors, invitees, or future subtenants
and/or assignees (if any), or other parties (excluding Landlord, its employees,
agents, and/or contractors) on the Property, does store, dispose, or transport
in, use or cause to be on the Property and (ii) any claims by third parties
resulting from such Hazardous Materials contamination. Tenant shall indemnify
Landlord and hold Landlord harmless from any liabilities, demands, costs,
expenses and damages, including, without limitation, attorney fees incurred as a
result of any claims resulting from such Hazardous Materials contamination.
Tenant also agrees not to use or dispose of any toxic waste or Hazardous
Materials on the Property without first obtaining Landlord's written consent.
In the event consent is granted by Landlord, Tenant agrees to complete
compliance with governmental regulations, and prior to the termination of said
Lease Tenant agrees to follow the property closure procedures and will obtain a
clearance from the local fire department and/or the appropriate city agency. If
Tenant uses Hazardous Materials, Tenant also agrees to install at Tenant's
expense such toxic waste and/or Hazardous Materials monitoring devices as
Landlord deems necessary. It is mutually agreed that Tenant's and Landlord's
responsibilities related to toxic waste and Hazardous Materials will survive the
termination date of the Lease and that either party may obtain specific
performance of the other party's responsibilities under this Paragraph 48.
9
<PAGE>
FAROUDJA LABORATORIES, INC.
1995 STOCK OPTION PLAN
Adopted by the Board of Directors on August 1, 1995
and Approved by the Shareholders on August 1, 1995
Amended by the Board on August 19, 1996
and Approved by the Shareholders on August 19, 1996.
1. PURPOSES OF THIS PLAN. The purposes of this 1995 Stock Option Plan
are to attract and retain the best available personnel, to provide additional
incentive to the Employees of the Company and its Subsidiaries, to promote
the success of the Company's business and to enable the Employees to share in
the growth and prosperity of the Company by providing them with an
opportunity to purchase stock in the Company.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected
in the terms of the written stock option agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CODE" shall mean the Internal Revenue Code of the 1986, as
amended.
(c) "COMMON STOCK" shall mean the Common Stock of the Company,
without par value.
(d) "COMPANY" shall mean Faroudja Laboratories, Inc. a California
corporation.
(e) "COMMITTEE" shall mean the Committee appointed by the Board in
accordance with Section 4 of this Plan, if one is appointed.
(f) "CONTINUOUS EMPLOYMENT" or "Continuous Status as an Employee"
shall mean the absence of any interruption or termination of employment or
service as an Employee by or to the Company or any Parent or Subsidiary of
the Company which now exists or is hereafter organized or acquired by or
acquires the Company. Continuous Employment shall not be considered
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Board or in the event of transfers between locations
of the Company or between the Company, its Parent, any of its Subsidiaries or
its successors.
1
<PAGE>
(g) "DISINTERESTED PERSON" shall mean a director who is a
"disinterested person," as such term is defined pursuant to Rule
16b-3(c)(2)(i) promulgated pursuant to the Exchange Act and any applicable
releases and opinions or the Securities and Exchange Commission.
(h) "EMPLOYEE" shall mean any person, including officers and
directors, employed by the Company, its Parent, any of its Subsidiaries or
its successors; or, for purposes of eligibility for Nonstatutory Stock
Options, any person employed by the Company, including officers and
directors, or any consultant to, or director of, the Company, or any Parent
or Subsidiary of the Company, whether or not such consultant or director is
an employee of such entities.
(i) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any successor legislation.
(j) "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(k) "NONSTATUTORY STOCK OPTION" shall mean an Option which is not an
Incentive Stock Option.
(l) "OPTION" shall mean a stock option granted pursuant to this Plan.
(m) "OPTION AGREEMENT" shall mean a written agreement in such form or
forms as the Board (subject to the terms and conditions of this Plan) may
from time to time approve, evidencing an Option.
(n) "OPTIONED STOCK" shall mean the Common Stock subject to an Option.
(o) "OPTIONEE" shall mean an Employee who is granted an Option.
(p) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Sections 425(e) and (g) of the Code.
(q) "PLAN" shall mean this 1995 Stock Option Plan.
(r) "REGISTRATION DATE" shall mean the effective date of the first
registration statement which is filed by the Company and declared effective
pursuant to Section 12(g) of the Exchange Act, with respect to any class of
the Company's securities.
(s) "SHARE" or "Shares" shall mean the Common Stock, as adjusted in
accordance with Section 11 of this Plan.
2
<PAGE>
(t) "STOCK PURCHASE AGREEMENT" shall mean an agreement in such form
or forms as the Board (subject to the terms and conditions of this Plan) may
from time to time approve, which is to be executed as a condition of
purchasing Optioned Stock upon exercise of an Option.
(u) "SUBSIDIARY" shall mean a subsidiary corporation, whether now or
hereafter existing, as defined in Sections 425(f) and (g) of the Code.
3. STOCK SUBJECT TO THIS PLAN. Subject to the provisions of Section 11
of this Plan, the maximum aggregate number of Shares which may be optioned
and sold under this Plan shall not exceed in the aggregate of Two Million
Five Hundred Thousand (2,500,000) Shares. The Shares may be authorized, but
unissued or reacquired Shares other than reacquired Shares delivered pursuant
to Section 7(c)(iv) hereof as payment of consideration in the exercise of an
option.
If (a) an Option should expire or become unexercisable for any reason
without having been exercised in full or (b) if the Company repurchases
Shares from the Optionee pursuant to the terms of a Stock Purchase Agreement
(provided that the Optionee did not receive benefits of ownership, such as
dividends, which would destroy the exemption from the provisions of Section
16(b) of the Exchange Act provided by Rule 16b-3 promulgated pursuant to the
Exchange Act), the unpurchased Shares or repurchased Shares, respectively,
which were subject thereto shall, unless this Plan shall have been
terminated, return to this Plan and become available for other Options under
this Plan.
The Company intends that as long as it is not subject to the reporting
requirements of Section 13 or l5(d) of the Exchange Act, and is not an
investment company registered or required to be registered under the
Investment Company Act of 1940, as amended, all offers and sales of Options
and Common Stock issuable upon exercise of any Option shall be exempt frown
registration under the provisions of Section 5 of the Securities Act, and
this Plan shall be administered in such a manner so as to preserve such
exemption. The Company intends for this Plan to constitute a written
compensatory benefit plan within the meaning of Rule 701(b) of 17 CFR Section
230.701 ("Rule 701") promulgated by the Securities and Exchange Commission
pursuant to such Act. Unless otherwise designated by the Committee at the
time an Option is granted, all options granted under this Plan by the
Company, and the issuance of any Shares upon exercise thereof, are intended
to be granted in reliance on Rule 701.
4. ADMINISTRATION OF THIS PLAN.
(a) PROCEDURE. This Plan shall be administered by the Board. The
Board may appoint a Committee consisting of two (2) or more members of the
Board (or such greater number as is required to qualify for the exemption
from the provisions of Section 16(b) of the Exchange Act provided by Rule
16b-3 promulgated pursuant to the Exchange Act) to administer this Plan on
behalf of the Board, subject to such terms and conditions as the Board may
prescribe. Once appointed, the Committee shall continue to serve until
otherwise directed by the
3
<PAGE>
Board. From time to time, the Board may increase the size of the Committee
and appoint additional members of the Board thereto, remove members (with or
without cause) and appoint new members of the Board in substitution therefor,
fill vacancies, however caused, and remove all members of the Committee and,
thereafter, directly administer this Plan. Members of the Board or Committee
who are either eligible for Options or have been granted Options may vote on
any matters affecting the administration of this Plan or the grant of Options
pursuant to this Plan, except that no such member shall act upon the granting
of an Option to such person nor shall any such members presence at a meeting
of the Board of Directors establish the existence of a quorum at any meeting
of the Board or the Committee during which action is taken with respect to
the granting of an Option to him.
(b) PROCEDURE AFTER REGISTRATION DATE. Notwithstanding the
provisions of subsection (a), after the Registration Date this Plan shall be
administered either by: (i) the full Board, provided that at all times each
member of the Board is a Disinterested Person; or (ii) a Committee which at
all times consists solely of Board members who are Disinterested Persons.
After the Registration Date, the Board shall take all action necessary to
administer this Plan in accordance with the then-effective provisions of Rule
16b-3 promulgated under the Exchange Act, provided that any amendment to this
Plan required for compliance with such provisions shall be made in accordance
with Section 13 of this Plan.
(c) POWERS OF THE BOARD AND/OR COMMITTEE. Subject to the provisions
of this Plan, the Committee or the Board, as appropriate, shall have the
authority, in its discretion: (i) to grant Incentive Stock Options and
Nonstatutory Stock Options; (ii) to determine, upon review of relevant
information and in accordance with Section 7 of this Plan, the fair market
value per Share; (iii) to determine the exercise price of the Options, which
exercise price and type of consideration shall be determined in accordance
with Section 7 of this Plan; (iv) to determine the Employees to whom, and the
time or times at which, Options shall be granted, and the number of Shares to
be subject to each Option; (v) to prescribe, amend and rescind rules and
regulations relating to this Plan; (vi) to determine the terms and provisions
of each Option Agreement and each Stock Purchase Agreement (each of which
need not be identical with the terms of other Option Agreements and Stock
Purchase Agreements) and, with the consent of the holder thereof, to modify
or amend each Option Agreement and Stock Purchase Agreement; (vii) to
determine whether a stock repurchase agreement or other agreement will be
required to be executed by any Employee as a condition to the exercise of an
Option, and to determine the terms and provisions of any such agreement
(which need not be identical with the terms of any other such agreement) and,
with the consent of the Optionee, to amend any such agreement; (viii) to
interpret this Plan, the option Agreements, the Stock Purchase Agreements or
any agreement entered into with respect to the grant or exercise of Options;
(ix) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted
by the Board or to take such other actions as may be necessary or appropriate
with respect to the Company's rights pursuant to Options or agreements
relating to the grant or exercise thereof; and (x) to make such other
determinations and establish such other procedures as it deems necessary or
advisable for the administration of this Plan.
4
<PAGE>
(d) EFFECT OF THE BOARD'S OR COMMITTEE'S DECISION. All decisions,
determinations and interpretations of the Board or the Committee shall be
final and binding on all Optionees and any other holders of Options.
5. ELIGIBILITY. Options may be granted only to Employees. An Employee
who has been granted an Option may, if such Employee is otherwise eligible,
be granted additional Options.
6. TERM OF PLAN. This Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by vote of a majority of
the outstanding shares of the Company's capital stock entitled to vote on the
adoption of this Plan. This Plan shall continue in effect for a term often
(10) years unless sooner terminated in accordance with the terms and
provisions of this Plan.
7. OPTION PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The exercise price per Share for the Shares to
be issued pursuant to the exercise of an Option shall be such price as is
determined by the Board; provided, however, that such price shall in no event
be less than eighty-five percent (85%) with respect to Nonstatutory Stock
Options, and one hundred percent (100%) with respect to Incentive Stock
Options, of the fair market value per Share on the date of grant. In the case
of an Option granted to an Employee who, at the time the Option is granted,
owns stock (as determined under Section 425(d) of the Code) constituting more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or its Parent or Subsidiaries, the exercise price per
Share shall be no less than one hundred ten percent (110%) of the fair market
value per Share on the date of grant.
(b) FAIR MARKET VALUE. The fair market value per Share on the date
of grant shall be determined by the Board in its sole discretion, exercised
in good faith; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the average of the
closing bid and asked prices of the Common Stock on the date of grant, as
reported in The Wall Street Journal (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated
Quotations ("NASDAQ") System), or, in the event the Common Stock is listed on
a stock exchange or on the NASDAQ System, the fair market value per Share
shall be the closing price on the exchange or on the NASDAQ System as of the
date of grant of the Option, as reported in The Wall Street Journal.
(c) PAYMENT OF CONSIDERATION. The consideration to be
paid for the Shares to be issued upon exercise of an Option,
including the method of payment, shall be determined by the Board
and may consist entirely of cash, check, promissory notes, Shares
held by the Optionee for the requisite period necessary to avoid a
charge to the Company's earnings for financial reporting purposes
which 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, or any combination of such methods of payment.
Subject to subparagraphs (i) through (iv) hereto,
5
<PAGE>
utilization of Shares as the method of payment may be completed by either (a)
the tender of Shares then held by the Optionee, or (b) the withholding of
Shares which would otherwise be issued pursuant to an Option pursuant to
broker-dealer sale and remittance procedure described in subparagraph (iii)
hereto. In making its determination as to the type of consideration to
accept, the Board shall consider if acceptance of such consideration is
deemed to be such as may be reasonably expected to benefit the Company.
(i) If the consideration for the exercise of an Option is a
promissory note, it shall be a full recourse promissory note executed by the
Optionee, bearing interest at a rate which shall be sufficient to preclude
the imputation of interest under the applicable provisions of the Code.
Until such time as the promissory note has been paid in full, the Company may
retain the Shares purchased upon exercise of the Option in escrow as security
for payment of the promissory note.
(ii) If the consideration for the exercise of an Option is the
surrender of previously acquired and owned Shares, the Optionee will be
required to make representations and warranties satisfactory to the Company
regarding his title to the Shares used to effect the purchase, including,
without limitation, representations and warranties that the Optionee has good
and marketable title to such Shares free and clear of any and all liens,
encumbrances, charges, equities, claims, security interests, options or
restrictions and has full power to deliver such Shares without obtaining the
consent or approval of any person or governmental authority other than those
which have already given consent or approval in a form satisfactory to the
Company. The value of the Shares used to effect the purchase shall be the
fair market value of those Shares as determined by the Board in its sole
discretion, exercised in good faith.
(iii) If the consideration for the exercise of an Option is
to be paid through a broker-dealer sale and remittance procedure, the
Optionee shall provide (1) irrevocable written instructions to a designated
brokerage firm to effect the immediate sale of the purchased Shares and to
remit to the Company, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate option price payable for the
purchased Shares plus all applicable Federal and State income and employment
taxes required to be withheld by the Company in connection with such purchase
and (2) written instructions to the Company to deliver the certificates for
the purchased shares directly to such brokerage firm in order to complete the
sale transaction. Notwithstanding the foregoing, Optionees subject to the
short-swing profit limitation of Section 16 of the Exchange Act shall have
the right to deliver irrevocable written instructions to effect the exercise
of an option through the foregoing broker-dealer sale and remittance
procedure (a) six months or more prior to the date such transaction is to be
effected, and/or (b) prior to the date such transaction is to be effected and
within a "window period" specified in Rule 16b-3(3)(iii) promulgated pursuant
to the Exchange Act.
(iv) If an Optionee is permitted to exercise an Option by
delivering shares of the Company's Common Stock, the option agreement
covering such Option may include provisions authorizing the Optionee to
exercise the Option, in whole or in part, by: (1) delivering whole shares of
the Company's Common Stock previously owned by such
6
<PAGE>
Optionee (whether or not acquired through the prior exercise of a stock
option) having a fair market value equal to the option price; and/or (2)
directing the Company to withhold from the Shares that would otherwise be
issued upon exercise of the Option that number of whole Shares having a fair
market value equal to the option price. Shares of the Company's Common Stock
so delivered or withheld shall be valued at their fair market value on the
date of exercise of the Option, as determined by the Committee and/or the
Board, as appropriate. Any balance of the exercise price shall be paid in
cash or by check or a promissory note, each in accordance with the terms of
this Section 7. Any shares delivered or withheld in accordance with this
provision shall again become available for purposes of this Plan and for
Options subsequently granted thereunder to the extent permissible pursuant to
Section 3 of this Plan.
8. OPTIONS.
(a) TERMS AND PROVISIONS OF OPTIONS. As provided in Section 4 of
this Plan and subject to any Imitations specified herein, the Board and/or
Committee shall have the authority to determine the terms and provisions of
any Option granted under this Plan or any agreement required to be executed
in connection with the grant or exercise of an Option. Each Option granted
pursuant to this Plan shall be evidenced by an Option Agreement. Options
granted pursuant to this Plan are conditioned upon the Company obtaining any
required permit or order from appropriate governmental agencies authorizing
the Company to issue such Options and Shares issuable upon exercise thereof.
(b) TERM OF OPTION. The term of each Option may be up to ten (10)
years from the date of grant thereof as determined by the Board upon the
grant of the Option and specified in the Option Agreement, except that the
term of an Option granted to an Employee who, at the time the Option is
granted, owns stock comprising more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or its Parent or
Subsidiaries, shall be five (5) years from the date of grant thereof or such
shorter term as may be provided in the Option Agreement.
(c) EXERCISE OF OPTION.
(i) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
shall be exercisable at such times, in such installments and under such
conditions as may be determined by the Board and specified in the Option
Agreement, including performance criteria with respect to the Company and/or
the Optionee, and as shall be permissible under the terms of this Plan.
An option may be exercised in accordance with the provisions of
this Plan as to all or any portion of the Shares then exercisable under an
option, from time to time during the term of the Option. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company at its principal business office
in accordance with the
7
<PAGE>
terms of the option Agreement by the person entitled to exercise the option
and, except when the broker-dealer sale and remittance procedure described in
Section 7(c)(iii) hereto is used, full payment for the Shares with respect to
which the Option is exercised has been received by the Company, accompanied
by an executed Stock Purchase Agreement and any other agreements required by
the terms of this Plan and/or the option Agreement. Full payment may consist
of such consideration and method of payment allowable under Section 7 of this
Plan. Until the option is properly exercised in accordance with the terms of
this paragraph, no right to vote or receive dividends or any other rights as
a stockholder exist with respect to the optioned Stock. No adjustment shall
be made for a dividend or other right for which the record date is prior to
the date the Option is exercised, except as provided in Section 11 of this
Plan.
As soon as practicable after any proper exercise of an Option in
accordance with the provisions of this Plan, the Company shall, without
transfer or issue tax to the Optionee, deliver to the Optionee at the
principal executive office of the Company or such other place as shall be
mutually agreed upon between the Company and the Optionee, a certificate or
certificates representing the Shares for which the Option shall have been
exercised. The time of issuance and delivery of the certificate(s)
representing the Shares for which the Option shall have been exercised may be
postponed by the Company for such period as may be required by the Company,
with reasonable diligence, to comply with any applicable listing requirements
of any national or regional securities exchange or any law or regulation
applicable to the issuance or delivery of such Shares. No Option may be
exercised unless this Plan has been duly approved by the shareholders of the
Company in accordance with applicable law. Notwithstanding anything to the
contrary herein, the terms of a Stock Purchase Agreement required to be
executed and delivered in connection with the exercise of an Option may
require the certificate or certificates representing the Shares purchased
upon exercise of an Option to be delivered and deposited with the Company as
security for the Optionee's faithful performance of the terms of his Stock
Purchase Agreement.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of
this Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
(ii) TERMINATION OF STATUS AS AN EMPLOYEE. If an Optionee ceases
to serve as an Employee for any reason other than death or disability and
thereby terminates his Continuous Status as an Employee, such Optionee shall
have the right to exercise the Option at any time within thirty (30) days (or
such other period of time not exceeding three (3) months as is determined by
the Board at the time of granting the Option), following the date such
Optionee ceases his Continuous Status as an Employee of the Company to the
extent that such Optionee was entitled to exercise the Option at the date of
such termination; provided, however, that no Option shall be exercisable
after the expiration of the term set forth in the Option Agreement. To the
extent that such Optionee was not entitled to exercise the Option at the date
of such termination, or if such Optionee does not exercise such Option (which
such Optionee was entitled to exercise) within the time specified herein, the
Option shall terminate.
8
<PAGE>
(iii) DEATH OR DISABILITY OF OPTIONEE. If an Optionee ceases to
serve as an Employee due to death or disability and thereby terminates his
Continuous Status as an Employee, the Option may be exercised at any time
within six (6) months following the date of death or termination of
employment due to disability, in the case of death, by the Optionee's estate
or by a person who acquired the right to exercise the Option by bequest or
inheritance, or, in the case of disability, by the Optionee, but in any case
only to the extent the Optionee was entitled to exercise the Option at the
date of his termination of employment by death or disability; provided,
however, that no Option shall be exercisable after the expiration of the
Option term set forth in the Option Agreement. To the extent that such
Optionee was not entitled to exercise such Option at the date of his
termination of employment by death or disability or if such Option is not
exercised (to the extent it could be exercised) within the time specified
herein, the Option shall terminate.
(iv) EXTENSION OF TIME TO EXERCISE. Notwithstanding anything to
the contrary in this Section 8, the Board may at any time and from time to
time prior to the termination of a Nonstatutory Stock Option, with the
consent of the Optionee, extend the period of time during which the Optionee
may exercise his Nonstatutory Stock Option following the date the Optionee
ceases such Optionee's Continuous Status as an Employee; provided, however,
that (1) the maximum period of time during which a Nonstatutory Stock Option
shall be exercisable following such termination date shall not exceed an
aggregate of six (6) months, (2) the Nonstatutory Stock Option shall not
become exercisable after the expiration of the term of such Option as set
forth in the Option Agreement as a result of such extension, and (3)
notwithstanding any extension of time during which the Nonstatutory Stock
Option may be exercised, such Option, unless otherwise amended by the Board,
shall only be exercisable to the extent to which the Optionee was entitled to
exercise it on the date Optionee ceased Continuous Status as an Employee. To
the extent that such Optionee was not entitled to exercise the Option at the
date of such termination, or if such Optionee does not exercise an Option
which Optionee was entitled to exercise within the time specified herein, the
Option shall terminate.
9. LIMIT ON VALUE OF OPTIONED STOCK. No Incentive Stock Option may be
granted to an Employee if, as a result of such grant, the aggregate fair
market value (determined at the time an Incentive Stock Option is granted) of
the Shares with respect to which Incentive Stock Options are exercisable for
the first time by an Optionee during any calendar year under all incentive
stock option plans of the Company, its Parents or its Subsidiaries, if any,
exceeds One Hundred Thousand Dollars ($100.000).
10. NONTRANSFERABILITY OF OPTIONS. Options granted under this Plan may
not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed
of in any manner, either voluntarily or involuntarily by operation of law,
other than by will or by the laws of descent or distribution, and may be
exercised during the lifetime of the Optionee only by such Optionee.
9
<PAGE>
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Subject to any required action by the shareholders of the
Company, the number of Shares covered by each outstanding Option, and the
number of Shares which have been authorized for issuance under this Plan but
as to which no Options have yet been granted or which have been returned to
this Plan upon cancellation or expiration of an Option or repurchase of
shares from an Optionee upon termination of employment or service, as well as
the exercise or purchase price per Share covered by each such outstanding
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split,
combination or reclassification of the Common Stock, or the payment of a
stock dividend (but only on 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 (other than stock bonuses to
Employees, including, without limitation, officers and directors); provided,
however, that the conversion of any convertible securities of the Company
shall not be deemed to have been effected without the 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 issue 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 subject to this Plan or an Option.
(b) In the event of the merger, consolidation or reorganization of
the Company with or into another corporation as a result of which the Company
is not the surviving corporation or as a result of which the outstanding
Shares are exchanged for or converted into cash or property or securities not
of the Company, the Board may (i) make provision for the assumption of all
outstanding Options by the successor corporation or a Parent or a Subsidiary
thereof, or (ii) declare that outstanding Options shall terminate as of a
date fixed by the Board which is at least thirty (30) days after the notice
thereof to the Optionee, unless such thirty (30) day period is waived by the
Optionee. In the event of a dissolution or liquidation of the Company or the
sale of all or substantially all of the assets of the Company, the Company's
outstanding options shall terminate as to an Optionee upon termination of
Continuous Status as an Employee.
(c) No fractional shares of Common Stock shall be issuable on account
of any action described in this Section, and the aggregate number of Shares
into which Shares then covered by the Option, when changed as the result of
such action, shall be reduced to the largest number of whole shares resulting
from such action, unless the Board, in its sole discretion, shall determine
to issue scrip certificates in respect to any fractional shares, which scrip
certificates, in such event, shall be in a form and have such terms and
conditions as the Board in its discretion shall prescribe.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall be the
date on which the Board makes the determination granting such Option;
provided, however, that if the Board determines that such grant shall be as
of some future date, the date of grant shall be such
10
<PAGE>
future date. Notice of the determination shall be given to each Employee to
whom an Option is so granted within a reasonable time after the date of such
grant.
13. AMENDMENT AND TERMINATION OF THIS PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate this
Plan from time to time in such respects as the Board may deem advisable and
shall make any amendments which may be required so that Options intended to
be Incentive Stock Options shall at all times continue to be Incentive Stock
Options for the purpose of the Code, except that, without approval of the
holders of a majority of the outstanding shares of the Company's capital
stock, no such revision or amendment shall:
(i) Increase the number of Shares subject to this Plan, other
than in connection with an adjustment under Section 11 of this Plan;
(ii) Materially change the designation of the class of Employees
eligible to be granted Options;
(iii) Remove the administration of this Plan from the Board
(other than to the Committee);
(iv) Materially increase the benefits accruing to participants
under this Plan; or
(v) Extend the term of this Plan.
(b) EFFECT OF AMENDMENT OR TERMINATION. Except as otherwise provided
in Section 11, any amendment or termination of this Plan shall not affect
Options already granted and such Options shall remain in full force and
effect as if this Plan had not been amended or terminated, unless mutually
agreed otherwise between the Optionee and the Company, which agreement must
be in writing and signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES.
(a) 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 pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, applicable state securities laws, the rules and regulations
promulgated thereunder, and the requirement of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval
of counsel for the Company with respect to such compliance.
(b) As a condition to the exercise of an Option, the Board may
require the person
11
<PAGE>
exercising such Option to execute an agreement with, and/or may require the
person exercising such Option to make any representation and warranty to, the
Company as may in the judgment of counsel to the Company be required under
applicable law or regulation, including but not limited to a representation
and warranty 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 appropriate
under any of the aforementioned relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan, at
all times shall reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of this Plan.
The Company, during the term of this Plan, shall use diligent efforts
to seek to obtain from appropriate regulatory agencies any requisite
authorization in order to issue and sell such number of Shares as shall be
sufficient to satisfy the requirements of this Plan. The inability of the
Company to obtain the requisite authorization(s) deemed by the Company's
counsel to be necessary for the lawful issuance and sale of any Shares
hereunder, or the inability of the Company to confirm to its satisfaction
that any issuance and sale of any Shares hereunder will meet applicable legal
requirements, shall relieve the Company of any liability in respect to the
failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
16. STOCK OPTION AND STOCK PURCHASE AGREEMENTS. Options shall be
evidenced by written stock option agreements in such form or forms as the
Board shall approve from time to time. Upon the exercise of an Option, the
Optionee shall sign and deliver to the Company a Stock Purchase Agreement (if
required to be executed and delivered to the Company by an Optionee as a
condition to the exercise of an option) in such form or forms as the Board
shall approve from time to time.
17. SHAREHOLDER APPROVAL. Continuance of this Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before
or after the date this Plan is adopted by the Board. If such shareholder
approval is obtained at a duly held shareholders' meeting, it may be obtained
by the affirmative vote of the holders of a majority of the outstanding
shares of the Company entitled to vote thereon. All Options granted prior to
shareholder approval of this Plan are subject to such approval, and if such
approval is not obtained within twelve (12) months before or after the date
this Plan is adopted by the Board all such Options shall expire and shall be
of no further force or effect.
18. TAXES, FEES, EXPENSES AND WITHHOLDING OF TAXES.
(a) The Company shall pay all original issue and transfer taxes (but
not income taxes, if any) with respect to the grant of Options and/or the
issue and transfer of Shares pursuant to the exercise thereof, and all other
fees and expenses necessarily incurred by the Company in connection
therewith, and will from time to time use diligent efforts to comply with
12
<PAGE>
all laws and regulations which, in the opinion of counsel for the Company,
shall be applicable thereto.
(b) The grant of Options hereunder and the issuance of Shares
pursuant to the exercise thereof is conditioned upon the Company's
reservation of the right to withhold, in accordance with any applicable law,
from any compensation payable to the Optionee any taxes required to be
withheld by federal, state or local law as a result of the grant or exercise
of such Option or the sale of the Shares issued upon exercise thereof. To
the extent that compensation or other amounts, if any, payable to the
Optionee are insufficient to pay any taxes required to be so withheld, the
Company may, in its sole discretion, require the Optionee, as a condition of
the exercise of an option, to pay in cash to the Company an amount sufficient
to cover such tax liability or otherwise to make adequate provision for the
Company's satisfaction of its withholding obligations under federal and state
law.
(c) The Board or any Committee may, in its discretion and upon such
terms and conditions as it may deem appropriate (including the applicable
safe-harbor provisions of SEC Rule 16b-3 and interpretations thereof by the
staff of the Securities and Exchange Commission) provide any or all holders
of outstanding option grants under this Plan with the election (a
"Withholding Election") to have the Company withhold, from the shares of
Common Stock otherwise issuable upon the exercise of such options, one or
more of such shares with an aggregate fair market value equal to the
designated percentage (any multiple of 5% specified by the Optionee) of the
Federal and State income taxes ("Taxes") incurred in connection with the
acquisition of such Shares. In lieu of such direct withholding, one or more
Optionees may also be granted the right to deliver shares of Common Stock to
the Company in satisfaction of such Taxes. The withheld or delivered shares
shall be valued at the Fair Market Value on the applicable determination date
for such Taxes (the "Tax Date") or such other date required by the applicable
safe-harbor provisions of SEC Rule 16b-3. Notwithstanding the foregoing,
Optionees subject to the short-swing profit limitations of Section 16 of the
Exchange Act shall have the right to elect to deliver previously owned stock
or make a Withholding Election: (a) six months or more prior to the Tax Date
and/or (b) prior to the Tax Date and within a "window period"' specified in
Rule 16(b)-3(e)(iii) promulgated pursuant to the Exchange Act.
19. LIABILITY OF COMPANY. The Company, its Parent or any Subsidiary which
is in existence or hereafter comes into existence shall not be liable to an
Optionee or other person if it is determined for any reason by the Internal
Revenue Service or any court having jurisdiction that any Options intended to
be Incentive Stock Options granted hereunder do not qualify as incentive
stock options within the meaning of Section 422 of the Code.
20. INFORMATION TO OPTIONEE. The Company shall provide without charge at
least annually to each Optionee during the period his option is outstanding a
balance sheet and income statement of the Company. In the event that the
Company provides annual reports or periodic reports to its shareholders
during the period in which an Optionee's Option is outstanding, the Company
shall provide to each Optionee a copy of each such report.
13
<PAGE>
21. NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail, as first class, registered or certified
mail, with postage and fees prepaid and addressed (i) if to the Company, at
its principal place of business, attention: Secretary, or (ii) if to the
Optionee at his address as set forth on the signature page of his option
Agreement, or at such other address as either party may from time to time
designate in writing to other. It shall be the obligation of each Optionee
and each transferee holding Shares purchased upon exercise of an Option to
provide the Secretary of the Company, by letter mailed as provided
hereinabove, with written notice of his direct mailing address.
22. NO ENLARGEMENT OF EMPLOYEE RIGHTS. This Plan is purely voluntary on
the part of the Company, and the continuance of this Plan shall not be deemed
to constitute a contract between the Company and any Employee, or to be
consideration for or a condition of the employment or service of any
Employee. Nothing contained in this Plan shall be deemed to give any
Employee the right to be retained in the employ or service of the Company,
its Parent, Subsidiary or a successor corporation, or to interfere with the
right of the Company or any such corporations to discharge or retire any
Employee at any time with or without cause and with or without notice. No
Employee shall have any right to or interest in Options authorized hereunder
prior to the grant thereof to such Employee, and upon such grant such
Employee shall have only such rights and interests as are expressly provided
herein, subject, however, to all applicable provisions of the Company's
Articles of Incorporation, as the same may be amended from time to time.
23. LEGENDS ON CERTIFICATES.
(a) FEDERAL LAW. Unless an appropriate registration statement is
filed pursuant to the Securities Act of 1933, as amended, with respect to the
Options and Shares issuable under this Plan, each document or certificate
representing such Options or Shares shall be endorsed thereon with a legend
substantially as follows:
"THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED
UPON EXERCISE OF THIS SECURITY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR
IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO
SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED."
14
<PAGE>
(b) CALIFORNIA LEGEND. If required by the California Commissioner of
Corporations, each document or certificate representing the Options or Shares
issuable under this Plan shall be endorsed thereon with a legend
substantially as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON
EXERCISE OF THIS OPTION, OR ANY INTEREST THEREIN, OR TO
RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF
THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES."
(c) ADDITIONAL LEGENDS. Each document or certificate representing
the Options or Shares issuable under this Plan shall also contain legends as
may be required under applicable blue sky laws or by any Stock Purchase
Agreement or other agreement the execution of which is a condition to the
exercise of an Option under this Plan.
24. AVAILABILITY OF PLAN. A copy of this Plan shall be delivered to the
Secretary of the Company and shall be shown by him to any eligible person
making reasonable inquiry concerning it.
25. COMPLIANCE WITH EXCHANGE ACT RULE 16b-3. With respect to persons
subject to Section 16 of the Exchange Act, transactions under this Plan are
intended to comply with all applicable conditions of Rule 16b-3, promulgated
pursuant to the Exchange Act, or its successors. To the extent any provision
of this Plan or action by the Board or any Committee fails so to comply, it
shall be deemed null and void to the extent permitted by law and deemed
advisable by the Board or any Committee.
26. INVALID PROVISIONS. In the event that any provision of this Plan is
found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained herein as invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though
the invalid or unenforceable provision was not contained herein.
27. APPLICABLE LAW. This Plan shall be governed by and construed in
accordance with the laws of the State of California.
15
<PAGE>
SECOND AMENDMENT TO THE 1995 STOCK OPTION PLAN
OF FAROUDJA, INC.
The first sentence of the first paragraph of Section 3 of the 1995
Stock Option Plan of Faroudja, Inc., as adopted on August 1, 1995 and amended
on August 19, 1996, is amended and restated in its entirety to read as
follows:
"3. STOCK SUBJECT TO THIS PLAN. Subject to the provisions of
Section 11 of this Plan, the maximum aggregate number of Shares which
may be optioned and sold under this Plan shall not exceed the aggregate
of One Million Four Hundred Thousand (1,400,000) Shares . . . "
IN WITNESS WHEREOF, the undersigned has executed this Second Amendment
to the 1995 Stock Option Plan of Faroudja, Inc. as of February 11, 1997.
FAROUDJA, INC.
By:/s/ Michael Hoberg
-------------------------------------
Michael Hoberg, Chief Financial Officer
<PAGE>
THIRD AMENDMENT TO THE 1995 STOCK OPTION PLAN
OF FAROUDJA, INC.
Section 11 of the 1995 Stock Option Plan of Faroudja, Inc., as adopted
on August 1, 1995 and amended on August 19, 1996 and on February 11, 1997, is
amended and restated in its entirety to read as follows:
"11. EFFECT OF CERTAIN CHANGES.
(a) ANTI-DILUTION. If there is any change in the number of shares
of Common Stock through the declaration of stock dividends or through a
recapitalization which results in stock splits or reverse stock splits, or
through the combination or reclassification of such shares, the Board shall
make corresponding adjustments to the number of shares of Common Stock
available for Options, the number of such shares covered by outstanding
Options, and the price per share of such Options in order to appropriately
reflect any increase or decrease in the number of issued shares of Common
Stock; provided, however, that any fractional shares of Common Stock
resulting from such adjustment shall be eliminated. Any determination made
by the Board relating to such adjustments shall be final, binding and
conclusive.
(b) CHANGE IN PAR VALUE. In the event of a change in the Common
Stock of the Company, as constituted as of the date of this Plan, which is
limited to a change in all of its authorized shares with par value into the
same number of shares with a different par value or without par value, the
shares resulting from any such change shall be deemed to be the Common Stock
within the meaning of the Plan.
(c) MERGERS AND CONSOLIDATIONS. Notwithstanding the other Sections
of this Section 11, upon the dissolution or liquidation of the Company, or
upon any reorganization, merger or consolidation of the Company with one or
more corporations where the Company is the surviving corporation and the
stockholders of the Company immediately prior to such transaction do not own
at least eighty percent (80%) of the Company's Common Stock immediately after
such transaction, or upon any reorganization, merger or consolidation of the
Company with one or more corporations where the Company is not the surviving
corporation, or upon a sale of substantially all of the assets or eighty
percent (80%) or more of the then outstanding shares of Common Stock of the
Company to another corporation or entity, (any such reorganization, merger,
consolidation, sale of assets, or sale of shares of Common Stock being
hereinafter referred to as the "Transaction"), the Plan shall terminate;
provided however, that
(i) any Options theretofore granted and outstanding under the
Plan shall become immediately exercisable in full and shall remain
exercisable until the effective date of such Transaction;
<PAGE>
(ii) the termination of the Plan, and any exercise of any Option
(to the extent that the holder's right to exercise such Option has
been accelerated by the operation of Section 11(c)(i)) shall be
subject to and conditioned upon the consummation of the Transaction to
which such termination and acceleration relates, and if, for any
reason, such Transaction is abandoned, exercise of the Option shall be
void and such Option shall thereafter be exercisable only as permitted
by the Plan and the Option Agreement, which shall remain in full force
and effect.
For purposes of applying Section 11(c): (x) the fair market value
of shares of Common Stock underlying the Incentive Stock Options shall be
determined as of the time the Option with respect to such shares is granted;
(y) the Incentive Stock Options shall be transformed, to the extent required,
into Nonstatutory Stock Options in reverse chronological order, such that the
last-granted Incentive Stock Option shall be the first Option transformed
into a Nonstatutory Stock Option and the first granted Incentive Stock Option
shall be the last Option so transformed; and (z) the terms and conditions of
each Nonstatutory Stock Option so created shall be identical, to the extent
possible, in all respects to those of the Incentive Stock Option that it
replaces including but not limited to the fact that it shall be immediately
exercisable in full and shall remain exercisable until the time at which the
Transaction becomes effective. In the event that Incentive Stock Options are
transformed into Nonstatutory Stock Options by operation of this Section
11(c), the Board may in its discretion issue replacement Option Agreements
that reflect the adjusted number of Incentive Stock Options and Nonstatutory
Stock Options. The Company shall use its best efforts to give each Optionee
written notice of any proposed Transaction at least thirty (30) days prior to
the effective date of any such Transaction. Any Option not exercised by the
time the Transaction legally becomes effective shall thereupon terminate.
(d) RIGHTS OF PARTICIPANTS. Except as hereinbefore expressly
provided in this Section 11, the Optionee shall have no rights by reason of
any subdivision or consolidation of shares of stock of any class or the
payment of any stock dividend or any other increase or decrease in the number
of shares of stock of any class or by reason of any dissolution, liquidation,
merger, or consolidation or spin-off of assets or stock of another
corporation, and any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not 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. The grant of an
Option shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structures or to merge or to
2
<PAGE>
consolidate or to dissolve, liquidate or sell or transfer all or part of its
business or assets."
IN WITNESS WHEREOF, the undersigned has executed this Third Amendment to
the 1995 Stock Option Plan of Faroudja, Inc. as of April 30, 1997.
FAROUDJA, INC.
By:/s/ Michael Hoberg
------------------------------------
Michael Hoberg, Chief Financial Officer
3
<PAGE>
FOURTH AMENDMENT TO THE 1995 STOCK OPTION PLAN
OF FAROUDJA, INC.
The first sentence of the first paragraph of Section 3 of the 1995
Stock Option Plan of Faroudja, Inc., as adopted on August 1, 1995 and as
amended on August 19, 1996, February 11, 1997 and April 30, 1997, is amended
and restated in its entirety to read as follows:
"3. STOCK SUBJECT TO THIS PLAN. Subject to the provisions of Section
11 of this Plan, the maximum aggregate number of Shares which may be optioned
and sold under this Plan shall not exceed the aggregate of One Million Two
Hundred Twenty Five Thousand (1,225,000) Shares . . . "
IN WITNESS WHEREOF, the undersigned has executed this Fourth Amendment
to the 1995 Stock Option Plan of Faroudja, Inc. as of June 13, 1997.
FAROUDJA, INC.
By:/s/ Michael Hoberg
------------------------------------
Michael Hoberg, Chief Financial Officer
<PAGE>
- --------------------------------------------------------------------------------
Faroudja, Inc.
1997 Non-Employee Directors Stock Option Plan
December 31, 1996
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I - Purpose....................................................... 1
ARTICLE II - Definitions................................................... 1
ARTICLE III - Shares Subject to Plan........................................ 3
ARTICLE IV - Administration................................................ 4
ARTICLE V - Eligibility................................................... 6
ARTICLE VI - Options....................................................... 7
ARTICLE VII - Effect of Certain Changes..................................... 11
ARTICLE VIII -Amendment and Termination..................................... 13
ARTICLE IX - Issuance of Shares and Compliance with Securities Regulations. 14
ARTICLE X - Application of Funds.......................................... 15
ARTICLE XI - Notice........................................................ 15
ARTICLE XII - Term of Plan.................................................. 15
ARTICLE XIII -Effectiveness of the Plan..................................... 16
ARTICLE XIV - Captions...................................................... 16
ARTICLE XV - Governing Law................................................. 16
i
<PAGE>
FAROUDJA, INC.
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
ARTICLE I
PURPOSE
The purpose of the FAROUDJA, INC. 1997 NON-EMPLOYEE DIRECTOR STOCK
OPTION PLAN (the "Plan") is to promote the interest of the Company and its
stockholders by increasing the proprietary and vested interest of non-employee
directors in the growth and performance of the Company. The Plan provides for
awards of non-qualified options (the "Options") to non-employee directors of the
Company, as set forth in Section 5.1, below, in accordance with Rule 16-b,
promulgated under the Securities Exchange Act of 1934, as amended (the "1934
Act"). The Options shall be exercisable in whole or in part at all times during
the period beginning on the date of grant until the earlier of (i) ten years
from the date of grant, and (ii) one year form the date on which a Grantee
ceases to be an Eligible Director. In this Plan, the terms "Parent" and
"Subsidiary" mean "Parent Corporation" and "Subsidiary Corporation,"
respectively, as such terms are defined in Sections 424(e) and (f) of the Code.
ARTICLE II
DEFINITIONS
The following words and terms as used herein shall have that meaning
set forth therefor in this Article II, unless a different meaning is clearly
required by the context.
1
<PAGE>
Whenever appropriate, words used in the singular shall be deemed to include the
plural and vice versa, and the masculine gender shall be deemed to include the
feminine gender.
2.1 BOARD shall mean the Board of Directors of the Company.
2.2 CODE shall mean the Internal Revenue Code of 1986, as now in
effect or as hereafter amended.
2.3 COMMITTEE shall mean the Compensation Committee which may be
appointed by the Board in accordance with the provisions of Article IV to
administer the Plan.
2.4 COMMON STOCK shall mean the shares of common stock, .001 par
value, of the Company, and any other securities of the Company to the extent
provided in Article VIII.
2.5 COMPANY shall mean Faroudja, Inc., a Delaware corporation, and
any successor to it.
2.6 EFFECTIVE DATE shall mean the day upon which the Plan is approved
by the stockholders of the Company.
2.7 ELIGIBLE DIRECTOR shall have the meaning set forth in Section 5.1
herein.
2.8 FAIR MARKET VALUE shall have the meaning set forth in Section 6.2
herein.
2.9 GRANTEE shall mean a Non-Employee Director who is granted an
Option by the Board under this Plan.
2.10 NON-EMPLOYEE DIRECTOR shall have the meaning set forth in Rule
16b-3 promulgated under the 1934 Act, as amended.
2
<PAGE>
2.11 OPTION shall mean an option granted under this Plan.
2.12 OPTION AGREEMENT shall mean a written agreement evidencing the
right to purchase shares of Common Stock pursuant to the terms of this Plan
which agreement shall be in the form described in Article VI.
2.13 PLAN shall mean the Faroudja, Inc. 1997 Non-Employee Director
Stock Option Plan, as set forth herein and as amended from time to time.
2.14 SECURITIES ACT means the Securities Act of 1933, as amended.
2.15 SUBSIDIARY shall mean any corporation that at the time qualifies
as a subsidiary of the Company under the definition of "subsidiary corporation"
contained in Section 424(f) of the Code, as that section may be amended from
time to time.
ARTICLE III
SHARES SUBJECT TO PLAN
3.1 TOTAL NUMBER OF SHARES AVAILABLE. The maximum number of shares
of Common Stock in respect of which awards may be granted under the Plan is One
Hundred Thousand (100,000) (subject to adjustment as provided below in
Section 3.3 and in Article VII hereof).
3.2 SOURCE OF SHARES. The shares of Common Stock issued upon the
exercise of an Option shall be made available, in the discretion of the Board,
either from the authorized but
3
<PAGE>
unissued shares of Common Stock or from any outstanding shares of Common Stock
which have been reacquired by the Company.
3.3 SHARES SUBJECT TO EXPIRED OR OTHERWISE TERMINATED OPTIONS.
Shares of Common Stock subject to awards that are expired, forfeited,
terminated, canceled or settled without the delivery of Common Stock will again
be available for awards. Also, shares tendered to the Company in satisfaction
or partial satisfaction of the exercise price of any award will increase the
number of shares available for awards to the extent permitted by Rule 16b-3
promulgated under the 1934 Act.
ARTICLE IV
ADMINISTRATION
4.1 COMMITTEE TO ADMINISTER PLAN. The Board shall delegate the
exclusive control and management of the operations of the Plan to the Committee.
The Board may, however, at any time or times either (i) terminate any such
delegation of authority and assume the exclusive control and management of the
Plan, or (ii) having terminated such a delegation of authority may again
delegate the exclusive control and management of the Plan to the Committee. In
the event that and for so long as this Plan is controlled and managed by the
Board, the terms and provisions of this Plan, other than Sections 2.1, 2.3, 4.1,
4.2, shall be applied by substituting the term "Board" for "Committee" therein.
4.2 APPOINTMENT OF A COMMITTEE. In the event that the Board appoints
a Committee: (i) the Committee shall be
4
<PAGE>
composed solely of two or more Non-Employee Directors; (ii) all vacancies
occurring on the Committee shall be filled with Non-Employee Directors by
appointment of the Board; (iii) the members of the Committee shall serve at the
pleasure of the Board; (iv) the Committee shall adopt such rules and regulations
as it shall deem appropriate concerning the holding of meetings and the
administration of the Plan; and (v) the entire Committee shall constitute a
quorum and the actions of the entire Committee present at a meeting, or actions
approved in writing by the entire Committee, shall be the accounts of the
Committee.
4.3 DETERMINATIONS TO BE MADE BY THE COMMITTEE. Subject to the
provisions of this Plan, the Committee shall determine: (i) the Grantees;
(ii) the number of shares of Common Stock subject to an Option; (iii) the date
or dates upon which an Option may be exercised or granted; (iv) the manner in
which an Option may be exercised; (v) such other terms to which an Option is
subject (including the manner in which it vests); and (vi) the form of any
Option Agreements (as defined in Section 6.1 below). In determining the amount
and terms of options granted under the Plan, the Committee shall review
performance measures which shall influence the number of Options granted and the
vesting of such Options.
4.4 INTERPRETATION OF PLAN. The Committee shall interpret the Plan
and from time to time may adopt such rules and regulations for carrying out the
terms and purposes of the Plan and may take such other actions in the
administration of
5
<PAGE>
the Plan as it deems advisable. The interpretation and construction by the
Committee of any provision of this Plan or any Option Agreement and the
determination of any question arising under this Plan, any such rule or
regulation, or any Option Agreement shall be final and binding on all persons
interested in the Plan.
4.5 LIMITED LIABILITY. Neither the Board nor any member of the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan.
ARTICLE V
ELIGIBILITY
5.1 ELIGIBLE DIRECTORS. Options may be granted under the Plan only
to non-employee directors of the Company, in accordance with Rule 16-b,
promulgated under the 1934 Act, as amended, who (i) are not officers of, or
otherwise employed by, the Company, its affiliates, its parent, or its
subsidiaries, if any, (ii) do not receive compensation, either directly or
indirectly, from the Company, its affiliates, its parent, or its subsidiaries,
if any, for services rendered as a consultant or in any capacity other than as a
director, except for an amount that does not exceed the dollar amount for which
disclosure would be required as set forth in Rule 16b-3(b)(3)(i)(B), (iii) do
not possess an interest in any other transaction for which disclosure would be
required as set forth in Rule 16b-3(b)(3)(i)(C), and (iv) are not engaged in a
business relationship for which disclosure would be
6
<PAGE>
required as set forth in Rule 16b-3(b)(3)(i)(D) (collectively, the "Eligible
Directors").
ARTICLE VI
OPTIONS
6.1 TERMS AND CONDITIONS OF OPTIONS. Each Option shall specify the
number of shares of Common Stock for which such Option shall be exercisable and
the exercise price for each such shares of Common Stock. In addition, each
Option shall be evidenced by a written agreement (an "Option Agreement"), in
substantially the form of EXHIBIT A, with such changes thereto as are consistent
with the Plan as the Board (or Committee, if one is appointed) shall deem
appropriate and shall provide in substance as follows:
6.2 NUMBER OF SHARES AND PURCHASE PRICE. Each Option Agreement shall
specify the number of shares of Common Stock covered by such Option and the
purchase price per share. The price (the "Option Price") at which each share of
Common Stock may be purchased shall be 100% of the Fair Market Value of the
shares of Common Stock on the date of the grant (as determined in accordance
with this Article VI).
For purposes of the Plan, the "Fair Market Value" of shares of Common
Stock shall be equal to:
6.2.1 if such shares are publicly traded, (x) the
closing price on the business day immediately preceding the date of
grant if any trades were made on such business day and such
information is available, otherwise the average of
7
<PAGE>
the last bid and asked prices on the business day immediately preceding the
date of grant, in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotations System ("THOUSAND")
or (y) if such shares are then traded on a national securities exchange,
the closing price on the business day immediately preceding the date of
grant, if any trades were made on such business day and such information is
available, otherwise the average of the high and low prices on the business
day immediately preceding the date of grant, on the principal national
securities exchange on which it is so traded; or
6.2.2 if there is no public trading market for such
shares, the fair value of such shares on the date of grant as
reasonably determined in good faith by the Board (or Committee, if
applicable, and with the consent of a majority of the Board) after
taking into consideration all factors which it deems appropriate,
including, without limitation, recent sale and offer prices of such
shares in private transactions negotiated at arms' length.
Notwithstanding anything contained in the Plan to the contrary, all
determinations pursuant to Article VI hereof shall be made without regard to any
restriction other than a restriction which, by its terms, will never lapse.
8
<PAGE>
6.3 PAYMENT OF OPTION PRICE. The Option Price of the Options may be
satisfied in cash, by a certified or cashier's check, or unless otherwise
determined by the Board, by exchanging shares of Common Stock owned by the
Grantee at their Fair Market Value, or by a combination of cash and shares of
Common Stock. The ability to pay the Option Price in shares of Common Stock
would enable a Grantee to engage in a series of successive stock-for-stock
exercises of an Option (sometimes referred to as "pyramiding") and thereby fully
exercise an Option with little or no cash investment. However, the Board's
current policy is to require any shares tendered in satisfaction of the Option
Price to have been owned by the exercising Grantee for a minimum of six (6)
months.
6.4 NON-TRANSFERABILITY OF OPTIONS. Each Option Agreement shall
provide that the Option granted therein shall be non-transferable and
non-assignable by the Grantee other than by will or the laws of descent and
distribution pursuant to a qualified domestic relations order, and that during
the lifetime of the Grantee such Option may be exercised only by the Grantee or
such Grantee's legal representative.
6.5 MAXIMUM TERM; DATE OF EXERCISE; TERMINATION. Each Option
Agreement shall provide that the Options shall be exercisable in whole or in
part at all times during the period beginning on the date of grant until the
earlier of (i) ten years from the date of grant, and (ii) one year form the date
on which a Grantee ceases to be an Eligible Director.
9
<PAGE>
6.6 EXERCISE OF OPTIONS. Each Option Agreement shall provide that
Options shall be exercised by delivering a written notice of exercise to the
Company. Each such notice shall state the number of shares of Common Stock with
respect to which the Option is being exercised and shall be signed by the person
(or persons) exercising the Option and, in the event the Option is being
exercised by any person other than the Grantee, shall be accompanied by proof,
satisfactory to counsel for the Company, of the right of such person to exercise
the Option. The exercise price for each Option shall be paid in full for the
number of shares of Common Stock specified in the notice as provided in this
Section 6.6.
The date of exercise of an Option shall be the date on which written
notice of exercise shall have been delivered to the Company, but the exercise of
an Option shall not be effective until the person (or persons) exercising the
Option shall have complied with all the provisions of the Option Agreement
governing the exercise of the Option. The Company shall deliver as soon as
practicable after receipt of notice and payment, certificates for the shares of
Common Stock subject to the Option. No one shall be deemed to be the holder of
any shares of Common Stock subject to an Option, or have any other rights as a
stockholder, unless and until certificates for the shares of such Common Stock
are issued to that person.
6.7 OTHER PROVISIONS. The Option Agreement may include such other
terms and conditions, not inconsistent with
10
<PAGE>
this Plan, as the Board in its sole discretion shall determine.
ARTICLE VII
EFFECT OF CERTAIN CHANGES
7.1 ANTI-DILUTION. If there is any change in the number of shares of
Common Stock through the declaration of stock dividends or through a
recapitalization which results in stock splits or reverse stock splits, the
Board shall make corresponding adjustments to the number of shares of Common
Stock available for Options, the number of such shares covered by outstanding
Options, and the price per share of such Options in order to appropriately
reflect any increase or decrease in the number of issued shares of Common Stock;
provided, however, that any fractional shares of Common Stock resulting from
such adjustment shall be eliminated. Any determination made by the Board
relating to such adjustments shall be final, binding and conclusive.
7.2 CHANGE IN PAR VALUE. In the event of a change in the Common
Stock of the Company, as constituted as of the date of this Plan, which is
limited to a change of all of its authorized shares with par value into the same
number of shares with a different par value or without par value, the shares
resulting from any such change shall be deemed to be the Common Stock within the
meaning of the Plan.
7.3 MERGERS AND CONSOLIDATIONS. Notwithstanding the other Sections
of this Article VII, upon the dissolution or liquidation of the Company, or upon
any reorganization,
11
<PAGE>
merger or consolidation of the Company with one or more corporations where the
Company is the surviving corporation and the stockholders of the Company
immediately prior to such transaction do not own at least eighty percent (80%)
of the Company's Common Stock immediately after such transaction, or upon any
reorganization, merger or consolidation of the Company with one or more
corporations where the Company is not the surviving corporation, or upon a sale
of substantially all of the assets or eighty percent (80%) or more of the then
outstanding shares of Common Stock of the Company to another corporation or
entity, (any such reorganization, merger, consolidation, sale of assets, or sale
of shares of Common Stock being hereinafter referred to as the "Transaction"),
the Plan shall terminate; provided however, that
(i) any Options theretofore granted and outstanding under the
Plan shall become immediately exercisable in full and shall remain
exercisable until the effective date of such Transaction;
(ii) the termination of the Plan, and any exercise of any Option
(to the extent that the holder's right to exercise such Option has
been accelerated by the operation of Section 7.3(i)), shall be subject
to and conditioned upon the consummation of the Transaction to which
such termination and acceleration relates, and if, for any reason,
such Transaction is abandoned, exercise of the Option shall be void
and such Option shall thereafter be exercisable only as permitted by
the Plan and the Option Agreement, which shall remain in full force
and effect.
For purposes of applying this Section 7.3, the Fair Market Value of
shares of Common Stock underlying the Options shall be determined as of the time
the Option with respect to such shares is granted. The Company shall use its
best
12
<PAGE>
efforts to give each Grantee written notice of any proposed Transaction at least
thirty (30) days prior to the effective date of any such Transaction. Any
Option not exercised by the time the Transaction legally becomes effective shall
thereupon terminate.
7.4 RIGHTS OF PARTICIPANTS. Except as hereinbefore expressly
provided in this Article VII, the Grantee shall have no rights by reason of any
subdivision or consolidation of shares of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class or by reason of any dissolution, liquidation, merger, or
consolidation or spin-off of assets or stock of another corporation, and any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not 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. The grant of an Option shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structures or to merge or to consolidate or to dissolve, liquidate or sell or
transfer all or part of its business or assets.
ARTICLE VIII
AMENDMENT AND TERMINATION
The Board shall have the right to amend, suspend or terminate this
Plan at any time, provided that unless first
13
<PAGE>
approved by the stockholders of the Company, no amendment shall be made to the
Plan (except to conform the Plan and the Option Agreements thereunder to changes
in the Code or governing law) which: (i) increases the number of shares of
Common Stock which may be purchased pursuant to the Options, either individually
or in the aggregate, (ii) changes the requirement that Option grants be priced
at Fair Market Value, (iii) modifies in any respect the class of individuals who
constitute Eligible Directors or (iv) materially increases benefits. The
provisions governing eligibility and the grant, terms and conditions of the
Options may not be amended more often than once every six months, other than to
comport with changes in the Code, the Employee Retirement Income Security Act,
or the rules under either such statute.
ARTICLE IX
ISSUANCE OF SHARES AND COMPLIANCE
WITH SECURITIES REGULATIONS
The obligation of the Company to sell and deliver the shares of Common
Stock pursuant to Options granted under this Plan shall be subject to all
applicable laws, regulations, rules and approvals, including, but not by way of
limitation, the effectiveness of a registration statement under the Securities
Act of 1933, as amended, if deemed necessary or appropriate by the Board, to
register the shares of Common Stock reserved for issuance upon exercise of
Options under such Act.
14
<PAGE>
ARTICLE X
APPLICATION OF FUNDS
Any proceeds received by the Company as a result of the exercise of
Options granted under the Plan may be used for any valid corporate purpose.
ARTICLE XI
NOTICE
Any notice to the Company required under this Plan shall be in writing
and shall either be delivered in person or sent by registered or certified mail,
return receipt requested, postage prepaid, to:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Hoberg, CFO
ARTICLE XII
TERM OF PLAN
The Plan shall terminate ten (10) years from the date upon which it is
approved by the stockholders of the Company or on such earlier date as may be
determined by the Board. In any event, termination shall be deemed to be
effective as of the close of business on the day of termination. No Options may
be granted after such termination. Termination of the Plan, however, shall not
affect the rights of Grantees under Options previously granted to them, and all
unexpired Options shall continue in full
15
<PAGE>
force and operation after termination of the Plan until they lapse or terminate
by their own terms and conditions.
ARTICLE XIII
EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon adoption by the Board; provided,
however, that the Plan shall be submitted for approval by the holders of a
majority of the voting stock of the Company at the Company's next Annual Meeting
of Stockholders to be held in 1997. In the event the stockholders shall fail to
approve the Plan, it and all Options granted thereunder shall be and become null
and void. Notwithstanding any other provision of the Plan to the contrary, no
Options granted under the Plan may be exercised until after such stockholder
approval.
ARTICLE XIV
CAPTIONS
The use of captions in this Plan is for convenience. The captions are
not intended to provide substantive rights.
ARTICLE XV
GOVERNING LAW
All questions concerning the construction, interpretation and validity
of this Plan and the instruments evidencing the Options granted hereunder shall
be governed by and construed and enforced in accordance with the domestic laws
of the State of Delaware, without giving effect to any choice or conflict of law
provision or rule (whether in the State of Delaware or any other jurisdiction)
that would cause
16
<PAGE>
the application of the laws of any jurisdiction other than the State of
Delaware. In furtherance of the foregoing, the internal law of the State of
Delaware will control the interpretation and construction of this Plan, even if
under such jurisdiction's choice of law or conflict of law analysis, the
substantive law of some other jurisdiction would ordinarily apply.
As adopted by the Board of Directors of FAROUDJA, INC. on December 31,
1996.
17
<PAGE>
EXHIBIT A
NONQUALIFIED STOCK OPTION AGREEMENT
dated as of [____________] between
FAROUDJA, INC.,
a Delaware corporation (the "Company"),
and [__________] (the "Grantee").
The Company, acting through its Board of Directors (the "Board") or
through a Committee (as defined in the Plan), has granted to the Grantee,
effective as of the date of this Agreement, an option under the Company's 1997
Non-Employee Director Stock Option Plan (the "Plan") to purchase shares of
Common Stock, on the terms and subject to the conditions set forth in this
Agreement and the Plan.
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
SECTION 1. THE PLAN. The terms and provisions of the Plan are hereby
incorporated into this Agreement as if set forth herein in their entirety. In
the event of a conflict between any provision of this Agreement and the Plan,
the provisions of the Plan shall control. A copy of the Plan may be obtained
from the Company by the Grantee upon request. Capitalized terms used herein and
not otherwise defined shall have the meanings ascribed thereto in the Plan.
SECTION 2. OPTION; OPTION PRICE. On the terms and subject to the
conditions of the Plan and this Agreement, the Grantee shall have the option
(the "Option") to purchase up to [__] shares of Common Stock (the "Option
Shares") at the price of $[______] per Option Share (the "Option Price") at the
times and in the manner provided herein. Payment of the Option Price may be
made in the manner specified by Article VI of the Plan. The Option is not
intended to qualify for federal income tax purposes as an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
SECTION 3. TERM. The term of the Option (the "Option Term") shall
commence on the date hereof and expire on the earlier of (i) the tenth
anniversary of the Effective Date and (ii) one year from the date on which a
Grantee ceases to be an Eligible Director.
SECTION 4. RESTRICTION ON TRANSFER. The Option may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any way
by the Grantee and may be exercised during the lifetime of the Grantee only by
the
1
<PAGE>
Grantee. If the Grantee dies, the Option shall thereafter be exercisable, in
accordance with Section 6.4 of the Plan. The Option shall not be subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of the Option contrary to the
provisions hereof, and the levy of any execution, attachment or similar process
upon the Option, shall be null and void and without effect.
SECTION 5. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
(a) if to the Company, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Hoberg, CFO
with copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400;
(b) if to the Grantee, to him at:
--------------------------------
--------------------------------
--------------------------------
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) in the case of
personal delivery, on the date of such delivery (or if such date is not a
business day, on the next business day after the date of delivery), (ii) in the
case of nationally-recognized overnight courier, on the next business day after
the date sent, (iii) in the case of telecopy transmission, when received (or if
not sent on a business day, on the next business day after the date sent), and
(iv) in the case of mailing, on the third
2
<PAGE>
business day following that date on which the piece of mail containing such
communication is posted.
SECTION 6. WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this Agreement must be in writing and shall not operate or
be construed as a waiver of any other or subsequent breach.
SECTION 7. GRANTEE'S UNDERTAKING. The Grantee hereby agrees to take
whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Grantee pursuant to the express provisions of this Agreement and the Plan.
SECTION 8. MODIFICATION OF RIGHTS. The rights of the Grantee are
subject to modification and termination in certain events as provided in this
Agreement and the Plan.
SECTION 9. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF DELAWARE TO BE APPLIED. IN FURTHERANCE OF
THE FOREGOING, THE INTERNAL LAW OF THE STATE OF DELAWARE WILL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
SECTION 10. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and each such counterpart shall be deemed to be an original,
but all such counterparts together shall constitute but one agreement.
SECTION 11. ENTIRE AGREEMENT. This Agreement and the Plan (and the
other writings referred to herein) constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior written or oral negotiations, commitments, representations and agreements
with respect thereto.
SECTION 12. SEVERABILITY. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or
3
<PAGE>
unenforceable for any reason, such provision, as to such jurisdiction, shall be
ineffective, without invalidating the remaining provisions of this Agreement or
affecting the validity or enforceability of such provision in any other
jurisdiction. Notwithstanding the foregoing, if such provision could be more
narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction
SECTION 13. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND
EFFECTIVELY DO SO, TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING
HEREUNDER.
IN WITNESS WHEREOF, the parties hereto have executed this Nonqualified
Stock Option Agreement as of the date first written above.
FAROUDJA, INC.
By:
-----------------------------------
Name:
Title:
--------------------------------------
[GRANTEE]
4
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Faroudja, Inc.
1997 Performance Stock Option Plan
January 2, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
ARTICLE I. Purpose....................................................... 1
ARTICLE II. Definitions................................................... 2
ARTICLE III. Shares Subject to Plan........................................ 4
ARTICLE IV. Administration................................................ 5
ARTICLE V. Eligibility................................................... 8
ARTICLE VI. Annual Limitation on Value of Incentive Stock Options......... 9
ARTICLE VII. Terms and Conditions of Options............................... 9
ARTICLE VIII. Effect of Certain Changes..................................... 16
ARTICLE IX. Amendment and Termination..................................... 20
ARTICLE X. Issuance of Shares and Compliance with Securities Regulations. 21
ARTICLE XI. Application of Funds.......................................... 21
ARTICLE XII. Notice........................................................ 21
ARTICLE XIII. Term of Plan.................................................. 22
ARTICLE XIV. No Contract of Employment..................................... 22
ARTICLE XV. Effectiveness of the Plan..................................... 22
ARTICLE XVI. Captions...................................................... 23
ARTICLE XVII. Disqualifying Dispositions.................................... 23
ARTICLE XVIII. Withholding Taxes............................................. 24
ARTICLE XIX. Governing Law................................................. 24
ARTICLE XX. Financial Statements.......................................... 25
</TABLE>
i
<PAGE>
FAROUDJA, INC.
1997 PERFORMANCE STOCK OPTION PLAN
ARTICLE I.
PURPOSE
The purpose of the FAROUDJA, INC. 1997 PERFORMANCE STOCK OPTION PLAN
(the "Plan") is (i) to further the growth and success of FAROUDJA, INC., a
Delaware corporation (the "Company"), and its Subsidiaries (as hereinafter
defined) by enabling employees of, or consultants to, the Company or any of
its Subsidiaries to acquire shares of the Company's Common Stock thereby
increasing their personal interest in such growth and success, and (ii) to
provide a means of rewarding outstanding performance by such persons to the
Company and/or its Subsidiaries. Options granted under the Plan (the
"Options") may be either "incentive stock options," intended to qualify as such
under the provisions of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or "non-qualified stock options." In this Plan, the
terms "Parent" and "Subsidiary" mean "Parent Corporation" and "Subsidiary
Corporation", respectively, as such terms are defined in Sections 424(e) and
(f) of the Code. Unless the context otherwise requires, any Incentive Stock
Option or Nonqualified Stock Option is referred to in this Plan as an "Option."
1
<PAGE>
ARTICLE II.
DEFINITIONS
The following words and terms as used herein shall have that meaning
set forth therefor in this Article II, unless a different meaning is clearly
required by the context. Whenever appropriate, words used in the singular shall
be deemed to include the plural and vice versa, and the masculine gender shall
be deemed to include the feminine gender.
2.1 BOARD shall mean the Board of Directors of the Company.
2.2 CODE shall mean the Internal Revenue Code of 1986, as now in
effect or as hereafter amended.
2.3 COMMITTEE shall mean the Compensation Committee appointed by the
Board in accordance with the provisions of Article IV to administer the Plan.
2.4 COMMON STOCK shall mean the shares of common stock, .001 par
value, of the Company, and any other securities of the Company to the extent
provided in Article VIII.
2.5 COMPANY shall mean Faroudja, Inc., a Delaware corporation, and
any successor to it.
2.6 DISABILITY shall have the meaning set forth in Section 22(e)(3)
of the Code, as that section may be amended from time to time. The
determination under the Plan that a Grantee's employment terminated as the
result of Disability shall not be and shall not be construed as an admission by
the
2
<PAGE>
Company of the Disability of the Grantee for any other purpose.
2.7 DISQUALIFYING DISPOSITION shall have the meaning set forth in
Article XVII hereof.
2.8 EFFECTIVE DATE shall mean the day upon which the Plan is
approved by the stockholders of the Company.
2.9 EMPLOYEE shall mean any individual employed by and receiving
compensation from the Company or any Subsidiary.
2.10 FAIR MARKET VALUE shall have the meaning set forth in
Section 7.2 herein.
2.11 GRANTEE shall mean an Employee who is granted an Option by the
Committee under this Plan.
2.12 INCENTIVE STOCK OPTION shall mean any Option designated as an
"incentive stock option" within the meaning of Code Section 422.
2.13 INVOLUNTARY TERMINATION shall have the meaning set forth in
Section 7.4 hereof.
2.14 NON-EMPLOYEE DIRECTOR shall have the meaning set forth in Rule
16b-3 promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934 ("Exchange Act"), as such rule may be amended
from time to time, or any successor definition adopted by the Securities and
Exchange Commission.
2.15 NONQUALIFIED STOCK OPTION shall mean any Option that is not an
Incentive Stock Option, including any Option
3
<PAGE>
that provides at the time of grant that it will not be treated as an
Incentive Stock Option.
2.16 OPTION shall mean both an Incentive Stock Option and a
Nonqualified Stock Option.
2.17 OPTION AGREEMENT shall mean a written agreement evidencing the
right to purchase shares of Common Stock pursuant to the terms of this Plan
which agreement shall be in the form described in Article VII.
2.18 PLAN shall mean the Faroudja, Inc. 1997 Performance Stock
Option Plan, as set forth herein and as amended from time to time.
2.19 SECURITIES ACT means the Securities Act of 1933, as amended.
2.20 SUBSIDIARY shall mean any corporation that at the time
qualifies as a subsidiary of the Company under the definition of "subsidiary
corporation" contained in Section 424(f) of the Code, as that section may be
amended from time to time.
2.21 TERMINATION FOR CAUSE shall have the meaning set forth in
Section 7.4 hereof.
ARTICLE III.
SHARES SUBJECT TO PLAN
3.1 NUMBER OF SHARES AVAILABLE. The total number of shares of
Common Stock which are available for granting Options hereunder shall be Three
Hundred Thousand (300,000)
4
<PAGE>
(subject to adjustment as provided below in Section 3.3 and in Article VIII
hereof).
3.2 SOURCE OF SHARES. The shares of Common Stock issued upon the
exercise of an Option shall be made available, in the discretion of the Board,
either from the authorized but unissued shares of Common Stock or from any
outstanding shares of Common Stock which have been reacquired by the Company.
3.3 SHARES SUBJECT TO EXPIRED OPTIONS. In the event that any
Option expires or otherwise terminates for any reason (whether such Option is
vested or non-vested at the time of termination), without having been
exercised in full, the unpurchased shares of Common Stock subject to that
Option shall once again become available for the granting of Options.
ARTICLE IV.
ADMINISTRATION
4.1 COMMITTEE TO ADMINISTER PLAN. The Board shall delegate the
exclusive control and management of the operations of the Plan to the
Committee. The Board may, however, at any time or times either (i) terminate
any such delegation of authority and assume the exclusive control and
management of the Plan, or (ii) having terminated such a delegation of
authority may again delegate the exclusive control and management of the Plan
to the Committee. In the event that and for so long as this Plan is
controlled and managed by the Board, the terms and provisions of this Plan,
5
<PAGE>
other than Sections 2.1, 2.3, 4.1, 4.2, shall be applied by substituting the
term "Board" for "Committee" therein.
4.2 APPOINTMENT OF A COMMITTEE. In the event that the Board
appoints a Committee: (i) the Committee shall be composed solely of two or
more directors; however, if the Plan is required to comply with Rule 16b-3 of
the Exchange Act in order to permit officers and directors of the Company to
be exempt from the provisions of Section 16(b) of the Exchange Act with
respect to transactions effected pursuant to the Plan, the Committee shall be
composed solely of two or more Non-Employee Directors; (ii) all vacancies
occurring on the Committee shall be filled by appointment of the Board; (iii)
the members of the Committee shall serve at the pleasure of the Board; (iv)
the Committee shall adopt such rules and regulations as it shall deem
appropriate concerning the holding of meetings and the administration of the
Plan; and (v) the entire Committee shall constitute a quorum and the actions
of the entire Committee present at a meeting, or actions approved in writing
by the entire Committee, shall be the actions of the Committee.
4.3 DETERMINATIONS TO BE MADE BY THE COMMITTEE. Subject to the
provisions of this Plan, the Committee shall determine: (i) the Grantees;
(ii) the number of shares of Common Stock subject to an Option; (iii) the
date or dates upon which an Option may be exercised or is granted; (iv) the
manner in which an Option may be exercised; (v) such other
6
<PAGE>
terms to which an Option is subject (including the manner in which it vests);
(vi) the form of any Option Agreements; and (vii) whether the Option is an
Incentive Stock Option or a Nonqualified Stock Option. In determining the
amount and terms of Options granted under the Plan, the Committee shall review
performance measures which shall influence the number of Options granted and
the vesting of such Options. All Options issued under the Plan shall vest at
the rate of at least 20% per year over 5 years from the date the Option is
granted.
4.4 INTERPRETATION OF PLAN. The Committee shall interpret the Plan
and from time to time may adopt such rules and regulations for carrying out
the terms and purposes of the Plan and may take such other actions in the
administration of the Plan as it deems advisable. The interpretation and
construction by the Committee of any provisions of this Plan or any Option
Agreement and the determination of any question arising under this Plan, any
such rule or regulation, or any Option Agreement shall be final and binding on
all persons interested in the Plan.
4.5 LIMITED LIABILITY. Neither the Board nor any member of the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan.
7
<PAGE>
ARTICLE V.
ELIGIBILITY
5.1 GENERAL. Options may be granted under the Plan only to persons
who are employees of, or consultants to, the Company or any of its
Subsidiaries on the date of grant. Options granted to consultants shall be
Nonqualified Stock Options. Options granted to employees of the Company or
any of its Subsidiaries shall be, in the discretion of the Committee, either
Incentive Stock Options or Nonqualified Stock Options on the date of grant.
5.2 EXCEPTIONS. Notwithstanding anything contained in Article V
and this Plan to the contrary:
5.2.1 no Option may be granted under the Plan to an
employee or consultant who owns, directly or indirectly (within the
meaning of Sections 422(b)(6) and 424(d) of the Code), stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of its Parent, if any, or any of
its Subsidiaries, unless (a) the Option Price (as defined in Article
VII hereof) of the shares of Common Stock subject to such Option is
fixed at not less than 110% of the Fair Market Value on the date of
grant (as determined in accordance with Article VII hereof) of such
shares and (b) such Option by
8
<PAGE>
its terms is not exercisable after the expiration of five years from the
date it is granted;
5.2.2 no Option may be granted to any Person
serving on the Committee for so long as such Person serves on the
Committee; and
5.2.3 no Options may be granted to any Person in
any one taxable year of the Company in excess of 25% of the Options
issued or issuable under the Plan.
ARTICLE VI.
ANNUAL LIMITATION ON VALUE OF INCENTIVE STOCK OPTIONS
To the extent that the aggregate Fair Market Value of the shares of
Common Stock (determined at the time the Incentive Stock Option is granted)
with respect to which Incentive Stock Options are exercisable for the first
time in any calendar year, together with options granted under all other
incentive stock option plans of the Company and any parent corporation (as
defined in Section 424(e) of the Code) or any Subsidiary exceeds one hundred
thousand dollars ($100,000) for any one Grantee, such Options shall be
treated as Nonqualified Stock Options.
ARTICLE VII.
TERMS AND CONDITIONS OF OPTIONS
7.1 Each Option granted under the Plan shall be designated as an
Incentive Stock Option or an Nonqualified Stock Option and shall be subject to
the terms and conditions
9
<PAGE>
applicable to Incentive Stock Options and/or Nonqualified Stock Options (as
the case may be) set forth in the Plan. Each Option shall specify the number
of shares of Common Stock for which such Option shall be exercisable and the
exercise price for each such shares of Common Stock. In addition, each Option
shall be evidenced by a written agreement (an "Option Agreement"), in
substantially the form of EXHIBIT A for an Incentive Stock Option and EXHIBIT
B for an Nonqualified Stock Option, with such changes thereto as are
consistent with the Plan as the Committee shall deem appropriate, and shall
provide in substance as follows:
7.2 NUMBER OF SHARES AND PURCHASE PRICE. Each Option Agreement
shall specify the number of shares of Common Stock covered by such Option and
the purchase price per share. The price (the "Option Price") at which each
share of Common Stock may be purchased shall be the Fair Market Value (or such
lesser amount (but not less than 85% of the Fair Market Value) approved by
the Board) of the shares of Common Stock on the date of the grant (as
determined in accordance with this Article VII); PROVIDED, HOWEVER, that in
the case of an Incentive Stock Option, such Option Price shall in no event be
less than 100% of the Fair Market Value on the date of grant of the shares of
Common Stock; and PROVIDED, FURTHER, that the Option Price shall comply with
Section 5.2.1 herein.
Subject to the requirements of Section 422 of the Code regarding
Incentive Stock Options, for purposes of the
10
<PAGE>
Plan, the "Fair Market Value" of shares of Common Stock shall be equal to:
7.2.1 if such shares are publicly traded, (x) the
closing price on the business day immediately preceding the date of
grant if any trades were made on such business day and such
information is available, otherwise the average of the last bid and
asked prices on the business day immediately preceding the date of
grant, in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotations System
("NASDAQ") or (y) if such shares are then traded on a national
securities exchange, the closing price on the business day immediately
preceding the date of grant, if any trades were made on such business
day and such information is available, otherwise the average of the
high and low prices on the business day immediately preceding the date
of grant, on the principal national securities exchange on which it is
so traded; or
7.2.2 if there is no public trading market for such
shares, the fair value of such shares on the date of grant as
reasonably determined in good faith by the Committee (with the consent
of a majority of the Board) after taking into consideration all
factors which it deems
11
<PAGE>
appropriate, including, without limitation, recent sale and offer prices of
such shares in private transactions negotiated at arms' length.
Notwithstanding anything contained in the Plan to the contrary, all
determinations pursuant to Article VII hereof shall be made without regard to
any restriction other than a restriction which, by its terms, will never
lapse.
Subsequent to the date of grant of any Nonqualified Stock Options, the
Committee may, at its discretion and with the written consent of the Grantee
and the prior approval of the Board, establish a new Option Price for such
Nonqualified Stock Options so as to increase or decrease the Option Price of
such Nonqualified Stock Options.
7.3 NON-TRANSFERABILITY OF OPTIONS. Each Option Agreement shall
provide that the Option granted therein shall be non-transferable and
non-assignable by the Grantee except by will or by the laws of descent and
distribution. During the lifetime of the Grantee such Option may be exercised
only by the Grantee or such Grantee's legal representative.
7.4 MAXIMUM TERM; DATE OF EXERCISE; TERMINATION. Each Option
Agreement shall set forth the period during which it may be exercised. Each
Option granted under the Plan shall automatically terminate and shall become
null and void and be of no further force or effect upon the first to occur of
the following:
12
<PAGE>
7.4.1 the tenth anniversary of the date on which such
Option is granted or, in the case of any Option granted to a person
described in Section 5.2.1, the fifth anniversary of the date on which such
Option is granted;
7.4.2 within 90 days after the date that the Grantee
ceases to be an employee of the Company or any of it Subsidiaries (other
than as a result of an Involuntary Termination (as defined in clause (iii)
below)) or a Termination For Cause (as defined in clause (iv) below));
7.4.3 within 365 days after the date that the Grantee
ceases to be an employee of the Company or any of its Subsidiaries, if such
termination is due to such Grantee's death or permanent and total
disability (within the meaning of Section 22(e) (3) of the Code) (an
"Involuntary Termination");
7.4.4 within 30 days if the Grantee ceases to be an
employee of the Company or any of its Subsidiaries, if such termination is
determined by the Committee to be for Cause (a "Termination For Cause");
and
7.4.5 simultaneously with the consummation of a sale of
the Company if prior to such time the Grantees are given the opportunity to
13
<PAGE>
exercise their Options with respect to all shares of Common Stock available
for award pursuant to the Options.
The Committee shall have the power to determine what constitutes a
Termination For Cause for purposes of the Plan, and the date upon which such
Termination For Cause shall occur. All such determinations shall be final and
conclusive and binding upon the Grantee.
Any shares of Common Stock available for award pursuant to the Options
that are not acquired as a result of an Option expiring without being fully
exercised shall be available for award by the Committee to another eligible
person.
7.5 EXERCISE OF OPTIONS. Each Option Agreement shall provide that
Options shall be exercised by delivering a written notice of exercise to the
Company. Each such notice shall state the number of shares of Common Stock with
respect to which the Option is being exercised and shall be signed by the person
(or persons) exercising the Option and, in the event the Option is being
exercised by any person other than the Grantee, shall be accompanied by proof,
satisfactory to counsel for the Company, of the right of such person to exercise
the Option. The exercise price for each Option shall be paid in full for the
number of shares of Common Stock specified in the notice by a certified or
cashier's check or by transfer to the Company of shares of Common Stock valued
14
<PAGE>
for this purpose at their Fair Market Value, or a combination of both. In
addition, in the event that the Option being exercised is a Nonqualified Stock
Option, a certified or cashier's check in full payment of the aggregate amount
of any federal, state or local withholding taxes, if any, attributable to the
transfer of stock pursuant to the exercise of the Option must accompany such
notice.
The date of exercise of an Option shall be the date on which written
notice of exercise shall have been delivered to the Company, but the exercise of
an Option shall not be effective until the person (or persons) exercising the
Option shall have complied with all the provisions of the Option Agreement
governing the exercise of the Option. The Company shall deliver as soon as
practicable after receipt of notice and payment, certificates for the shares of
Common Stock subject to the Option. No one shall be deemed to be the holder of
any shares of Common Stock subject to an Option, or have any other rights as a
stockholder, unless and until certificates for the shares of such Common Stock
are issued to that person.
7.6 CONDITIONS ON RIGHT OF EXERCISE. The Option Agreement may
provide for such conditions on the right of exercise as the Committee, in its
sole discretion, deems appropriate, which conditions may, without limitation, be
based upon either (i) the completion of a further period of continued employment
or (ii) the performance of the Company,
15
<PAGE>
of any Subsidiary or of any division thereof, or of the Grantee. Without
limiting the foregoing, an Option Agreement may provide that the Committee may,
in its sole discretion, terminate in whole or in part any portion of the Option
which has not yet become exercisable if it determines that the Grantee is not
satisfactorily performing the duties to which he or she was assigned on the date
the Option was granted or duties of at least equal responsibility. The
Committee shall have the right at any time or times to waive any condition on
the exercise of any Option whenever it deems such a waiver to be appropriate.
7.7 CHARACTER OF OPTION GRANTED. Each Option Agreement shall
specifically provide whether the Option granted thereby is an Incentive Stock
Option or a Nonqualified Stock Option.
7.8 OTHER PROVISIONS. The Option Agreement may include such other
terms and conditions, not inconsistent with this Plan, as the Committee in its
sole discretion shall determine.
ARTICLE VIII.
EFFECT OF CERTAIN CHANGES
8.1 ANTI-DILUTION. If there is any change in the number of shares of
Common Stock through the declaration of stock dividends or through a
recapitalization which results in stock splits or reverse stock splits, or
through the combination or reclassification of such shares, the Board
16
<PAGE>
shall make corresponding adjustments to the number of shares of Common Stock
available for Options, the number of such shares covered by outstanding Options,
and the price per share of such Options in order to appropriately reflect any
increase or decrease in the number of issued shares of Common Stock; provided,
however, that any fractional shares of Common Stock resulting from such
adjustment shall be eliminated. Any determination made by the Board relating to
such adjustments shall be final, binding and conclusive.
8.2 CHANGE IN PAR VALUE. In the event of a change in the Common
Stock of the Company, as constituted as of the date of this Plan, which is
limited to a change in all of its authorized shares with par value into the same
number of shares with a different par value or without par value, the shares
resulting from any such change shall be deemed to be the Common Stock within the
meaning of the Plan.
8.3 MERGERS AND CONSOLIDATIONS. Notwithstanding the other Sections
of this Article VIII, upon the dissolution or liquidation of the Company, or
upon any reorganization, merger or consolidation of the Company with one or more
corporations where the Company is the surviving corporation and the stockholders
of the Company immediately prior to such transaction do not own at least eighty
percent (80%) of the Company's Common Stock immediately after such transaction,
or upon any reorganization, merger or consolidation of the Company with one or
more corporations where the Company is not
17
<PAGE>
the surviving corporation, or upon a sale of substantially all of the assets or
eighty percent (80%) or more of the then outstanding shares of Common Stock of
the Company to another corporation or entity, (any such reorganization, merger,
consolidation, sale of assets, or sale of shares of Common Stock being
hereinafter referred to as the "Transaction"), the Plan shall terminate;
provided however, that
(i) any Options theretofore granted and outstanding under the
Plan shall become immediately exercisable in full and shall remain
exercisable until the effective date of such Transaction;
(ii) the termination of the Plan, and any exercise of any Option
(to the extent that the holder's right to exercise such Option has
been accelerated by the operation of Section 8.3(i)), shall be subject
to and conditioned upon the consummation of the Transaction to which
such termination and acceleration relates, and if, for any reason,
such Transaction is abandoned, exercise of the Option shall be void
and such Option shall thereafter be exercisable only as permitted by
the Plan and the Option Agreement, which shall remain in full force
and effect.
For purposes of applying Section 8.3: (A) the Fair Market Value of
shares of Common Stock underlying the Incentive Stock Options shall be
determined as of the time the Option with respect to such shares is granted; (B)
the Incentive Stock Options shall be transformed, to the extent required, into
Nonqualified Stock Options in reverse chronological order, such that the
last-granted Incentive Stock Option shall be the first Option transformed into a
Nonqualified Stock Option and the first granted Incentive Stock Option shall be
the last Option so transformed; and (C)
18
<PAGE>
the terms and conditions of each Nonqualified Stock Option so created shall be
identical, to the extent possible, in all respects to those of the Incentive
Stock Option that it replaces including but not limited to the fact that it
shall be immediately exercisable in full and shall remain exercisable until the
time at which the Transaction becomes effective. In the event that Incentive
Stock Options are transformed into Nonqualified Stock Options by operation of
this Section 8.3, the Board may in its discretion issue replacement Option
Agreements that reflect the adjusted number of Incentive Stock Options and
Nonqualified Stock Options. The Company shall use its best efforts to give each
Grantee written notice of any proposed Transaction at least thirty (30) days
prior to the effective date of any such Transaction. Any Option not exercised
by the time the Transaction legally becomes effective shall thereupon terminate.
8.4 RIGHTS OF PARTICIPANTS. Except as hereinbefore expressly
provided in this Article VIII, the Grantee shall have no rights by reason of any
subdivision or consolidation of shares of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class or by reason of any dissolution, liquidation, merger, or
consolidation or spin-off of assets or stock of another corporation, and any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no
19
<PAGE>
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option. The grant of an Option shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structures or to merge or to consolidate or to dissolve, liquidate or sell or
transfer all or part of its business or assets.
ARTICLE IX.
AMENDMENT AND TERMINATION
The Board shall have the right to amend, suspend or terminate this
Plan at any time, provided that unless first approved by the stockholders of the
Company, no amendment shall be made to the Plan (except to conform the Plan and
the Option Agreements thereunder to changes in the Code or governing law) which:
(i) materially modifies the eligibility requirements of Article V, (ii)
increases the total number of shares of Common Stock which may be issued under
the Plan, (iii) changes the purchase price for Incentive Stock Options specified
in Article VII, (iv) lengthens the term of the Plan as set forth in Article XIII
during which Incentive Stock Options may be granted, or (v) otherwise materially
increases the benefits accruing to Grantees under the Plan. No amendment to the
Plan shall be made by the Board that materially changes the terms of the Plan so
as to impair or
20
<PAGE>
adversely alter the rights of a Grantee or other Option holder without such
person's consent.
ARTICLE X.
ISSUANCE OF SHARES AND COMPLIANCE
WITH SECURITIES REGULATIONS
The obligation of the Company to sell and deliver the shares of Common
Stock pursuant to Options granted under this Plan shall be subject to all
applicable laws, regulations, rules and approvals, including, but not by way of
limitation, the effectiveness of a registration statement under the Securities
Act of 1933, as amended, if deemed necessary or appropriate by the Board, to
register the shares of Common Stock reserved for issuance upon exercise of
Options under such Act.
ARTICLE XI.
APPLICATION OF FUNDS
Any proceeds received by the Company as a result of the exercise of
Options granted under the Plan may be used for any valid corporate purpose.
ARTICLE XII.
NOTICE
Any notice to the Company required under this Plan shall be in writing
and shall either be delivered in person or sent by registered or certified mail,
return receipt requested, postage prepaid, to the Company at its offices at
21
<PAGE>
750 Palomar Avenue, Sunnyvale, California 94086, Attention: Michael Hoberg,
Chief Financial Officer.
ARTICLE XIII.
TERM OF PLAN
The Plan shall terminate ten (10) years from the date upon which it is
approved by the stockholders of the Company or adopted by the Board, whichever
is earlier, or on such earlier date as may be determined by the Board. In any
event, termination shall be deemed to be effective as of the close of business
on the day of termination. No Options may be granted after such termination.
Termination of the Plan, however, shall not affect the rights of Grantees under
Options previously granted to them, and all unexpired Options shall continue in
full force and operation after termination of the Plan until they lapse or
terminate by their own terms and conditions.
ARTICLE XIV.
NO CONTRACT OF EMPLOYMENT
Neither the adoption of this Plan nor the grant of any option shall be
deemed to obligate the Company or any Subsidiary to continue the employment of
any Employee.
ARTICLE XV.
EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon adoption by the Board; provided,
however, that the Plan shall be submitted for approval by the holders of a
majority of the voting stock of
22
<PAGE>
the Company at the Company's next Annual Meeting of Stockholders to be held in
1997. In the event the stockholders shall fail to approve the Plan within 12
months before or after the Plan is adopted by the Board, it and all Options
granted thereunder shall be and become null and void. Notwithstanding any other
provision of the Plan to the contrary, no Options granted under the Plan may be
exercised until after such stockholder approval.
ARTICLE XVI.
CAPTIONS
The use of captions in this Plan is for convenience. The captions are
not intended to provide substantive rights.
ARTICLE XVII.
DISQUALIFYING DISPOSITIONS
If securities acquired by exercise of an Incentive Stock Option
granted under this Plan are disposed of within two years following the date of
grant of the Incentive Stock Option or one year following the issuance of the
securities to the Grantee (a "Disqualifying Disposition"), the holder of such
securities shall, immediately prior to such Disqualifying Disposition, notify
the Company in writing of the date and terms of such Disqualifying Disposition
and provide such other information regarding the Disqualifying Disposition as
the Company may reasonably require.
23
<PAGE>
ARTICLE XVIII.
WITHHOLDING TAXES
Whenever under the Plan securities are to be delivered by an Grantee
upon exercise of a Nonqualified Stock Option, the Company shall be entitled to
require as a condition of delivery that the Grantee remit or, in appropriate
cases, agree to remit when due, an amount sufficient to satisfy all current or
estimated future federal, state and local withholding tax and employment tax
requirements relating thereto. At the time of a Disqualifying Disposition, the
Grantee shall remit to the Company in cash the amount of any applicable federal,
state and local withholding taxes and employment taxes.
ARTICLE XIX.
GOVERNING LAW
All questions concerning the construction, interpretation and validity
of this Plan and the instruments evidencing the Options granted hereunder shall
be governed by and construed and enforced in accordance with the domestic laws
of the State of Delaware, without giving effect to any choice or conflict of law
provision or rule (whether in the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware. In furtherance of the foregoing, the internal law of the
State of Delaware will control the interpretation and construction of this Plan,
even if under
24
<PAGE>
such jurisdiction's choice of law or conflict of law analysis, the substantive
law of some other jurisdiction would ordinarily apply.
ARTICLE XX.
FINANCIAL STATEMENTS
The Company shall provide all Grantees under the Plan with financial
statements of the Company at least annually. Such financial statements shall
include, at a minimum, an income statement, balance sheet and cash flow
statement for the Company.
As adopted by the Board of Directors of FAROUDJA, INC. on January 2,
1997.
25
<PAGE>
EXHIBIT A
INCENTIVE STOCK OPTION AGREEMENT
dated as of_____________ between
FAROUDJA, INC.,
a Delaware corporation (the "Company"),
and [__________] (the "Grantee").
The Company, acting through a Committee (as defined in the Plan) with
the consent of the Company's Board of Directors (the "Board") has granted to the
Grantee, effective as of the date of this Agreement, an option under the
Company's 1997 Performance Stock Option Plan (the "Plan") to purchase shares of
Common Stock, on the terms and subject to the conditions set forth in this
Agreement and the Plan.
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
SECTION 1. THE PLAN. The terms and provisions of the Plan are hereby
incorporated into this Agreement as if set forth herein in their entirety. In
the event of a conflict between any provision of this Agreement and the Plan,
the provisions of the Plan shall control. A copy of the Plan may be obtained
from the Company by the Grantee upon request. Capitalized terms used herein and
not otherwise defined shall have the meanings ascribed thereto in the Plan.
SECTION 2. OPTION; OPTION PRICE. On the terms and subject to the
conditions of the Plan and this Agreement, the Grantee shall have the option
(the "Option") to purchase up to [ ] shares of Common Stock (the "Option
Shares") at the price of $[ ] per Option Share (the "Option Price") at the
times and in the manner provided herein. Payment of the Option Price may be
made in the manner specified by Article VII of the Plan. The Option is intended
to qualify for federal income tax purposes as an "incentive stock option" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
SECTION 3. TERM. The term of the Option (the "Option Term") shall
commence on the date hereof and expire on the tenth anniversary of the date
hereof, unless the Option shall have sooner been terminated in accordance with
the terms of the Plan (including, without limitation, Section 7.4 of the Plan)
or this Agreement.
SECTION 4. RESTRICTION ON TRANSFER. The Option may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any way
by the Grantee other than by
1
<PAGE>
will or by the laws of descent and distribution, and may be exercised during
the lifetime of the Grantee only by the Grantee. If the Grantee dies, the
Option shall thereafter be exercisable, during the period specified in
Article VII of the Plan, by his executors or administrators to the full
extent to which the Option was exercisable by the Grantee at the time of his
death. The Option shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of the Option contrary to the provisions hereof, and the levy of
any execution, attachment or similar process upon the Option, shall be null
and void and without effect.
SECTION 5. GRANTEE'S EMPLOYMENT. Nothing in the Option shall confer
upon the Grantee any right to continue in the employ of the Company or any of
its affiliates or to interfere in any way with the right of the Company or its
affiliates or stockholders, as the case may be, to terminate the Grantee's
employment or to increase or decrease the Grantee's compensation at any time.
SECTION 6. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
(a) if to the Company, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Hoberg, CFO
with copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400;
(b) if to the Grantee, to him at:
---------------------------------
---------------------------------
---------------------------------
2
<PAGE>
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) in the case of
personal delivery, on the date of such delivery (or if such date is not a
business day, on the next business day after the date of delivery), (ii) in the
case of nationally-recognized overnight courier, on the next business day after
the date sent, (iii) in the case of telecopy transmission, when received (or if
not sent on a business day, on the next business day after the date sent), and
(iv) in the case of mailing, on the third business day following that date on
which the piece of mail containing such communication is posted.
SECTION 7. WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this Agreement must be in writing and shall not operate or
be construed as a waiver of any other or subsequent breach.
SECTION 8. GRANTEE'S UNDERTAKING. The Grantee hereby agrees to take
whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Grantee pursuant to the express provisions of this Agreement and the Plan.
SECTION 9. MODIFICATION OF RIGHTS. The rights of the Grantee are
subject to modification and termination in certain events as provided in this
Agreement and the Plan.
SECTION 10. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF DELAWARE TO BE APPLIED. IN FURTHERANCE OF
THE FOREGOING, THE INTERNAL LAW OF THE STATE OF DELAWARE WILL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
SECTION 11. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and each such counterpart shall be deemed to be an original,
but all such counterparts together shall constitute but one agreement.
SECTION 12. ENTIRE AGREEMENT. This Agreement and the Plan (and the
other writings referred to herein) constitute the entire agreement between
the parties with
3
<PAGE>
respect to the subject matter hereof and thereof and supersede all
prior written or oral negotiations, commitments, representations and agreements
with respect thereto.
SECTION 13. SEVERABILITY. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 14. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND
EFFECTIVELY DO SO, TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING
HEREUNDER.
IN WITNESS WHEREOF, the parties hereto have executed this Incentive
Stock Option Agreement as of the date first written above.
FAROUDJA, INC.
By:
-----------------------------------
Name:
Title:
-----------------------------------
[GRANTEE]
4
<PAGE>
EXHIBIT B
NONQUALIFIED STOCK OPTION AGREEMENT
dated as of [___________] between
FAROUDJA, INC.,
a Delaware corporation (the "Company"),
and [_________] (the "Grantee").
The Company, acting through a Committee (as defined in the Plan) with
the consent of the Company's Board of Directors (the "Board") has granted to the
Grantee, effective as of the date of this Agreement, an option under the
Company's 1997 Performance Stock Option Plan (the "Plan") to purchase shares of
Common Stock, on the terms and subject to the conditions set forth in this
Agreement and the Plan.
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
SECTION 1. THE PLAN. The terms and provisions of the Plan are hereby
incorporated into this Agreement as if set forth herein in their entirety. In
the event of a conflict between any provision of this Agreement and the Plan,
the provisions of the Plan shall control. A copy of the Plan may be obtained
from the Company by the Grantee upon request. Capitalized terms used herein and
not otherwise defined shall have the meanings ascribed thereto in the Plan.
SECTION 2. OPTION; OPTION PRICE. On the terms and subject to the
conditions of the Plan and this Agreement, the Grantee shall have the option
(the "Option") to purchase up to [ ] shares of Common Stock (the "Option
Shares") at the price of $[ ] per Option Share (the "Option Price") at the
times and in the manner provided herein. Payment of the Option Price may be
made in the manner specified by Article VII of the Plan. The Option is not
intended to qualify for federal income tax purposes as an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
SECTION 3. TERM. The term of the Option (the "Option Term") shall
commence on the date hereof and expire on the tenth anniversary of the Effective
Date, unless the Option shall have sooner been terminated in accordance with the
terms of the Plan (including, without limitation, Section 7.4 of the Plan) or
this Agreement.
SECTION 4. RESTRICTION ON TRANSFER. The Option may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any
way by the Grantee, other than by
1
<PAGE>
will or by the laws of descent and distribution, and may be exercised during
the lifetime of the Grantee only by the Grantee. If the Grantee dies, the
Option shall thereafter be exercisable, during the period specified in
Article VII of the Plan, by his executors or administrators to the full
extent to which the Option was exercisable by the Grantee at the time of his
death. The Option shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of the Option contrary to the provisions hereof, and the levy of
any execution, attachment or similar process upon the Option, shall be null
and void and without effect.
SECTION 5. GRANTEE'S EMPLOYMENT. Nothing in the Option shall confer
upon the Grantee any right to continue in the employ of the Company or any of
its affiliates or to interfere in any way with the right of the Company or its
affiliates or stockholders, as the case may be, to terminate the Grantee's
employment or to increase or decrease the Grantee's compensation at any time.
SECTION 6. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
(a) if to the Company, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Hoberg, CFO
with copies to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attention: Mark Bonenfant, Esq.
Telephone: (213) 891-0700
Telecopier: (213) 896-0400;
(b) if to the Grantee, to him at:
-------------------------------------
-------------------------------------
-------------------------------------
2
<PAGE>
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) in the case of
personal delivery, on the date of such delivery (or if such date is not a
business day, on the next business day after the date of delivery), (ii) in the
case of nationally-recognized overnight courier, on the next business day after
the date sent, (iii) in the case of telecopy transmission, when received (or if
not sent on a business day, on the next business day after the date sent), and
(iv) in the case of mailing, on the third business day following that date on
which the piece of mail containing such communication is posted.
SECTION 7. WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this Agreement must be in writing and shall not operate or
be construed as a waiver of any other or subsequent breach.
SECTION 8. GRANTEE'S UNDERTAKING. The Grantee hereby agrees to take
whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Grantee pursuant to the express provisions of this Agreement and the Plan.
SECTION 9. MODIFICATION OF RIGHTS. The rights of the Grantee are
subject to modification and termination in certain events as provided in this
Agreement and the Plan.
SECTION 10. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF DELAWARE TO BE APPLIED. IN FURTHERANCE OF
THE FOREGOING, THE INTERNAL LAW OF THE STATE OF DELAWARE WILL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER SUCH
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
SECTION 11. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and each such counterpart shall be deemed to be an original,
but all such counterparts together shall constitute but one agreement.
SECTION 12. ENTIRE AGREEMENT. This Agreement and the Plan (and the
other writings referred to herein) constitute the entire agreement between
the parties with
3
<PAGE>
respect to the subject matter hereof and thereof and supersede all prior
written or oral negotiations, commitments, representations and agreements
with respect thereto.
SECTION 13. SEVERABILITY. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction
SECTION 14. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND
EFFECTIVELY DO SO, TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING
HEREUNDER.
IN WITNESS WHEREOF, the parties hereto have executed this Nonqualified
Stock Option Agreement as of the date first written above.
FAROUDJA, INC.
By:
------------------------------------
Name:
Title:
------------------------------------
[GRANTEE]
4
<PAGE>
FIRST AMENDMENT TO THE 1997 PERFORMANCE STOCK OPTION PLAN
OF FAROUDJA, INC.
Article III, Paragraph 3.1 of the 1997 Performance Stock Option Plan of
Faroudja, Inc., as adopted on January 2, 1997, is amended and restated in its
entirety to read as follows:
"3.1 NUMBER OF SHARES AVAILABLE. "The total number of shares of Common
Stock which are available for granting Options hereunder shall be Seven Hundred
Fifty Thousand (725,000) (subject to adjustment as provided below in Section 3.3
and in Article VIII hereof)."
IN WITNESS WHEREOF, the undersigned has executed this First Amendment to
the 1997 Performance Stock Option Plan of Faroudja, Inc. as of June 13, 1997.
FAROUDJA, INC.
By:/s/ Michael Hoberg
---------------------------------------
Michael Hoberg, Chief Financial Officer
<PAGE>
FAROUDJA, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock Purchase
Plan of Faroudja, Inc.
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase
Common Stock of the Company through accumulated payroll deductions. It is
the intention of the Company that the Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. The provisions of the Plan, accordingly, shall be construed so as
to extend and limit participation in a manner consistent with the
requirements of that section of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of Faroudja, Inc., a
Delaware corporation.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the Common Stock of the Company.
(d) "COMPANY" shall mean Faroudja, Inc. and any Designated Subsidiary
of the Company.
(e) "COMPENSATION" shall mean an employee's basic or regular rate of
compensation, exclusive of payments for overtime, incentive compensation,
incentive payments, bonuses and other compensation.
(f) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries which have
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is an Employee of the
Company for tax purposes, and whose customary employment with Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship will be deemed to have terminated on the
91st day of such leave.
<PAGE>
(h) "ENROLLMENT DATE" shall mean the first day of each Offering
Period.
(i) "EXERCISE DATE" shall mean the last day of each Purchase Period.
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the
closing sale price for the Common Stock (or the mean of the closing bid and
asked prices, if no sales were reported), as quoted on such exchange (or the
exchange with the greatest volume of trading in Common Stock) or system on the
date of such determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable, or;
(2) If the Common Stock is quoted on the NASDAQ System (but not
on the Nasdaq National Market thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(4) For purposes of the Enrollment Date under the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final Prospectus included within the Registration
Statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock.
(k) "OFFERING PERIOD" shall mean a period of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after June 15 and
December 15 of each year and terminating on the last Trading Day in the periods
ending twenty-four months later, except that the first Offering Period shall
begin on the effective date of the Company's initial public offering of its
Common Stock that is registered with the Securities and Exchange Commission and
shall end on the last Trading Day in the period ending June 15, 1999. The
second Offering Period under the Plan shall commence with the first Trading Day
on or after December 15, 1997. The duration of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "PLAN" shall mean this 1997 Employee Stock Purchase Plan.
2
<PAGE>
(m) "PURCHASE PERIOD" shall mean the approximately six month period
commencing on the first day after each prior Exercise Date, except that the
first Purchase Period of any Offering Period shall commence on the Enrollment
Date and end with the next Exercise Date; provided, however, that the first
Purchase Period of the first Offering Period under the Plan shall commence
with the date on which the Company's registration statement on Form S-1 (or
any successor form thereof) is declared effective by the Securities and
Exchange Commission and end on the last Trading Day occurring in the period
ending December 14, 1997.
(n) "PURCHASE PRICE" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(o) "RESERVES" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and
the number of shares of Common Stock which have been authorized for issuance
under the Plan but not yet placed under option.
(p) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(q) "TRADING DAY" shall mean a day on which national stock
exchanges and the NASDAQ System are open for trading.
3. ELIGIBILITY.
(a) Any Employee employed by the Company on a given Enrollment Date
shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (and any other person or entity whose stock would be
attributed to such Employee pursuant to Section 424(d) of the Code) would own
capital stock of the Company and/or hold outstanding options to purchase such
stock possessing five percent (5%) or more of the total combined voting power or
value of all classes of the capital stock of the Company or of any Subsidiary,
or (ii) which permits his or her rights to purchase stock under all employee
stock purchase plans of the Company and its subsidiaries accrue at a rate which
exceeds twenty-five thousand dollars ($25,000) worth of stock (determined at the
Fair Market Value of the shares at the time such option is granted) for each
calendar year in which such option is outstanding at any time.
3
<PAGE>
4. OFFERING PERIODS. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after June 15 and December 15 each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 19 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the First Trading Date on or after the
date the Company's registration statement on Form S-1 is declared effective by
the Securities and Exchange Commission and ending on the last Trading Day in the
period ending June 15, 1999. The second Offering Period under the Plan shall
commence with the first Trading Day on or after December 15, 1997. The Board
shall have the power to change the duration of Offering Periods (including the
commencement dates thereof) with respect to future offerings without shareholder
approval if such change is announced at least fifteen (15) days prior to the
scheduled beginning of the first Offering Period to be affected thereafter.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement in the form of Exhibit A to this Plan
authorizing payroll deductions and filing it with the Company's payroll officer
not later than one week prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and will be withheld on whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing and
filing with the Company a new subscription agreement authorizing a change in
payroll deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the
4
<PAGE>
Company elects to process a given change in participation more quickly. A
participant's subscription agreement shall remain in effect for successive
Offering Periods unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to 0% at such time during any Purchase
Period which is scheduled to end during the current calendar year (the "Current
Offering Period") that the aggregate of all payroll deductions which were
previously used to purchase stock under the Plan in a prior Purchase Period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the Current Offering Period equal $21,250. Payroll deductions
shall recommence at the rate provided in such participant's subscription
agreement at the beginning of the first Purchase Period which is scheduled to
end in the following calendar year, unless terminated by the participant as
provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but will not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The Option shall
expire on the last day of the Offering Period.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
5
<PAGE>
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
Participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. DELIVERY. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. WITHDRAW; TERMINATION OF EMPLOYMENT.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account will be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period will be automatically terminated, and no further payroll deductions for
the purchase of shares will be made during the Offering Period. If a
participant withdraws from an Offering Period, payroll deductions will not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) Upon a participant's ceasing to be an Employee (as defined in
Section 2(g) hereof) for any reason, he or she will be deemed to have elected to
withdraw from the Plan and the payroll deductions credited to such participant's
account during the Offering Period but not yet used to exercise the option will
be returned to such participant or, in the case of his or her death, to the
person or persons entitled thereto under Section 14 hereof, and such
participant's option will be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee for
the participant's customary number of hours per week of employment during the
period in which the participant is subject to such payment in lieu of notice.
(c) A participant's withdrawal from an Offering Period will not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. INTEREST. No interest shall accrue on the payroll deductions of any
participant in the Plan.
6
<PAGE>
12. STOCK.
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be 400,000 shares, subject
to adjustment upon changes in capitalization of the Company as provided in
Section 18 hereof. If on a given Exercise Date the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Company shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant will have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. ADMINISTRATION.
(a) ADMINISTRATIVE BODY. The Plan shall be administered by the Board
or a committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
(b) RULE 16B-3 LIMITATIONS. Notwithstanding the provisions of
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be administered only by
such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion
concerning decisions regarding the Plan shall be afforded to any committee or
person that is not "disinterested" as that term is used in Rule 16b-3.
14. DESIGNATED BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
7
<PAGE>
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
16. USE OF FUNDS. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be given to each participating Employee
at least annually, which statements will set forth the amounts of each payroll
deduction, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the Reserves as well as the price per share of
Common Stock covered by each option under the Plan which has not yet been
exercised 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 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.
8
<PAGE>
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each option under the Plan shall be assumed or
an equivalent option shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation, unless the Board determines,
in the exercise of its sole discretion and in lieu of such assumption or
substitution, to shorten the Offering Period then in progress by setting a new
Exercise Date (the "New Exercise Date") or to cancel each outstanding right to
purchase and refund all sums collected from participants during the Offering
Period then in progress. If the Board shortens the Offering Period then in
progress in lieu of assumption or substitution in the event of a merger or sale
of assets, the Board shall notify each participant in writing, at least ten (10)
business days prior to the New Exercise Date, that the Exercise Date for his
option has been changed to the New Exercise Date and that his option will be
exercised automatically on the New Exercise Date, unless prior to such date he
has withdrawn from the Offering Period as provided in Section 10 hereof. For
purposes of this paragraph, an option granted under the Plan shall be deemed to
be assumed if, following the sale of assets or merger, the option confers the
right to purchase, for each share of option stock subject to the option
immediately prior to the sale of assets or merger, the consideration (whether
stock, cash or other securities or property) received in the sale of assets or
merger by holders of Common Stock for each share of Common Stock held on the
effective date of the transaction (and if such holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares of Common Stock); provided, however, that if such
consideration received in the sale of assets or merger was not solely common
stock of the successor corporation or its parent (as defined in Section 424(e)
of the Code), the Board may, with the consent of the successor corporation,
provide for the consideration to be received upon exercise of the option 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 sale of assets or merger.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event the Company
effects one or more reorganizations, recapitalizations, rights offerings or
other increases or reductions of shares of its outstanding Common Stock, and in
the event of the Company being consolidated with or merged into any other
corporation.
19. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 18 hereof, no
such
9
<PAGE>
termination can affect options previously granted, provided that an Offering
Period may be terminated by the Board of Directors on any Exercise Date if the
Board determines that the termination of the Plan is in the best interests of
the Company and its shareholders. Except as provided in Section 18 hereof, no
amendment may make any change in any option theretofore granted which adversely
affects the rights of any participant. To the extent necessary to comply with
Rule 16b-3 or under Section 423 of the Code (or any successor rule or provision
or any other applicable law or regulation), the Company shall obtain shareholder
approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Purchase Periods or
Offering Periods, limit the frequency and/or number of changes in the amount
withheld during an Offering Period or Purchase Period, establish the exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars,
permit payroll withholding in excess of the amount designated by a participant
in order to adjust for delays or mistakes in the Company's processing of
properly completed withholding elections, establish reasonable waiting and
adjustment periods and/or accounting and crediting procedures to ensure that
amounts applied toward the purchase of Common Stock for each participant
properly correspond with amounts withheld from the participant's Compensation,
and establish such other limitations or procedures as the Board (or its
committee) determines in its sole discretion advisable which are consistent with
the Plan.
20. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof. Notice to
participants will be deemed given if mailed postage prepaid five (5) days after
mailing addressed to the participant's address reflected on the Company's
payroll records.
21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
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 by any of
the aforementioned applicable provisions of law.
10
<PAGE>
22. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
23. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
24. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. To the extent
permitted by Rule 16b-3 of the Exchange Act, if the Fair Market Value of the
Common Stock on any Exercise Date in an Offering Period is lower than the Fair
Market Value of the Common Stock on the Enrollment Date of such Offering Period,
then all participants in such Offering Period shall be automatically withdrawn
from such Offering Period immediately after the exercise of their option on such
Exercise Date and automatically re-enrolled in the immediately following
Offering Period as of the first day thereof.
11
<PAGE>
EXHIBIT A
FAROUDJA, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: _____
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________ hereby elects to participate in the Faroudja,
Inc. 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
and subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock Purchase
Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (not to exceed 10%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option on each Exercise Date during the Offering Period.
4. I have received a copy of the complete "1997 Employee Stock Purchase Plan."
I understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that the
grant of the option by the Company under this Subscription Agreement is
subject to obtaining shareholder approval of the Employee Stock Purchase
Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse Only):
______________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated
for federal income tax purposes as having received ordinary income at the
time of such disposition in an amount equal
A-1
<PAGE>
to the excess of the Fair Market Value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE
OF ANY DISPOSITION OF SHARES AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL
STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE
DISPOSITION OF THE COMMON STOCK. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to meet
any applicable withholding obligation including any withholding necessary
to make available to the Company any tax deductions or benefits
attributable to sale or early disposition of Common Stock by me. If I
dispose of such shares at any time after the expiration of the 2-year
holding period, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition,
and that such income will be taxed as ordinary income only to the extent of
an amount equal to the lesser of (1) the excess of the Fair Market Value of
the shares at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the Fair Market Value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
A-2
<PAGE>
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan.
NAME: (Please print)
----------------------------------------------
(First) (Middle) (Last)
- ------------------ ----------------------------------------------
Relationship
----------------------------------------------
(Address)
NAME: (Please print)
----------------------------------------------
(First) (Middle) (Last)
- ------------------ ----------------------------------------------
Relationship
----------------------------------------------
(Address)
Employee's Social
Security Number:
----------------------------------------------
Employee's Address:
-------------------------
-------------------------
-------------------------
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
--------- ---------------------------------
Signature of Employee
---------------------------------
Spouse's Signature (If beneficiary
other than spouse)
A-3
<PAGE>
EXHIBIT B
FAROUDJA, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Faroudja, Inc.
1997 Employee Stock Purchase Plan which began on ____________, 19___ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Purchase Period and/or
Offering Period will be automatically terminated. The undersigned understands
further that no further payroll deductions will be made for the purchase of
shares in the current Offering Period and the undersigned shall be eligible to
participate in succeeding Offering Periods only by delivering to the Company a
new Subscription Agreement.
Name and Address of Participant:
--------------------------------
--------------------------------
--------------------------------
Signature:
-------------------------------
Date:
--------------------------
B-1
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of July 8, 1996 between Faroudja
Laboratories, Inc., a California corporation with offices at 750 Palomar Avenue,
Sunnyvale, CA 94086 (the "Company") and Michael J. Moone, residing at 457 Walsh
Road, Atherton, CA 94025 ("Employee").
The Company desires to engage Employee to perform services for the Company
and Employee desires to perform such services, on the terms and conditions
hereinafter set forth.
1. TERM. The Company agrees to employ Employee, and Employee agrees to
serve, on the terms and conditions of this Agreement for a period commencing on
July 8, 1996 and ending four years from such starting date, or such shorter
period as may be provided for herein. The period during which Employee is
employed hereunder is hereinafter referred to as the "Employment Period."
2. DUTIES AND SERVICES. During the Employment Period, Employee shall be
employed in the business of the Company as President and Chief Executive
Officer. Employee shall serve as a member of the Company's Board of Directors
and be a member of the Company's Executive Committee. In performance of his
duties, Employee shall be subject to the direction of the Board of Directors of
the Company. Employee agrees to his employment as described in this Section 2
and agrees to devote all of his working time and efforts to the performance of
his duties under this Agreement, excepting disabilities, illness, and vacation
time as provided by Section 3(d). In performing his duties hereunder, Employee
shall be available for reasonable travel as the needs of the business require.
3. COMPENSATION AND OTHER BENEFITS
(a) As Compensation for his services hereunder, the Company shall pay
Employee, during the Employment Period, a salary payable in equal semi-monthly
installments at the annual rate of $175,000.
(b) Employee's salary rate shall be reviewed annually by the Board of
Directors. Upon such review, Employee's salary may be adjusted upwards to such
rate as shall be considered appropriate and fixed by the Board of Directors,
taking into account economic conditions, competitive conditions within the
industry, the financial condition, operations, and prospects of the Company, and
Employee's performance and salary. In addition, Employee shall be entitled to
receive such bonuses as the Board of Directors of the Company may, in its sole
discretion, award from time to time, based upon specific criteria and
achievements (including but not limited to profit, cash flow, growth,
achievement of specific business objectives, etc.).
1
<PAGE>
(c) Employee shall be entitled to participate in all group health and
insurance programs and all other fringe benefit or retirement plans or
additional compensation which the Company may hereafter, in its sole and
absolute discretion, elect to make available to its employees generally,
provided Employee meets the qualifications therefor, but the Company shall not
be required to establish any such program or plan or otherwise to pay any such
additional compensation. The Company currently has a 401K Plan in effect and
covers approximately 80% of the monthly premium of the Employee's Blue Cross
medical and dental insurance policy.
(d) Employee shall be entitled to 10 days of vacation per year of the
Employment Period and 5 days period sick leave.
(e) Employee shall be granted 500,000 stock options in the Company's
Stock Option Plan at an exercise price of $2.65 per share. Employee shall also
be granted 500,000 stock options in Faroudja Images, Inc. Stock Option Plan at
an exercise price of $1.00 per share. Both option plans are "qualified" plans
and vest over a four year period in equal installments.
4. EXPENSES. Employee shall be entitled to reimbursement for all
reasonable travel and other out-of-pocket expenses necessarily incurred in the
performance of his duties hereunder, upon submission and approval of written
statements and bills in accordance with the then regular procedures of the
Company.
5. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE. Employee represents and
warrants to the Company that (a) Employee is under no contractual or other
restriction or obligation which is inconsistent with the execution of this
Agreement, the performance of his duties hereunder, or the other rights of the
Company hereunder and (b) Employee is under no physical or mental disability
that would hinder his performance of duties under this Agreement.
6. NON-COMPETITION. In view of the unique and valuable services it is
expected Employee will render to the Company, Employee's knowledge of the
customers, trade secrets, and other proprietary information relating to the
business of the Company and its customers and suppliers and similar knowledge
regarding the Company it is expected Employee will obtain, and in consideration
of the compensation to be received hereunder and at the shares of stock of the
Company being sold to Employee, Employee agrees that he will not during the
period he is employed full-time by the Company under this Agreement or otherwise
Participate in (hereinafter defined in this Section 6) any other business or
organization, whether or not such business or organization now is or shall then
be competing with or of a nature similar to the business of the Company;
provided, however, that the provisions of this Section 6 will not be deemed
breached merely because Employee owns not more than 1% of the outstanding common
stock of a corporation, if, at the time its acquisition by Employee, such stock
is listed on a national securities exchange, is reported on NASDAQ, or is
regularly traded in the over-the-counter market
2
<PAGE>
by a member of a national securities exchange. The term "Participate In" shall
mean: "directly or indirectly, for his own benefit or for, with or through any
other person, firm, or corporation, own, manage, operate, control, loan money
to, or participate in the ownership, management, operation, or control of, or be
connected as a director, officer, employee, partner, consultant, agent,
independent contractor, or otherwise with, or acquiesce in the use of his name
in." Employee will not directly or indirectly reveal the name of, solicit or
interfere with, or endeavor to entice away from the Company any of its
suppliers, customers, or employees. Employee will not directly or indirectly
employ any person who was an employee of the company within a period of one year
after such person leaves the employ of the Company. Since a breach of the
provisions of this Section 6 could not adequately be compensated by money
damages, the Company shall be entitled, in addition to any other right and
remedy available to it, to an injunction restraining such breach or a threatened
breach, and in either case no bond or other security shall be required in
connection therewith. Employee agrees that the provisions of this Section 6 are
necessary and reasonable to protect the Company in the conduct of its business.
If any restriction contained in this Section 6 shall be deemed to be invalid,
illegal, or unenforceable by reason of the extent, duration, or geographical
scope hereof, or otherwise, then the court making such determination shall have
the right to reduce such extent, duration, geographical scope, or other
provisions hereof, and in its reduced from such restriction shall then be
enforceable in the manner contemplated hereby.
7. PATENTS, ETC. Any interest in patents, patent applications,
inventions, technological innovations, copyrights, copyrightable works,
developments, discoveries, designs, and processes which Employee now or
hereafter during the period he is employed by the Company under this
Agreement or otherwise and for six months thereafter may own, conceive of, or
develop and either relating to the fields in which the Company may then be
engaged or contemplates (as demonstrated by the records of the Company) being
engaged or conceived of or developed utilizing the time, material,
facilities, or information of the Company ("Such Inventions") shall belong to
the Company; as soon as Employee owns, conceives of, or develops any Such
Invention, he agrees immediately to communicate such fact in writing to the
Secretary of the Company, and without further compensation, but at the
Company's expense (except as noted in clause (a) of this Section 7),
forthwith upon request of the Company, Employee shall execute all such
assignments and other documents (including applications for patents,
copyrights, trademarks, and assignments thereof) and take all such other
action as the Company may reasonably request in order (a) to vest in the
Company all Employee's right, title, and interest in and to Such Inventions,
free and clear of liens, mortgages, security interests, pledges, charges, and
encumbrances arising from the acts of Employee ("Liens") (Employee to take
such action, at his expense, as is necessary to remove all such Liens) and
(b) if patentable or copyrightable, to obtain patents or copyrights
(including extensions and renewals) therefor in any and all countries in such
name as the company shall determine.
8. CONFIDENTIAL INFORMATION. All confidential information which Employee
may now possess, may obtain during or after the Employment Period, or may create
prior to the
3
<PAGE>
end of the period he is employed by the Company under this Agreement or
otherwise relating to the business of the Company or of any customer or supplier
of the Company shall not be published, disclosed, or made accessible by him to
any other person, firm, or corporation either during or after the termination of
his employment or used by him except during the Employment Period in the
business and for the benefit of the Company, in each case without the prior
written permission of the Company. Employee shall return all physical evidence
of such confidential information to the Company prior to or at the termination
of his employment. As used in this Section 8, "confidential information" shall
mean any information except that information competitors or which is generally
available to the public.
9. LIFE INSURANCE. If requested by the Company, Employee shall submit to
such physical examinations and otherwise take such actions and execute and
deliver such documents as may be reasonably necessary to enable the Company, at
its expense and for its own benefit, to obtain life insurance on the life of
Employee. Employee has no reason to believe that his life is not insurable with
a reputable insurance company at prevailing rates.
10. TERMINATION. Notwithstanding anything herein contained, if on or
after the date hereof and prior to the end of the Employment Period:
(a) Either (i) Employee shall be physically or mentally incapacitated
or disabled or otherwise unable fully to discharge his duties hereunder for a
period of three months, as determined by the Board of Directors, (ii) Employee
shall be convicted of a crime of moral turpitude or a felony, (iii) Employee
shall breach any fiduciary duty to the Company, or (iv) Employee shall breach
any material term of this Agreement and fail to correct such breach within 10
days after notice by the Company to Employee of his commission of the same,
then, and in each such case, the Company shall have the right to give notice of
termination of Employee's services hereunder as of a date (not earlier than 10
days from such notice) to be specified in such notice and this Agreement shall
terminate on the date so specified, or
(b) If the Employee shall die, then this Agreement shall terminate
on the date of Employee's death, whereupon Employee or his estate, as the
case may be, shall be entitled to receive only his compensation at the rate
then provided pursuant to Sections 3(a) and 3(b) to the date on which
termination shall take effect; provided, however, that if this Agreement is
terminated as a result of Employee's death, and if the Company shall not at
the date of such death be providing life insurance coverage for the benefit
of Employee's estate, Employee's estate shall be entitled to receive a
payment in the amount of three months' compensation at the rate then provided
pursuant to Section 3(a) and 3(b). Nothing contained in this Section 10
shall be deemed to limit any other right the Company may have to terminate
Employee's employment hereunder upon any ground permitted by law.
4
<PAGE>
11. SURVIVAL. The covenants, agreements, representations, and warranties
contained in or made pursuant to this Agreement shall survive Employee's
termination of employment as provided herein.
12. ENTIRE AGREEMENT: MODIFICATION. This Agreement sets forth the entire
understanding of the parties with respect to the subject matter hereof,
supersedes all existing agreements between them concerning such subject matter,
and may be modified only by a written instrument duly executed by each party.
13. NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or delivered against receipt to the party to whom it
is to be given at the address of such party set forth in the preamble to this
Agreement (or to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 14). Notice to the estate of
Employee shall be sufficient if addressed to Employee as provided in this
Section 14. Any notice or other communication given by certified mail shall be
deemed given three days after the time of certification thereof, except for a
notice changing a party's address which shall be deemed given at the time of
receipt thereof.
14. WAIVER. Any waiver by either party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term
of this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing,
signed by the party giving such waiver.
15. BINDING EFFECT. Employee's rights and obligations under this
Agreement shall not be transferable by assignment or otherwise, such rights
shall not be subject to commutation, encumbrance, or the claims of Employee's
creditors, and any attempt to do any of the foregoing shall be void. The
provisions of this Agreement shall be binding upon and inure to the benefit of
Employee and his heirs and personal representatives, and shall be binding upon
and inure to the benefit of the Company and its successors and those who are its
assigns under Section 11.
16. NO THIRD PARTY BENEFICIARIES. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement (except as provided in Section 16).
17. HEADINGS. The headings in this Agreement are solely for the
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
5
<PAGE>
18. COUNTERPARTS; GOVERNING LAW. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. It shall be
governed by and construed in accordance with the laws of the State of
California, without giving effect to the conflict of laws.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
FAROUDJA LABORATORIES, INC.
By: /s/ Michael J. Moone
---------------------------------------
August 23, 1996
6
<PAGE>
EMPLOYMENT AGREEMENT
WITH
YVES C. FAROUDJA
DATED MARCH 8, 1996
Faroudja Laboratories, Inc. (the "Employer"), a California
corporation, and Yves C. Faroudja (the "Executive") agree as follows:
1. EMPLOYMENT AND DUTIES. Subject to section 11(b), the Employer
shall employ the Executive, and the Executive shall serve the Employer, as
president, chief executive officer and chief technical officer during the term
set forth in section 2. As president and chief executive officer and subject to
section 11(b), the Executive shall, subject to the ultimate control of the board
of directors of the Employer, be in charge of all hiring and firing decisions.
The Executive shall use his best efforts to promote the interests of the
Employer, and he shall perform his duties faithfully and diligently, consistent
with sound business practices. Subject to the following sentence, the Executive
shall devote no less than half of his business time during the first year of the
term of this agreement and no less than one-third of his business time during
the second year of the term of this agreement to the performance of his duties
for the Employer, and the Executive shall not engage in any other business
activities (whether or not competitive with business of the Employer) that
interfere with the performance of his duties under this agreement. The
Executive shall serve as a member of board of directors of Faroudja Research
Enterprises Inc. ("FRE") and may engage in business activities on behalf of FRE.
2. TERM OF EMPLOYMENT. The term of the Executive's employment under
this agreement shall commence on the date of this agreement and shall continue
until the close of business on the second anniversary of this agreement, except
that the Executive's employment shall be subject to earlier termination under
section 4 and, with the mutual agreement of the parties, shall be subject to
extension after the second anniversary of this agreement.
3. COMPENSATION.
(a) As compensation for all services the Executive renders
during his employment under this agreement the Employer shall pay the Executive
a salary at the rate of $100,000 for the first year of the term of this
agreement and $66,600 for the second year of the term of this agreement. The
Executive's salary shall be payable in equal installments at least twice a
month.
(b) Notwithstanding the foregoing, if pursuant to an agreement
between the Executive and the Employer, the Executive devotes more than one-half
of his business time
<PAGE>
during the first year of the term of this agreement or more than one-third of
his business time during the second year of the term of this agreement to the
performance of his duties for the Employer, the Executive's salary shall be
increased proportionately.
4. EXPENSES. During the Executive's employment under this
agreement, the Employer shall reimburse the Executive for reasonable business
expenses incurred by him in the performance of his duties on behalf of the
Employer, FRE or any of their affiliates upon presentation of vouchers or other
evidence of such expenses in accordance with the policies of the Employer.
5. FRINGE BENEFITS. During the Executive's employment under this
agreement, the Executive shall be entitled to those fringe benefits and
perquisites (including medical and dental group insurance and participation in
the Employer's 401(k) plan) that are consistent with the Employer's practices in
the past with respect to the Executive or those that are provided to other
senior executives of the Employer generally.
6. AUTOMOBILE. During the Executive's employment under this
agreement, the Executive shall have use, at no charge, of the company car that
he presently uses (license number 3NDV219). If the Executive's employment under
this agreement is terminated other than for cause, or upon expiration of this
agreement, the Employer shall transfer to the Executive title to that car at no
charge to the Executive.
7. KEY MAN LIFE INSURANCE. During the Executive's employment under
this agreement, the Employer may at any time and from time to time obtain
insurance on the Executive's life in such amounts and in such forms as the
Employer may in its sole discretion determine (it being understood that the
Executive shall have no interest in such insurance and, if the Employer so
requests, the Executive shall submit to such medical examinations, supply such
information and execute such documents as may reasonably be required to obtain
such insurance).
8. LOCATION. During the term of the Executive's employment under
this agreement, the Employer's executive offices shall be located in Sunnyvale,
California; PROVIDED that the Executive may manage the Employer's sales and
research from an office to be established in France, and PROVIDED FURTHER, that
the Executive may be required to travel for business purposes for reasonable
lengths of time.
9. TERMINATION.
(a) The Executive's employment shall terminate upon his death,
and may be terminated at any earlier time at the option of the Employer (upon
notice given by the Employer to the Executive as much in advance of the
termination as the Employer considers practicable in the circumstances). On the
termination of the Executive's employment as a result of his death or at the
Employer's option as a result of the Executive's disability (as defined below)
or for cause (as defined below), the Employer shall pay the Executive (or his
named
2
<PAGE>
beneficiary or estate) the amount of his salary and other benefits accrued to
the date of termination (with no reduction for any period of disability prior to
termination). On the termination of the Executive's employment at the
Employer's option for any reason other than as a result of disability or for
cause, the Employer shall continue to pay the Executive (or his named
beneficiary or estate) the amount of his salary and other benefits in accordance
with this agreement for the remaining employment term specified in section 2, as
and when the same would have otherwise become due and payable. Except as
specifically provided in this agreement, the Employer shall have no other
obligation to the Executive (or his named beneficiary or estate).
(b) As used in this agreement,
(i) the term "disability" means the failure of the
Executive substantially to perform his duties and obligations under this
agreement for 90 consecutive days because of any mental or physical incapacity,
as determined by a physician mutually agreed upon the by the Employer and the
Executive, or if, after 30 days, they are unable to agree about the identity of
the physician, by a physician selected by the American Arbitration Association,
and
(ii) the term "cause" means (A) any action by the Executive
that constitutes dishonesty, a violation of law or a fraud against the Employer
or any of its affiliates, (B) the conviction of the Executive for a felony, (C)
willful misconduct, drunkenness or abuse of any controlled substance by the
Executive (but only if such misconduct, drunkenness or abuse adversely affects
the Executive's performance under this agreement) or (D) any material breach by
the Executive of this agreement or any other written agreement between him, on
the one hand, and the Employer, Faroudja Images, Inc. ("Images") or any of their
affiliates, on the other hand executed and delivered on or as of the date of
this agreement.
10. NON-COMPETITION; CONFIDENTIALITY.
(a) The Executive shall not at any time during his employment
under this agreement, for any reason, engage or become interested (as owner,
lender, stockholder, partner, director, officer, employee, consultant or
otherwise) in any business that is in competition with the business then
conducted by the Employer, FRE or any of their affiliates, PROVIDED that the
foregoing shall not prohibit the Executive from owning as a passive investment
not more than ten percent of the outstanding securities of any class of any
publicly-held company.
(b) The Executive shall not at any time during his employment
under this agreement or for a period of two years thereafter hire on his own
behalf, or on behalf of any other enterprise, any individual who was an employee
of the Employer, FRE or any of their affiliates at any time during the one-year
period immediately preceding the termination of the Executive's employment by
the Employer.
3
<PAGE>
(c) The Executive shall at all times during his employment and
thereafter hold in confidence all Confidential Information (as defined below)
that may have come or may come into his possession or within his knowledge
concerning the products, services, processes, businesses, suppliers, customers
and clients of the Employer, FRE or any of their affiliates. Except as
otherwise provided in the license agreement (the "License Agreement") dated this
date among the Executive, the Employer and FRE, the Executive agrees that
neither he nor any person or enterprise controlled by him will for any reason
directly or indirectly, for himself or any other person, use or disclose any
trade secrets, proprietary or confidential information, inventions, processes or
procedures, patents, trademarks, trade names, customer lists, service marks,
service names, copyrights, applications for any of the foregoing or licenses or
other rights in respect thereof (collectively, "Confidential Information"),
owned or used by, or licensed to, the Employer, FRE or any of their affiliates,
provided that the Executive may disclose Confidential Information that has
become generally available to the public other than as a result of a breach of
this agreement by the Executive or pursuant to an order of a court of competent
jurisdiction or of a governmental agency, department or commission or that
arises after the fifth anniversary of this agreement. Except as otherwise
provided in the License Agreement, upon termination of his employment under this
agreement, the Executive shall promptly surrender to the Employer all documents
that contain Confidential Information and that are within his possession or
control.
(d) The Executive acknowledges that the remedy at law for breach
of section 10(a), 10(b) or 10(c) would be inadequate and that, in addition to
any other remedy the Employer may have for such a breach, the Employer shall be
entitled to an injunction restraining any such breach or threatened breach.
11. MANAGEMENT.
(a) Except as specifically provided in this agreement, nothing
in this agreement shall (i) give the Executive the right to be employed by or to
continue in the employ of the Employer or any of its affiliates or prevent the
termination of his employment by the Employer at any time, or (ii) limit the
right of the board of directors (or other governing body) of the Employer to
manage the business and affairs of the Employer.
(b) The parties acknowledge that it is their agreement that
Images will recruit additional management of the Employer, subject to the
Executive's approval, including, after consultation with the Executive, a
marketing manager and a chief executive officer. Following the recruitment of a
chief executive officer, the Executive shall cease to be president and chief
executive officer of the Employer and, during the remaining term of his
employment under this agreement, the Executive's title shall be Chairman
Emeritus, Founder and Chief Technical Officer of the Employer.
12. NOTICES. All notices and other communications under this
agreement shall be in writing and may be given by any of the following methods:
(a) personal delivery, (b) facsimile transmission, (c) registered or certified
mail, postage prepaid, return receipt
4
<PAGE>
requested or (d) overnight delivery service. Notices shall be sent to the
appropriate party at his or its address or facsimile number given below (or at
such other address or facsimile number for that party as shall be specified by
notice given under this section 12):
if to the Executive, to him at:
c/o Faroudja Laboratories, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Fax: (408) 735-8571
with a copy to:
Cooley Godward Castro Huddleson and Tatum
5 Palo Alto Square, 4th Floor
3000 El Camino Real
Palo Alto, California 94306
Attention: Andrei M. Manoliu, Esq.
Fax: (415) 857-0663
if to the Employer, to it at:
Faroudja Laboratories, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention:
Fax: (408) 735-8571
with a copy to:
--------------------------------
--------------------------------
--------------------------------
Attention:
Fax:
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or (c)
in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming the
number of pages constituting the notice have been transmitted without error. In
the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
5
<PAGE>
13. ASSIGNMENT. This agreement shall be binding upon, and inure to
the benefit of, the parties' respective successors, assigns, heirs and legal
representatives. This agreement shall be assigned to and shall inure to the
benefit of any successor to substantially all the assets and business of the
Employer as a going concern, whether by merger, consolidation, liquidation or
sale of substantially all the assets of the Employer or otherwise, and the
Employer shall cause its successors to assume its obligations under this
agreement (but no such assignment shall relieve it of its obligations under this
agreement).
14. SEVERABILITY. If any provision of this agreement, or the
application of any provision to any person or circumstance shall for any reason
or to any extent be invalid or unenforceable, the remainder of this agreement
and the application of that provision to other persons or circumstances shall
not be affected, but shall be enforced to the full extent Permitted by law.
15. WAIVER. The failure of a party to insist upon strict adherence
to any term of this agreement on any occasion shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this agreement. Any waiver must be in writing.
16. GOVERNING LAW. This agreement shall be governed by and construed
in accordance with the law of the state of California applicable to agreements
made and to be performed wholly in California.
17. ARBITRATION. All claims, disputes and other matters as to which
the parties disagree arising out of this agreement, or the interpretation or
breach or alleged breach of this agreement, shall be decided by final and
binding arbitration in accordance with the Rules of Practice and Procedure of
the Judicial Arbitration and Mediation Services/Endispute ("JAMS") then in
effect, unless the parties mutually agree otherwise. The arbitration shall be
conducted before a retired judge selected by agreement of the parties from the
JAMS panel. If the parties cannot agree upon the arbitrator, JAMS will provide
a list of three available retired judges and each party may strike one. The
remaining judge will serve as arbitrator. The arbitration shall be held in San
Jose, California at a location selected by the arbitrator. This agreement to
arbitrate shall be specifically enforceable under applicable law in any court of
competent jurisdiction. Notice of the demand for arbitration shall be filed in
writing with the other party to this agreement and with JAMS. The demand for
arbitration shall be made within a reasonable time after the claim, dispute or
other matter in question has arisen, and in no event shall it be made after the
date when institution of legal or equitable proceedings based on such claim,
dispute or other matter in question would be barred by the applicable
contractual, or other, statute limitations. It is the parties' objective to
expedite the arbitration proceedings by placing the following limitations on
discovery: (a) each party may propound only one interrogatory requesting the
name, business affiliation and address of each witness to be called at the
arbitration hearing; (b) on a date to be determined at the pre-hearing
conference, each party may serve one request for the production of documents,
the requests shall be limited to 30, including subparts, and the documents are
to be exchanged 30 days later; and (c) each party may depose
6
<PAGE>
two witnesses. Each deposition must be concluded within four hours and all
depositions must be completed within 30 days of the pre-hearing conference. Any
party deposing an opponent's expert must pay the expert's fee for attending the
deposition. The arbitration proceedings shall remain confidential. Any
monetary award of the arbitrators may include interest at the prime rate as
published from time to time by The Chase Manhattan Bank, N.A., plus one percent,
which interest shall accrue from the date the claim, dispute or other matter in
question was rightfully due and payable under this agreement until the date the
award is paid to the prevailing party. There shall be no restriction on the
power of the arbitrator to award punitive damages in the appropriate case. The
award rendered by the arbitrator shall be final and judgment may be entered in
accordance with applicable law and in any court having jurisdiction thereof.
Each party shall pay the fees of its own attorneys, expenses of witnesses and
all other expenses connected with the presentation of such party's case. The
cost of the arbitration, including the cost of the record or transcripts of the
record, if any, administrative fees and all other fees involved, shall be shared
equally, unless the arbitrator otherwise directs.
Notwithstanding anything to the contrary in this section 17, this
section 17 shall not govern any claim, dispute or other matter as to which the
parties disagree arising out of the License Agreement.
18. COUNTERPARTS. This agreement may be executed in counterparts,
each of which shall be considered an original, but both of which together shall
constitute the same instrument.
FAROUDJA LABORATORIES, INC.
By:/s/ Yves C. Faroudja
------------------------------------------
Name:
Title:
/s/ Yves C. Faroudja
---------------------------------------------
Yves C. Faroudja
The undersigned hereby acknowledges section 11(b) of the foregoing agreement.
FAROUDJA IMAGES, INC.
By:/s/ Kevin B. Kimberlin
------------------------------------------
Kevin B. Kimberlin
Secretary
7
<PAGE>
REGISTRATION AND SHAREHOLDERS RIGHTS AGREEMENT
MARCH 7,1997
The parties to this Registration Rights Agreement (the "Agreement") are
Faroudja, Inc., a Delaware corporation ("FI"), Yves Faroudja and Isabell
Faroudja (collectively, "Y&I" or "Shareholder") and Adelson Investors, LLC,
Images Partners, LP and Faroudja Images Investors, LLC (collectively, the "Other
FI Shareholders").
WHEREAS, pursuant to the merger of Faroudja Research Enterprises, Inc., a
California corporation ("FRE") with and into Faroudja Laboratories, Inc., a
California corporation ("FLI"), and the subsequent merger of Faroudja
Acquisition, Inc., a California corporation and indirect wholly-owned subsidiary
of FLI, with and into FLI (collectively, the "Mergers"), with FLI surviving the
mergers as a wholly-owned subsidiary of FI, Y&I, FRE, FLI and Faroudja Images,
Inc., a Delaware corporation ("FII") entered into that certain Mutual
Termination of Shareholders Agreement, dated December 31, 1996, terminating that
certain Shareholders Agreement entered into on March 8, 1996, by and between
FII, FLI, FRE and Y&I ("Shareholders Agreements");
WHEREAS, FII liquidated effective December 31, 1996 and the assets of FII,
including options to purchase certain shares of FLI and FRE of Y&I, were
distributed to Roger K. Baumberger as liquidating trustee for Faroudja Images,
Inc. ("Liquidating Trustee"), which were subsequently transferred at a later
date to the Other FI Shareholders of FII;
WHEREAS, Y&I, FI, FII and each of the three Other FI Shareholders entered
into an Amended and Restated Option to Purchase Shares of Common Stock of
Faroudja, Inc. ("FI Options") as of March 7, 1997, restating certain rights of
FII and Y&I, and confirming the transfer by FII to the Liquidating Trustee and
subsequently to the Other FI Shareholders; and
WHEREAS, the parties desire to enter into this Agreement to restate and
amend certain registration and other rights granted to Y&I, which rights were
originally set forth in the Shareholders Agreement;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS. As used in this Section 1, the following terms shall
have the following meanings:
(a) "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents in compliance
<PAGE>
with the Securities Act and the declaration or ordering of effectiveness of such
registration statement or document by the SEC;
(b) "Registrable Securities" means (i) the Common Stock held by Y&I,
and (ii) any Common Stock of FI issued as a dividend or other distribution with
respect to, or in exchange for or in replacement of such Common Stock, excluding
in all cases, however, any Registrable Securities sold by a Shareholder in a
transaction in which its registration rights under this Agreement are not
assigned;
(c) "SEC" shall mean the Securities and Exchange Commission; and
(d) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the SEC
thereunder, all as the same shall be in effect at the time.
1.2 REGISTRATION.
(a) FI shall use all reasonable efforts to effect an initial
registered public offering of its stock pursuant to a registration statement
filed with the SEC under the Securities Act ("IPO"), and the parties shall
cooperate in structuring any such public offering.
(b) In the event that any FI shareholders are permitted to sell stock
in any registered public offering that is proposed at any time during the
five-year period commencing 6 months after the effective date of an IPO, FI
shall promptly give Y&I written notice thereof and shall allow Y&I to have
included in such registration all the Registrable Securities Y&I specify in a
written request within thirty (30) days following notice; PROVIDED that, if the
total number of shares requested to be registered for sale by FI shareholders,
including Y&I, to be included in the offering exceeds the number of shares to be
included other than by FI that the underwriters reasonably believe compatible
with the success of the offering, then the number of selling shareholders'
shares that may be included in the offering shall be apportioned pro rata among
the selling shareholders according to the total number of shares entitled to be
included in the offering owned by each selling shareholder pursuant to
registration rights granted by FI to such selling shareholder.
(c) If any officers or directors are permitted to sell any shares in
the IPO, Shareholder will be provided a right to sell shares on the same basis,
subject to the other terms of this Agreement.
(d) In connection with an IPO, the Shareholder agrees that, without
the prior written consent of FI, the Shareholder shall not offer, sell, contract
to sell or otherwise dispose of any Registrable Securities for and during the
period beginning on the date that an underwriting agreement is executed with
respect to such offering and continuing to and including 180 days after the date
of the prospectus included in the registration statement under the
2
<PAGE>
Securities Act for such offering; provided that all officers, directors and
Shareholders owning 1% or more of FI's shares enter into a similar agreement.
1.3 OBLIGATIONS OF FI. When required under this Agreement to effect the
registration of the Registrable Securities, FI shall, as expeditiously as
reasonably possible:
(a) prepare and file with the SEC a registration statement or similar
documents (the "Registration Statement') with respect to all Registrable
Securities, other than any Registrable Securities excluded pursuant to section
1.2(b), and use its best efforts to keep the Registration Statement effective
for a period of the earlier of One Hundred Twenty (120) days or until Y&I have
completed the distribution described in the Registration Statement, which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(b) prepare and file with the SEC such amendments (including post
effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective during the period
required by Section 1.3(a), and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by the
Registration Statement;
(c) furnish promptly to the Shareholder such numbers of copies of a
prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as the Shareholder may reasonably request in writing in
order to facilitate the disposition of the Registrable Securities;
(d) use its best efforts to register and qualify the securities
covered by the Registration Statement under such securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by the Shareholder, and to
prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions as may
be necessary to maintain such registration and qualification in effect at all
times during the period required by Section 1.3(a), and to take all other
actions necessary or advisable to enable the disposition of such securities in
such jurisdictions, provided that FI shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions or to
provide any undertaking or make any change in its charter or bylaws that its
Board of Directors determines to be contrary to the best interests of FI and its
stockholders;
(e) enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering. The Shareholder
3
<PAGE>
hereby agrees to enter into and perform its customary obligations under any such
agreement, including, without limitation, customary indemnification and
contribution obligations;
(f) notify the Shareholder, at any time when a prospectus relating to
Registrable Securities covered by the Registration Statement is required to be
delivered under the Securities Act, of the happening of any event as a result of
which the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing. FI shall promptly
amend or supplement the Registration Statement to correct any such untrue
statement or omission;
(g) notify the Shareholder of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. FI shall make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities and other FI shares included in such registration to
review the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing, and shall not file any document
in a form to which such counsel reasonably objects;
(i) at the request of the Shareholder, furnish on the date that
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Subscription Agreement (i) an opinion,
dated such date, of the counsel representing FI for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters and (ii) a
letter, dated such date, from the independent certified public accountants of
FI, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering, addressed
to the underwriters;
(j) make available for inspection by the Shareholder, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by the Shareholder or any such
underwriter, all pertinent financial and other records, corporate documents and
properties of FI and cause FI's officers, directors and employees to supply all
information reasonably requested by the Shareholder or any such underwriters in
connection with the registration;
(k) if the Common Stock is then listed on a national securities
exchange, use its best efforts to cause the Registrable Securities to be listed
on such exchange. If the Common Stock is not then listed on a national
securities exchange, use its best efforts to facilitate the reporting of the
Registrable Securities on NASDAQ;
4
<PAGE>
(l) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(m) take all actions reasonably necessary to facilitate the timely
preparation and delivery of certificates (not bearing any legend restricting the
sale or transfer of such securities) representing the Registrable Securities to
be sold pursuant to the Registration Statement and to enable such certificates
to be in such denominations and registered in such names as the Shareholder or
any underwriters may reasonably request; and
(n) take all other reasonable actions necessary to expedite and
facilitate the registration of the Registrable Securities pursuant to the
Registration Statement.
1.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of FI to take any action pursuant to this Section 1 with respect to
the Shareholder that the Shareholder shall furnish to FI such information
regarding itself, the Registrable Securities held by it, and the intended method
of disposition of such securities as shall be reasonably required to effect the
registration of the Registrable Securities and shall execute such documents in
connection with such registration as FI may reasonably request.
1.5 EXPENSES OF REGISTRATION. All expenses other than underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to this Section 1, including, without limitation, all
registration, listing, filing and qualification fees, printers and accounting
fees, the fees and disbursements of counsel for FI and the reasonable fees and
disbursements of the firm of counsel designated in accordance with Section
1.3(h) shall be borne by FI.
1.6 INDEMNIFICATION. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
(a) To the extent permitted by law, FI shall indemnify and hold
harmless the Shareholder, the directors, if any, of the Shareholder, the
officers, if any, of the Shareholder who sign the Registration Statement, each
person, if any, who controls the Shareholder, any underwriter (as defined in the
Securities Act) for the Shareholder and each person, if any, who controls any
such underwriter within the meaning of the Securities Act or the Securities
Exchange Act of 1934 (the "1934 Act"), against any losses, claims, damages,
expenses or liabilities (joint or several) to which any of them many become
subject under the Securities Act, the 1934 Act or otherwise, insofar as such
losses, claims, damages, expenses or liabilities (or actions or proceedings,
whether commenced or threatened, in respect thereof arise out of or are based
upon any of the following statements, omissions or violations (collectively, a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading
or (iii) any violation or
5
<PAGE>
alleged violation by FI of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act or any state securities law, and FI shall reimburse the Shareholder
and each such underwriter or controlling person, promptly as such expenses are
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; PROVIDED, HOWEVER, that the indemnity agreement
contained in this Section 1.6(a) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action, if such settlement is
effected without the consent of FI, which consent shall not be unreasonably
withheld, conditioned or delayed, nor shall FI be liable in any such case for
any such loss, claim, damage, liability or action to the extent that it arises
out of or is based upon a Violation that occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by the Shareholder, directors and officers of the
Shareholder or any such underwriter or controlling person, as the case may be.
Such indemnify shall remain in full force and effect regardless of any
investigation made by or on behalf of the Shareholder or any such underwriter or
controlling person or FI and shall survive the transfer of the Registrable
Securities by the Shareholder.
(b) To the extent permitted by law, the Shareholder shall indemnify
and hold harmless FI, each of its directors, each of its officers who have
signed the Registration Statement, each person, if any, who controls FI within
the meaning of the Securities Act or the 1934 Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such holder or underwriter,
against any losses, claims, damages or liabilities (jointly or severally) to
which any of them may become subject under the Securities Act, the 1934 Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by the Shareholder expressly for use in connection with such
registration; and the Shareholder shall reimburse any legal or other expense
reasonably incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this Section 1.6(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action, if such
settlement is effected without the consent of the Shareholder, which consent
shall not be unreasonably withheld, conditioned or delayed; and PROVIDED
FURTHER, that the Shareholder shall be liable under this Section 1.6(b) for only
that amount of losses, claims, damages and liabilities as does not exceed the
proceeds to the Shareholder as a result of the sale of Registrable Securities
pursuant to such registration.
(c) Promptly after receipt by an indemnified party under this Section
1.6 of notice of the commencement of any action (including any governmental
action), such indemnified party shall, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
that the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to
6
<PAGE>
assume control of the defense thereof with counsel mutually satisfactory to the
parties; provided, however, that an indemnified party shall have the right to
retain its own counsel, with the fees and expenses to be paid by the
indemnifying party, if, in the reasonable opinion of counsel for the
indemnifying party, representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.6 only to the extent prejudicial to its
ability to defend such action, but the omission so to deliver written notice to
the indemnifying party shall not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 1.6. The
indemnification required by this Section 1.6 shall be made by periodic payments
of the amount thereof during the course of the investigation or defense,
promptly as such expense, loss, damage or liability is incurred, and upon
receipt by the indemnifying party of such documentation as it may reasonably
request.
(d) To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under this Section 1.6 to the extent permitted by law, PROVIDED that (i) no
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in this
Section 1.6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation and (iii) contribution by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
1.7 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause FI to register
securities and related rights granted Shareholder under this Section 1 may not
be assigned except: (i) to a purchaser of more than 100,000 shares of the
Common Stock of FI (as adjusted for stock splits and the like) purchased from
Shareholder ,(ii) to an entity controlled by Shareholder, or (iii) to any donees
or heirs of Shareholder pursuant to gift, will or otherwise; provided, that the
FI receives notice within twenty (20) days following such assignment.
2. SHARE CAPITALIZATION. Prior to an IPO by FI, the parties hereto agree that
the capitalization of FI and the respective share ownership of the parties to
this Agreement shall remain the same as set forth in Exhibit "A" attached
hereto, except that the three (3) FI Options may be exercised. The parties to
this Agreement further agree that prior to an initial public offering of the
common stock of FI, at some later date, the share capitalization of FI cannot be
changed without the prior written consent of FI and Yves Faroudja.
7
<PAGE>
3. ELECTION OF DIRECTORS.
3.1 Until the fifth anniversary of this Agreement, the Other FI
Shareholders shall use their reasonable efforts (including, without limitation,
(i) requesting management and the directors of the Company to nominate such
party for election as a director and (ii) voting all their shares for such
person) (a) to cause Yves Faroudja to be elected to the board of directors of FI
and (b) to cause Isabell Faroudja to be elected to fill any vacancy in the board
of directors of FI that is created by the resignation, incapacity or death of
Yves Faroudja.
3.2 Until the fifth anniversary of this Agreement, FI shall allow Isabell
Faroudja to attend as a non-voting observer each meeting of FI's board of
directors.
3.3 Sections 3.1 and 3.2 above shall only remain in effect so long as Y&I
beneficially own at least 5% of the issued and outstanding common stock of FI.
4. NOTICES. All notices and other communications under this agreement shall
be in writing and may be given by any of the following methods: (a) personal
delivery, (b) facsimile transmission, (c) registered or certified mail, postage
prepaid, return receipt requested or (d) overnight delivery service. Notices
shall be sent to the appropriate party at its, his or her address or facsimile
number given below (or at such other address or facsimile number for that party
as shall be specified by notice given under this section 2):
if to FI, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Moone, President
Fax: (408) 735-8571
with a copy to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2400
Los Angeles, California 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
8
<PAGE>
if to Y&I, to him or her at:
Yves Faroudja
c/o Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Fax: (408) 735-8571
with a copy to:
Coudert Brothers
Four Embarcadero Center, Suite 3300
San Francisco, California 94111
Attention: Greg L. Pickrell
Fax: (415) 986-0320
if to any of the Other FI Shareholders, to it at:
the address of such party set forth on the
signature page of this Agreement
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or (c)
in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming that the
number of pages constituting the notice have been transmitted without error. In
the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
5. GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the law of the State of California applicable to agreements made
and to be performed wholly in California.
6. SEPARABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of this agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
7. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be considered an original, but all of which together shall
constitute the same instrument.
8. BINDING. To the extent permitted by applicable law, Sections 2 and 3 of
this Agreement shall be binding upon any person who acquires any shares of FI
from the Other FI Shareholders (and successor shareholders) by any means other
than by sale to the public in open market
9
<PAGE>
transactions. The Other FI Shareholders (and successor shareholders) shall take
all reasonable steps to inform such persons of the provisions of Sections 2 and
3 and obtain their written agreement and/or consent to be bound.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
FAROUDJA, INC.,
a Delaware corporation
By: /s/ Michael Moone
---------------------------------------
Michael Moone,
President
/s/ Yves Faroudja
---------------------------------------
Yves Faroudja
/s/ Isabell Faroudja
---------------------------------------
Isabell Faroudja
ADELSON INVESTORS, LLC
By: /s/ Paul Nadel
---------------------------------------
Address:
10900 Wilshire Blvd., #750
Los Angeles, CA 90024
Fax: (310) 209-3160
10
<PAGE>
IMAGES PARTNERS, LP
By: /s/ Kevin Kimberlin
---------------------------------------
Address:
535 Madison Ave.
18th Floor
New York, NY 10022
Fax: (212) 751-3483
FAROUDJA IMAGES INVESTORS, LLC
By: /s/ Roger K. Baumberger
---------------------------------------
Address:
535 Madison Ave.
18th Floor
New York, NY 10022
Fax: (212) 751-3483
11
<PAGE>
EXHIBIT "A"
FI CAPITALIZATION
SECURITY HOLDER FI C/S PERCENT
- --------------- ------ -------
Stock Option Plans(1) 1,800,000 17.86%
Y&I Direct Ownership 2,050,000 20.34%
Y&I Option Shares 1,537,500
Adelson Investors, LLC 486,875 4.83%
Images Partners, LP 384,375 3.81%
Faroudja Images Investors, LLC 666,250 6.61%
FII Direct Ownership 4,612,500 45.76%
Adelson Contingent Warrant 65,152 0.65%
John Sie Warrant 14,449 0.14%
---------- -----
TOTAL 10,079,960 100%
(1)The Stock Option Plans for FI break down as follows:
STOCK OPTION PLAN RESERVED C/S GRANTED OPTIONS
- ----------------- ------------ ---------------
1995 Stock Option Plan 1,400,000 1,386,578
1997 Performance Stock Option Plan 300,000 0
1997 Non-Employee Director Stock 100,000 26,060
Option Plan
12
<PAGE>
REGISTRATION RIGHTS AGREEMENT
The parties to this Registration Rights Agreement (the "Agreement"),
effective as of December 31, 1996, are Faroudja, Inc., a Delaware corporation
("FI") and Adelson Investors, LLC.
WHEREAS, certain investors ("Investors") entered into that certain
Subscription Agreement ("Subscription Agreement") with Faroudja Images, Inc., a
Delaware corporation ("FII") wherein those Investors purchased FII Common Stock
and were granted, among other things, registration rights in the event that FII,
including all successors and assigns of FII by way of merger or otherwise,
completes an initial public offering of its stock prior to March 8, 1999;
WHEREAS, concurrent with the merger of Faroudja Research Enterprises, Inc.,
a California corporation ("FRE") with and into Faroudja Laboratories, Inc., a
California corporation ("FLI"), and the merger of Faroudja Acquisition, Inc., a
California corporation and indirect wholly-owned subsidiary of FLI, with and
into FLI (collectively, the "Mergers"), with FLI surviving the Mergers as a
wholly-owned subsidiary of FI, Faroudja Images, Inc., a Delaware corporation
("FII") liquidated effective December 31, 1996 and the assets of FII, including
options to purchase certain shares of FLI and FRE held by Y&I, were distributed
to Roger K. Baumberger as the Liquidating trustee for FII (the "Liquidating
Trustee") to be distributed at a later date to the FII shareholders;
WHEREAS, Yves Faroudja and Isabell Faroudja (collectively, "Y&I"), FI, FII,
Adelson Investors, LLC, Images Partners, LP and the Liquidating Trustee (Adelson
Investors, LLC, Images Partners, LP and the Liquidating Trustee are
collectively, known herein as the "FI Shareholders") entered into that certain
Amended and Restated Option to Purchase Shares of Common Stock of Faroudja, Inc.
as of December 31, 1996, restating certain rights of FII and Y&I, and confirming
the transfer of assets by FII to the Liquidating Trustee, which assets will be
distributed at a later date to the FII shareholders;
WHEREAS Y&I, FI and the FI Shareholders entered into that certain
Registration and Shareholders Right Agreement of even date, restating certain
registration rights of Y&I that were originally set forth in that certain
Shareholders Agreement entered into on March 8, 1996, by and between FII, FLI,
FRE and Y&I, which agreement was terminated pursuant to that certain Mutual
Termination of Shareholders Agreement, dated December 30, 1996, by and between
FII, FLI, FRE and Y&I; and
<PAGE>
WHEREAS, the parties desire to enter into this Agreement to restate and
amend certain registration and other rights granted to Adelson Investors, LLC,
as successor to the Investors, which rights were originally set forth in the
Subscription Agreement;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS. As used in this Section 1, the following terms
shall have the following meanings:
(a) "register", "registered" and "registrations refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents in compliance with the Securities Act and the
declaration or ordering of effectiveness of such registration statement or
document by the SEC;
(b) "Registrable Securities" means (i) the common stock held by
Adelson Investors, LLC, and (ii) any common stock of FI issued as a dividend or
other distribution with respect to, or in exchange for or in replacement of such
common stock, excluding in all cases, however, any Registrable Securities sold
by Adelson Investors, LLC in a transaction in which its registration rights
under this Agreement are not assigned;
(c) "SEC" shall mean the Securities and Exchange Commission; and
(d) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the SEC
thereunder, all as the same shall be in effect at the time.
1.2 REGISTRATION.
(a) FI shall use all reasonable efforts to effect an initial
registered public offering of its stock pursuant to a registration statement
filed with the SEC under the Securities Act ("IPO"), and the parties shall
cooperate in structuring any such public offering.
(b) In the event that FI (which, for all purposes of this
section 1 (including, without limitation, section 1.2(c)), includes all
successors and assigns of FI by way of merger or otherwise) completes an IPO
prior to March 8, 1999, FI shall prepare and file, not later than 180 days after
the closing date of the IPO, a registration statement under the Securities Act
to permit resales of the Registrable Securities; provided, however that Adelson
Investors, LLC may inform the Company in writing that it wishes to exclude all
or a portion of its Registrable Securities from such registration. If Adelson
Investors, LLC elects to exclude its Registrable Securities from
2
<PAGE>
such registration it will have no further rights to have such Registrable
Securities registered by the Company.
(c) If FI does not complete an IPO prior to March 8, 1999, FI
shall prepare and file, upon the request of the holders of a majority of the
common stock of FI, a registration statement under the Securities Act to permit
resales of all the shares of common stock of FI; PROVIDED, HOWEVER, that Adelson
Investors, LLC may inform FI in writing that it wishes to exclude all or a
portion of its Registrable Securities from such registration.
(d) FI is obligated to effect only one registration pursuant to
this Agreement.
(e) In connection with an IPO, Adelson Investors, LLC agrees
that, without the prior written consent of FI, Adelson Investors, LLC shall not
offer, sell, contract to sell or otherwise dispose of any Registrable Securities
for and during the period beginning on the date that an underwriting agreement
is executed with respect to such offering and continuing to and including 180
days after the date of the prospectus included in the registration statement
under the Securities Act for such offering.
1.3 OBLIGATIONS OF FI. When required under this Agreement to effect
the registration of the Registrable Securities, FI shall, as expeditiously as
reasonably possible:
(a) prepare and file with the SEC a registration statement or
similar documents (the "Registration Statement') with respect to all Registrable
Securities, other than any Registrable Securities excluded pursuant to
section 1.2(b), and use its best efforts to keep the Registration Statement
effective at all times until March 8, 1999, which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading;
(b) prepare and file with the SEC such amendments (including
post effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times until
March 8, 1999, and to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by the Registration
Statement;
(c) furnish promptly to Adelson Investors, LLC such numbers of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto, in conformity with the requirements of the Securities
Act, and such
3
<PAGE>
other documents as Adelson Investors, LLC may reasonably request in writing in
order to facilitate the disposition of the Registrable Securities;
(d) use its best efforts to register and qualify the securities
covered by the Registration Statement under such securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by Adelson Investors, LLC,
and to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions as may
be necessary to maintain such registration and qualification in effect at all
times until March 8, 1999, and to take all other actions necessary or advisable
to enable the disposition of such securities in such jurisdictions, provided
that FI shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions or to provide any undertaking or make any
change in its charter or bylaws that its Board of Directors determines to be
contrary to the best interests of FI and its stockholders;
(e) enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering. Adelson Investors, LLC hereby agrees to enter into and perform
its customary obligations under any such agreement, including, without
limitation, customary indemnification and contribution obligations;
(f) notify Adelson Investors, LLC at any time when a prospectus
relating to Registrable Securities covered by the Registration Statement is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing.
FI shall promptly amend or supplement the Registration Statement to correct any
such untrue statement or omission;
(g) notify Adelson Investors, LLC of the issuance by the SEC of
any stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. FI shall make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities and other FI shares included in such registration to
review the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing, and shall not file any document
in a form to which such counsel reasonably objects;
4
<PAGE>
(i) at the request of Adelson Investors, LLC, furnish on the
date that Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Agreement (i) an opinion, dated
such date, of the counsel representing FI for the purposes of such registration,
in form and substance as is customarily given to underwriters in an underwritten
public offering, addressed to the underwriters and (ii) a letter, dated such
date, from the independent certified public accountants of FI, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters;
(j) make available for inspection by Adelson Investors, LLC, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by Adelson Investors, LLC or any
such underwriter, all pertinent financial and other records, corporate documents
and properties of FI and cause FI's officers, directors and employees to supply
all information reasonably requested by Adelson Investors, LLC or any such
underwriters in connection with the registration;
(k) if the common stock is then listed on a national securities
exchange, use its best efforts to cause the Registrable Securities to be listed
on such exchange. If the common stock is not then listed on a national
securities exchange, use its best efforts to facilitate the reporting of the
Registrable Securities on NASDAQ;
(l) provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(m) take all actions reasonably necessary to facilitate the
timely preparation and delivery of certificates (not bearing any legend
restricting the sale or transfer of such securities) representing the
Registrable Securities to be sold pursuant to the Registration Statement and to
enable such certificates to be in such denominations and registered in such
names as Adelson Investors, LLC or any underwriters may reasonably request; and
(n) take all other reasonable actions necessary to expedite and
facilitate the registration of the Registrable Securities pursuant to the
Registration Statement.
1.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of FI to take any action pursuant to this Section 1 with respect to
Adelson Investors, LLC that Adelson Investors, LLC shall furnish to FI such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as FI may reasonably
request.
5
<PAGE>
1.5 EXPENSES OF REGISTRATION. All expenses other than underwriting
discounts and commissions incurred in connection with registration filings or
qualifications pursuant to this Section 1, including, without limitation, all
registration, listing, filing and qualification fees, printers and accounting
fees, the fees and disbursements of counsel for FI and the reasonable fees and
disbursements of the firm of counsel designated in accordance with
Section 1.3(h) shall be borne by FI.
1.6 INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, FI shall indemnify and hold
harmless Adelson Investors, LLC, the directors, if any, of Adelson Investors,
LLC, the officers, if any, of Adelson Investors, LLC who sign the Registration
Statement, each person, if any, who controls Adelson Investors, LLC, any
underwriter (as defined in the Securities Act) for Adelson Investors, LLC and
each person, if any, who controls any such underwriter within the meaning of the
Securities Act or the Securities Exchange Act of 1934 (the "1934 Act"), against
any losses, claims, damages, expenses or liabilities (joint or several) to which
any of them may become subject under the Securities Act, the 1934 Act or
otherwise, insofar as such losses, claims, damages, expenses or liabilities (or
actions or proceedings, whether commenced or threatened, in respect thereof
arise out of or are based upon any of the following statements, omissions or
violations (collectively, a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading or (iii) any violation or alleged violation by FI of the
Securities Act, the 1934 Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any state securities law,
and FI shall reimburse Adelson Investors, LLC and each such underwriter or
controlling person, promptly as such expenses are incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
PROVIDED, HOWEVER, that the indemnity agreement contained in this Section 1.6(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action, if such settlement is effected without the consent of FI,
which consent shall not be unreasonably withheld, conditioned or delayed, nor
shall FI be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation that
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by Adelson Investors,
LLC, directors and officers of Adelson Investors, LLC or any such underwriter or
controlling person, as the case may be. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of Adelson
Investors, LLC or any such underwriter or controlling person or FI and shall
survive the transfer of the Registrable Securities by Adelson Investors, LLC.
6
<PAGE>
(b) To the extent permitted by law, Adelson Investors, LLC shall
indemnify and hold harmless FI, each of its directors, each of its officers who
have signed the Registration Statement, each person, if any, who controls FI
within the meaning of the Securities Act or the 1934 Act, any underwriter and
any other stockholder selling securities pursuant to the Registration Statement
or any of its directors or officers or any person who controls such holder or
underwriter, against any losses, claims, damages or liabilities (jointly or
severally) to which any of them may become subject under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by Adelson Investors, LLC expressly for use in connection with such
registration; and Adelson Investors, LLC shall reimburse any legal or other
expense reasonably incurred by any of them in connection with investigating or
defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER,
that the indemnity agreement contained in this Section 1.6(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action,
if such settlement is effected without the consent of Adelson Investors, LLC,
which consent shall not be unreasonably withheld, conditioned or delayed; and
PROVIDED, FURTHER, that Adelson Investors, LLC shall be liable under this
Section 1.6(b) for only that amount of losses, claims, damages and liabilities
as does not exceed the proceeds to Adelson Investors, LLC as a result of the
sale of Registrable Securities pursuant to such registration.
(c) Promptly after receipt by an indemnified party under this
Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.6,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent that the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party, if, in the reasonable opinion
of counsel for the indemnifying party, representation of such indemnified party
by the counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and any
other party represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 1.6 only to the extent
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party shall not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 1.6.
The indemnification required by this Section 1.6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, promptly as such
7
<PAGE>
expense, loss, damage or liability is incurred, and upon receipt by the
indemnifying party of such documentation as it may reasonably request.
(d) To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under this Section 1.6 to the extent permitted by law, PROVIDED that (i)
no contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in this
Section 1.6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation and (iii) contribution by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
1.7 ASSIGNABILITY. This Agreement is not transferable or assignable
by Adelson Investors, LLC; PROVIDED, THAT, the rights to have FI register
Adelson Investors, LLC's Registrable Securities pursuant to section 1 of this
Agreement may be assigned by Adelson Investors, LLC to transferees or assignees
of such securities provided FI is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned; PROVIDED, FURTHER, that such assignment shall be effective only
if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the Securities Act
and the transferee agrees that the further transfer or assignment of the
securities shall be made only in accordance with all applicable laws.
2. NOTICES. All notices and other communications under this Agreement
shall be in writing and may be given by any of the following methods: (a)
personal delivery, (b) facsimile transmission, (c) registered or certified mail,
postage prepaid, return receipt requested or (d) overnight delivery service.
Notices shall be sent to the appropriate party at its, his or her address or
facsimile number given below (or at such other address or facsimile number for
that party as shall be specified by notice given under this section 2):
if to FI, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Moone, President
Fax: (408) 735-8571
8
<PAGE>
with a copy to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2400
Los Angeles, California 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
if to Adelson Investors, LLC, to it at:
the address of such party set forth on the signature
page of this Agreement
All such notices and communications shall be deemed received upon (a)
actual receipt by the addressee, (b) actual delivery to the appropriate address
or (c) in the case of a facsimile transmission, upon transmission by the sender
and issuance by the transmitting machine of a confirmation slip confirming that
the number of pages constituting the notice have been transmitted without error.
In the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
3. GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the law of the State of California applicable to agreements made
and to be performed wholly in California.
4. SEPARABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of this agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
9
<PAGE>
5. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be considered an original, but all of which together shall
constitute the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
FAROUDJA, INC.,
a Delaware corporation
By:/s/ Michael Moone
----------------------------------------------
Michael Moone,
President
ADELSON INVESTORS, LLC
By:/s/ Paul Nadel
----------------------------------------------
Address: 10900 Wilshire Blvd.
Suite 750
Los Angeles, CA 90024
Fax: (310) 209-8160
10
<PAGE>
REGISTRATION RIGHTS AGREEMENT
The parties to this Registration Rights Agreement (the "Agreement"),
effective as of December 31, 1996, are Faroudja, Inc., a Delaware corporation
("FI") and Images Partners, LP.
WHEREAS, certain investors ("Investors") entered into that certain
Subscription Agreement ("Subscription Agreement") with Faroudja Images, Inc., a
Delaware corporation ("FII") wherein those Investors purchased FII Common Stock
and were granted, among other things, registration rights in the event that FII,
including all successors and assigns of FII by way of merger or otherwise,
completes an initial public offering of its stock prior to March 8, 1999;
WHEREAS, concurrent with the merger of Faroudja Research Enterprises, Inc.,
a California corporation ("FRE") with and into Faroudja Laboratories, Inc., a
California corporation ("FLI"), and the merger of Faroudja Acquisition, Inc., a
California corporation and indirect wholly-owned subsidiary of FLI, with and
into FLI (collectively, the "Mergers"), with FLI surviving the Mergers as a
wholly-owned subsidiary of FI, Faroudja Images, Inc., a Delaware corporation
("FII") liquidated effective December 31, 1996 and the assets of FII, including
options to purchase certain shares of FLI and FRE held by Y&I, were distributed
to the Roger K. Baumberger as the Liquidating Trustee for FII (the "Liquidating
Trustee") to be distributed at a later date to the FII shareholders;
WHEREAS, Yves Faroudja and Isabell Faroudja (collectively, "Y&I"), FI, FII,
Adelson Investors, LLC, Images Partners, LP and the Liquidating Trustee (Adelson
Investors, LLC, Images Partners, LP and the Liquidating Trustee are collectively
known herein as the "FI Shareholders") entered into that certain Amended and
Restated Option to Purchase Shares of Common Stock of Faroudja, Inc. as of
December 31, 1996, restating certain rights of FII and Y&I, and confirming the
transfer of assets by FII to the Liquidating Trustee, which assets will be
distributed at a later date to the FII shareholders;
WHEREAS Y&I, FI and the FI Shareholders entered into that certain
Registration and Shareholders Right Agreement of even date, restating certain
registration rights of Y&I that were originally set forth in that certain
Shareholders Agreement entered into on March 8, 1996, by and between FII, FLI,
FRE and Y&I, which agreement was terminated pursuant to that certain Mutual
Termination of Shareholders Agreement, dated December 30, 1996, by and between
FII, FLI, FRE and Y&I; and
<PAGE>
WHEREAS, the parties desire to enter into this Agreement to restate and
amend certain registration and other rights granted to Images Partners, LP, as a
successor to the Investors, which rights were originally set forth in the
Subscription Agreement;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS. As used in this Section 1, the following terms
shall have the following meanings:
(a) "register", "registered" and "registrations refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents in compliance with the Securities Act and the
declaration or ordering of effectiveness of such registration statement or
document by the SEC;
(b) "Registrable Securities" means (i) the common stock held by
Images Partners, LP, and (ii) any common stock of FI issued as a dividend or
other distribution with respect to, or in exchange for or in replacement of such
common stock, excluding in all cases, however, any Registrable Securities sold
by Images Partners, LP in a transaction in which its registration rights under
this Agreement are not assigned;
(c) "SEC" shall mean the Securities and Exchange Commission; and
(d) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the SEC
thereunder, all as the same shall be in effect at the time.
1.2 REGISTRATION.
(a) FI shall use all reasonable efforts to effect an initial
registered public offering of its stock pursuant to a registration statement
filed with the SEC under the Securities Act ("IPO"), and the parties shall
cooperate in structuring any such public offering.
(b) In the event that FI (which, for all purposes of this
section 1 (including, without limitation, section 1.2(c)), includes all
successors and assigns of FI by way of merger or otherwise) completes an IPO
prior to March 8, 1999, FI shall prepare and file, not later than 180 days after
the closing date of the IPO, a registration statement under the Securities Act
to permit resales of the Registrable Securities; provided, however that Images
Partners, LP may inform the Company in writing that it wishes to exclude all or
a portion of its Registrable Securities from such registration. If Images
Partners, LP elects to exclude its Registrable Securities from
2
<PAGE>
such registration it will have no further rights to have such Registrable
Securities registered by the Company.
(c) If FI does not complete an IPO prior to March 8, 1999, FI
shall prepare and file, upon the request of the holders of a majority of the
common stock of FI, a registration statement under the Securities Act to permit
resales of all the shares of common stock of FI; PROVIDED, HOWEVER, that Images
Partners, LP may inform FI in writing that it wishes to exclude all or a portion
of its Registrable Securities from such registration.
(d) FI is obligated to effect only one registration pursuant to
this Agreement.
(e) In connection with an IPO, Images Partners, LP agrees that,
without the prior written consent of FI, Images Partners, LP shall not offer,
sell, contract to sell or otherwise dispose of any Registrable Securities for
and during the period beginning on the date that an underwriting agreement is
executed with respect to such offering and continuing to and including 180 days
after the date of the prospectus included in the registration statement under
the Securities Act for such offering.
1.3 OBLIGATIONS OF FI. When required under this Agreement to effect
the registration of the Registrable Securities, FI shall, as expeditiously as
reasonably possible:
(a) prepare and file with the SEC a registration statement or
similar documents (the "Registration Statement') with respect to all Registrable
Securities, other than any Registrable Securities excluded pursuant to
section 1.2(b), and use its best efforts to keep the Registration Statement
effective at all times until March 8, 1999, which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading;
(b) prepare and file with the SEC such amendments (including
post effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times until
March 8, 1999, and to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by the Registration
Statement;
(c) furnish promptly to Images Partners, LP such numbers of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto, in conformity with the requirements of the Securities
Act, and such
3
<PAGE>
other documents as Images Partners, LP may reasonably request in writing in
order to facilitate the disposition of the Registrable Securities;
(d) use its best efforts to register and qualify the securities
covered by the Registration Statement under such securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by Images Partners, LP, and
to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions as may
be necessary to maintain such registration and qualification in effect at all
times until March 8, 1999, and to take all other actions necessary or advisable
to enable the disposition of such securities in such jurisdictions, provided
that FI shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions or to provide any undertaking or make any
change in its charter or bylaws that its Board of Directors determines to be
contrary to the best interests of FI and its stockholders;
(e) enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering. Images Partners, LP hereby agrees to enter into and perform its
customary obligations under any such agreement, including, without limitation,
customary indemnification and contribution obligations;
(f) notify Images Partners, LP at any time when a prospectus
relating to Registrable Securities covered by the Registration Statement is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing.
FI shall promptly amend or supplement the Registration Statement to correct any
such untrue statement or omission;
(g) notify Images Partners, LP of the issuance by the SEC of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. FI shall make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities and other FI shares included in such registration to
review the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing, and shall not file any document
in a form to which such counsel reasonably objects;
4
<PAGE>
(i) at the request of Images Partners, LP, furnish on the date
that Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Agreement (i) an opinion, dated
such date, of the counsel representing FI for the purposes of such registration,
in form and substance as is customarily given to underwriters in an underwritten
public offering, addressed to the underwriters and (ii) a letter, dated such
date, from the independent certified public accountants of FI, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters;
(j) make available for inspection by Images Partners, LP, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by Images Partners, LP or any such
underwriter, all pertinent financial and other records, corporate documents and
properties of FI and cause FI's officers, directors and employees to supply all
information reasonably requested by Images Partners, LP or any such underwriters
in connection with the registration;
(k) if the common stock is then listed on a national securities
exchange, use its best efforts to cause the Registrable Securities to be listed
on such exchange. If the common stock is not then listed on a national
securities exchange, use its best efforts to facilitate the reporting of the
Registrable Securities on NASDAQ;
(l) provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(m) take all actions reasonably necessary to facilitate the
timely preparation and delivery of certificates (not bearing any legend
restricting the sale or transfer of such securities) representing the
Registrable Securities to be sold pursuant to the Registration Statement and to
enable such certificates to be in such denominations and registered in such
names as Images Partners, LP or any underwriters may reasonably request; and
(n) take all other reasonable actions necessary to expedite and
facilitate the registration of the Registrable Securities pursuant to the
Registration Statement.
1.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of FI to take any action pursuant to this Section 1 with respect to
Images Partners, LP that Images Partners, LP shall furnish to FI such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as FI may reasonably
request.
5
<PAGE>
1.5 EXPENSES OF REGISTRATION. All expenses other than underwriting
discounts and commissions incurred in connection with registration filings or
qualifications pursuant to this Section 1, including, without limitation, all
registration, listing, filing and qualification fees, printers and accounting
fees, the fees and disbursements of counsel for FI and the reasonable fees and
disbursements of the firm of counsel designated in accordance with
Section 1.3(h) shall be borne by FI.
1.6 INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, FI shall indemnify and hold
harmless Images Partners, LP, the directors, if any, of Images Partners, LP, the
officers, if any, of Images Partners, LP who sign the Registration Statement,
each person, if any, who controls Images Partners, LP, any underwriter (as
defined in the Securities Act) for Images Partners, LP and each person, if any,
who controls any such underwriter within the meaning of the Securities Act or
the Securities Exchange Act of 1934 (the "1934 Act"), against any losses,
claims, damages, expenses or liabilities (joint or several) to which any of them
may become subject under the Securities Act, the 1934 Act or otherwise, insofar
as such losses, claims, damages, expenses or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof arise out of or
are based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading or (iii) any violation or alleged violation by FI of the
Securities Act, the 1934 Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any state securities law,
and FI shall reimburse Images Partners, LP and each such underwriter or
controlling person, promptly as such expenses are incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
PROVIDED, HOWEVER, that the indemnity agreement contained in this Section 1.6(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action, if such settlement is effected without the consent of FI,
which consent shall not be unreasonably withheld, conditioned or delayed, nor
shall FI be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation that
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by Images Partners, LP,
directors and officers of Images Partners, LP or any such underwriter or
controlling person, as the case may be. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of Images
Partners, LP or any such underwriter or controlling person or FI and shall
survive the transfer of the Registrable Securities by Images Partners, LP.
6
<PAGE>
(b) To the extent permitted by law, Images Partners, LP shall
indemnify and hold harmless FI, each of its directors, each of its officers who
have signed the Registration Statement, each person, if any, who controls FI
within the meaning of the Securities Act or the 1934 Act, any underwriter and
any other stockholder selling securities pursuant to the Registration Statement
or any of its directors or officers or any person who controls such holder or
underwriter, against any losses, claims, damages or liabilities (jointly or
severally) to which any of them may become subject under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by Images Partners, LP expressly for use in connection with such
registration; and Images Partners, LP shall reimburse any legal or other expense
reasonably incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this Section 1.6(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action, if such
settlement is effected without the consent of Images Partners, LP, which consent
shall not be unreasonably withheld, conditioned or delayed; and PROVIDED,
FURTHER, that Images Partners, LP shall be liable under this Section 1.6(b) for
only that amount of losses, claims, damages and liabilities as does not exceed
the proceeds to Images Partners, LP as a result of the sale of Registrable
Securities pursuant to such registration.
(c) Promptly after receipt by an indemnified party under this
Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.6,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent that the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party, if, in the reasonable opinion
of counsel for the indemnifying party, representation of such indemnified party
by the counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and any
other party represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 1.6 only to the extent
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party shall not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 1.6.
The indemnification required by this Section 1.6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, promptly as such
7
<PAGE>
expense, loss, damage or liability is incurred, and upon receipt by the
indemnifying party of such documentation as it may reasonably request.
(d) To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under this Section 1.6 to the extent permitted by law, PROVIDED that (i)
no contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in this
Section 1.6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation and (iii) contribution by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
1.7 ASSIGNABILITY. This Agreement is not transferable or assignable
by Images Partners, LP; PROVIDED, THAT, the rights to have FI register Images
Partners, LP's Registrable Securities pursuant to section 1 of this Agreement
may be assigned by Images Partners, LP to transferees or assignees of such
securities provided FI is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned; PROVIDED, FURTHER, that such assignment shall be effective only
if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the Securities Act
and the transferee agrees that the further transfer or assignment of the
securities shall be made only in accordance with all applicable laws.
2. NOTICES. All notices and other communications under this Agreement
shall be in writing and may be given by any of the following methods: (a)
personal delivery, (b) facsimile transmission, (c) registered or certified mail,
postage prepaid, return receipt requested or (d) overnight delivery service.
Notices shall be sent to the appropriate party at its, his or her address or
facsimile number given below (or at such other address or facsimile number for
that party as shall be specified by notice given under this section 2):
if to FI, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Moone, President
Fax: (408) 735-8571
8
<PAGE>
with a copy to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2400
Los Angeles, California 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
if to Images Partners, LP, to it at:
the address of such party set forth on the signature
page of this Agreement
All such notices and communications shall be deemed received upon (a)
actual receipt by the addressee, (b) actual delivery to the appropriate address
or (c) in the case of a facsimile transmission, upon transmission by the sender
and issuance by the transmitting machine of a confirmation slip confirming that
the number of pages constituting the notice have been transmitted without error.
In the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
3. GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the law of the State of California applicable to agreements made
and to be performed wholly in California.
4. SEPARABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of this agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
9
<PAGE>
5. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be considered an original, but all of which together shall
constitute the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
FAROUDJA, INC.,
a Delaware corporation
By: /s/ Michael Moone
----------------------------------------------
Michael Moone,
President
IMAGES PARTNERS, LP
By: /s/ Kevin Kimberlin
----------------------------------------------
Name: Kevin Kimberlin
Title: General Partner
Address: 535 Madison Avenue,
18th Floor
Attention: Kevin Kimberlin,
General Partner
Fax: (212) 751-3483
10
<PAGE>
REGISTRATION RIGHTS AGREEMENT
The parties to this Registration Rights Agreement (the "Agreement"),
effective as of December 31, 1996, are Faroudja, Inc., a Delaware corporation
("FI") and Roger K. Baumberger as Liquidating Trustee for Faroudja Images, Inc.
("Liquidating Trustee").
WHEREAS, certain investors ("Investors") entered into that certain
Subscription Agreement ("Subscription Agreement") with Faroudja Images, Inc., a
Delaware corporation ("FII") wherein those Investors purchased FII Common Stock
and were granted, among other things, registration rights in the event that FII,
including all successors and assigns of FII by way of merger or otherwise,
completes an initial public offering of its stock prior to March 8, 1999;
WHEREAS, concurrent with the merger of Faroudja Research Enterprises, Inc.,
a California corporation ("FRE") with and into Faroudja Laboratories, Inc., a
California corporation ("FLI"), and the merger of Faroudja Acquisition, Inc., a
California corporation and indirect wholly-owned subsidiary of FLI, with and
into FLI (collectively, the "Mergers"), with FLI surviving the Mergers as a
wholly-owned subsidiary of FI, Faroudja Images, Inc., a Delaware corporation
("FII") liquidated effective December 31, 1996 and the assets of FII, including
options to purchase certain shares of FLI and FRE held by Y&I, were distributed
to the Liquidating Trustee to be distributed at a later date to the FII
shareholders;
WHEREAS, the Liquidating Trustee is holding and may continue to hold shares
of FI common stock;
WHEREAS, Yves Faroudja and Isabell Faroudja (collectively, "Y&I"), FI, FII,
Adelson Investors, LLC, Images Partners, LP and the Liquidating Trustee (Adelson
Investors, LLC, Images Partners, LP and the Liquidating Trustee are collectively
known herein as the "FI Shareholders") entered into that certain Amended and
Restated Option to Purchase Shares of Common Stock of Faroudja, Inc. as of
December 31, 1996, restating certain rights of FII and Y&I, and confirming the
transfer of assets by FII to the Liquidating Trustee, which assets will be
distributed at a later date to the FII shareholders;
WHEREAS Y&I, FI and the FI Shareholders entered into that certain
Registration and Shareholders Right Agreement of even date, restating certain
registration rights of Y&I that were originally set forth in that certain
Shareholders Agreement entered into on March 8, 1996, by and between FII, FLI,
FRE and Y&I, which agreement was terminated pursuant to that certain Mutual
Termination of Shareholders Agreement, dated December 30, 1996, by and between
FII, FLI, FRE and Y&I; and
<PAGE>
WHEREAS, the parties desire to enter into this Agreement to restate and
amend certain registration and other rights granted to the Liquidating Trustee,
as successor to the Investors, which rights were originally set forth in the
Subscription Agreement;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS. As used in this Section 1, the following terms
shall have the following meanings:
(a) "register", "registered" and "registrations refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents in compliance with the Securities Act and the
declaration or ordering of effectiveness of such registration statement or
document by the SEC;
(b) "Registrable Securities" means (i) the common stock held by
the Liquidating Trustee, and (ii) any common stock of FI issued as a dividend or
other distribution with respect to, or in exchange for or in replacement of such
common stock, excluding in all cases, however, any Registrable Securities sold
by the Liquidating Trustee in a transaction in which its registration rights
under this Agreement are not assigned;
(c) "SEC" shall mean the Securities and Exchange Commission; and
(d) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the SEC
thereunder, all as the same shall be in effect at the time.
1.2 REGISTRATION.
(a) FI shall use all reasonable efforts to effect an initial
registered public offering of its stock pursuant to a registration statement
filed with the SEC under the Securities Act ("IPO"), and the parties shall
cooperate in structuring any such public offering.
(b) In the event that FI (which, for all purposes of this
section 1 (including, without limitation, section 1.2(c)), includes all
successors and assigns of FI by way of merger or otherwise) completes an IPO
prior to March 8, 1999, FI shall prepare and file, not later than 180 days after
the closing date of the IPO, a registration statement under the Securities Act
to permit resales of the Registrable Securities; provided, however that the
Liquidating Trustee may inform the Company in writing that it wishes to exclude
all or a portion of its Registrable Securities from such registration. If the
Liquidating Trustee elects
2
<PAGE>
to exclude its Registrable Securities from such registration it will have no
further rights to have such Registrable Securities registered by the Company.
(c) If FI does not complete an IPO prior to March 8, 1999, FI
shall prepare and file, upon the request of the holders of a majority of the
common stock of FI, a registration statement under the Securities Act to permit
resales of all the shares of common stock of FI; PROVIDED, HOWEVER, that the
Liquidating Trustee may inform FI in writing that it wishes to exclude all or a
portion of its Registrable Securities from such registration.
(d) FI is obligated to effect only one registration pursuant to
this Agreement.
(e) In connection with an IPO, the Liquidating Trustee agrees
that, without the prior written consent of FI, the Liquidating Trustee shall not
offer, sell, contract to sell or otherwise dispose of any Registrable Securities
for and during the period beginning on the date that an underwriting agreement
is executed with respect to such offering and continuing to and including 180
days after the date of the prospectus included in the registration statement
under the Securities Act for such offering.
1.3 OBLIGATIONS OF FI. When required under this Agreement to effect
the registration of the Registrable Securities, FI shall, as expeditiously as
reasonably possible:
(a) prepare and file with the SEC a registration statement or
similar documents (the "Registration Statement') with respect to all Registrable
Securities, other than any Registrable Securities excluded pursuant to
section 1.2(b), and use its best efforts to keep the Registration Statement
effective at all times until March 8, 1999, which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading;
(b) prepare and file with the SEC such amendments (including
post effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times until
March 8, 1999, and to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by the Registration
Statement;
(c) furnish promptly to the Liquidating Trustee such numbers of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto, in conformity with the requirements of the Securities
Act, and such
3
<PAGE>
other documents as the Liquidating Trustee may reasonably request in writing in
order to facilitate the disposition of the Registrable Securities;
(d) use its best efforts to register and qualify the securities
covered by the Registration Statement under such securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by the Liquidating Trustee,
and to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions as may
be necessary to maintain such registration and qualification in effect at all
times until March 8, 1999, and to take all other actions necessary or advisable
to enable the disposition of such securities in such jurisdictions, provided
that FI shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions or to provide any undertaking or make any
change in its charter or bylaws that its Board of Directors determines to be
contrary to the best interests of FI and its stockholders;
(e) enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering. The Liquidating Trustee hereby agrees to enter into and perform
its customary obligations under any such agreement, including, without
limitation, customary indemnification and contribution obligations;
(f) notify the Liquidating Trustee at any time when a prospectus
relating to Registrable Securities covered by the Registration Statement is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing.
FI shall promptly amend or supplement the Registration Statement to correct any
such untrue statement or omission;
(g) notify the Liquidating Trustee of the issuance by the SEC of
any stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. FI shall make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities and other FI shares included in such registration to
review the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing, and shall not file any document
in a form to which such counsel reasonably objects;
4
<PAGE>
(i) at the request of the Liquidating Trustee, furnish on the
date that Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Agreement (i) an opinion, dated
such date, of the counsel representing FI for the purposes of such registration,
in form and substance as is customarily given to underwriters in an underwritten
public offering, addressed to the underwriters and (ii) a letter, dated such
date, from the independent certified public accountants of FI, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters;
(j) make available for inspection by the Liquidating Trustee,
any underwriters participating in the offering pursuant to the registration and
the counsel, accountants or other agents retained by the Liquidating Trustee or
any such underwriter, all pertinent financial and other records, corporate
documents and properties of FI and cause FI's officers, directors and employees
to supply all information reasonably requested by the Liquidating Trustee or any
such underwriters in connection with the registration;
(k) if the common stock is then listed on a national securities
exchange, use its best efforts to cause the Registrable Securities to be listed
on such exchange. If the common stock is not then listed on a national
securities exchange, use its best efforts to facilitate the reporting of the
Registrable Securities on NASDAQ;
(l) provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(m) take all actions reasonably necessary to facilitate the
timely preparation and delivery of certificates (not bearing any legend
restricting the sale or transfer of such securities) representing the
Registrable Securities to be sold pursuant to the Registration Statement and to
enable such certificates to be in such denominations and registered in such
names as the Liquidating Trustee or any underwriters may reasonably request; and
(n) take all other reasonable actions necessary to expedite and
facilitate the registration of the Registrable Securities pursuant to the
Registration Statement.
1.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of FI to take any action pursuant to this Section 1 with respect to
the Liquidating Trustee that the Liquidating Trustee shall furnish to FI such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as FI may reasonably
request.
5
<PAGE>
1.5 EXPENSES OF REGISTRATION. All expenses other than underwriting
discounts and commissions incurred in connection with registration filings or
qualifications pursuant to this Section 1, including, without limitation, all
registration, listing, filing and qualification fees, printers and accounting
fees, the fees and disbursements of counsel for FI and the reasonable fees and
disbursements of the firm of counsel designated in accordance with
Section 1.3(h) shall be borne by FI.
1.6 INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, FI shall indemnify and hold
harmless the Liquidating Trustee who signs the Registration Statement, any
underwriter (as defined in the Securities Act) for the Liquidating Trustee and
each person, if any, who controls any such underwriter within the meaning of the
Securities Act or the Securities Exchange Act of 1934 (the "1934 Act"), against
any losses, claims, damages, expenses or liabilities (joint or several) to which
any of them may become subject under the Securities Act, the 1934 Act or
otherwise, insofar as such losses, claims, damages, expenses or liabilities (or
actions or proceedings, whether commenced or threatened, in respect thereof
arise out of or are based upon any of the following statements, omissions or
violations (collectively, a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading or (iii) any violation or alleged violation by FI of the
Securities Act, the 1934 Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any state securities law,
and FI shall reimburse the Liquidating Trustee and each such underwriter
promptly as such expenses are incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding; PROVIDED, HOWEVER,
that the indemnity agreement contained in this Section 1.6(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action,
if such settlement is effected without the consent of FI, which consent shall
not be unreasonably withheld, conditioned or delayed, nor shall FI be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation that occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by the Liquidating Trustee or any such
underwriter, as the case may be. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Liquidating
Trustee or any such underwriter or FI and shall survive the transfer of the
Registrable Securities by the Liquidating Trustee.
6
<PAGE>
(b) To the extent permitted by law, the Liquidating Trustee
shall indemnify and hold harmless FI, each of its directors, each of its
officers who have signed the Registration Statement, each person, if any, who
controls FI within the meaning of the Securities Act or the 1934 Act, any
underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such holder or underwriter, against any losses, claims, damages or
liabilities (jointly or severally) to which any of them may become subject under
the Securities Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by the Liquidating Trustee expressly for use in
connection with such registration; and the Liquidating Trustee shall reimburse
any legal or other expense reasonably incurred by any of them in connection with
investigating or defending any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the indemnity agreement contained in this Section 1.6(b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action, if such settlement is effected without the consent of the
Liquidating Trustee, which consent shall not be unreasonably withheld,
conditioned or delayed; and PROVIDED, FURTHER, that the Liquidating Trustee
shall be liable under this Section 1.6(b) for only that amount of losses,
claims, damages and liabilities as does not exceed the proceeds to the
Liquidating Trustee as a result of the sale of Registrable Securities pursuant
to such registration.
(c) Promptly after receipt by an indemnified party under this
Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.6,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent that the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party, if, in the reasonable opinion
of counsel for the indemnifying party, representation of such indemnified party
by the counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and any
other party represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 1.6 only to the extent
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party shall not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 1.6.
The indemnification required by this Section 1.6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense,
7
<PAGE>
promptly as such expense, loss, damage or liability is incurred, and upon
receipt by the indemnifying party of such documentation as it may reasonably
request.
(d) To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under this Section 1.6 to the extent permitted by law, PROVIDED that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in this
Section 1.6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation and (iii) contribution by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
1.7 ASSIGNABILITY. This Agreement is not transferable or assignable
by the Liquidating Trustee; PROVIDED, THAT, the rights to have FI register the
Liquidating Trustee's Registrable Securities pursuant to section 1 of this
Agreement may be assigned by the Liquidating Trustee to transferees or assignees
of such securities provided FI is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned; PROVIDED, FURTHER, that such assignment shall be effective only
if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the Securities Act
and the transferee agrees that the further transfer or assignment of the
securities shall be made only in accordance with all applicable laws.
2. NOTICES. All notices and other communications under this Agreement
shall be in writing and may be given by any of the following methods:
(a) personal delivery, (b) facsimile transmission, (c) registered or certified
mail, postage prepaid, return receipt requested or (d) overnight delivery
service. Notices shall be sent to the appropriate party at its, his or her
address or facsimile number given below (or at such other address or facsimile
number for that party as shall be specified by notice given under this
section 2):
if to FI, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Moone, President
Fax: (408) 735-8571
8
<PAGE>
with a copy to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2400
Los Angeles, California 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
if to the Liquidating Trustee, to him at:
the address of such party set forth on the signature
page of this Agreement
All such notices and communications shall be deemed received upon
(a) actual receipt by the addressee, (b) actual delivery to the appropriate
address or (c) in the case of a facsimile transmission, upon transmission by the
sender and issuance by the transmitting machine of a confirmation slip
confirming that the number of pages constituting the notice have been
transmitted without error. In the case of notices sent by facsimile
transmission, the sender shall contemporaneously mail a copy of the notice to
the addressee at the address provided for above. However, such mailing shall in
no way alter the time at which the facsimile notice is deemed received.
3. GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the law of the State of California applicable to agreements made
and to be performed wholly in California.
4. SEPARABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of this agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
9
<PAGE>
5. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be considered an original, but all of which together shall
constitute the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
FAROUDJA, INC.,
a Delaware corporation
By: /s/ Michael Moone
----------------------------------------------
Michael Moone,
President
s/ Roger K. Baumberger
-------------------------------------------------
Roger K. Baumberger, as Liquidating Trustee for
Faroudja Images, Inc.
Address: 535 Madison Avenue, 18th Floor
New York, NY 10022
Fax: (212) 751-3483
10
<PAGE>
REGISTRATION RIGHTS AGREEMENT
The parties to this Registration Rights Agreement (the "Agreement"),
effective as of March 7, 1997, are Faroudja, Inc., a Delaware corporation
("FI"), and Faroudja Images Investors, LLC.
WHEREAS, certain investors ("Investors") entered into that certain
Subscription Agreement ("Subscription Agreement") with Faroudja Images, Inc.,
a Delaware corporation ("FII") wherein those Investors purchased FII Common
Stock and were granted, among other things, registration rights in the event
that FII, including all successors and assigns of FII by way of merger or
otherwise, completes an initial public offering of its stock prior to March
8, 1999;
WHEREAS, concurrent with the merger of Faroudja Research Enterprises,
Inc., a California corporation ("FRE") with and into Faroudja Laboratories,
Inc., a California corporation ("FLI"), and the merger of Faroudja
Acquisition, Inc., a California corporation and indirect wholly-owned
subsidiary of FLI, with and into FLI (collectively, the "Mergers"), with FLI
surviving the Mergers as a wholly-owned subsidiary of FI, Faroudja Images,
Inc., a Delaware corporation ("FII") liquidated effective December 31, 1996
and the assets of FII, including options to purchase certain shares of FLI
and FRE held by Y&I, were distributed to Roger K. Baumberger as the
Liquidating Trustee for FII (the "Liquidating Trustee") to be distributed at
a later date to the FII shareholders;
WHEREAS, Yves Faroudja and Isabell Faroudja (collectively, "Y&I"), FI,
FII, Adelson Investors, LLC, Images Partners, LP, and the Liquidating Trustee
(Adelson Investors, LLC, Images Partners, LP and the Liquidating Trustee are
collectively, known herein as the "FI Shareholders") entered into that
certain Amended and Restated Option to Purchase Shares of Common Stock of
Faroudja, Inc. as of December 31, 1996, restating certain rights of FII and
Y&I, and confirming the transfer of assets by FII to the Liquidating Trustee,
which assets will be distributed at a later date to the FII shareholders;
WHEREAS Y&I, FI and the FI Shareholders entered into that certain
Registration and Shareholders Right Agreement of even date, restating certain
registration rights of Y&I that were originally set forth in that certain
Shareholders Agreement entered into on March 8, 1996, by and between FII,
FLI, FRE and Y&I, which agreement was terminated pursuant to that certain
Mutual Termination of Shareholders Agreement, dated December 30, 1996, by and
between FII, FLI, FRE and Y&I; and
WHEREAS, the parties desire to enter into this Agreement to restate and
amend certain registration and other rights granted to Faroudja Images
Investors, LLC, as a successor to the Investors, which rights were originally
set forth in the Subscription Agreement;
<PAGE>
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS. As used in this Section 1, the following terms
shall have the following meanings:
(a) "register", "registered" and "registrations refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents in compliance with the Securities Act and the
declaration or ordering of effectiveness of such registration statement or
document by the SEC;
(b) "Registrable Securities" means (i) the common stock held by
Faroudja Images Investors, LLC, and (ii) any common stock of FI issued as a
dividend or other distribution with respect to, or in exchange for or in
replacement of such common stock, excluding in all cases, however, any
Registrable Securities sold by Faroudja Images Investors, LLC in a
transaction in which its registration rights under this Agreement are not
assigned;
(c) "SEC" shall mean the Securities and Exchange Commission; and
(d) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
SEC thereunder, all as the same shall be in effect at the time.
1.2 REGISTRATION.
(a) FI shall use all reasonable efforts to effect an initial
registered public offering of its stock pursuant to a registration statement
filed with the SEC under the Securities Act ("IPO"), and the parties shall
cooperate in structuring any such public offering.
(b) In the event that FI (which, for all purposes of this
section 1 (including, without limitation, section 1.2(c)), includes all
successors and assigns of FI by way of merger or otherwise) completes an IPO
prior to March 8, 1999, FI shall prepare and file, not later than 180 days
after the closing date of the IPO, a registration statement under the
Securities Act to permit resales of the Registrable Securities; provided,
however that Faroudja Images Investors, LLC may inform the Company in writing
that it wishes to exclude all or a portion of its Registrable Securities from
such registration. If Faroudja Images Investors, LLC elects to exclude its
Registrable Securities from such registration it will have no further rights
to have such Registrable Securities registered by the Company.
(c) If FI does not complete an IPO prior to March 8, 1999, FI
shall prepare and file, upon the request of the holders of a majority of the
common stock
2
<PAGE>
of FI, a registration statement under the Securities Act to permit resales of
all the shares of common stock of FI; PROVIDED, HOWEVER, that Faroudja Images
Investors, LLC may inform FI in writing that it wishes to exclude all or a
portion of its Registrable Securities from such registration.
(d) FI is obligated to effect only one registration pursuant to
this Agreement.
(e) In connection with an IPO, Faroudja Images Investors, LLC
agrees that, without the prior written consent of FI, Faroudja Images
Investors, LLC shall not offer, sell, contract to sell or otherwise dispose
of any Registrable Securities for and during the period beginning on the date
that an underwriting agreement is executed with respect to such offering and
continuing to and including 180 days after the date of the prospectus
included in the registration statement under the Securities Act for such
offering.
1.3 OBLIGATIONS OF FI. When required under this Agreement to effect
the registration of the Registrable Securities, FI shall, as expeditiously as
reasonably possible:
(a) prepare and file with the SEC a registration statement or
similar documents (the "Registration Statement') with respect to all
Registrable Securities, other than any Registrable Securities excluded
pursuant to section 1.2(b), and use its best efforts to keep the Registration
Statement effective at all times until March 8, 1999, which Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) shall not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein, or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading;
(b) prepare and file with the SEC such amendments (including
post effective amendments) and supplements to the Registration Statement and
the prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times until
March 8, 1999, and to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by the Registration
Statement;
(c) furnish promptly to Faroudja Images Investors, LLC such
numbers of copies of a prospectus, including a preliminary prospectus, and
all amendments and supplements thereto, in conformity with the requirements
of the Securities Act, and such other documents as Faroudja Images Investors,
LLC may reasonably request in writing in order to facilitate the disposition
of the Registrable Securities;
(d) use its best efforts to register and qualify the securities
covered by the Registration Statement under such securities or Blue Sky laws
of such jurisdictions as shall be reasonably requested by Faroudja Images
Investors, LLC, and to prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements and to take
such other actions as may be necessary to maintain such registration
3
<PAGE>
and qualification in effect at all times until March 8, 1999, and to take all
other actions necessary or advisable to enable the disposition of such
securities in such jurisdictions, provided that FI shall not be required in
connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such states or
jurisdictions or to provide any undertaking or make any change in its charter
or bylaws that its Board of Directors determines to be contrary to the best
interests of FI and its stockholders;
(e) enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. Faroudja Images Investors, LLC hereby
agrees to enter into and perform its customary obligations under any such
agreement, including, without limitation, customary indemnification and
contribution obligations;
(f) notify Faroudja Images Investors, LLC at any time when a
prospectus relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing. FI shall promptly amend or supplement the
Registration Statement to correct any such untrue statement or omission;
(g) notify Faroudja Images Investors, LLC of the issuance by
the SEC of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose. FI shall
make every reasonable effort to prevent the issuance of any stop order and,
if any stop order is issued, to obtain the lifting thereof at the earliest
possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities and other FI shares included in such registration to
review the Registration Statement and all amendments and supplements thereto
a reasonable period of time prior to their filing, and shall not file any
document in a form to which such counsel reasonably objects;
(i) at the request of Faroudja Images Investors, LLC, furnish
on the date that Registrable Securities are delivered to the underwriters for
sale in connection with a registration pursuant to this Agreement (i) an
opinion, dated such date, of the counsel representing FI for the purposes of
such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the
underwriters and (ii) a letter, dated such date, from the independent
certified public accountants of FI, in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters;
4
<PAGE>
(j) make available for inspection by Faroudja Images Investors,
LLC, any underwriters participating in the offering pursuant to the
registration and the counsel, accountants or other agents retained by
Faroudja Images Investors, LLC or any such underwriter, all pertinent
financial and other records, corporate documents and properties of FI and
cause FI's officers, directors and employees to supply all information
reasonably requested by Faroudja Images Investors, LLC or any such
underwriters in connection with the registration;
(k) if the common stock is then listed on a national securities
exchange, use its best efforts to cause the Registrable Securities to be
listed on such exchange. If the common stock is not then listed on a
national securities exchange, use its best efforts to facilitate the
reporting of the Registrable Securities on NASDAQ;
(l) provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective
date of the Registration Statement;
(m) take all actions reasonably necessary to facilitate the
timely preparation and delivery of certificates (not bearing any legend
restricting the sale or transfer of such securities) representing the
Registrable Securities to be sold pursuant to the Registration Statement and
to enable such certificates to be in such denominations and registered in
such names as Faroudja Images Investors, LLC or any underwriters may
reasonably request; and
(n) take all other reasonable actions necessary to expedite and
facilitate the registration of the Registrable Securities pursuant to the
Registration Statement.
1.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of FI to take any action pursuant to this Section 1 with respect
to Faroudja Images Investors, LLC that Faroudja Images Investors, LLC shall
furnish to FI such information regarding itself, the Registrable Securities
held by it, and the intended method of disposition of such securities as
shall be reasonably required to effect the registration of the Registrable
Securities and shall execute such documents in connection with such
registration as FI may reasonably request.
1.5 EXPENSES OF REGISTRATION. All expenses other than underwriting
discounts and commissions incurred in connection with registration filings or
qualifications pursuant to this Section 1, including, without limitation, all
registration, listing, filing and qualification fees, printers and accounting
fees, the fees and disbursements of counsel for FI and the reasonable fees
and disbursements of the firm of counsel designated in accordance with
Section 1.3(h) shall be borne by FI.
1.6 INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
5
<PAGE>
(a) To the extent permitted by law, FI shall indemnify and hold
harmless Faroudja Images Investors, LLC, the directors, if any, of Faroudja
Images Investors, LLC, the officers, if any, of Faroudja Images Investors,
LLC who sign the Registration Statement, each person, if any, who controls
Faroudja Images Investors, LLC, any underwriter (as defined in the Securities
Act) for Faroudja Images Investors, LLC and each person, if any, who controls
any such underwriter within the meaning of the Securities Act or the
Securities Exchange Act of 1934 (the "1934 Act"), against any losses, claims,
damages, expenses or liabilities (joint or several) to which any of them may
become subject under the Securities Act, the 1934 Act or otherwise, insofar
as such losses, claims, damages, expenses or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof arise out of
or are based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading or (iii) any violation or alleged violation by FI
of the Securities Act, the 1934 Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the 1934 Act or any state
securities law, and FI shall reimburse Faroudja Images Investors, LLC and
each such underwriter or controlling person, promptly as such expenses are
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; PROVIDED, HOWEVER, that the indemnity
agreement contained in this Section 1.6(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action, if such
settlement is effected without the consent of FI, which consent shall not be
unreasonably withheld, conditioned or delayed, nor shall FI be liable in any
such case for any such loss, claim, damage, liability or action to the extent
that it arises out of is based upon a Violation that occurs in reliance upon
and in conformity with written information furnished expressly for use in
connection with such registration by Faroudja Images Investors, LLC,
directors and officers of Faroudja Images Investors, LLC or any such
underwriter or controlling person, as the case may be. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of Faroudja Images Investors, LLC or any such underwriter or
controlling person or FI and shall survive the transfer of the Registrable
Securities by Faroudja Images Investors, LLC.
(b) To the extent permitted by law, Faroudja Images Investors,
LLC shall indemnify and hold harmless FI, each of its directors, each of its
officers who have signed the Registration Statement, each person, if any, who
controls FI within the meaning of the Securities Act or the 1934 Act, any
underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such holder or underwriter, against any losses, claims, damages or
liabilities (jointly or severally) to which any of them may become subject
under the Securities Act, the 1934 Act or other federal or state law, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any
6
<PAGE>
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by Faroudja Images Investors, LLC expressly for use in connection
with such registration; and Faroudja Images Investors, LLC shall reimburse
any legal or other expense reasonably incurred by any of them in connection
with investigating or defending any such loss, claim, damage, liability or
action; PROVIDED, HOWEVER, that the indemnity agreement contained in this
Section 1.6(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action, if such settlement is effected
without the consent of Faroudja Images Investor, LLC, which consent shall not
be unreasonably withheld, conditioned or delayed; and PROVIDED, FURTHER, that
Faroudja Images Investors, LLC shall be liable under this Section 1.6(b) for
only that amount of losses, claims, damages and liabilities as does not
exceed the proceeds to Faroudja Images Investors, LLC as a result of the sale
of Registrable Securities pursuant to such registration.
(c) Promptly after receipt by an indemnified party under this
Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.6,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent that the indemnifying party so desires, jointly with any
other indemnifying party similarly noticed, to assume control of the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party shall have the right to retain its own counsel,
with the fees and expenses to be paid by the indemnifying party, if, in the
reasonable opinion of counsel for the indemnifying party, representation of
such indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing interests between
such indemnified party and any other party represented by such counsel in
such proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall
relieve such indemnifying party of any liability to the indemnified party
under this Section 1.6 only to the extent prejudicial to its ability to
defend such action, but the omission so to deliver written notice to the
indemnifying party shall not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 1.6. The
indemnification required by this Section 1.6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, promptly as such expense, loss, damage or liability is incurred, and
upon receipt by the indemnifying party of such documentation as it may
reasonably request.
(d) To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise
be liable under this Section 1.6 to the extent permitted by law, PROVIDED
that (i) no contribution shall be made under circumstances where the maker
would not have been liable for indemnification under the fault standards set
forth in this Section 1.6, (ii) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of
Registrable Securities who was not guilty
7
<PAGE>
of such fraudulent misrepresentation and (iii) contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
1.7 ASSIGNABILITY. This Agreement is not transferable or assignable
by Faroudja Images Investors, LLC; PROVIDED, THAT, the rights to have FI
register Faroudja Images Investors, LLC's Registrable Securities pursuant to
section 1 of this Agreement may be assigned by Faroudja Images Investors, LLC
to transferees or assignees of such securities provided FI is, within a
reasonable time after such transfer, furnished with written notice of the
name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; PROVIDED,
FURTHER, that such assignment shall be effective only if immediately
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and the
transferee agrees that the further transfer or assignment of the securities
shall be made only in accordance with all applicable laws.
2. NOTICES. All notices and other communications under this Agreement
shall be in writing and may be given by any of the following methods: (a)
personal delivery, (b) facsimile transmission, (c) registered or certified
mail, postage prepaid, return receipt requested or (d) overnight delivery
service. Notices shall be sent to the appropriate party at its, his or her
address or facsimile number given below (or at such other address or
facsimile number for that party as shall be specified by notice given under
this section 2):
if to FI, to it at:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Michael Moone, President
Fax: (408) 735-8571
with a copy to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street
Suite 2400
Los Angeles, California 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
if to Faroudja Images Investors, LLC, to it at:
the address of such party set
forth on the signature page of
this Agreement
8
<PAGE>
All such notices and communications shall be deemed received upon (a)
actual receipt by the addressee, (b) actual delivery to the appropriate
address or (c) in the case of a facsimile transmission, upon transmission by
the sender and issuance by the transmitting machine of a confirmation slip
confirming that the number of pages constituting the notice have been
transmitted without error. In the case of notices sent by facsimile
transmission, the sender shall contemporaneously mail a copy of the notice to
the addressee at the address provided for above. However, such mailing shall
in no way alter the time at which the facsimile notice is deemed received.
3. GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the law of the State of California applicable to agreements
made and to be performed wholly in California.
4. SEPARABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of this agreement shall remain in effect, and if
any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
5. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be considered an original, but all of which together shall
constitute the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
FAROUDJA, INC.,
a Delaware corporation
By:/S/ MICHAEL MOONE
------------------------------
Michael Moone,
President
FAROUDJA IMAGES INVESTORS, LLC
By:/S/ ROGER K. BAUMBERGER
------------------------------
Name: Roger K. Baumberger
Title: Manager
Address: 535 Madison Ave.,
18th Floor
NY, NY 10022
Fax: (212) 751-3483
9
<PAGE>
AGREEMENT
This Agreement (the "Agreement") dated as of the 20th day of January,
1997 (the "Effective Date") by and between Yves Faroudja, a natural person
residing at 26595 Anacapa Drive, Las Altos Hills, CA 94022 ("Faroudja"), and
Faroudja Laboratories, Inc., a California corporation with an office at 750
Palomar Avenue, Sunnyvale, CA 94096 ("Company").
WITNESSETH:
WHEREAS, the parties have entered into that certain "License Agreement"
dated as of March 6, 1996 relating to certain intellectual property rights
owned by Faroudja; and
WHEREAS, the parties wish to cancel and nullify such License Agreement
and replace it in its entirety with this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
contained herein, the parties hereto hereby agree as follows:
ARTICLE 1
CANCELLATION OF MARCH 6, 1996 AGREEMENT
Section 1.1 CANCELLATION AND RELEASE. The parties hereby cancel,
void, and nullify that certain "License Agreement" entered into between them
on March 6, 1996 (the "Prior Agreement") and substitute in its place this
Agreement, as if the Prior Agreement never existed and this Agreement were
entered into between the parties on March 6, 1996, Each party hereby releases
and forever discharges the other from any claims such party may have had for
any breach of the Prior Agreement.
ARTICLE 2
CONSTRUCTION AND DEFINITIONS
Section 2.1 CONSTRUCTION. (a) All references in this Agreement to
"Articles," "Sections," and "Exhibits" refer to the articles, sections, and
exhibits to this Agreement.
(b) As used in this Agreement, neutral pronouns and any variations
thereof shall be deemed to include the feminine and masculine and all terms
used in the singular shall be deemed to include the plural, and vice versa,
as the context may require.
(c) The words and "HEREOF," "HEREIN" and "HEREUNDER" and other words of
similar import refer to this Agreement as a whole, including the exhibits
hereto, as the same may from time to time be amended or supplemented and not
to any subdivision contained in this Agreement.
<PAGE>
(d) The word "INCLUDING" when used herein is not intended to be
exclusive and means "INCLUDING WITHOUT LIMITATION."
Section 2.2 CAPITALIZED TERMS. The following capitalized terms have
the meaning provided below:
(a) "COMPANY FIELD" shall mean the field of data processing for
electronically displaying images to the human eye. For purposes of
illustration only, the Company Field includes the following functionalities,
whether they are implemented within the frame of a TV set/projector, within a
standalone unit, or otherwise: any video manipulation, enhancement, display
and reproduction, encoding and decoding of NTSC, PAL, SECAM or any other
composite video standard, analog-to-digital and digital-to-analog conversion
of video signals; add-on device (or portion thereof) which performs
video/image manipulation, enhancement, display or reproduction (including
without limitation Tvs, computers, videoconferencing equipment, printers and
medical imaging devices); line doubling and quadrupling, video enhancement,
display, reproduction and noise reduction; HDTV video companion products; and
any implementation of the foregoing functionalities in general purpose
integrated circuits which accomplish such processes in hardware or software.
Without limiting the foregoing, the Company Field shall include all existing
Company products, including as described on pages 18-19 of that certain
Faroudja Images Inc. Private Placement Memorandum dated December 14, 1995
(the "PPM") and the products described in the "New Product Development"
section on pages 20-21 of the PPM.
(b) "INTELLECTUAL PROPERTY" shall mean all intellectual property,
proprietary, or similar rights, including any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United States,
international and foreign utility and design patents and applications
therefor and all reissued divisions, renewals, extensions, provisionals,
continuations and continuations-in-part thereof, (ii) all inventions (whether
patentable or not), invention disclosures, improvements, trade secrets,
proprietary information, know how, technology and technical data, and all
documentation relating to any of the foregoing; (iii) all copyrights,
copyrights registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) all industrial designs and
any registrations and applications therefor throughout the world; and (v) any
similar or equivalent rights to any of the foregoing anywhere in the world.
(c) "POST-AGREEMENT TECHNOLOGY" shall mean all Intellectual
Property first owned by Faroudja during the period commencing on the
Effective Date and ending on the date Faroudja ceases to be an employee of
Company.
(d) "YF PATENTS" shall mean (i) all patents and applications
therefor owned, in whole or in part, by Faroudja as either an inventor or
assignee, including the patents and applications therefor listed on Exhibit
A; (ii) all patents and applications therefor on inventions conceived by
Faroudja prior to the Effective Date, regardless of when such inventions arc
2
<PAGE>
reduced to practice or such applications are filed; and (iii) all
continuations, continuations-in-part, divisionals, reissues, and foreign or
international counterparts of any of the foregoing.
(e) "YF TECHNOLOGY" shall mean all Intellectual Property owned by
Faroudja as of the Effective Date and the YF Patents.
ARTICLE 3
OTHER AGREEMENTS
Section 3.1 OTHER AGREEMENTS. Faroudja Inc., the parent of the
Company, shall issue to Faroudja a warrant to purchase shares of Company's
common stock substantially in the form of the Warrant attached as Exhibit B
hereto.
ARTICLE 4
LICENSE GRANT
Section 4.1 LICENSE GRANT. Subject to (a) the rights previously
granted to third parties pursuant to those agreements listed on Exhibit A,
and (b) the rights retained by Faroudja pursuant to Section 4.2, Faroudja
hereby grants to Company an exclusive (including as to Faroudja, except as
set forth in Section 4.2), worldwide, perpetual, irrevocable, fully paid,
royalty-free, fully transferable right and license under the YF Technology to
make, have made, use, reproduce in copies, modify, publicly display, offer
for sale, sell, have sold, import, have imported, distribute, and otherwise
fully exploit in any manner any product, device, system,, machine, work of
authorship, apparatus or other subject matter covered by the YF Technology
and practice any method or procedure (including the unlimited, unrestricted
right to grant and authorize sublicenses to any or all of the foregoing
rights).
Section 4.2 FAROUDJA RIGHTS. Faroudja shall retain the nonexclusive,
non-transferable right (except as set forth in Section 15.7) with the right
to sublicense third parties, outside the Company Field to make, have made,
use, reproduce in copies, modify, publicly display, offer for sale, sell,
have sold, import, have imported, distribute, and otherwise fully exploit in
any manner any product, device, work of authorship, or apparatus and practice
any method or procedure covered by the YF Technology.
ARTICLE 5
ASSIGNMENT OF RIGHTS
Section 5.1 ASSIGNMENT. Company shall own all right, title, and
interest in and to all the Post-Agreement Technology. Faroudja hereby
irrevocably transfers, grants, conveys, and assigns to Company, throughout
the world and in perpetuity, without reservation, all right, title and
interest in and to all the Post-Agreement Technology, including without
limitation all Intellectual Property therein. Faroudja shall, from time to
time, without further consideration, execute such documents, render such
assistance, and take such other action as Company may
3
<PAGE>
reasonably require at no charge to Company, to apply for, prosecute,
register, obtain, maintain, perfect, protect, confirm, and enforce Company's
rights in the Post-Agreement Technology.
Section 5.2 EXECUTION OF DOCUMENTS. Faroudja hereby irrevocably
constitutes and appoints Company, with full power of substitution, to be its
true and lawful attorney, in name, place, and stead, to execute, acknowledge,
swear to, and fill all instruments, conveyances, certificates, agreements,
and other documents, and to take any action which may be necessary,
appropriate, or desirable to effectuate the provisions of this Article 5.
Company shall not exercise the powers of attorney granted herein unless
Faroudja falls to fulfill its obligations under Section 5.1. The powers of
attorney granted herein shall be deemed to be coupled with an interest and
shall be irrevocable.
ARTICLE 6
DELIVERY OF TECHNOLOGY
Section 6.1 DELIVERY. As soon as practicable, Faroudja shall deliver
to Company copies of any and all physical embodiments in Faroudja's
possession of all YF Technology and all Post-Agreement Technology, including
all documentation relating thereto and shall provide Company with
explanations of such technology including descriptions of the advantages
thereto.
ARTICLE 7
PATENT PROSECUTION AND MAINTENANCE
Section 7.1 CONFERENCE, At Company's request, from time to time during
the Term, Faroudja shall meet and confer with Company and Company's
designated representatives, if any, to aid Company in developing a plan for
the preparation, filing and prosecution of patent applications covering YF
Technology, including those patent applications listed on Exhibit A (all such
patent applications collectively, "YF Applications").
Section 7.2 COMPANY CONTROL. Subject only to the rights granted to
Faroudja in Section 7,5, Company shall have the exclusive right to control,
including the right to designate patent counsel to be used for the
preparation, filing, prosecution, issuance, maintenance, and the like of any
and all YP Applications worldwide, including conducting any interference,
re-examinations, reissues and opposition, extension, and similar proceedings
relating thereto, whether or not such YF Applications have been prepared or
filed prior to the Effective Date.
Section 7.3 FAROUDJA COOPERATION. (a) Faroudja shall provide all
reasonable cooperation to Company and Company's counsel in connection with
the preparation, filing, prosecution, issuance, maintenance, and the like of
any and all YF. Applications worldwide, including conducting any
interferences, re-examinations, reissues and apposition, extension, and
similar proceedings relating thereto.
(b) Faroudja shall provide all reasonable cooperation to Company and
Company's counsel in connection with the preparation, filing, prosecution,
issuance, maintenance, and the
4
<PAGE>
like of any and all Post-Agreement Technology worldwide, including conducting
any interferences, re-examinations, reissues and opposition, extension, and
similar proceedings relating thereto.
Section 7.4 COST. Company shall be solely responsible for all costs
in connection with the preparation, filing, promotion, issuance, and
maintenance of the YF Patents and applications therefor and any
interferences, re-examinations, reissues and opposition proceedings relating
thereto.
Section 7.5 FAROUDJA'S RIGHT TO PROSECUTE. If the Company, in its
reasonable business judgment, declines to prepare, file and/or prosecute a
patent application, in any particular jurisdiction, covering a particular
portion of the YF Technology, the Company shall provide notice of such
decision within a time period reasonable for Faroudja to pursue patent
protection. Faroudja shall then have the right to prepare, file and/or
prosecute such an application at his own expense through patent counsel of
his own choosing. If any such application matures into an issued patent,
Faroudja shall provide prompt written notification thereof to Company, along
with a complete description of the patented technology and the advantages
provided thereby. Company shall then have the option of (a) reimbursing
Faroudja for his reasonable expenses incurred for preparation, filing,
prosecution, issuance and maintenance of such patent and application
therefor, in which case such patent shall be considered a part of the YF
Technology for all purposes hereunder; or (b) not reimbursing Faroudja for
any such expenses, in which case such patent shall not be considered a part
of the YF Technology for any purpose hereunder.
ARTICLE 8
ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
Section 8.1 NOTIFICATION. Faroudja shall promptly notify Company in
writing if he becomes aware of any third-party activity which reasonably
appears to infringe the YF Technology. Company shall promptly notify
Faroudja in writing if it becomes aware of any third-party activity in a
field outside of the Company Field which reasonably appears to infringe the
YF Technology.
Section 8.2 COMPANY RIGHT OF ENFORCEMENT. Subject only to Faroudja's
rights set forth in Section 9.3, Company shall have in perpetuity the sole
and exclusive right (but not the obligation) to bring an action, in its own
name, using attorneys of its own selection, against any third party that
appears to infringe the YF Technology. Company shall be solely responsible
for all costs of any such action, including attorney's fees and costs of
suit. Faroudja shall consent to being joined in any such action as
reasonably necessary or requested by Company, Company shall have sole control
of all aspects of any such action, including its settlement, and Faroudja
shall cooperate with Company in the prosecution thereof. With regard to any
recovery from an accused infringer, whether by way of a judgment for damages
or settlement or otherwise, the Company shall have the right to retain the
entirety of such recovery, but to the extent any monies so recovered exceed
the sum of all Company's expenses for such action, including attorneys' fees,
the Company shall reimburse Faroudja for his out-of-pocket costs,
5
<PAGE>
including attorneys' fees and, if Faroudja is no longer an employee of the
Company, his then standard consulting fees. The foregoing provisions shall
apply notwithstanding that Faroudja may elect to join such action as a party
plaintiff, or be joined as such by the Company, the court, the accused
infringer or any other party to the action, in which case Faroudja may elect
either (i) to be represented by the Company's attorney with no obligation to
pay any of the attorneys' fees in connection with of such action, or (ii) to
retain his own attorney, at his own expense.
Section 8.3 FAROUDJA'S RIGHT TO ENFORCE. If Company elects not to
enforce the YF Technology against an infringer whose infringing acts occur
outside the Company Field, Faroudja may, beginning nine (9) months after
Company's receipt of notice of such infringing acts, institute an action to
enforce the YF Technology against such infringer. Absent any written
agreement otherwise relating to the Company's participation in such action,
Faroudja shall (i) bear all the cost of such action, including attorneys'
fees and costs of suit and (ii) retain any and all money recovered in
connection with such action, whether by way of judgement or settlement.
Company shall cooperate with Faroudja in the prosecution of such action.
Faroudja shall control such action, but Company shall have the right to
monitor such action, including the right to review and approve all documents
submitted in connection therewith. Faroudja shall not enter into any
settlement of such action without Company's express written approval,
Company's approval of such documents or settlement terms shall not bc
unreasonably withheld. The foregoing provisions shall apply notwithstanding
that Company may be joined as a party plaintiff by the court, or by the
accused infringer or any other party to such action, in which case Company
may elect either (i) to be represented by Faroudja's attorney, with no
obligation to pay any attorneys' fees in connection with such action, or (ii)
retain its own attorney, at its own expense.
Section 8.4 DEFENSE OF DECLARATORY JUDGMENT ACTION. In the event that
a third party initiates an action against the Company and/or Faroudja seeking
a declaratory judgment that one or more YF Patents are not infringed and/or
not valid, the provisions of Sections 9.2 and 9.3 shall pertain, that is, (i)
Company shall respond to such action as it deems appropriate in its sole
discretion, including the election to cross-complain against such third party
for infringement, pursuant to Section 9.2, and (ii) if the infringement is
outside of the Company Field and if Company elects not to defend against such
action, or cross-complain, Faroudja may elect to so defend and
cross-complain, pursuant to Section 8.3.
ARTICLE 9
INDEMNITY
Section 9.1 INDEMNITY. The Company acknowledges that it has the sole
obligation to use and implement the YF Technology into products and to ensure
that such implementation and use does not infringe any proprietary rights of
any third party. Faroudja shall not be liable for any claim by the Company
or any third party for any damages arising from any product incorporating or
created using the YF Technology, including without limitation those arising
from a cause of action based upon negligence, strict liability in tort,
product warranty, defect
6
<PAGE>
in manufacture or design or due to a defective product. The Company, its
successors and permitted assigns shall indemnify and hold harmless Faroudja
(and his successors and assigns) from and against any and all damages and
costs resulting from or arising out of any claim or suit based upon (i)
products of the Company or the Company's licensees that incorporate or are
created using the YF Technology, or (ii) any infringement by such products or
the Company's use of the YF Technology of any third party's Intellectual
Property or proprietary right; provided, that Faroudja gives the Company
immediate written notice of any such claim or suit. Company shall have
complete control over the defense and disposition, including the settlement,
if any, of such claim or suit. Faroudja shall cooperate with the Company, at
the Company's expense (but without charge for Faroudja's services), in the
defense of any such claim or suit.
ARTICLE 10
FAROUDJA WARRANTIES
Section 10.1 FAROUDJA WARRANTIES. Faroudja hereby represents and
warrants to Company that:
(a) when executed and delivered, this Agreement will become valid
and binding on Faroudja, and enforceable against Faroudja in accordance with
its terms;
(b) Faroudja is not a party to any agreement that would prohibit
him from entering into this Agreement and fully performing his obligations
hereunder, including granting the licenses granted hereunder;
(c) Faroudja has not previously granted, and will not grant, any
rights in conflict with the rights and licenses granted to Company herein;
(d) Faroudja is the sole and exclusive owner of the YF Patents; and
(e) the YF Patents are free and clear of any lien, encumbrance,
security interest or restriction on transfer or license.
Section 10.2 DISCLAIMER. EXCEPT FOR THE WARRANTIES EXPRESSLY SET FORTH
HEREIN, FAROUDJA HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.
ARTICLE 11
LIMITATION OF LIABILITY
Section 11.1 LIMITATION. FAROUDJA SHALL NOT BE LIABLE TO THE COMPANY
OR ANY ENTITY CLAIMING THROUGH THE COMPANY FOR ANY LOSS OF PROFITS OR INCOME,
LOSS OF DATA, OR OTHER TANGIBLE BUSINESS LOSS OR OTHER
7
<PAGE>
CONSEQUENTIAL, INCIDENTAL, OR SPECIAL DAMAGES, OR FOR ANY CLAIM BY ANY OTHER
PARTY, WHETHER IN AN ACTION IN CONTRACT OR TORT OR BASED ON A WARRANTY, EVEN
IF FAROUDJA HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING OUT
OF OR IN CONNECTION WITH THIS AGREEMENT.
ARTICLE 12
CONFIDENTIAL INFORMATION
Section 12.1 DEFINITION. The term "Confidential Information" shall
mean any information disclosed by one party to the other in connection with
this Agreement which, if in written, graphic, machine-readable or other
tangible form is marked as "Confidential"' or "Proprietary," or which, if
disclosed orally, is identified at the time of initial disclosure as
confidential. Without limiting the foregoing, the YF Technology and the
Post-Agreement Technology shall be considered Company's Confidential
Information.
Section 12.2 EXCLUSIONS. Notwithstanding the provisions of Section
12.1 above, Confidential Information shall exclude information that:
(a) was independently developed by the receiving party without any
use of the Confidential Information of the other party or by employees or
other agents of (or independent contractors hired by) the receiving party who
have not been exposed to the Confidential Information;
(b) becomes known to the receiving party, without restriction, from
a source other than the other party hereto without breach of this Agreement
and who had a right to disclose it;
(c) was in the public domain at the time it was disclosed or
becomes in the public domain through no act or omission of the receiving
party;
(d) was rightfully known to the receiving party, without
restriction, at the time of disclosure; or
(e) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; that the receiving party
shall provide prompt notice thereof to the other party and shall use its
reasonable best efforts to obtain a protective order or otherwise prevent
public disclosure of such information.
Section 12.3 OBLIGATION. Each party shall treat as confidential all of
the other party's Confidential Information (except to the extent that the
Receiving Party owns such Confidential Information) and shall not use such
Confidential Information except as expressly permitted under this Agreement.
Without limiting the foregoing, each party shall use at least the same degree
of care which it uses to prevent the disclosure of its own confidential
information of like
8
<PAGE>
importance, but in no event with less than reasonable care, to prevent the
disclosure of the other party's Confidential Information under this Agreement.
Section 12.4 CONFIDENTIALITY OF AGREEMENT. Each party agrees that the
terms and conditions of this Agreement shall be treated as Confidential
Information and that no reference to the terms and conditions of this
Agreement or to activities pertaining thereto can be made in any form of
public or commercial advertising without the prior written consent of the
other party; PROVIDED, HOWEVER, that each party may disclose the terms and
conditions of this Agreement:
(a) as required by any court or other governmental body;
(b) as otherwise required by law;
(c) to legal counsel of the parties;
(d) in connection with the requirements of an Initial Public
Offering or securities filing;
(e) in confidence, to accountants, banks and financing sources and
their advisors;
(f) in confidence, in connection with the enforcement of this
Agreement or rights under this Agreement;
(g) in confidence, in connection with a merger or acquisition or
proposed merger or acquisition, or the like; or
(h) in confidence, in connection with any sublicensing activities
permitted by this Agreement.
Section 12.5 REMEDIES. Unauthorized use by a party of the other
party's Confidential Information will diminish the value of such information.
Therefore, if a party breaches any of its obligations with respect to
confidentiality and unauthorized use of Confidential Information hereunder,
the other party shall be entitled to seek equitable relief to protect its
interest therein, including but not limited to injunctive relief, as well as
money damages.
ARTICLE 13
TRADEMARKS
Section 13.1 TRADEMARK. The parties acknowledge and agree that, as
between them, the trademark "Faroudja" (the "Mark") and all goodwill
associated therewith is, and at all times has been, solely owned by Company
in the worldwide Company Field. Faroudja shall retain the right to use the
name "Faroudja" for his individual business ventures, including its use as
9
<PAGE>
a trade name and trademark for goods and services of such ventures, provided
that any such use will not be likely to cause confusion in the Company Field.
Faroudja agrees that he will not license any third party to use the name
"Faroudja" in any manner that would be likely to cause confusion in the
Company Field and Faroudja or his licensee, the parties hereto agree to
cooperate to mitigate such confusion and to take reasonable measures to
prevent similar confusion in the future.
Section 13.2 NO CONTEST. Faroudja will not attempt to use or register
with any trademark office worldwide, in the Company Field, any mark based on,
incorporating, or confusingly similar to the Mark or that otherwise infringes
or dilutes the Mark. Faroudja shall not contest the validity or
registration, if any, of the Mark in the Company Field or otherwise take any
action inconsistent with Company's ownership of the Mark in the Company Field.
Section 13.3 NO OBLIGATION. Company shall be under no obligation
whatsoever to use the "Faroudja" name or mark in any manner.
Section 13.4 COOPERATION. Faroudja shall provide Company with all
reasonable cooperation, at Company's expense (but without charge for
Faroudja's services), required or reasonably desired by Company to ensure
registration of "Faroudja" or any mark incorporating "Faroudja" as a trade
name or trademark and otherwise maintain or enforce any such name or
trademark worldwide.
Section 13.5 PUBLICITY RIGHTS. Company and its successors and assigns
may, worldwide and in perpetuity, without additional consideration, refer to
"Yves Faroudja" or "Faroudja" as the founder of Company and originator or
inventor of the YF Technology or the Post-Agreement Technology and use
Faroudja's name and likeness in Company's advertising and promotional
materials and otherwise in connection with the operation of Company's
business.
ARTICLE 14
TERM AND TERMINATION
Section 14.1 TERM. The term of this Agreement (the "Term") shall
commence upon the Effective Date and continue in full force and effect until
the date Faroudja ceases to be an employee of Company.
Section 14.2 SURVIVAL. The following provisions of this Agreement
shall survive any termination or expiration hereof. Articles 1, 2, 4, 8, 10,
11, 12, 13, 14, and 15.
ARTICLE 15
GENERAL
Section 15.1 FURTHER ASSURANCES.Each party shall execute and deliver
all further instruments and documents, and will take all further action that
may bc necessary or desirable as reasonably requested by a party hereto to
effectuate the parties' intent hereunder.
10
<PAGE>
Section 15.2 EQUITABLE REMEDIES. It is understood and agreed that
breach of this Agreement will cause irreparable damage for which recovery of
money damages would be inadequate, and that any party may be notified to seek
timely injunctive relief, without obligation to post a bond, to protect such
party's right in addition to any and all remedies available at law.
Section 15.3 SEVERABILITY AND HEADING. If any provision, or any
portions thereof, of this Agreement is held by a court of competent
jurisdiction to be invalid under any applicable statute or rule of law, the
parties agree that such invalidity shall not affect the validity of the
remaining portions of this Agreement and further agree to substitute for the
invalid provision a valid provision which most closely approximates the
intent and economic effect of the invalid provision. Headings used in this
Agreement are for reference purposes only and in no way define, limit,
construe or describe the scope of extent of such section, or any way affect
this Agreement.
Section 15.4 NOTICES. All notices, requests, consents and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed effective when mailed by registered or certified mail,
postage prepaid, or transmitted by confirmed facsimile to the appropriate
address as first set forth above. Either party may change its notice address
by written notice to the other.
Section 15.5 NON-WAIVER. No term or provisions hereof shall be deemed
waived, and no breach excused, unless such waiver or consent shall be in
writing and signed by the party claimed to have waived or consented. Any
consent by any party to, or waiver of, a breach by the other, whether express
or implied, shall not constitute a consent to, waiver of, or excuse for any
other different or subsequent breach.
Section 15.6 INDEPENDENT CONTRACTORS. The parties' relationship shall
be solely that of independent contractor and nothing contained in this
Agreement shall be construed to make any party an agent, partner co-venturer,
representative or principal of the other for any purpose, and no party shall
have any right whatsoever to incur any liability or obligation on behalf of
or binding upon the other party.
Section 15.7 ASSIGNMENT. Faroudja may not assign this Agreement or any
of the YF Patents to any third party, other than to his heirs or a company in
which he owns more than a majority of the capital stock, and any attempt to
do so will be void and of no force or effect.
Section 15.8 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of California, excluding its conflicts
of law principles. Any suit hereunder may be brought in the federal or state
courts in Santa Clara County, California and all parties submit to the
jurisdiction thereof.
Section 15.9 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes
the final, complete and exclusive entire agreement between the parties with
respect to the subject matter hereof and supersedes any previous proposals,
negotiations, agreements, arrangements, or
11
<PAGE>
warranties, whether verbal or written, made between the parties with respect
to such subject matter. This Agreement may only be amended or modified by
mutual agreement or authorized representatives of the parties in writing.
Section 15.10 COUNTERPARTS. This Agreement may be executed in
counterparts or duplicate originals, both of which shall be regarded as one
and the same instrument, and which shall be the official and governing
version in the interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed in duplicate by duly authorized officers or representatives as of the
date first above written,
Yves Faroudja Faroudja Laboratories, Inc.
/s/ Ives Faroudja By: /S/ Michael Moone
- ---------------------- ---------------------------
Name: Michael Moone
Title: President, CEO
12
<PAGE>
EXHIBIT A
PATENTS AND PATENT APPLICATIONS OWNED BY FAROUDJA
13
<PAGE>
EXHIBIT B
WARRANT
14
<PAGE>
Exhibit 10.16
**CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO 17 C.F.R. SUBSECTIONS 200.80(B)(4), 200.83, 230.406 AND
240.24B-2.**
[*] INDICATES TEXT WHICH HAS BEEN REDACTED
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement") is made and entered into
effective as of March 31, 1997, between FAROUDJA LABORATORIES, INC., a
California corporation, having its principal place of business at 750 Palomar
Avenue, Sunnyvale, California 94086 ("Licensor"), and S3 INCORPORATED, a
Delaware corporation, having its principal place of business at 2801 Mission
College Boulevard, Santa Clara, California 95054 ("Licensee" or "S3").
RECITALS
A. A glossary of certain of the initially capitalized terms used
in this Agreement and other terms defined for purposes of this Agreement is
set forth on Exhibit A attached to this Agreement.
B. Licensor and Licensee wish to cooperate to establish high
quality brand Video Display and Enhancement Integrated Circuits for use in
PC, Non-MS and Consumer Electronics systems.
C. Licensor holds rights to the Licensed Technology.
D. Licensee desires to secure the right and license to use the
Licensed Technology in connection with the design, manufacture,
advertisement, promotion, distribution and sale of Licensee Products.
E. Licensor is willing to grant Licensee a license on the terms
and conditions set forth in this Agreement.
F. Licensor and Licensee desire to enter into a long term
relationship for their mutual benefit.
NOW, THEREFORE, the parties agree as follows:
1
<PAGE>
AGREEMENT
1. LICENSE
1.1 GRANT. For the term of this Agreement and subject to the
other terms and conditions of this Agreement, Licensor hereby grants to
Licensee a worldwide, royalty-bearing license under Licensor's Intellectual
Property Rights to use the Licensed Technology solely on or in connection
with the design, manufacture, advertisement, promotion, distribution and sale
of Licensee Products. The Licensed Technology may not be used in connection
with the design, manufacture, advertisement, promotion, distribution or sale
of any product or service other than Licensee Products for [*] as more fully
set forth on Schedule 1.1-A. The license granted under this Section 1.1
shall be exclusive as to the Category I Technology with respect to certain
uses, non-exclusive as to the Category I Technology with respect to certain
uses, semi-exclusive as to the Category II Technology with respect to certain
uses, and non-exclusive as to the Category II Technology with respect to
certain uses, all as set forth in Schedule 1.1-A. The license granted
hereunder extends to such subsidiaries of S3 as to which, and only so long
as, S3 owns a majority of the capital stock entitled to elect the board of
directors thereof and as to which S3 has the ability to control the
management and the conduct of business of such subsidiaries ("Majority Owned
Subsidiary"), which subsidiaries are set forth on Schedule 1.1-B. In any
event, any such subsidiaries and S3 shall be deemed parties hereto, in
privity of contract with Licensor hereunder, intended third party
beneficiaries of this Agreement, and S3 and such subsidiaries shall be
jointly and severally liable for all obligations of S3 and such subsidiaries
hereunder. In the event of any claim against any such subsidiary under this
Agreement, Licensor agrees to make such claim first against S3 or the
specific subsidiary alleged to be in violation of the Agreement or both
before making any claims against other subsidiaries of S3. S3 agrees to
promptly cause each such subsidiary to sign a counterpart signature page to
this Agreement reconfirming that it is bound by the terms and conditions of
this Agreement. S3 may request from time to time that Licensor consent to
the addition of majority-owned subsidiaries to Schedule 1.1-B, and Licensor
shall consider the addition of such subsidiaries as licensees hereunder in
its reasonable commercial judgment. For purposes of this Agreement,
"Licensee" shall be deemed to include subsidiaries listed in Schedule 1.1-B
pursuant to this Section. S3 shall immediately notify Licensor if any such
subsidiary no longer is a Majority Owned Subsidiary and Licensor shall have
the right to review the status of such subsidiary and terminate the grant of
license under this Section 1.1 to such subsidiary. Upon any such
termination, all rights of such subsidiary in and to technology under Section
7.2 shall revert to S3.
1.2 NO SUBLICENSING RIGHTS; LIMITED DISCLOSURE RIGHTS. Licensee
shall not have the right to sublicense any of the rights or licenses granted to
Licensee under this Agreement. Licensee may disclose the Licensed Technology
in connection with the design, manufacture or provision of any products or
service in connection with the: (a) manufacturing of Licensee Products for
Licensee performed by subcontractors of
2
<PAGE>
Licensee; and (b) design by subcontractors of Licensee of Licensee Products
that include all or a part of the Licensed Technology; provided that any such
disclosure shall be of only such of the Licensed Technology as is necessary
to the manufacturing or design services to be performed and shall be pursuant
to confidentiality agreements between Licensee and such subcontractors which
contain provisions regarding the limited and secure use and storage of the
Licensed Technology at least as restrictive and stringent as those in this
Agreement and shall be in a form reasonably satisfactory to Licensor, which
form may be submitted to Licensor for pre-approval.
1.3 RELATIONSHIP OF PARTIES. The relationship between Licensor
and Licensee is that of licensor and licensee of intellectual property
rights. In its capacity as licensee, Licensee shall be acting only as an
independent contractor, and not as a partner, co-venturer, agent, employee or
representative of Licensor.
1.4 OTHER PRODUCTS AND TECHNOLOGY. Licensee acknowledges that
under this Agreement it has no right or license to any technology or
intellectual property of Licensor other than the Licensed Technology, and the
Licensed Technology expressly excludes Licensor's [*] technologies. In
addition to Licensee rights under Section 7, Licensor and Licensee agree to
conduct discussions from time to time for the purpose of considering on a
technology-by-technology or product-by-product basis additional products or
technology which may be included hereunder or otherwise employ the Licensed
Technology on terms which Licensor and Licensee determine to be mutually
acceptable.
2. TERM
2.1 TERM. The term of this Agreement shall commence on the date
of this Agreement and shall continue until the Expiration Date, unless sooner
terminated in accordance with this Agreement or unless extended by the mutual
written agreement of the parties (the "Term").
2.2 EFFECT OF TERMINATION OR EXPIRATION. Prior to the Expiration
Date and so long as this Agreement has not been sooner terminated in
accordance with its terms, Licensor and Licensee shall enter into discussions
for the purpose of extending or renewing the Term upon mutually acceptable
terms and conditions which are within the same general framework of this
Agreement. In the event no agreement is reached by Licensor and Licensee as
to such extension or renewal, then Licensor and Licensee shall enter into a
new license agreement for the license of the Licensed Technology to Licensee
on a non-exclusive and most-favored customer basis. Subject to the foregoing
sentence and in addition to the provisions of Section 10.3, upon the
termination or expiration of this Agreement, all license rights of Licensee
shall terminate other than the right to retain and use the Licensed
Technology and Marks solely for the purpose of: (a) supporting the installed
base of Licensee Products; (b) filling any accepted purchase orders which are
not subject to cancellation for Licensee Products; (c) selling Licensee
3
<PAGE>
Products developed as of such date until such time as Licensee discontinues
such products, but in any event not longer than two (2) years following the
date of termination; and (d) producing and selling such additional inventory,
if any, as may be required for Licensee to recoup any and all pre-paid
License Fees. Licensee shall otherwise cease manufacture and distribution of
Licensee Products and, at Licensor's direction, Licensee shall return or
destroy all copies of the Licensed Technology other than as permitted to be
retained pursuant to this Section 2.2.
2.3 RENEWAL OF TERM. The Term shall be renewed for successive
periods of one (1) year unless voluntarily terminated by either Licensor or
Licensee at the end of the initial Term or any renewal Term by providing to
the other party written notice of non-renewal of the Term at least 90 days
prior to the expiration of the initial or any renewal Term.
3. MANUFACTURING
3.1 ACKNOWLEDGMENT OF STANDARDS AND GOODWILL. Licensee
acknowledges that Licensor has made a substantial investment in developing
and fostering an image and reputation of high quality, design, prestige and
integrity and that the Licensed Technology is associated with products of
consistently high quality and design.
3.2 MANUFACTURING SPECIFICATIONS. Licensee shall manufacture all
of the Licensee Products that include the Licensed Technology consistent with
standards of high quality and design, and Licensee shall exercise its
commercially reasonable efforts to consult and cooperate with Licensor at all
times in connection with the manufacture of such Licensee Products. In that
regard, as early as possible, and in any event prior to the commencement of
distribution of each Licensee Product, Licensee shall provide to Licensor
pre-distribution versions of each Licensee Product. Licensee agrees that
Licensor shall have the right to test and evaluate all Licensee Products
which use Licensed Technology to confirm that such Licensee Products conform
to the specifications to be developed by Licensee and Licensor pursuant to
Section 5.2 hereof. In the event that Licensor determines that any such
Licensee Products do not meet such specifications, Licensor shall immediately
notify Licensee thereof and Licensee shall use all commercially reasonable
efforts to modify such Licensee Products to meet such specifications.
4. DUTIES OF LICENSEE
4.1 MARKETING AND PROMOTION. In addition to the advertising and
public relations requirements set forth in Section 9, Licensee shall exercise
its commercially reasonable efforts to market, promote and sell the Licensee
Products that include the Licensed Technology and to meet the demand for the
Licensee Products which include Licensed Technology. All such Licensee
Products, packaging, literature,
4
<PAGE>
advertising and promotional materials shall include the appropriate Mark and
other intellectual property rights notice as may designated by Licensor;
provided that unless Licensee otherwise agrees, such Mark shall be the same
Mark that Licensor uses or authorizes others to use to identify products that
perform similar functions or that include technology similar to the Licensed
Technology. [*].
4.2 COMPETING PRODUCTS. During such portion of the Term as
Licensee holds an exclusive license to any portion of the Licensed
Technology, Licensee shall not, nor shall it permit any of its principals,
subsidiaries, or affiliates to engage in the marketing, promotion, sale,
distribution, design, development or sourcing or manufacturing of any Video
Display and Enhancement Integrated Circuit for use in the PC market other
than in cooperation with Licensor and, with respect to use in markets other
than the PC market, Licensee shall first request Licensor to license
Licensor's technology to Licensee on mutually agreeable terms and cooperate
with Licensee and if Licensor declines then Licensee may work with third
parties with respect to such markets; provided that the foregoing shall not
prohibit Licensee from developing in-house its own Video Display and
Enhancement Integrated Circuits or from meeting with other holders of video
technology for the purpose of confirming that Licensee's leadership in its
industry is maintained. In addition, during the Term [*]
4.3 RECORDS AND INSPECTIONS. Licensee shall maintain and retain
complete, clear and accurate records regarding the distribution of all
Licensee Products that include Licensed Technology, and shall retain such
records for a period of at least one (1) year after payment of License Fees
with respect to such Licensee Product. Licensor shall have the right to an
inspection and audit of all accounting and sales books and records of
Licensee relevant to the calculation of License Fees under Section 6 below
conducted by an independent audit professional selected and paid by Licensor
no more than once every twelve (12) months during regular business hours at
Licensee's offices, on at least ten (10) days notice and in such a manner
which will not interfere with the conduct of Licensee's business. Licensee
shall cooperate fully with Licensor's representatives during such audits by
rendering such assistance as may be reasonably requested. If any such audit
discloses underpayment of ten percent (10%) or more of amounts due hereunder,
Licensee shall bear all of the reasonable costs of the audit. Licensee's
obligations and Licensor's audit rights under this Section shall survive the
expiration or termination of this Agreement and shall terminate on the date
which is one (1) year after the date of termination or expiration of this
Agreement or any renewal or extension hereof.
4.4 COMPLIANCE WITH LAW. Licensee shall comply with all
applicable laws and regulations respecting the design, development,
manufacture, advertising, promotion and distribution of the Licensee Products
that included Licensed Technology and the use of the Licensed Technology.
5
<PAGE>
5. DUTIES OF LICENSOR
5.1 PRODUCT DEVELOPMENT. Licensor shall continue its Development
Work with respect to the Licensed Technology to effect the delivery of the
Licensed Technology and the integration of the Licensed Technology into the
Licensee Products in accordance with Section 5.2. Any and all reasonable
costs and expenses incurred by Licensor in connection with such Development
Work that are unique to Licensee shall be reimbursed by Licensee to Licensor
on a quarterly basis, payable with the License Fee payments, provided that
the same shall have been pre-approved by Licensee. In addition, Licensor
shall continue to meet with such PC industry companies as it deems
appropriate to ensure that product leadership is maintained with respect to
the Licensed Technology in the PC market, and Licensor may develop,
manufacture and sell its own Video Display and Enhancement Integrated
Circuits. If Licensor becomes aware of an opportunity for the sale of Video
Display and Enhancement Circuits [*] not otherwise addressed by this
Agreement, Licensor will inform Licensee of such opportunity and Licensor and
Licensee will discuss in good faith the terms and conditions of cooperation
for the mutual exploitation of such opportunity. Licensor agrees that during
that portion of the Term during which Licensee holds an exclusive license
hereunder, Licensor will not distribute products containing Licensed
Technology combined with 3D Graphics Technology in a single integrated
circuit for sale [*]. Subject to the foregoing terms of this Section 5.1,
nothing contained in this Agreement shall restrict Licensor's right to
develop and sell its own Video Display and Enhancement Integrated Circuits.
5.2 PRODUCT SUPPORT. Licensor shall use commercially reasonable
efforts to assist Licensee in the integration of the Licensed Technology into
Licensee Products, including generation of C++ models and macro block
synthesis, and Licensor shall use commercially reasonable efforts to
cooperate and work jointly with Licensee in defining specifications of the
video processing functions of the Licensed Technology to be integrated in the
Licensee Products.
5.3 APPLICATION SUPPORT. Licensor shall provide Licensee up to
eight (8) man hours per week of technical applications support during the
Term for the purpose of solving potential applications problems via telephone
calls, facsimile transmission and electronic mail at numbers and addresses
established by Licensor and at on-site meetings at Licensee premises, as
necessary. Licensee shall notify Licensor of any restrictions or limitation
as to the number and identity of employees of Licensee as are authorized by
Licensee to use such support services. Licensor agrees that it will evaluate
all Licensee Products that include Licensed Technology at Licensor's lab and
provide a summary report to Licensee of the result of such evaluation.
6. LICENSE FEES AND OTHER PAYMENTS
6.1 [*]
6
<PAGE>
6.2 LICENSE FEES. Licensee shall pay Licensor, in arrears on or
before forty-five (45) days after the end of each calendar quarter of the
Term, a License Fee calculated as provided in Annex II, to the extent that on
a quarterly basis, such License Fees exceed the then current balance of the
Minimum License Fees paid in accordance with Section 6.1 above.
6.3 EXCEPTIONS. No License Fees shall be payable by Licensee for
the following Licensee Products: (a) a reasonable number of units used for
promotional, demonstration, other marketing or internal purposes by Licensee;
(b) damaged or returned and which Licensee nets against Licensee Products
shipped; or (c) provided at no or nominal charge as replacement products for
damaged or returned Licensee Product which Licensee has not netted against
units shipped.
6.4 [*]
6.5 PAYMENTS.
6.5.1 The License Fee and Minimum License Fees shall be
due and payable to Licensor by Licensee on the dates and in the amounts as
set forth in this Section 6 above.
6.5.2 Concurrent with each such payment, Licensee shall
provide to Licensor a written statement of the License Fee amount that is
certified by Licensee's Chief Financial Officer to be correct together with a
good faith, non-binding projection of the License Fee amount which Licensee
forecasts will be payable with respect to the next quarter. Licensee will
make available to Licensor, for review by an independent certified public
accountant at Licensee's offices only no more than once per quarter and upon
reasonable notice and at a mutually reasonably acceptable time, a detailed
accounting of the calculation of the License Fee[*]. Because of the highly
confidential nature of the statement available for review at Licensee's
offices, the reviewer may not copy or remove such statement from Licensee's
offices. In the event that the certified statement issued for the end of a
fiscal year shall amend, modify, correct or otherwise restate any prior
quarter's License Fee calculation, then the License Fee payable with respect
to the fiscal year end shall be adjusted, and, if necessary, subsequent
License Fee payment amounts shall be credited to adjust for such restatement.
6.5.3 All payments required under this Agreement shall be
in U.S. dollars, and made payable to the order of "FAROUDJA LABORATORIES,
INC.", or in such other currency, time, Licensor location or manner as
Licensor shall specify; provided that Licensee shall have no obligation with
respect to withholding or other taxes under Section 6.6 hereof in the event
that Licensor specifies that payments shall be made from or to any
jurisdiction other than the United States.
6.5.4 If Licensee fails to pay (by direct deposit for
Licensor's account, duly delivered check or confirmed wire delivery of funds)
any payment due
7
<PAGE>
under this Agreement on or before the due date thereof, then the delinquent
amount shall be subject to a late charge equal one and one-half percent
(1.5%) per month from the due date until paid. If this late charge exceeds
the maximum rate allowable by law, then the late charge shall accrue at the
maximum rate allowable by law.
6.5.5 Acceptance by Licensor of any payments under this
Agreement shall not prevent Licensor at any later date from disputing the
amount owed or from demanding more information from Licensee regarding
payments finally due, and such acceptance of any payment by Licensor shall
not constitute a waiver of any breach of any term or provision of this
Agreement by Licensee if any such breach shall have occurred.
6.6 TAXES. In addition to any other payments due under this
Agreement, Licensee shall pay, and hereby agrees to indemnify and hold
Licensor harmless from, any sales, use, excise, import or export, value-added
or similar tax or duty not based on Licensor's net income, including any
penalties and interest, as well as any costs associated with the collection
or withholding thereof, and all government permit fees, license fees and
customs and similar fees levied on the delivery of any services or the
Licensed Technology to Licensee (collectively, "Taxes"). All payments due
under this Agreement shall be made without any deduction or withholding for
any Taxes, unless such deduction or withholding is required by any applicable
law of any relevant government revenue authority then in effect. If Licensee
is required to deduct or withhold any Taxes other than in connection with any
failure by Licensor to make payment of any Taxes, Licensee will promptly
notify Licensor of the requirement, pay the required amount to the relevant
governmental authority, provide Licensor with an official receipt or
certified copy or other documentation acceptable to Licensor evidencing the
payment, and gross-up the payments subject to any such deduction or
withholding and pay to Licensor, in addition to the payment to which Licensor
is otherwise entitled under this Agreement, such additional amount as is
necessary to insure that the net amount actually received by Licensor after
any such deduction or withholding equals the full amount Licensor would have
received had no such deduction or withholding been imposed. In the event
that Licensor receives any allowable or actual financial benefit from any
Taxes so paid by Licensee such that, together with the grossed-up payment
amount paid by Licensee, Licensor receives, or is entitled to receive, more
than the full amount Licensor would have received had no such deduction or
withholding been imposed, then Licensor shall promptly refund to Licensee any
such excess, or at Licensee's option, apply such excess to future license
fees. In the event that Licensor notifies Licensee that Licensor will not
receive any allowable or actual financial benefit from the deduction or
withholding of any Taxes, Licensor will make available to Licensee, for
review, at Licensee expense, by an independent certified public accountant at
Licensor's office, no more than once per year and upon reasonable notice at a
mutually reasonably acceptable time, the relevant Licensor tax returns (if
any) and the related documents so as to establish the propriety on the
non-receipt of the benefit. As a result of such audit, should a benefit be
discovered that was not taken by
8
<PAGE>
Licensor, to the extent agreed by Licensor or its tax accountants, Licensor
shall promptly refund to Licensee any such excess or, at Licensee's option,
apply such excess to future license fees. If Licensor does not agree with
the findings of Licensee's auditor, then Licensee may refer such matter to
arbitration in accordance with Section 13.7 below. Any information disclosed
to such independent certified public accountants in the course of any such
audit shall be treated as confidential and may be disclosed to Licensee only
to the extent necessary to explain the benefit discovered by the audit.
6.7 FAVORED CUSTOMER PRICING.
6.7.1 WHILE LICENSEE HOLDS EXCLUSIVE RIGHTS. During such
of the Term as Licensee holds an exclusive license to Category I Technology,
Licensor agrees that it will not offer to license to any third party, with a
right to sell into or otherwise supply [*], the Category II Technology on
Economic Terms more favorable than those then in effect between Licensor and
Licensee with respect to substantially the same Category II Technology and
volumes.
6.7.2 WHILE LICENSEE DOES NOT HOLD EXCLUSIVE RIGHTS.
During such of the Term as Licensee does not hold an exclusive license as to
Category I Technology, Licensor shall offer to enter into with Licensee a
license agreement on the same Economic Terms with respect to any Licensed
Technology as entered into by Licensor with any similarly situated
third-party licensee within ten (10) days after the date that Licensor enters
into such agreement with such third party. Licensee may, within thirty (30)
days after receipt of such an offer from Licensor, notify Licensor that
Licensee desires to substitute each and every Economic Term granted to such
licensee for all (but not less than all) of the Economic Terms of this
Agreement. If Licensee elects to substitute the Economic Terms of any such
agreement for the Economic Terms of this Agreement, the substituted Economic
Terms shall become effective on the first day of the subsequent calendar
quarter as to the applicable Licensed Technology subject to Licensor and
Licensee entering into an amendment to this Agreement evidencing the new
Economic Terms.
7. OWNERSHIP OF THE INTELLECTUAL PROPERTY RIGHTS; CONFIDENTIAL INFORMATION
7.1 LICENSOR OWNERSHIP. Licensee acknowledges that (i) nothing
contained in this Agreement shall give to Licensee any right, title or
interest in the Intellectual Property Rights, other than the express license
granted in Section 1.1 of this Agreement and the rights (which are subject to
such license) granted under Sections 7.2 and 7.3, and (ii) Licensee's use of
the Intellectual Property Rights shall inure only to the benefit of Licensee
and sublicensees permitted hereunder, if any.
7.2 OWNERSHIP BY LICENSEE. Licensee owns all intellectual
property rights in and to Licensee's design and implementation of the
Licensed Technology in
9
<PAGE>
Licensee Products, including but not limited to all VHDL code that embodies
such design; provided that Licensee's right to use and transfer such rights
are subject to the Licensor's rights in the Licensed Technology and this
Agreement and Licensee's rights in the Licensed Technology as provided in
this Agreement.
7.3 INVENTIONS AND ENHANCEMENTS.
7.3.1 OWNERSHIP. Any Enhancement or Invention jointly
conceived or developed during the Term by the employees, representatives or
agents of both Licensor and Licensee shall be jointly owned by Licensor and
Licensee with each holding an undivided fifty percent (50%) ownership
interest. Any Invention or Enhancement made during the Term independently by
or for Licensor or Licensee shall be owned solely by Licensor or Licensee,
respectively. With respect to jointly owned Inventions and jointly owned
Enhancements: (a) the parties shall agree on a case-by-case basis which
party will file United States and foreign patent applications and other
filings, recordation or registrations, if any; (b) the parties shall share
equally the reasonable cost of all mutually agreed upon patent applications
and other filings, recordation or registrations; (c) each party shall provide
to the other party, at no charge, copies of all designs, specifications,
samples and prototypes constituting such jointly owned Inventions or jointly
owned Enhancements, and of all licenses thereof or infringement claims,
actions or proceeding relating thereto as soon as possible and no later than
thirty (30) days after the development or occurrence thereof; and (d) each
party shall bear all cost of enforcement and defense of its rights and
interests in and to the jointly owned rights.
7.3.2 UTILIZATION OF INVENTIONS AND ENHANCEMENTS.
(a) With respect to jointly owned Inventions, the
parties shall negotiate in good faith the terms and conditions under which
each shall be entitled to license and otherwise exploit its interest during
the Term and thereafter.
(b) With respect to jointly owned Enhancements:
(i) during the Term and only during the Term, Licensee shall have the right,
for no additional fees or royalties, to utilize such Enhancements pursuant
and subject to the terms of this Agreement (e.g., Licensee shall have the
right to utilize Enhancements to Category I Technology in the same manner as
Licensee is entitled to utilize Category I Technology under this Agreement);
and (ii) Licensor shall have a perpetual, worldwide, royalty free license to
exploit and use the jointly owned Enhancements during the Term, subject to
the terms of this Agreement and to Licensee's rights and licenses with
respect to the applicable Category of Technology (including as set forth in
Section 1.1 and 5.1 above), and at all times thereafter.
10
<PAGE>
(c) With respect to Enhancements developed during
the Term and owned by Licensor, Licensee shall have the rights described in
clause (i) of subsection (b) above.
(d) With respect to Enhancements developed during
the Term and owned by Licensee: (i) during the Term and only during the Term,
Licensee shall have the right to utilize such Enhancements pursuant and
subject to the terms of this Agreement (e.g., Licensee shall have the right
to utilize Enhancements to Category I Technology in the same manner as
Licensee is entitled to utilize Category I Technology under this Agreement);
and (ii) Licensor shall have a perpetual, worldwide, royalty free license to
exploit and use such Enhancements during the Term, subject to the terms of
this Agreement and to Licensee's rights and licenses with respect to the
applicable Category of Technology (including as set forth in Section 1.1 and
5.1 above), and at all times thereafter.
(e) With respect to Inventions arising during the
Term and owned by Licensor, if Licensor at its discretion and election
determines to offer to any party such Inventions for use [*], then Licensee
shall be entitled to a right of first refusal to license and utilize such
technology [*] on mutually acceptable terms (which may include exclusive or
non-exclusive license rights).
(f) With respect to Inventions arising during the
Term and owned by Licensee, if Licensee at its discretion and election
determines to offer to any party such Inventions in [*], then Licensor shall
be entitled to a right of first refusal to license and utilize such
technology in such market(s) on mutually acceptable terms (which may include
exclusive or non-exclusive license rights).
7.4 NO USE OF NAME. Licensee shall not use any of the
Intellectual Property Rights as a trade name, service mark, business name,
trade style, or fictitious business name. Any unauthorized use shall inure
solely to the benefit of Licensor, and such unauthorized use by Licensee
shall not confer on Licensee any right, title or interest in the Intellectual
Property Rights.
7.5 REGISTRATION. Licensee shall not seek or obtain any
registration of any of the Intellectual Property Rights or Licensed
Technology in any name other than that of Licensor or participate directly or
indirectly in such registration anywhere in the world without Licensor's
prior written consent. Nothing in this Section 7.5 shall restrict Licensee's
right to register intellectual property rights in Inventions or Enhancements
which Licensee owns in accordance with Section 7 above. If Licensee has
obtained or obtains in the future, in any country, any registered filed,
recorded or other right, title or interest in any of the Intellectual
Property Rights or the Licensed Technology, or in any other trademark or
service mark owned by Licensor, Licensee has so acted or will act as an agent
and for the benefit of Licensor for the limited purpose of obtaining such
registrations and assigning the same to Licensor. Licensee shall execute any
and all
11
<PAGE>
instruments deemed by Licensor, or its respective attorneys or
representatives, to be necessary to transfer such right, title or interest to
Licensor.
7.6 [*]
7.7 INFRINGEMENT SUITS.
7.7.1 SUITS BY LICENSOR. In connection with the use and
exercise of Licensee's license rights hereunder, Licensee shall use its best
efforts to detect any possible infringements, claims or actions in derogation
of any Intellectual Property Rights by any third parties and shall inform
Licensor promptly of any such infringement, claim or action; provided,
however, that Licensor shall have the sole right to determine whether any
action shall be taken on account of such infringement, claim or action and
Licensee shall not take any action on account of such infringement, claim or
action without the prior written consent of Licensor. If Licensor initiates
any legal proceedings on account of any such infringement, claim or action,
Licensee shall cooperate with and assist Licensor to the extent reasonably
necessary to protect the Intellectual Property Rights, including without
limitation, being joined as a necessary or desirable party to such
proceedings. Licensor shall be entitled to retain all proceeds received upon
settlement or from judgment awarded in any such suits.
7.7.2 SUITS BY LICENSEE. If Licensee has provided written
notice to Licensor, pursuant to Section 7.7.1 above, of a material actual
infringement by a third party of one or more of the Patents [*] If Licensor
elects not to pursue any action against the alleged infringer, then Licensee
may maintain, at Licensee's expense and, in the case of any proposed action
against any third-party licensee of Licensor, [*] any appropriate suit,
action or proceeding involving the infringement or misappropriation [*]
Licensee shall be entitled to retain all proceeds received upon settlement or
from judgment awarded in any such suits as prosecuted by Licensee and not by
Licensor.
7.8 INTELLECTUAL PROPERTY RIGHTS. Licensor represents and
warrants that: (i) to Licensor's knowledge (without duty of inquiry), the
Licensed Technology does not and will not infringe any valid and subsisting
Patents or other intellectual property rights owned by any person other than
Licensee or an affiliate of Licensee; (ii) Licensor has not received and is
aware of no notice or allegation that any of the Licensed Technology
infringes any third-party intellectual property rights; (iii) to Licensor's
knowledge, Licensor owns or controls all rights in and to the Licensed
Technology; and (iv) to Licensor's knowledge, Licensor has the right to grant
the licenses granted in this Agreement. If it is determined that Licensor
does not have the right to use the Licensed Technology, or any portion
thereof, upon receipt of written notice from Licensor, Licensee shall
immediately refrain from selling the Licensee Products and, provided that
Licensor has not breached its representations and warranties made under
clauses (i), (ii), (iii) and (iv) of this Section 7.8, Licensee shall have no
claims against Licensor for
12
<PAGE>
damages caused by such cessation or termination or otherwise caused except as
provided in Section 12.
7.9 COPYRIGHTS. If Licensee, alone or with others, develops any
written material pertaining to Licensee Products which include Licensed
Technology or to the Licensed Technology, prior to its publication and
dissemination, Licensor shall be provided a reasonable opportunity to review
and approve such material, which approval shall not be unreasonably withheld.
7.10 POWER OF ATTORNEY. During and for a period of two (2) years
after the Term, each party agrees to execute such documents, render such
assistance and take such other actions as the other party may reasonably
request, to assist the requesting party to apply for, register, perfect,
confirm and protect the requesting party's rights in the Licensed Technology,
Inventions and Enhancements as set forth in this Agreement. Each party will
assist the other in obtaining and enforcing Patents and other protection with
respect to the Licensed Technology, Inventions and Enhancements in accordance
with the ownership rights set forth in this Agreement in any and all
countries during and after the Term. Neither party shall incur any expense
with respect to any such assistance provided to the other party. If a
requesting party is unable to secure the other party's signature to any
lawful and necessary document that accurately reflects the ownership rights
established under this Agreement, where such document is required to apply
for, execute, perfect, enforce or protect any Patent or other rights with
respect to any Licensed Technology, Invention or Enhancement, then the
non-requesting party hereby designates and appoints the requesting party as
its agent and attorney in fact to act for and on behalf of and instead of the
non-requesting party to execute any such document and to take any such action
in the name of the non-requesting party.
7.11 CONFIDENTIAL INFORMATION. During and after the Term, Licensor
and Licensee shall maintain in strict confidence and shall not disclose any
Confidential Information. Licensor and Licensee shall take every reasonable
precaution to protect the confidentiality of the Confidential Information of
the other, consistent with the higher of: (a) the standard of care which that
party exercises with respect to its own Confidential Information; or (b) the
standard of care that an ordinarily prudent business would exercise to
protect its own Confidential Information. In any event, each party shall (i)
disclose Confidential Information to (x) only those authorized employees of
such party whose duties justify their need to know such information and who
have been clearly informed of their obligation, and who have agreed in
writing, to maintain the confidential and/or proprietary status of such
Confidential Information; or (y) only those third parties required for the
performance of a party's rights and obligations under this Agreement pursuant
to a written confidentiality agreement at least as extensive as the
confidentiality provisions of this Agreement; and (ii) use such Confidential
Information only for the purposes set forth in this Agreement. The
obligations set forth in this Section 7.11 shall not apply to any
Confidential Information which must be disclosed pursuant to applicable
federal, state or local law, regulation, court order, or other legal
13
<PAGE>
process. In addition, neither party shall disclose the terms of this
Agreement to any third party without the express prior written consent of the
other party other than to its attorneys and accountants or as may be required
by law. If either party is required to disclose Confidential Information
pursuant to applicable federal, state or local law, regulation, court order
or other legal process or law, then prior to such disclosure, such party
shall give notice to the other party so that the other party may take
reasonable steps to oppose or limit such disclosure. The parties shall take
reasonable steps to agree as quickly as possible in light of Licensor's
requirements to determine what Licensor will disclose in any filings with
the Securities and Exchange Commission, and in any event a party shall
respond within 48 hours of such a proposed disclosure, with any failure to so
respond to be deemed consent.
8. NOTICE OF OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS
8.1 PROPRIETARY NOTICES. Licensee shall include Licensor's logo
on Licensee Products that include Licensed Technology, in accordance with
logo usage guidelines provided by Licensor. Licensee will determine the size
and placement of Licensor's logo on such Licensee Products given the overall
size and design of other markings on such Licensee Products. Licensee also
will include with documentation that accompanies Licensee Products that
include Licensed Technology all trademarks, trade names, logos, patent or
copyright notices, confidential or proprietary legends or other notices or
markings on or in the Licensed Technology.
8.2 TRADEMARK LICENSE. Subject to the terms hereof, Licensor
grants to Licensee a world-wide, limited license to use the Marks on Licensee
Products that include Licensed Technology and in Licensee's advertising and
printed materials for such Licensee Products. Licensee's license under this
Section 8.2 is [*] as to the use of the Marks [*] to identify Category I
Technology for so long as Licensee holds an exclusive license to such
Licensed Technology, [*] as to the use of the Marks [*] to identify Category
II Technology for so long as the Licensee holds a [*] license, and
non-exclusive as to the use of the Marks to identify Licensed Technology as
to which Licensee does not hold exclusive rights. Licensee shall provide a
notice of trademark status adjacent to and with the first or most prominent
use of the Mark in such printed materials and include the respective legends
adjacent to or as a footnote to the Mark as follows:
--[*] is a trademark of Faroudja Laboratories, Inc., which may be
registered in certain jurisdictions; and
--such other symbols and notices as may be prescribed by Licensor
from time to time
14
<PAGE>
9. ADVERTISING AND PUBLIC RELATIONS
9.1 LICENSOR ADVERTISING AND PROMOTION. Licensor may as it deems
appropriate advertise and promote the Licensed Technology but shall have no
obligation to undertake any such advertising and promotion. Notwithstanding
the foregoing, at Licensee's reasonable request, Licensor will make
reasonable efforts to participate with Licensee in presentations by Licensee
to the public and to potential customers of Licensee Products that include
Licensed Technology.
9.2 LICENSEE ADVERTISING AND PROMOTION; [*]
9.3 PRIOR REVIEW. Licensee shall submit to Licensor for
Licensor's review samples of all advertising and other promotional plans and
materials that Licensee desires to use or is using to promote the Licensee
Products to the extent the same includes any references to or descriptions of
the Licensed Technology or Licensor prior to the publication or distribution
of such materials.
9.4 PUBLIC RELATIONS AND PRESS RELEASES. Licensee shall publicize
the Licensee Products as a part of Licensee's general public relations
efforts, including the participation by Licensor in new products "road show"
presentations, as reasonably requested by Licensee or Licensor. Licensor
agrees that Licensee shall have the right to make the first general
announcement of this Agreement and the transactions contemplated hereby. In
any event, neither party shall advertise, issue any press release or
otherwise publish the fact that the parties have entered into this Agreement
without the prior written consent of the other party, except as may be
required by law. The parties shall use their best efforts to draft and issue
a press release announcing the signing of this Agreement and each party may
include the information included in such press release in subsequent
advertisements, press releases or other publications without the other
party's prior written consent, provided that such party includes proper
attribution of the other party's name. Following the issuance of such press
release, Licensor may refer to Licensee as Licensor's customer in Licensor's
sales and marketing materials and presentations.
10. TERMINATION
10.1 TERMINATION FOR CAUSE. In the event of a material breach by
Licensor or Licensee (including any subsidiary set forth on Schedule 1.1-B)
of this Agreement, the non-breaching party may give written notice of the
breach to the breaching party and specify a reasonable period of time of not
less than thirty (30) days and not more than sixty (60) days within which the
breaching party is to cure the breach. As used in this Section 10.1, a
"reasonable period of time" for curing a breach shall be determined based
upon commercial circumstances existing at the time of the breach and the
commercially reasonable time necessary to cure such breach, but in any event
shall not be more than thirty (30) days with respect to the cure of any
payment default. If the
15
<PAGE>
breach is not cured within the specified period, the non-breaching party may
terminate this Agreement effective upon written notice to the breaching
party.
10.2 TERMINATION UPON BANKRUPTCY INSOLVENCY OR DISSOLUTION. Upon
the insolvency, bankruptcy, or dissolution of Licensee (other than a
subsidiary), or the assignment or sale or other disposition of a substantial
portion of its assets for the benefit of creditors, this Agreement shall
immediately and automatically terminate. Upon the insolvency, bankruptcy, or
dissolution of any subsidiary listed on Schedule 1.1-B, or the assignment or
sale or other disposition of a substantial portion of its assets for the
benefit of creditors, the license granted to that subsidiary under Section
1.1 shall immediately and automatically terminate.
10.3 EFFECTS OF TERMINATION. Upon any termination of this
Agreement in accordance with its terms:
10.3.1 Any indebtedness of Licensee to Licensor shall
become immediately due and payable and Licensor may retain as security or
apply as payment against any such indebtedness any Licensee Products of
Licensee in the possession of Licensor.
10.3.2 Licensor shall not be liable to Licensee, either for
compensation or for damages of any kind, whether on account of loss by
Licensee or any other person, of present or prospective profits on present or
prospective sales, investments or goodwill resulting from Licensor's
termination of this Agreement in accordance with its terms.
10.3.3 Except as otherwise permitted under Section 2.2,
Licensee immediately shall discontinue to manufacture, promote, distribute or
sell in any manner the Licensee Products and shall discontinue the use of the
Licensed Technology, and any signs, equipment, certificates, advertising or
promotional materials, stationery, forms and any other articles or materials,
that display or refer to Licensed Technology.
10.3.4 Each party shall continue to maintain in confidence
any and all Confidential Information, and, within five (5) days after such
termination, except as otherwise permitted under Section 2.2, will return to
the other party, at the returning party's expense, all packaging, promotional
or advertising materials or other materials and documents relating to the
Licensee Products, Licensed Technology or any Confidential Information and
certify to the other party that the certifying party has complied with all of
its obligations with respect to Confidential Information under this Agreement.
10.4 SURVIVAL. Sections 7.1-7.3, 7.5, 7.6, 7.7.2, 7.10, 7.11,
10.3, 10.4, 11, 12 (provided that the indemnification obligations of Licensor
under Section 12
16
<PAGE>
shall not survive termination based upon Licensee's breach) and 13 shall
survive the expiration or earlier termination of this Agreement.
11. DISCLAIMER OF WARRANTY
11.1 LIMITED WARRANTY. Except as set forth in Section 7.8 above,
the Licensed Technology is delivered to Licensee on an "as is" basis.
LICENSOR MAKES NO WARRANTIES, EXPRESS OR IMPLIED, CONCERNING THE LICENSED
TECHNOLOGY OR ANY OTHER MATERIALS OR SERVICES PROVIDED TO LICENSEE UNDER THIS
AGREEMENT, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT.
LICENSOR SPECIFICALLY DOES NOT WARRANT THAT THE LICENSED TECHNOLOGY IS
COMPLETE, ERROR-FREE OR SUFFICIENT FOR THE MANUFACTURING AND SALE OF LICENSED
PRODUCTS.
11.2 NO LICENSOR WARRANTIES TO CUSTOMERS; LIABILITY DISCLAIMER. To
the extent that Licensee makes any warranty to its customers with respect to
the Licensee Products, such warranty shall be made solely for Licensee's
account and shall not bind Licensor.
12. INDEMNIFICATION AND LIMITATION ON LIABILITY
12.1 LICENSOR INDEMNITY FOR LICENSED TECHNOLOGY. Subject to the
limits of liability in this Section 12 and so long as Licensee is not in
material breach of its obligations hereunder, Licensor shall indemnify and
defend Licensee, and hold Licensee harmless against direct (but not
consequential or incidental) damages awarded in favor of any third party,
against any claim, suit or proceeding (collectively, "Claim") brought against
Licensee to the extent that such Claim is based on a breach of one or more of
Licensor's warranties under Section 7.8 above or any claim that any Licensed
Technology constitute a direct infringement of any patent or any mask work,
copyright or trade secret issued or protected under the laws of the United
States or under the laws of a country similar to those of the United States,
and Licensor shall pay all damage and costs (including attorney's fees)
awarded by final judgment (from which no appeal may be taken) or settlement
against Licensee, subject to the conditions set forth in Section 12.3 below.
During the pendency of any Claim, Licensee shall have no right of offset or
deduction against its obligations to make payment of License Fees and Minimum
Annual License Fees under this Agreement.
12.2 EXCEPTIONS AND CROSS-INDEMNITY. Licensor shall have no
liability to or for any Claim alleging infringement or misappropriation based
upon (a) Licensor's compliance with Licensee's instructions, drawings,
designs or functional specifications; (b) any use of the Licensed Technology
in a manner other than as specified by Licensor; (c) any use of the Licensed
Technology in combination with other products equipment,
17
<PAGE>
devices, software, systems, data or services not supplied by Licensor to the
extent that such Claim is directed against such combination, (d) any
representation or warranty by Licensee to its customers with respect to the
Licensee Products except to the extent that such representation or warranty
was made by Licensee consistent with its rights and licenses under this
Agreement, or (e) any alteration or modification of the Licensed Technology
by anyone other than Licensor. In the event of an infringement or
misappropriation action or claim against Licensor which is based on any of
the circumstances or conduct described in the preceding sentence, Licensee
shall at its own expense defend such Claim, and Licensee shall pay any and
all damages and costs finally awarded against Licensor in favor of a third
party in connection with such Claim, or those damages and costs agreed in any
monetary settlement or compromise of such action, subject to the conditions
set forth in Section 12.3 below.
12.3 INDEMNIFICATION PROCEDURES. If either party receives any
Claim or is subject to any Claim as to which it is entitled to be indemnified
by the other party under Section 12.1 or 12.2 above, such indemnified party
shall promptly notify the indemnifying party in writing of such Claim. The
indemnifying party shall defend or settle such Claim and satisfy any final
judgments rendered against the indemnified party, provided that the
indemnifying party shall have sole control of the defense or settlement of
the Claim, and the indemnified party shall provide all reasonable assistance
requested by the indemnifying party, at the indemnifying party's expense.
If, in the reasonable judgment of the indemnified party, its interests
diverge from the interests of the indemnifying party, the indemnified party
may assume control of and conduct such defense at its own expense; provided,
however that the indemnifying party shall have no liability for damages or
losses attributable to such defense. The indemnified party may, at any time,
participate at its own expense, in the defense of the claim through counsel
of its choice. Neither party shall settle any such action without first
obtaining the other party's written consent thereto, which consent shall not
be unreasonably withheld.
12.4 REMEDIES. If any Licensed Technology supplied by Licensor to
Licensee shall be held to directly infringe any third party patent issued or
protected as of the date hereof or any mask work, copyright, trade secret or
other proprietary right, issued under the laws of the United States or the
laws of a country similar to those of the United States, and the use of same
is enjoined, or if Licensor believes such a holding is likely. Licensor
shall either: (i) procure for Licensee the right to use such Licensed
Technology free of liability for infringement; or (ii) replace (or modify)
the Licensed Technology with a non-infringing substitute otherwise complying
substantially with all the requirements of this Agreement; or (iii) if
neither of the foregoing alternatives is commercially feasible, to terminate
the Agreement and, in such event, Licensor's sole obligation and liability,
in addition to the obligations set forth in this Section 12, shall be to
refund to Licensee any unrecouped License Fees paid by Licensee with respect
to Licensee Products containing or based on the infringing Licensed
Technology.
18
<PAGE>
12.5 DISCLAIMER. THE FOREGOING SECTIONS 12.1 - 12.4 AND SECTION
12.6 BELOW STATE THE SOLE AND EXCLUSIVE LIABILITY OF THE PARTIES FOR
INFRINGEMENT CLAIMS AND ACTIONS, WHETHER DIRECT OR CONTRIBUTORY.
12.6 LIMITATION OF LIABILITY. EXCEPT FOR LICENSEE'S LIABILITY FOR
PAYMENTS OF LICENSE FEES DUE AND OWING UNDER THIS AGREEMENT, EACH PARTY'S
AGGREGATE LIABILITY IN CONNECTION WITH THIS AGREEMENT, REGARDLESS OF THE FORM
OF ACTION GIVING RISE TO SUCH LIABILITY (WHETHER IN CONTRACT, TORT OR
OTHERWISE), AND INCLUDING ANY LIABILITY UNDER SECTION 12, SHALL NOT EXCEED
THE AGGREGATE AMOUNTS PAID, AS OF THE DATE OF FINAL DISPOSITION OR RESOLUTION
OF THE CLAIM, BY LICENSEE TO LICENSOR UNDER THIS AGREEMENT. NEITHER PARTY
SHALL BE LIABLE FOR ANY INDIRECT, EXEMPLARY, SPECIAL, CONSEQUENTIAL OR
INCIDENTAL DAMAGES OF ANY KIND (INCLUDING WITHOUT LIMITATION LOST PROFITS),
EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, EXCEPT FOR A
BREACH OF EITHER PARTY'S OBLIGATIONS WITH RESPECT TO SECTION 7.11. THE
LIMITATIONS OF LIABILITY CONTAINED IN THIS AGREEMENT ARE A FUNDAMENTAL PART
OF THE BASIS OF EACH PARTY'S BARGAIN HEREUNDER, AND NEITHER PARTY WOULD ENTER
INTO THIS AGREEMENT ABSENT SUCH LIMITATIONS.
13. GENERAL
13.1 EQUITABLE RELIEF. Licensor and Licensee acknowledge that
there may be no adequate remedy at law for its failure to comply with terms
of this Agreement relating to the obligations under Section 4.2, Licensee's
obligation to cease the manufacture, sale, advertisement, promotion or
distribution of the Licensee Products upon termination of this Agreement,
Licensor's and Licensee's obligations with respect to the limited use and the
rights to future use of Licensed Technology, Inventions and Enhancements, and
the obligation to maintain the confidentiality of Confidential Information.
Accordingly, if either party fails to comply with such terms of this
Agreement or other terms the breach of which may not have an adequate remedy
at law, the other party shall have the right to have any such breach remedied
by equitable relief by way of a temporary restraining order, preliminary
injunction, permanent injunction, and such other alternative relief as may be
appropriate.
13.2 ASSIGNMENTS; SUCCESSORS AND ASSIGNS; SUBSIDIARIES. No right
or obligation of either party under this Agreement may be assigned, delegated
or otherwise transferred, whether by agreement, operation of law or otherwise
without the express prior written consent of the other party, except pursuant
to a merger, sale of all or substantially all assets, disposition of all or
substantially all of the assigning party's business with respect to the
Licensed Technology or other corporate reorganization,
19
<PAGE>
other than any of the foregoing effected in connection with an insolvency,
bankruptcy or like proceeding, and any attempt to otherwise assign, delegate
or otherwise transfer any rights or obligations hereunder, without such
consent, shall be void. Subject to the preceding sentence, this Agreement
shall bind each party and its permitted successors and assigns and all
representations, warranties, covenants and agreements of the parties shall
inure to the benefit of and bind their respective successors and permitted
assigns. To the extent any subsidiary of Licensee is a licensee hereunder,
it shall have all the rights, benefits and obligations of the Licensee
hereunder, and, subject to Section 1.1: (a) each such subsidiary, together
with Licensee, shall be jointly and severally liable for all of the
obligations of the Licensee hereunder, and (b) Licensor may enforce its
rights and remedies hereunder against any one or more of Licensee or such
subsidiaries as Licensor may, in its sole discretion, deem appropriate,
irrespective of which of Licensee or such subsidiaries has breached the terms.
13.3 NOTICES. Any notice, request, demand, or other communication
required or permitted under this Agreement, shall be deemed to be properly
given by the sender and received by the addressee (i) if personally
delivered; (ii) three (3) days after deposit in the mails if mailed by
certified or registered air mail, postage prepaid; (iii) twenty-four (24)
hours after being sent by facsimile with confirmation sent as provided in
(ii) above; or (iv) twenty-four (24) hours after being sent by commercial
overnight mail, addressed as follows, and in the case of facsimile
transmission, to the appropriate facsimile number shown below:
To Licensor: FAROUDJA LABORATORIES, INC.
750 Palomar Avenue
Sunnyvale, California 94086
Attention: Chief Executive Officer
Facsimile No: 408.735.8571
With a copy to: BUCHALTER, NEMER, FIELDS & YOUNGER
601 S. Figueroa St., Suite 2400
Los Angeles, California 90017
Attention: Matthew Kavanaugh
Facsimile No: 213.896.0400
To Licensee: S3 INCORPORATED
2801 Mission Boulevard
Santa Clara, California 95052-8058
(or if by overnight courier, 95054)
Attention: Director of Legal Affairs
Facsimile No: 408.980.5444
20
<PAGE>
With a copy to: PILLSBURY MADISON & SUTRO LLP
2700 Sand Hill Road
Menlo Park, California 94025
Attention: Marina H. Park
Facsimile No: 415.223.4545
or to such other address or facsimile number as from time to time may be
given in the manner permitted above.
13.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Licensor or Licensee,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to
fairly accomplish the purposes and intentions of all parties hereto.
13.5 SEVERABILITY. If any provision of this Agreement is found by
any court of competent jurisdiction to be invalid or unenforceable, such
provision shall be deemed to be modified to the minimum extent necessary to
cause it to be valid and enforceable and the invalidity or unenforceability
of such provision prior to such modification shall not affect the other
provisions of this Agreement and all provisions not affected by the
invalidity or unenforceability shall remain in full force and effect.
13.6 AMENDMENT AND MODIFICATION. This Agreement may not be amended
or modified orally. This Agreement may be amended or modified only by a
writing executed by all parties.
13.7 GOVERNING LAW AND ARBITRATION. The parties agree that this
Agreement is executed and delivered in the State of California. This
Agreement shall be construed and governed in accordance with the internal
laws of the State of California, without regard to conflict of law
principles. Any dispute arising out of or relating to this Agreement shall
be resolved by binding arbitration in Santa Clara, California in accordance
with the rules of the American Arbitration Association and the procedures set
forth in Schedule 13.7; PROVIDED that the foregoing shall not prevent either
party from seeking provisional relief, including equitable relief under
Section 13.1.
13.8 ENTIRE AGREEMENT. This Agreement, together with the
Non-Disclosure Agreement between Licensor and Licensee (erroneously referred
to as S3 Corporation) dated as of October 10, 1996, constitutes the entire
agreement between the parties relating to the subject matter hereof and
supersedes any and all previous agreements relating to the subject matter
hereof.
13.9 GOVERNMENT APPROVALS AND REGISTRATIONS. In the event that any
approvals with respect to this Agreement or any registration hereof is
required, initially
21
<PAGE>
or at any time during the term of this Agreement, Licensee shall obtain such
approvals and make such registrations; and any costs, expenses, fees or
charges associated therewith shall be borne by Licensee.
13.10 AUTHORITY TO MAKE AGREEMENT. Each party warrants and
represents that it has the power to enter into this Agreement and perform in
accordance with the provisions hereof and that the execution and performance
of the Agreement has been duly and validly authorized in accordance with all
applicable laws and governing instruments.
13.11 NO WAIVER. No waiver of any breach of any of the
provisions of this Agreement shall be construed to be a waiver of any other
breach of the same or any other provision.
13.12 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of
the specific provisions of this Agreement is intended to be exclusive of any
other remedy, except as expressly provided in this Agreement or any Exhibit,
Annex or Schedule hereto, and each and every remedy shall be cumulative and
shall be in addition to every other remedy given hereunder or now or
hereafter existing in law or in equity or by statute or otherwise. The
election of any one or more remedies shall not constitute a waiver of the
right to pursue other available remedies.
22
<PAGE>
13.13 EXHIBITS, ANNEXES AND SCHEDULES. The definitions and
provisions set forth on Exhibit A and the Annexes and Schedules attached
hereto are incorporated herein and made a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
"Licensor"
FAROUDJA LABORATORIES, INC.,
a California corporation
By /s/ Michael Moone
-------------------------------------
Title: President, CEO
"Licensee"
S3 INCORPORATED,
a Delaware corporation
By /s/ Gary Johnson
-------------------------------------
Title: President and CEO
23
<PAGE>
EXHIBIT A
GLOSSARY OF TERMS
As used in the foregoing Agreement, the following terms shall have
the meanings as defined below:
[*]
"Average Selling Price" means the weighted average selling price,
based on the invoice price less discounts, of Licensee Products that include
Licensed Technology, sold by Licensee during the applicable calendar quarter.
"Category I Technology" is the technology [*] as set forth in
Section B of ANNEX I.
"Category II Technology" is the technology [*] as set forth in
Section A of ANNEX I.
"Confidential Information" means all of the terms and provisions of
the Agreement, this Exhibit and the Annexes and Schedules to the Agreement,
and any data or information disclosed under the Agreement (whether written,
oral or graphical) that relates to the disclosing party's products,
technology, research, development customers or business activities, and which
is confidential or proprietary or a trade secret of the disclosing party if
any such other information is disclosed in a tangible form it is labeled as
confidential or proprietary, or if provided orally, is identified as
confidential or proprietary at the time of disclosure with a written summary
of the confidential information that identifies such information as
"confidential or proprietary" provided to the recipient within ten (10) days
of the oral disclosure. Confidential Information shall not include any
information, data or material which: (a) the disclosing party expressly
agrees in writing is free of any non-disclosure obligations; (b) at the time
of disclosure to the receiving party was known to the receiving party (as
evidenced by documentation in the receiving party's possession) free of any
non-disclosure obligations; (c) is independently developed by the receiving
party (as evidenced by documentation in the receiving party's possession);
(d) is lawfully received by the receiving party, free of any non-disclosure
obligations, from a third party having the right to so furnish such
Confidential Information; or (e) is or becomes generally available to the
public without any breach of this Agreement or unauthorized disclosure of
such Confidential Information by the receiving party.
"Consumer Electronics" means [*] (commonly referred to as [*]) which
are capable of utilizing an integrated circuit which employs both Licensed
Technology and Licensee's 3D Graphics Technology (other than Licensed
Technology), including,
A-1
<PAGE>
without limitation, [*] systems, [*] With respect to sales into the Consumer
Electronics market, in the aggregate, Licensee Products must include enough
3D Graphics Technology and additional features as appropriate such that the
overall product consists of more of Licensee's technology, circuits and die
area than those which represent the Licensed Technology.
"Cost of Goods Sold" means Licensee's direct costs for the Licensee
Products, as applicable and as are consistent with generally accepted
accounting principles. Direct costs consist of Licensee's costs for wafer,
packaging and testing, together with manufacturing overhead. The
manufacturing overhead allocated to the direct cost of Licensee Products
shall be calculated as a pro rata percentage of Licensee's total
manufacturing overhead for the applicable calendar quarter, based on the
total dollar volume of the particular Licensee Product(s) divided by the
total dollar volume of all Licensee Products that are subject to
manufacturing overhead.
"Decoders" means [*].
"Development Work" means work done by Licensor specifically for
Licensee's applications.
"Economic Terms" means all terms and conditions with respect to
license fees, advances on license fees, volume commitments, payment of
development fees, marketing and advertising expenditure commitments, and
support obligations and term of agreement.
"Encoders" means [*].
"Enhancement" means: (i) new technology or know-how covered by a
claim or claims of a Patent which is a part of the Licensed Technology; (ii)
any continuation-in-part of a Patent which is a part of the Licensed
Technology; or (iii) an improvement in know-how which is directly related to
the Licensed Technology.
"Exclusive-Licensed Technology" means the Licensed Technology
subject to an exclusive license in favor of Licensee pursuant to Schedule 1.1
"Expiration Date" means December 31, 2001 or the earlier
termination of the Agreement.
"Gross Profit Margin" means the Average Selling Price of Licensee
Products that include Licensed Technology sold by License during the
applicable calendar quarter less the Cost of Goods Sold for such products
together with other cost-of-goods-sold deductions taken consistent with
generally accepted accounting principles.
A-2
<PAGE>
"Intellectual Property Rights" means all of Licensor's copyrights,
trade secrets, patents, mask works and other intellectual property rights
which are owned by or licensed to Licensor at any time during the Term which
are necessary for the manufacture, use, sale or support of the Licensed
Technology in the uses licensed under the Agreement, but excluding
trademarks, service marks, trade names and other product, service or company
identifiers.
"Invention" means: (i) any Patent which is related to line doubling
for video display and video enhancement which is not a part of the Licensed
Technology; or (ii) any technology which is deemed to be patentable by both
Licensor and Licensee and is not a part of the Licensed Technology and which
is related to line doubling for video display and video enhancement.
"License Fee" means the quarterly license fees payable by Licensee
to Licensor as set forth on ANNEX II.
"Licensee Products" means any Licensee integrated circuit products.
"Licensed Rights" means collectively the Licensed Technology and
Marks.
"Licensed Technology" means the Patents set forth on ANNEX III and
technology and know-how which Licensor owns or to which Licensor hold
licenses and is directly related to the application of such Patents to the
licensed uses of Licensee under the Agreement, but which in any event
excludes technology and know-how related [*]
"Marks" means those trademarks and/or service marks set forth on
ANNEX IV attached hereto and incorporated herein by this reference; PROVIDED,
HOWEVER, that the appearance and/or style of the Marks may vary from time to
time as specified by Licensor in its sole discretion without affecting this
Agreement.
"Minimum Advertising and Promotion Expenditures" means the minimum
annual advertising and promotion expenditures required to be made by Licensee
with respect to Licensee Products which include Licensed Technology, as set
forth on ANNEX V. Such expenditures must be of a nature intended to directly
publicize and promote the Licensee Products that include Licensed Technology,
the Marks or the Licensed Technology and shall not include any expenditures
for advertising and promotion of Licensee generally or for other Licensee
Products unless the Marks or the name of Licensor is also referenced therein.
"Minimum Annual License Fee Payments" means the minimum annual
license fee payments as set forth on ANNEX VI.
A-3
<PAGE>
"Non-MS" means computer systems integrating a microprocessor
running third-party application software with an operating system sold or
licensed by an entity other than Microsoft Corporation, including but not
limited to current and future versions of Apple Corporation's Macintosh
operating system, the Sun Microsystems' Unix or Solaris operating systems, or
IBM's OS/2 operating system, which are capable of utilizing an integrated
circuit which employs both Licensed Technology and Licensee's 3D Graphics
Technology (other than Licensed Technology), but does not include PC systems;
[*] Licensee Products must include enough 3D Graphics Technology and
additional features as appropriate such that the overall product consists of
more of Licensee's technology, circuits and die area than those which
represent the Licensed Technology.
"Patents" means any and all issued United States patents and filed
United States patent applications, including any divisions, substitutions,
continuations, continuations-in-part, reissues, reexaminations, or extensions
thereof, and all corresponding foreign patents and patent applications filed
or issued in any country prior to the termination of this Agreement.
"PC" means personal computer systems integrating a microprocessor
running third-party applications software with x86, RISC or other
architecture, and executing a Microsoft (or Microsoft compatible) operating
system which are capable of utilizing an integrated circuit which employs
both Licensed Technology and Licensee's 3D Graphics Technology (other than
Licensed Technology); [*] With respect to sales into the PC market, in the
aggregate, Licensee Products must include enough 3D Graphics Technology and
additional features as appropriate such that the overall product consists of
more of Licensee's technology, circuits and die area than those which
represent the Licensed Technology.
"3D Graphics Technology" means [*] implemented by Licensee in
Licensee Products that include the Licensed Technology. Examples of such
functions which may be included are [*] In the aggregate, Licensee Products
will include enough of the above features and additional features as
appropriate such that the overall product consists of more of Licensee's
technology, circuits and die area than those which represent the Licensed
Technology.
"Video Display and Enhancement Integrated Circuits" means
integrated circuits which perform [*].
A-4
<PAGE>
ANNEX I
CATEGORY I AND II TECHNOLOGY
[*]
[*]
Annex I
1
<PAGE>
ANNEX II
LICENSE FEES
[*]
Annex II
1
<PAGE>
ANNEX III
LICENSED PATENTS
A. FAROUDJA TECHNOLOGY (CATEGORY II TECHNOLOGY)
1. U.S. PATENTS
Description Patent No. Date
----------- ---------- ----
[*]
2. FOREIGN PATENTS
Description Patent No. US Patent Date
----------- ---------- --------- ----
[*]
3. FOREIGN PATENT APPLICATIONS
Application
Description Country Number
----------- ------- ------------
[*]
B. FAROUDJA PRO (CATEGORY I TECHNOLOGY)
1. U.S. PATENTS
Description Patent No. Date
----------- ---------- ----
[*]
2. U.S. PATENTS PENDING
PATENT
DESCRIPTION APPLICATION NO.
----------- ---------------
[*]
3. FOREIGN PATENTS
Description Patent No. US Patent Date
----------- ---------- --------- ----
[*]
Annex III
1
<PAGE>
4. FOREIGN PATENT APPLICATIONS
PATENT
DESCRIPTION APPLICATION NO.
----------- ---------------
[*]
Annex III
2
<PAGE>
ANNEX IV
MARKS
[*]
Annex IV
1
<PAGE>
ANNEX V
[*]
Annex V
1
<PAGE>
ANNEX VI
[*] LICENSE FEES
[*]
[*]
[*]
[*]
[*]
Annex VI
1
<PAGE>
SCHEDULE 1.1-A
EXCLUSIVE AND SEMI-EXCLUSIVE LICENSE:
During the Term, Licensee shall have an exclusive license as to the
Licensed Technology employed with the Category I Technology [*] so long as
each and all of the following are satisfied: [*] (b) Licensee shall have
paid when due the Minimum License Fee payment applicable to each quarter
during the 12 month period then ended; and [*]
NON-EXCLUSIVE LICENSE:
During the Term, Licensee shall have a non-exclusive license as to the
Licensed Technology employed with the Category I Technology and Category II
Technology [*]. As provided above in this Schedule 1.1, in the event the
conditions for the exclusive and semi-exclusive licenses are not satisfied, upon
either of the Licensor's or Licensee's election such licenses shall become
non-exclusive.
Schedule 1.1-A
1
<PAGE>
SCHEDULE 1.1-B
Majority-Owned Subsidiary Licensees
S3 Japan
S3 Germany
S3 India
Schedule 1.1-B
1
<PAGE>
SCHEDULE 13.7
ARBITRATION PROCEDURES
(a) CLAIMS OR CONTROVERSIES SUBJECT TO ARBITRATION. Any claim or
controversy between or among the parties to this Agreement and any and all
ancillary and related documents, amendments, renewals and substitutions
thereto (collectively, the "Subject Documents"), (ii) any negotiations,
correspondence or communications relating to any of the Subject Documents,
whether or not incorporated into the Subject Documents or any indebtedness
evidenced thereby, (iii) the administration and management of the Subject
Documents and the transactions thereunder, and (iv) any alleged agreements,
promises, representations or transactions in connection therewith, including
but not limited to any claim or controversy which arises out of or is based
upon an alleged tort, shall, at the written request of any party, be
determined by binding arbitration. The arbitration shall be conducted in
accordance with Title 9 of the California Code of Civil Procedure sections
1280 ET. SEQ. (the "California Arbitration Act") and under the Commercial
Rules of the American Arbitration Association (the "AAA"). IN CONNECTION WITH
SUCH ARBITRATION, THE PARTIES HEREBY EXPRESSLY, INTENTIONALLY AND
DELIBERATELY WAIVE ANY RIGHT THEY MAY OTHERWISE HAVE TO TRIAL BY JURY OF SUCH
CLAIM OR CONTROVERSY.
(b) SELECTION OF ARBITRATOR. Within thirty (30) days after written
demand, or within thirty (30) days after commencement by any party of any
lawsuit subject to these arbitration provisions, a single neutral arbitrator
will be selected pursuant to the Commercial Rules of the AAA. However, the
arbitrator selected must be a retired state or federal court judge with at
least five years of judicial experience in civil and commercial transaction
matters. In the event that the selection pursuant to the Commercial Rules of
the AAA does not result in the appointment OF a single neutral arbitrator
within thirty (30) days, any such party may petition the court to appoint a
single neutral arbitrator who is a retired state or federal court judge with
at least five years of judicial experience in civil matters ("Arbitrator").
The parties shall equally bear the fees and expenses of the Arbitrator unless
the Arbitrator otherwise provides in the award.
(c) POWERS OF AND LIMITATIONS ON THE ARBITRATOR. The Arbitrator shall
have the powers provided by the California Arbitration Act and the Commercial
Rules of the AAA except as provided in these arbitration provisions,
including without limitation the following:
(1) The Arbitrator shall determine all challenges to the legality
and/or enforceability of the Agreement, including these
arbitration provisions.
(2) The Arbitrator shall apply the rules of evidence to the same
extent as they would be applied in a court of law.
Schedule 13.7
1
<PAGE>
(3) The Arbitrator shall give effect to all legal and equitable
defenses in determining any claim or controversy, including
without limitation statutes of limitation, the statute of frauds,
waiver and estoppel.
(4) A party may not conduct discovery unless the Arbitrator grants
such party leave to do so upon a showing of good cause, provided
that limited discovery may be conducted as mutually agreed by the
parties or as otherwise ordered by the Arbitrator. All discovery
shall be completed within ninety (90) days after the appointment
of the Arbitrator. The Arbitrator shall limit discovery to
non-privileged material that is relevant to the issues to be
determined by the Arbitrator.
(5) The AAA shall determine the time of the hearing and shall
designate its location in the city of Santa Clara, San Francisco,
or San Jose, California, based upon the convenience of the
Arbitrator, the parties and any witnesses. However, such hearing
shall be commenced within thirty (30) days after completion of
discovery, unless the Arbitrator grants a continuance upon a
showing of good cause by any party. At least seven (7) days
before the date set for such hearing, the parties shall exchange
copies of exhibits to be offered as evidence, and lists of the
witnesses who will testify, at such hearing. Once commenced, the
hearing shall proceed day to day until completed, unless the
Arbitrator grants a continuance upon a showing of good cause by
any party. Any party may cause to be prepared, at its expense, a
written transcription or electronic recording of such hearing.
(6) Any award by the Arbitrator shall be set forth in a written
decision supported by findings of fact and conclusions of law
which the Arbitrator shall deliver to the parties concurrently
with such award.
(7) The award of the Arbitrator may include equitable relief.
(8) The Arbitrator may not award punitive damages.
(9) The Arbitrator shall have the power to award reasonable
attorneys' fees (including a reasonable allocation for the costs
of in-house counsel) and costs to the prevailing party.
(10) The provisions of California Civil Code Sections 47 ET. SEQ.
shall apply to the arbitration to the same extent as they would
apply to a judicial proceeding subject to such provisions.
(11) The laws of the State of California shall govern the arbitration
pursuant to these arbitration provisions.
Schedule 13.7
2
<PAGE>
(d) PROVISIONAL REMEDIES. No provision of these arbitration provisions
shall limit the right of any party to obtain or oppose injunctive,
provisional or ancillary remedies from a court of competent jurisdiction
before, after or during the pendency of the arbitration. The exercise of, or
opposition to, any such remedy does not waive the right of any party to
arbitration pursuant to the Agreement.
(e) MISCELLANEOUS. Judgment upon the award of the Arbitrator may be
entered in any court of competent jurisdiction. In the event that multiple
claims are asserted, some of which are found not subject to these arbitration
provisions, the parties agree to stay the proceedings of the claims not
subject to these arbitration provisions until all other claims are resolved
in accordance with these arbitration provisions. In the event that claims
are asserted against multiple parties, some of whom are not subject to these
arbitration provisions, the parties agree to sever the claims subject to the
arbitration provisions and resolve them in accordance with these provisions.
Schedule 13.7
3
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
FAROUDJA, INC.
AND
S3 INCORPORATED
JUNE 30, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. Purchase and Sale of Securities . . . . . . . . . . . . . . . . . . . . 1
1.1 Sale and Issuance of Securities . . . . . . . . . . . . . . . . . 1
1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Representations, Warranties and Agreements of the Company . . . . . . . 3
2.1 Organization and Qualification. . . . . . . . . . . . . . . . . . 4
2.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.5 Valid Issuance. . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.6 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . 5
2.7 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . 5
2.8 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.9 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 6
2.10 No Material Adverse Change. . . . . . . . . . . . . . . . . . . . 6
2.11 Licenses, Patents and Trademarks and Other Rights . . . . . . . . 6
2.12 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.13 Compliance with Other Instruments . . . . . . . . . . . . . . . . 8
2.14 Agreements; Action. . . . . . . . . . . . . . . . . . . . . . . . 8
2.15 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.16 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . 10
2.17 Title to Property and Assets. . . . . . . . . . . . . . . . . . . 10
2.18 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . 10
2.19 Access to Information . . . . . . . . . . . . . . . . . . . . . . 10
3. Representations and Warranties of the Investor. . . . . . . . . . . . . 11
3.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.3 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . 11
3.4 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . 12
3.5 Purchase Entirely for Own Account . . . . . . . . . . . . . . . . 12
3.6 Restricted Securities . . . . . . . . . . . . . . . . . . . . . . 12
3.7 Accredited Investor . . . . . . . . . . . . . . . . . . . . . . . 13
3.8 Investment Experience; California Corporate Securities Laws . . . 13
i
<PAGE>
PAGE
----
4. Conditions to Closing . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.1 Mutual Conditions . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2 Conditions of the Investor's Obligations at Closing . . . . . . . 13
4.3 Conditions of the Company's Obligations at Closing. . . . . . . . 14
5. Purchaser Protection for Certain Dilutive Issuances . . . . . . . . . . 15
5.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . 15
5.2 Purchase Price Adjustments and Issuance of Additional Shares. . . 15
5.3 Certain Adjustments to New Shares of Common Stock, and
Common Stock Purchase Price . . . . . . . . . . . . . . . . . . . 16
5.4 Adjustments for Stock Splits, Dividends and the Like. . . . . . . 17
5.5 No Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6. Right of Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.1 Right to Exchange for Preferred Stock . . . . . . . . . . . . . . 18
6.2 Dilutive Preferred Offering . . . . . . . . . . . . . . . . . . . 18
6.3 Non-Dilutive Preferred Offering . . . . . . . . . . . . . . . . . 18
7. Purchase Price Adjustment on IPO. . . . . . . . . . . . . . . . . . . . 19
8. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.1 Termination; Term of Agreement. . . . . . . . . . . . . . . . . . 19
8.2 Public Announcements. . . . . . . . . . . . . . . . . . . . . . . 19
8.3 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . 20
8.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.5 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.6 Finders or Brokers. . . . . . . . . . . . . . . . . . . . . . . . 21
8.7 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.8 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . . 21
8.9 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.10 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 22
8.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.12 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.13 Titles and Subtitles. . . . . . . . . . . . . . . . . . . . . . . 22
Exhibit A - Investor's Rights Agreement
Exhibit B - Form of Opinion of Buchalter, Nemer, Fields & Younger
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the 30th day
of June, 1997 by and between FAROUDJA, INC., a Delaware corporation (the
"Company") and S3 INCORPORATED, a Delaware corporation (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF SECURITIES.
1.1 SALE AND ISSUANCE OF SECURITIES.
(a) Subject to the terms and conditions of this Agreement, the
Investor agrees to purchase at the Closing (as defined below) and the Company
agrees to sell and issue to the Investor at the Closing 526,316 shares (the
"Shares") of Common Stock (as defined below) for the purchase price of $9.50 per
share in cash, or an aggregate purchase price of $5,000,002 (the "Aggregate
Purchase Price"), subject to adjustments in the purchase price per share and
number of shares purchased as provided in Section 1.1(b) and elsewhere herein.
(b) Subject to the terms and conditions of this Agreement, the
Company agrees to issue to the Investor from time to time, pursuant to
adjustments in the Common Stock Purchase Price (as defined below) as set forth
in Sections 5 and 7, such number of additional shares of Common Stock (the total
number of such shares issued as of any time being herein referred to as
"Additional Shares").
1.2 CLOSING. The closing of the purchase and sale of the Shares
(the "Closing") shall take place at the offices of Pillsbury Madison &
Sutro LLP, 2700 Sand Hill Road, Menlo Park, California, at 4:00 p.m., on
June 30, 1997, or at such other time and place as the Company and the Investor
mutually agree upon. The date on which the Closing takes place is referred to
as the "Closing Date." At the Closing, the Company shall deliver to the
Investor a certificate or certificates representing the Shares against payment,
by check or by wire transfer in immediately available funds to an account
designated in writing by the Company, of the amount of the Aggregate Purchase
Price specified in Section 1.1.
1.3 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
"Additional Shares" means shares of Common Stock issued pursuant
to the provisions of Section 5.2.
<PAGE>
"Aggregate Purchase Price" has the meaning specified in
Section 1.1.
"Closing" has the meaning specified in Section 1.2.
"Closing Date" has the meaning specified in Section 1.2.
"Common Stock" shall mean the common stock, $0.001 par value, of
the Company.
"Common Stock Equivalents" has the meaning specified in
Section 5.4.
"Common Stock Purchase Price" means initially the Aggregate
Purchase Price divided by the number of Shares as set forth in Section 1.1. The
Common Stock Purchase Price shall be adjusted from time to time in accordance
with Sections 5 and 7. All references to the Common Stock Purchase Price herein
shall mean the Common Stock Purchase Price as so adjusted.
"Company" means Faroudja, Inc., a Delaware corporation, and, for
purposes of the representations and warranties contained herein and for purposes
of Section 8.10, Faroudja Laboratories, Inc., a California corporation.
"Dilutive Issuance" has the meaning specified in Section 5.1(b).
"Effective Price" means, with respect to a Preferred Offering,
the quotient derived by dividing the price per share of the Preferred Stock to
be issued in a Preferred Offering by the number of shares of Common Stock
initially issuable upon conversion of such Preferred Stock and, with respect to
an issuance of New Shares of Common Stock, means the aggregate consideration
received, or deemed to have been received, by the Company for an issuance of New
Shares of Common Stock pursuant to Section 5, divided by the total number of New
Shares of Common Stock issued or sold. or deemed to have been issued or sold, by
the Company under Section 5.
"Escrowholder" has the meaning specified in Section 5.3(e).
"Financial Statements" has the meaning specified in Section 2.9.
"Investor" has the meaning specified in the preamble to this
Agreement.
"Investor's Rights Agreement" means the Investor's Rights
Agreement between the Company and the Investor attached as Exhibit A hereto.
2
<PAGE>
"IPO" means the Company's initial firm commitment, underwritten
public offering of its Common Stock.
"IPO Closing Date" means the date of the initial closing with
respect to the IPO.
"IPO Purchase Price" has the meaning specified in Section 7.
"Lien" means, with respect to any asset, any mortgage, pledge,
security interest, encumbrance, lien or charge of any kind in respect of such
asset.
"New Shares of Common Stock" has the meaning specified in
Section 5.1.
"Offered Preferred Stock" has the meaning specified in
Section 6.1.
"Plans" has the meaning specified in Section 2.2.
"Preferred Offering" has the meaning specified in Section 6.1.
"Preferred Stock" shall mean the preferred stock, $0.001 par
value, of the Company.
"Securities Act" has the meaning specified in Section 2.15.
"Shareholders Agreement" means the Registration and Shareholders
Rights Agreement dated March 7, 1997, among the Company and Yves and Isabell
Faroudja, Adelson Investors, LLC, Images Partners, LP, and Faroudja Images
Investors, LLC.
"Shares" has the meaning specified in Section 1.1.
"Subsidiary" means, with respect to any entity, any other entity
of which securities or other ownership interest having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are owned directly or indirectly by such entity.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company hereby represents and warrants to, and agrees with, the Investor that,
except as set forth on a Schedule of Exceptions furnished to the Investor and
its counsel specifically identifying the relevant Section or subparagraph
hereof, which exceptions shall be deemed to be representations and warranties as
if made hereunder:
3
<PAGE>
2.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. The Company has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as
currently conducted. The Company is qualified as a foreign corporation and is
in good standing in all states where the conduct of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, results of operations or financial condition of the
Company.
2.2 CAPITALIZATION. The authorized capital of the Company consists
of 2,000,000 shares of Preferred Stock and 18,000,000 shares of Common Stock. As
of May 31, 1997, there were outstanding no shares of Preferred Stock, 8,207,380
shares of Common Stock, warrants to purchase an aggregate of 179,601 shares of
Common Stock, and options to purchase an aggregate of 1,306,849 shares of Common
Stock, and 885,771 shares of Common Stock were reserved for future issuance
pursuant to the Company's 1997 Non-Employee Directors Stock Option Plan, 1995
Stock Option Plan, 1997 Employee Performance Stock Option Plan, and 1997 Common
Stock Purchase Plan (collectively, the "Plans"). The Company has issued no
additional shares of its capital stock subsequent to May 31, 1997, except for
shares of Common Stock issued upon the exercise of outstanding options referred
to in the immediately preceding sentence. Except for the warrants referred to in
the second sentence of this Section 2.2 and options issued pursuant to the
Plans, as of the date hereof the Company had outstanding no other securities
convertible into or exchangeable for its capital stock, and there were no other
outstanding options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock.
2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association,
partnership or other business entity, other than Faroudja Laboratories, Inc., a
California corporation and wholly-owned subsidiary of the Company.
2.4 AUTHORIZATION. All corporate action on the part of the Company
necessary for the authorization, execution and delivery of this Agreement and
the Investor's Rights Agreement, the performance of all obligations of the
Company hereunder and thereunder, and the authorization, issuance and delivery
of the Shares, has been taken or will be taken on or prior to the Closing. This
Agreement and the Investor's Rights Agreement each constitutes a legal, valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except for (a) the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting the
rights of creditors generally, (b) limitations imposed by federal or state law
or equitable principles upon the specific enforceability of any of the remedies,
covenants or other provisions of this Agreement and the Investor's Rights
Agreement and upon the availability of injunctive relief or other equitable
remedies, and (c) limitations imposed by applicable federal or state securities
laws or principles of public policy upon the enforcement
4
<PAGE>
of the provisions of the Investor's Rights Agreement relating to indemnification
and contribution.
2.5 VALID ISSUANCE. The Shares have been duly authorized and, when
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be validly issued, fully paid and
nonassessable and will be issued in compliance with all applicable federal and
state securities laws. The Additional Shares, when determined, will have been
duly authorized and validly reserved and, when issued and delivered in
accordance with the terms of this Agreement, will be validly issued, fully paid
and nonassessable and will be issued in compliance with all applicable federal
and state securities laws. The outstanding shares of Common Stock are all duly
and validly issued, fully paid and nonassessable, and were issued in compliance
with all applicable federal and state securities laws.
2.6 NON-CONTRAVENTION. The execution and delivery of this Agreement
and the Investor's Rights Agreement and the consummation of the transactions
contemplated hereby and thereby will not conflict with, or result in any breach
or violation of the Certificate of Incorporation or the Bylaws of the Company or
conflict with or constitute a breach of, or default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or result
in the creation of a Lien on any property or asset of the Company pursuant to
any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company is a party or by which it or any of its
properties may be bound, or to the Company's knowledge violate any law,
administrative regulation or court decree applicable to the Company or its
properties, except for conflicts, breaches, defaults, violations or Liens which,
either individually or in the aggregate, would not materially and adversely
impair or restrict the Company's ability to perform its obligations under this
Agreement or the Investor's Rights Agreement or to consummate the transactions
contemplated hereby or thereby, and except for the Shareholders Agreement.
Consents under the Shareholders Agreement to the execution and delivery of this
Agreement and the Investor's Rights Agreement and the consummation of the
transactions contemplated hereby and thereby will be obtained prior to the
Closing.
2.7 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement or the Investor's Rights Agreement, except for
such filings as may be required to be made pursuant to applicable federal or
state securities laws, and except for such consents, approvals, authorizations
or orders the absence of which, either individually or in the aggregate, would
not have a material adverse effect on the business, properties, results of
operations or financial condition of the Company.
5
<PAGE>
2.8 LITIGATION. Except as set forth on Schedule 2.8 of the Schedule
of Exceptions, there is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or adversely affecting the Company
that would, if determined adversely to the Company, result in any material
adverse change in the condition, financial or otherwise, or in the earnings,
affairs or business prospects of the Company, or materially and adversely affect
the properties or assets of the Company or the consummation of the transactions
contemplated by this Agreement or the Investor's Rights Agreement. The Company
is not a party or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality.
2.9 FINANCIAL STATEMENTS. The Company has delivered to the Investor
its audited consolidated financial statements as of and for the year ended
December 31, 1996 and its unaudited financial statements as of and for the
three-month period ended March 31, 1997 (the "Financial Statements"). The
Financial Statements are complete and correct in all material respects and have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and are
consistent with each other, except that unaudited Financial Statements may not
contain all accruals and adjustments and all footnotes required by generally
accepted accounting principles for fiscal year-end statements. The Financial
Statements accurately set out and describe the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
subject, in the case of unaudited Financial Statements, to normal year-end
accruals and adjustments. Except as set forth in the Financial Statements, the
Company has no liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to March 31, 1997,
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in the Financial Statements, which, individually or in the
aggregate, are not material to the financial condition or operating results of
the Company, and (iii) the issuance of a warrant to Yves Faroudja as set forth
on Schedule 2.11 of the Schedule of Exceptions. The Company maintains and will
continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
2.10 NO MATERIAL ADVERSE CHANGE. Since March 31, 1997, except as
otherwise disclosed by the Company in writing to the Investor, in each case on
or prior to the date hereof, (a) there has been no material adverse change in
the condition, financial or otherwise, or earnings of the Company, whether or
not arising in the ordinary course of business, (b) there have been no material
transactions entered into by the Company, and (c) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class of
its capital stock.
2.11 LICENSES, PATENTS AND TRADEMARKS AND OTHER RIGHTS. To the best
of its knowledge, the Company has all permits and licenses (except permits and
licenses necessary for compliance with applicable environmental laws and
regulations, as to which
6
<PAGE>
the Company is not aware of any laws or regulations with which it is not
currently in compliance in all material respects) and other similar authority
necessary for the conduct of its business as now being conducted by it, the lack
of which could materially and adversely affect the operations or condition,
financial or otherwise, of the Company. It is not in default in any material
respect under any of such permits, licenses or other similar authority. To the
best of its knowledge, the Company has sufficient title and ownership of or
licenses to all patents, trademarks, trademark rights, service marks, trade
names, trade name rights, mask works, copyrights, trade secrets, information,
proprietary rights and processes necessary for its business as now conducted
without any conflict with or infringement of the rights of others.
Schedule 2.11 to the Schedule of Exceptions lists all material options, licenses
or agreements of any kind relating to the foregoing. Other than as set forth on
Schedule 2.11, the Company is not bound by or a party to any options, licenses
or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, mask works, copyrights, trade secrets, licenses,
information, proprietary rights and processes of any other person or entity
which options, licenses or agreements are material to the Company's business.
The Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, mask works, copyrights or trade
secrets or other proprietary rights of any other person or entity, and to the
best of the Company's knowledge and belief the Company has not violated any such
proprietary rights.
2.12 EMPLOYEES.
(a) The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the Company's business as now being conducted. The Company does not
believe it is or will be necessary to utilize any inventions of any of its
employees (or people it currently intends to hire) made prior to their
employment by the Company other than those of Yves Faroudja, the rights to which
inventions have been either assigned or licensed to the Company. To the
Company's knowledge, there are neither pending nor threatened any actions,
suits, proceedings or claims, or any basis therefor or threat thereof with
respect to any contract, agreement, covenant or obligation referred to in this
Section 2.12. To the Company's knowledge, no full-time employee of the Company
has any affiliation with or obligation to any other employer.
(b) None of the officers, directors or employees of the
Company, or their respective spouses or relatives, owns directly or indirectly,
individually or collectively, a material interest in any entity which is a
competitor, customer or supplier of the Company.
7
<PAGE>
2.13 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any provisions of its Restated Certificate of
Incorporation or By-laws or of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound or, to its knowledge, of
any provision of federal or state statute, rule or regulation applicable to the
Company, which violation or default would be materially adverse to the Company.
The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not result in any such violation or
be in conflict with or constitute, with or without the passage of time and
giving of notice, either a default under any such provision, instrument,
judgment, order, writ, decree or contract or an event which results in the
creation of any lien, charge or encumbrance upon any assets of the Company,
which violation, default, conflict or event would be materially adverse to the
Company.
2.14 AGREEMENTS; ACTION.
(a) Except for (i) the agreements explicitly contemplated
hereby or by the Investor's Rights Agreement, (ii) employment, stock option,
consulting and similar employer-employee arrangements, (iii) the agreements
relating to registration rights described in Section 2.16, and (iv) the license
agreement dated as of January 20, 1997 between the Company and Yves Faroudja,
there are no material agreements or understandings between the Company and any
of its officers or any affiliate thereof.
(b) There are no agreements, understandings, instruments or
contracts to which the Company is a party or by which it is bound not entered
into in the ordinary course of business which involve (i) obligations of or
payments to the Company in excess of $100,000, (ii) the license of any patent,
copyright, trade secret or other proprietary right of the Company not referred
to in Schedule 2.11, or (iii) provisions materially and adversely restricting or
affecting the development, manufacture or distribution of the Company's products
or services.
(c) Since December 31, 1996, the Company has not (i) declared
or paid any dividends, or authorized or made any distribution upon or with
respect to any class or series of its capital stock, (ii) incurred any
indebtedness for money borrowed or incurred any other liabilities individually
in excess of $100,000 or in excess of $250,000 in the aggregate, other than
vendor commitments in the ordinary course of business, obligations or
liabilities of the Company for compensation under employment, advisor or
consulting agreements, a $2,000,000 credit facility with Silicon Valley Bank,
and a $500,000 fixed asset term loan with Silicon Valley Bank, (iii) made any
loans or advances to any person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its material
assets or rights, other than the sale of its inventory in the ordinary course of
business.
(d) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Restated Certificate
8
<PAGE>
of Incorporation or By-laws, which adversely affects in any material respect its
business as now conducted or as proposed to be conducted, its properties or its
financial condition.
(e) The Company has not engaged in the past three months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than 50 percent of
the voting power of the Company is disposed of, or (iii) regarding any other
form of liquidation, dissolution or winding up of the Company.
(f) There are no joint venture contracts or other agreements
(other than license agreements set forth on Schedule 2.11 or its collaborative
agreements) involving a material sharing of profits or expenses to which the
Company is a party.
(g) There are no agreements (other than license agreements set
forth in Schedule 2.11 or its collaborative agreements) materially limiting the
freedom of the Company to compete in any line of business or any geographic area
or with any person.
(h) There are no agreements providing for disposition of the
business, assets or shares of the Company, agreements of merger or liquidation
to which the Company is a party or letters of intent with respect to the
foregoing.
(i) There are no letters of intent or agreements with respect
to the acquisition by the Company of the business, assets or shares of any other
business.
2.15 DISCLOSURE. The Company believes it has fully provided or made
available to the Investor all the material information that the Investor has
reasonably requested for deciding whether to purchase the Shares and all
information reasonably necessary to enable the Investor to make such decision.
Neither this Agreement, the Investor's Rights Agreement, nor any other
statements or certificates made or delivered in connection herewith, as of its
respective date, contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements herein or therein not
misleading; provided, however, that all information relating to the Company's
future economic performance represents only the Company's good faith assessment
of such future economic performance and is based upon assumptions which the
Company believes are reasonable. The Company has not taken any action that will
cause the issuance, sale and delivery of the Shares or Additional Shares to
constitute a violation of the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws. The minute books of the
Company provided to the Investor contain a complete summary of all meetings of
directors and stockholders since the time of incorporation and reflect all
transactions referred to in such minutes accurately in all material respects.
9
<PAGE>
2.16 REGISTRATION RIGHTS. Except as provided in the Investor's
Rights Agreement, the Registration Rights Agreements, dated as of December 31,
1996, between the Company and each of Adelson Investors, LLC, Images Partners,
LP, and Roger K. Baumberger, as Liquidating Trustee of Faroudja Images, Inc.,
the Registration Rights Agreement, dated as of March 7, 1997, between the
Company and Faroudja Images Investors, LLC, the Shareholders Agreement, and the
Warrants listed in Schedule 2.16 to the Schedule of Exceptions, true and
complete copies of each of which have previously been provided to the Investor,
the Company has not granted or agreed to grant any registration rights,
including piggy-back rights, to any person or entity.
2.17 TITLE TO PROPERTY AND ASSETS. The Company owns its tangible
property and assets free and clear of all mortgages, liens, loans and
encumbrances, except such encumbrances and liens which arise in the ordinary
course of business and do not materially impair the Company's ownership or use
of such property or assets. With respect to the property and assets it leases,
the Company is in compliance with such leases and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances,
which liens, claims or encumbrances would be materially adverse to the Company.
The Company's lease to the premises at 750 Palomar Avenue, Sunnyvale,
California, is valid and binding and the Company is not in any material default
thereunder.
2.18 EMPLOYEE BENEFIT PLANS. The Company sponsors a 401(k) plan for
its employees. The Company does not have any other Employee Pension Benefit Plan
described in Section 3(2)(a) or Section 3(2)(b) of the Employer Retirement
Income Security Act of 1974, as amended.
2.19 ACCESS TO INFORMATION. The Company has and will continue to
provide to the Investor, its officers, employees and professional
representatives with such information regarding the Company as such persons have
requested or shall reasonably request. No investigation pursuant to this
Section 2.19 shall affect any representation or warranty given by the Company
hereunder.
From and after the Closing Date, the Investor shall have the right to:
(a) Visit with officers of the Company to discuss its affairs
and finances, all with reasonable notice, at such reasonable times and as
often as may be reasonably requested, but not more than once per calendar
quarter; and
(b) Send an observer (who shall not be a member of the
Company's Board of Directors) to attend meetings of the Company's Board of
Directors and committees thereof and, in this respect, receive copies of
all notices, minutes, consents, and other materials that the Company
provides to its directors (except for materials that relate to matters with
respect to which the Company may exclude the Investor's observer from any
Board meeting as specified below). The Investor may in its discretion send
its observer to all or less than all Board or
10
<PAGE>
committee meetings and to a portion only of any such Board meeting, and the
Company may in its discretion exclude the Investor's observer from
discussions in any meeting, or portion thereof, (i) concerning the
relationships between the Company and the Investor or (ii) if such
attendance would (A) result in disclosure of trade secrets to the Investor
or (B) adversely affect the attorney-client privilege between the Company
and its counsel. The Company understands further that the Investor's
observer will attend any such meeting solely as a representative of the
Investor.
Information obtained by the Investor's observer in the course of
attending Board meetings shall be treated as confidential ("Confidential
Information") and the Investor's observer and the Investor shall hold such
Confidential Information in confidence and trust, shall act in a fiduciary
manner with respect to such Confidential Information, and shall not disclose
such Confidential Information to any third party except as may be reasonably
required to be disclosed in accordance with the order or requirement of a court,
administrative agency, or other governmental body or agency.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents and warrants to the Company that:
3.1 ORGANIZATION. The Investor is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Investor has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as currently conducted.
3.2 AUTHORIZATION. All corporate action on the part of the Investor
necessary for the authorization, execution and delivery of this Agreement, the
Investor's Rights Agreement and for the performance of all obligations of the
Investor hereunder and thereunder has been taken or will be taken on or prior to
the Closing. This Agreement and the Investor's Rights Agreement each
constitutes a legal, valid and binding agreement of the Investor, enforceable
against the Investor in accordance with its terms, except for (a) the effect of
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting the rights of creditors generally, (b) limitations
imposed by federal or state law or equitable principles upon the specific
enforceability of any of the remedies, covenants or other provisions of this
Agreement, the Investor's Rights Agreement and upon the availability of
injunctive relief or other equitable remedies, and (c) limitations imposed by
applicable federal or state securities laws or principles of public policy upon
the enforcement of the provisions of the Investor's Rights Agreement relating to
indemnification and contribution.
3.3 NON-CONTRAVENTION. The execution and delivery of this
Agreement, the Investor's Rights Agreement, and the consummation of the
transactions contemplated hereby and thereby will not conflict with, or result
in any breach or violation of the Certificate of Incorporation or the Bylaws of
the Investor or conflict with or constitute a
11
<PAGE>
breach of, or a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of any contract, indenture, mortgage,
loan agreement, note, lease or other instrument to which the Investor is a party
or by which it or any of its properties may be bound, or to the knowledge of the
Investor violate any law, administrative regulation or court decree applicable
to the Investor or its properties, except for conflicts, breaches, defaults or
violations which, either individually or in the aggregate, would not materially
and adversely impair or restrict the Investor's ability to perform its
obligations under this Agreement or the Investor's Rights Agreement or to
consummate the transactions contemplated hereby or thereby.
3.4 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Investor is required in connection with the consummation of the
transactions contemplated by this Agreement or the Investor's Rights Agreement,
except for such filings as may be required to be made pursuant to applicable
federal or state securities laws and except for such consents, approvals,
authorizations or orders the absence of which, either individually or in the
aggregate, would not materially and adversely impair the Investor's ability to
perform its obligations hereunder or to consummate the transactions contemplated
hereby.
3.5 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Shares and any Additional Shares will be acquired for
investment for the Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that the
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Investor
further represents that the Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Shares or Additional Shares.
3.6 RESTRICTED SECURITIES. The Investor understands that the Shares
and Additional Shares it is purchasing are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations the Shares and Additional Shares
may be resold without registration under the Securities Act only in certain
limited circumstances. The Investor agrees that it will not sell or otherwise
dispose of any of the Shares or Additional Shares unless such sale or other
disposition has been registered or is exempt from registration under the
Securities Act and has been registered or qualified or is exempt from
registration or qualification under applicable state securities laws. The
Investor understands that the certificates evidencing the Shares and Additional
Shares will bear a restrictive legend to the effect that such shares have not
been registered under the Securities Act and may not be sold, offered for sale,
12
<PAGE>
pledged or hypothecated in the absence of a registration statement in effect
with respect to such shares under the Securities Act and any applicable state
securities laws or an opinion of counsel reasonably satisfactory to the Company
that such registration is not required or unless such shares may be sold
pursuant to Rule 144 under the Securities Act.
3.7 ACCREDITED INVESTOR. The Investor is an accredited investor as
defined in Rule 501(a) of Regulation D under the Securities Act.
3.8 INVESTMENT EXPERIENCE; CALIFORNIA CORPORATE SECURITIES LAWS.
The Investor acknowledges that it can bear the economic risk of its investment
and by reason of its experience in business and financial matters has the
capacity to protect its own interests in connection with its investment in the
Common Stock. The Investor understands that the offer and sale of the Shares
has not been qualified under the California Corporate Securities Law of 1968, as
amended, by reason of the exemption set forth in Section 25102(f) of the
California Corporations Code, and the Investor represents that it is a
corporation with outstanding securities registered under Section 12 of the
Securities Exchange Act of 1934, within the meaning of Section 25102(i) of the
California Corporations Code.
4. CONDITIONS TO CLOSING.
4.1 MUTUAL CONDITIONS. The obligations of the Company and of the
Investor under Section 1.1 of this Agreement are each subject to the fulfillment
on or before the Closing of each of the following conditions, any of which may,
to the extent legally permissible, be waived in writing in whole or in part by
each party:
(a) LITIGATION. No order enjoining or restraining the
transactions contemplated by this Agreement or the Investor's Rights Agreement
shall be in effect and no action or proceeding before any federal or state court
or governmental agency or other regulatory or administrative agency or
instrumentality shall have been instituted or pending that challenges the
acquisition of, or payment for, the Shares by the Investor or otherwise seeks to
restrain or prohibit consummation of the transactions contemplated by this
Agreement or the Investor's Rights Agreement or seeking to impose any material
limitations on any provisions of this Agreement or the Investor's Rights
Agreement.
(b) OTHER AGREEMENTS. The Company and the Investor shall have
executed and delivered the Investor's Rights Agreement.
4.2 CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT CLOSING. The
obligations of the Investor under Section 1.1 of this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions,
any of which may be waived in writing in whole or in part by the Investor:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing
13
<PAGE>
with the same effect as though such representations and warranties had been made
on and as of the date of such Closing.
(b) PERFORMANCE. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
(c) COMPLIANCE CERTIFICATE. If the Closing shall be held on a
date other than the date of this Agreement, the Chief Executive Officer of the
Company shall deliver to the Investor at the Closing a certificate certifying
that the conditions specified in Section 4.2(a) and (b) have been fulfilled.
(d) OPINION OF COMPANY COUNSEL. The Investor shall have
received from Buchalter, Nemer, Fields & Younger, counsel for the Company, an
opinion, dated as of the date of the Closing, in form and substance satisfactory
to counsel for the Investor, which opinion shall be substantially similar to
that set forth in Exhibit B hereto. Upon the issuance of Additional Shares, the
Investor shall receive an opinion from such counsel, with respect to such
Additional Shares, substantially similar to that set forth in Exhibit B hereto.
(e) CONSENTS. The Company shall have obtained consents under
the Shareholders Agreement to the execution and delivery of this Agreement and
the Investor's Rights Agreement and the consummation of the transactions
contemplated hereby and thereby.
4.3 CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The
obligations of the Company to the Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions by
the Investor, any of which may be waived in writing in whole or in part by the
Company:
(a) PAYMENT OF PURCHASE PRICE BY THE INVESTOR. The Investor
shall have delivered to the Company the cash purchase price specified in
Section 1.1 by check or by wire transfer in immediately available funds in
accordance with the provisions of Section 1.2.
(b) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
(c) COMPLIANCE CERTIFICATE. If the Closing shall be held on a
date other than the date of this Agreement, the Chief Executive Officer of the
Investor shall deliver to the Company at the Closing a certificate certifying
that the condition specified in Section 4.3(b) has been fulfilled.
14
<PAGE>
5. PURCHASER PROTECTION FOR CERTAIN DILUTIVE ISSUANCES.
5.1 CERTAIN DEFINITIONS.
(a) "New Shares of Common Stock" means all shares of Common
Stock issued by the Company or deemed to be issued pursuant to this Section 5,
whether or not subsequently reacquired or retired by the Company, subsequent to
the Closing Date and prior to the IPO Closing Date, other than (i) Common Stock
issued pursuant to a transaction described in Section 5.4 hereof, (ii) 2,200,000
shares (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like) of Common Stock, net of repurchases, issued or
issuable to employees, directors, consultants or advisors under the Plans or
pursuant to stock option or restricted stock purchase agreements approved by the
Company's Board of Directors or the Compensation Committee thereof, (iii) shares
of Common Stock issued pursuant to the exercise of warrants outstanding as of
the Closing Date and described in Section 2.2 hereof, or (iv) shares issued
pursuant to the IPO.
(b) "Dilutive Issuance" means the issuance or sale, or as
deemed by the provisions of this Section 5 to be an issuance or sale, of New
Shares of Common Stock for an Effective Price less than the Common Stock
Purchase Price in effect immediately prior to the issuance or sale (or deemed
issuance or sale) of such New Shares of Common Stock. The IPO shall not be
deemed to be a Dilutive Issuance for purposes of this Section 5.
5.2 PURCHASE PRICE ADJUSTMENTS AND ISSUANCE OF ADDITIONAL SHARES.
(a) If at any time or from time to time after the Closing Date
and prior to the IPO Closing Date, the Company shall make a Dilutive Issuance,
the then existing Common Stock Purchase Price shall be reduced, as of the
opening of business on the date of such issue or sale (or deemed issuance or
sale), to the Effective Price of such Dilutive Issuance.
(b) Subject to the escrow and return requirements of
Section 5.3(e), upon an issuance or sale (or deemed issuance or sale) of New
Shares of Common Stock, the Company shall issue to the Investor, as a result of
the reduction in the Common Stock Purchase Price referred to in Section 5.2(a)
and without payment of further consideration, that number of shares of Common
Stock that equals the difference between (i) the Aggregate Purchase Price
divided by the Effective Price and (ii) the aggregate number of Shares
(including Additional Shares) issued to the Investor under this Agreement,
including those shares issued pursuant to adjustments under this Section 5,
prior to such Dilutive Issuance. No fractional shares shall be issued under
this Section 5.2, and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share.
15
<PAGE>
(c) For the purpose of making any adjustment required under
this Section 5, the consideration received by the Company for any issue or sale
of New Shares of Common Stock shall (i) to the extent it consists of cash, be
computed at the amount of cash received by the Company, (ii) to the extent it
consists of property other than cash, be computed at the fair value of that
property as determined in good faith by the Company's Board of Directors, and
(iii) if New Shares of Common Stock are issued or sold together with other stock
or securities or other assets of the Company for a consideration that covers
both, be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Company's Board of Directors to be
allocable to such New Shares of Common Stock.
5.3 CERTAIN ADJUSTMENTS TO NEW SHARES OF COMMON STOCK, AND COMMON
STOCK PURCHASE PRICE. In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities (which are not excluded from the
definition of New Shares of Common Stock), the following provisions shall apply:
(a) The aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to be New Shares of Common Stock issued at the time
such options or rights were issued, and the consideration deemed to be received
by the Company for such New Shares of Common Stock shall be equal to the
consideration (determined in the manner provided in Section 5.2(c)), if any,
received by the Company upon the issuance of such options or rights plus the
minimum purchase price provided in such options or rights for the Common Stock
covered thereby.
(b) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to be New Shares of Common Stock
issued at the time such securities were issued or such options or rights were
issued, and the consideration deemed to be received by the Company for such New
Shares of Common Stock shall be equal to the consideration, if any, received by
the Company for the sale or issuance of any such securities and related options
or rights (excluding any cash received on account of accrued interest or accrued
dividends), plus the additional consideration, if any, to be received by the
Company upon the conversion or exchange of such securities or the exercise of
any related options or rights (the consideration in each case to be determined
in the manner provided in Section 5.2(c)).
(c) In the event of any change in the number of shares of
Common Stock deliverable or any increase in the consideration payable to the
Company upon exercise of options or rights or upon conversion of or in exchange
for such convertible or exchangeable securities (other than those issued as of
the date hereof), including, but not
16
<PAGE>
limited to, a change resulting from the anti-dilution provisions thereof, the
Common Stock Purchase Price obtained with respect to the adjustment that was
made upon the issuance of such options, rights or securities, and any subsequent
adjustments based thereon, shall be recomputed using the Effective Price that
reflects such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.
(d) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Common Stock Purchase Price obtained with respect to the adjustment which was
made upon the issuance of such options, rights or securities or options or
rights related to such securities, and any subsequent adjustments based thereon,
shall be recomputed to reflect the issuance of only the number of shares of
Common Stock actually issued upon the exercise of such options or rights upon
the conversion or-exchange of such securities or upon the exercise of the
options or rights related to such securities.
(e) Notwithstanding Section 5.2 and this Section 5.3(e), if the
Common Stock Purchase Price or New Shares of Common Stock or Effective Price is
subject to readjustment under Section 5.3(c) or 5.3(d), the Secretary of the
Company shall hold in escrow ("Escrowholder") for the Investor the number of
shares computed pursuant to Section 5.2 and Section 5.3(d) that are subject to
return to the Company due to expiration, occurrence or non-occurrence of
specified events or any other contingency. Upon the earlier of the resolution of
such contingencies or the IPO Closing Date, the Escrowholder shall distribute
the number of such shares no longer subject to such contingencies to the
appropriate party. The Investor agrees and acknowledges that in the event the
Investor is required to return any shares held in escrow to the Company, the
Escrowholder is hereby effectively and irrevocably ordered to convey such shares
back to the Company without any additional action required on behalf of the
Investor.
5.4 ADJUSTMENTS FOR STOCK SPLITS, DIVIDENDS AND THE LIKE. In the
event the Company should at any time or from time to time after the Closing Date
fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or dividend or other distribution payable in
additional shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter "Common Stock Equivalents")
without payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then, as of such
record date (or the date of such dividend distribution, split or subdivision if
no record date is fixed), the Common Stock Purchase Price shall be decreased so
that the number of shares obtained by dividing (i) the Aggregate Purchase Price
by (ii) the Common Stock Purchase Price, shall be increased in proportion to
such increase in the aggregate number of shares of Common
17
<PAGE>
Stock outstanding and those issuable with respect to such Common Stock
Equivalents. If the number of shares of Common Stock outstanding at any time
after the Closing Date is decreased by a reverse split or combination of the
outstanding shares of Common Stock, then, following the record date of such
reverse split or combination, the Common Stock Purchase Price shall be increased
so that the number of shares obtained by dividing (i) the Aggregate Purchase
Price by (ii) the Common Stock Purchase Price, shall be decreased in the same
proportion as such decrease in the aggregate number of shares of Common Stock
outstanding. Thereafter, the Investor shall retain the number of shares of
Common Stock equal to the Aggregate Purchase Price divided by the Common Stock
Purchase Price, as adjusted pursuant to this Section 5.4.
5.5 NO IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or Bylaws or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the Investor against impairment.
6. RIGHT OF EXCHANGE.
6.1 RIGHT TO EXCHANGE FOR PREFERRED STOCK. If, after the Closing
Date and prior to the IPO Closing Date, the Company offers and issues Preferred
Stock (the "Offered Preferred Stock") that is convertible into Common Stock (a
"Preferred Offering"), the Investor shall have the right to exchange the Shares
for Offered Preferred Stock as set forth in this Section 6. The Investor's
right to exchange under this Section 6 is conditioned upon the Investor's
agreement in writing to be bound by the terms and conditions of the purchase
agreement pursuant to which the Preferred Offering is consummated.
6.2 DILUTIVE PREFERRED OFFERING. If the issuance of the Offered
Preferred Stock pursuant to the Preferred Offering will be at an Effective Price
less than the then existing Common Stock Purchase Price, then the Investor shall
be entitled to exchange the Shares (including any Additional Shares then held by
the Investor that are issued prior to the Preferred Offering) for a number of
shares of Offered Preferred Stock that would result in the Investor holding the
right to acquire, upon conversion of such Offered Preferred Stock, the number of
shares of Common Stock equal to the Aggregate Purchase Price divided by the
Effective Price of the Preferred Offering.
6.3 NON-DILUTIVE PREFERRED OFFERING. If the issuance of the Offered
Preferred Stock will be at an Effective Price equal to or greater than the then
existing Common Stock Purchase Price, then the Investor shall be entitled to
exchange the Shares (including any Additional Shares then held by the Investor
that are issued prior to the Preferred Offering) for either (i) the number of
shares of Offered Preferred Stock that would
18
<PAGE>
result in the Investor holding the right to acquire, upon conversion of such
Offered Preferred Stock, the number of shares of Common Stock equal to the
Aggregate Purchase Price divided by the Effective Price or (ii) the number of
shares of Offered Preferred Stock that would result in the Investor holding the
right to acquire, upon conversion of such Offered Preferred Stock, the number of
shares of Common Stock equal to the Aggregate Purchase Price divided by the then
existing Common Stock Purchase Price, provided that in the case of (ii) the
Investor provides additional consideration to the Company equal to the number of
such shares of Common Stock multiplied by the difference between the Effective
Price and the then existing Common Stock Purchase Price.
7. PURCHASE PRICE ADJUSTMENT ON IPO.
If the Common Stock Purchase Price is more than the purchase price per
share (prior to underwriting discounts and commissions) of the Common Stock sold
by the Company in the IPO (the "IPO Purchase Price"), the then existing Common
Stock Purchase Price shall be reduced, as of the initial closing with respect to
the IPO, to a price equal to the IPO Purchase Price. Concurrently with the IPO
Closing Date, the Company shall issue to the Investor, as a result of such
reduction in the Common Stock Purchase Price and without payment of further
consideration, that number of shares of Common Stock that equals the difference
between (i) the Aggregate Purchase Price divided by the IPO Purchase Price and
(ii) the aggregate number of Shares (including Additional Shares) issued to the
Investor under this Agreement, including pursuant to adjustments under
Section 5, prior to the IPO Closing Date.
8. MISCELLANEOUS.
8.1 TERMINATION; TERM OF AGREEMENT.
(a) This Agreement may be terminated by either party by written
notice to the other party in the event that the Closing Date does not occur on
or before June 30, 1997 or such other date as the Company and the Investor shall
mutually agree in writing.
(b) Nothing herein shall relieve any party from liability for
any breach hereof.
8.2 PUBLIC ANNOUNCEMENTS. The Company and the Investor shall
jointly approve any public announcements relating to the transactions described
herein or the relationship between the parties. Each party agrees to cooperate
with the other in the preparation of any required governmental filing relating
to the transactions contemplated hereby. If, prior to the Closing, any party
publicly announces the transactions contemplated herein without the prior
written approval of the other party, the non-approving party shall have the
right, at its sole discretion, to terminate this Agreement.
19
<PAGE>
8.3 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Neither the Company nor the Investor shall assign this
Agreement or any rights hereunder or delegate any duties hereunder without the
prior written consent of the other (which consent may be withheld for any reason
in the sole discretion of the party from whom consent is sought).
8.4 NOTICES. Unless otherwise provided, any notice, request, demand
or other communication required or permitted under this Agreement shall be given
in writing and shall be deemed effectively given upon personal delivery to the
party to be notified, or when sent by telecopier (with receipt confirmed and
promptly confirmed by personal delivery, U.S. first class mail, or courier), or
overnight courier service, or upon deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed as follows (or at
such other address as a party may designate by notice to the other):
If to the Company:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, CA 94086
Attention: Michael Hoberg,
Vice President, Finance and Chief Financial
Officer
Telecopier: (408) 735-8571
with a copy to:
Buchalter, Nemer, Fields & Younger,
a Professional Corporation
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017
Attention: Stuart D. Buchalter, Esq.
Telecopier: (213) 896-0400
If to the Investor:
S3 Incorporated
2801 Mission College Boulevard
Santa Clara, CA 95052
Attention: Chief Financial Officer
Telecopier: (408) 980-5429
20
<PAGE>
with a copy to:
Pillsbury Madison & Sutro LLP
2700 Sand Hill Road
Menlo Park, CA 94025
Attention: Jorge del Calvo, Esq.
Telecopier: (415) 233-4545
8.5 SURVIVAL. All representations and warranties contained or
provided for herein shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of the party benefiting
from any such representation or warranty, and shall survive the Closing to the
extent of applicable statutes of limitations; PROVIDED, HOWEVER, that the
representations and warranties in Sections 2 and 3 of this Agreement shall not
be construed so as to constitute representations and warranties concerning
circumstances existing after any date specifically referred to therein, or the
Closing Date, as the case may be.
8.6 FINDERS OR BROKERS. The Investor represents that it has not
engaged any investment banker, finder or broker, and neither is nor will be
obligated for any finder's fee or commission, in connection with the
transactions contemplated hereby. The Company represents that it has not
engaged any investment banker, finder or broker, and neither is nor will be
obligated for any finder's fee or commission, in connection with the
transactions contemplated hereby. Each party agrees to indemnify and hold
harmless the other from the liability for any fees, commissions and other
payments (and the costs and expenses of defending against such liability or
asserted liability) that may be owing as a result of such party's breach of its
representation made in this Section 8.6.
8.7 EXPENSES. Each party hereto shall pay all of its own costs and
expenses incurred in connection with the negotiation, preparation, execution,
delivery and performance of this Agreement and the transactions contemplated
herein, whether or not such transactions are consummated.
8.8 AMENDMENTS AND WAIVERS. This Agreement may be amended or
modified only by a written instrument signed by the Company and the Investor.
The observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) only with
the written consent of the party against whom such waiver is sought to be
enforced. No waiver by either party of any default with respect to any
provision, condition or requirement hereof shall be deemed to be a continuing
waiver in the future thereof or a waiver of any other provision, condition or
requirement hereof; nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right accruing
to it thereafter.
8.9 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable, invalid or void by a court of competent jurisdiction,
such provision
21
<PAGE>
shall be excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
8.10 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein contain the entire understanding of the parties with respect to the
matters covered herein and supersedes all prior agreements and understandings,
written or oral, between the parties relating to the subject matter hereof.
Notwithstanding the foregoing, the Non-Disclosure Agreement dated as of
October 10, 1996 between the Company and the Investor (erroneously referred to
as S3 Corporation) shall remain in full force and effect in accordance with its
terms, except as may have been modified herein.
8.11 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of California (irrespective of its choice
of law principles).
8.12 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.13 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. Any reference in this Agreement to a
statutory provision or rule or regulation promulgated thereunder shall be deemed
to include any similar successor statutory provision or rule or regulation
promulgated thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
FAROUDJA. INC.
By /s/ Michael Moone
---------------------------------------
Name: Michael Moone
Title: President, CEO
S3 INCORPORATED
By /s/ Gary Johnson
---------------------------------------
Name: Gary Johnson
Title: President, CEO
22
<PAGE>
EXHIBIT A
INVESTOR'S RIGHTS AGREEMENT
THIS INVESTOR'S RIGHTS AGREEMENT (this "Agreement") is made as of the 30th
day of June 1997 by and among FAROUDJA, INC., a Delaware corporation (the
"Company") and S3 INCORPORATED, a Delaware corporation (the "Investor").
WHEREAS, the Company and the Investor have entered into that certain Stock
Purchase Agreement of even date herewith (the "Stock Purchase Agreement")
whereby the Company agreed to issue to the Investor shares (the "Shares" (which
term includes the Additional Shares that may be issued pursuant to the Stock
Purchase Agreement)) of common stock, $0.001 par value, of the Company ("Common
Stock"); and
WHEREAS, in connection with the issuance of the Shares, the Company and the
Investor desire to provide for the rights of the Investor with respect to the
registration of the Shares and certain other matters according to the terms of
this Agreement.
NOW THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS.
(a) The term "Commission" means the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(b) The term "Exchange Act" means the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(c) The term "Holder" means the Investor, as a holder of
Registrable Securities, and any holder of Registrable Securities to whom the
registration rights conferred by this Agreement have been transferred in
accordance with Section 1.9 hereof;
(d) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document by the
Commission.
EXHIBIT A
1
<PAGE>
(e) The term "Registrable Securities" means (i) the Shares,
(ii) any Common Stock issued upon conversion of any preferred stock, $0.001 par
value, of the Company ("Preferred Stock"), issued pursuant to Section 6 of the
Stock Purchase Agreement, and (iii) Common Stock issued as (or issuable upon the
conversion or exercise of any warrant, right or other security that is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, the Shares or for the Preferred Stock or Common Stock referred
to in (ii) above, excluding in all cases, however, any Common Stock sold by a
person in a transaction in which such person's registration rights are not
assigned; provided, however, that any shares that have been sold to the public
pursuant to a registered public offering or Rule 144 under the Securities Act
shall cease to be Registrable Securities.
(f) The term "Securities Act" means the Securities Act of 1933,
as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(g) All other capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Stock Purchase Agreement to
which this Exhibit A is attached.
1.2 REQUEST FOR REGISTRATION.
(a) So long as there are at least 100,000 shares of Registrable
Securities outstanding, if the Company shall receive, at any time after twelve
months after the effective date of the registration statement relating to the
IPO, a written request from the Holders of at least 40% of the Registrable
Securities then outstanding that the Company file a registration statement under
the Securities Act covering the registration of at least 20% of the Registrable
Securities then outstanding (or a lesser percentage if the anticipated aggregate
offering price, before deduction of any underwriting discounts and commissions,
would exceed $5,000,000), then the Company shall, within ten days of the receipt
thereof, give written notice of such request to all other Holders of Registrable
Securities and shall, subject to the limitations of subsection 1.2(b), use its
best efforts to effect as soon as practicable the registration under the
Securities Act of all Registrable Securities that the Holders request to be
registered under this Section 1.2(a) within 30 days of the mailing of such
notice by the Company in accordance with Section 3.2.
(b) If the Holders of Registrable Securities initiating the
registration request pursuant to subsection 1.2(a) ("Initiating Holders") intend
to distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to this Section 1.2 and the Company shall include such information in
the written notice referred to in subsection 1.2(a). The underwriter or
underwriters shall be selected by the Company and shall be reasonably acceptable
to a majority in interest of the Initiating Holders. In such event, the right of
any such Holder to include such Holder's Registrable Securities in such
EXHIBIT A
2
<PAGE>
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in Section 1.4(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities that would otherwise be underwritten pursuant hereto, and
the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities owned by each Holder; provided, however, that the number
of shares of Registrable Securities to be included in such underwriting shall
not be reduced unless all other securities are first entirely excluded from the
underwriting.
(c) If the Company shall receive, at any time after twelve
months after the effective date of the registration statement relating to the
IPO, a written request or requests from any Holder or Holders that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders, the Company shall, within ten days of the receipt thereof, give
written notice of such request to all other Holders of Registrable Securities
and shall use its best efforts to effect as soon as practicable such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within 20 days after receipt of such written notice from
the Company; provided, however, that the Company shall not be obligated to
effect any such registration, qualification or compliance pursuant to this
subsection 1.2(c): (i) if Form S-3 is not available for such offering by the
Holders or (ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
price to the public (before deduction of any underwriters' discounts or
commissions) of less than $3,000,000.
(d) The Company is obligated to effect only two registrations
pursuant to subsection 1.2(a) and one registration pursuant to
subsection 1.2(c).
(e) Notwithstanding the foregoing, if the Company shall furnish
to the Initiating Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of the Company
it would be seriously detrimental to the Company for such registration statement
to be filed and it is therefore
EXHIBIT A
3
<PAGE>
essential to defer the filing of such registration statement, the Company shall
have the right to defer such filing for a period of not more than 120 days after
receipt of the request of the Initiating Holders (or, if the Company is engaged
or has fixed plans to engage in a registered public offering as to which the
Holders may include Registrable Securities pursuant to Section 1.3, the Company
may defer such filing for a period beginning 60 days prior to the initial filing
with the Commission of the registration statement relating to such offering, and
ending not more than 180 days (90 days in the case of a request pursuant to
subsection 1.2(c)) after the effective date of such registration statement);
provided, however, that the Company may not utilize this right more than once in
any 12-month period.
1.3 COMPANY REGISTRATION.
(a) If (but without any obligation to do so), at any time after
twelve months after the effective date of the registration statement relating to
the IPO, the Company proposes to register (including for this purpose a
registration effected by the Company for stockholders other than the Holders)
any of its stock or other securities under the Securities Act in connection with
the public offering of such securities solely for cash (other than the IPO, a
registration relating solely to the sale of securities to participants in a
Company stock plan, or a registration on any form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Securities), the
Company shall, at such time, promptly give each Holder written notice of such
registration. Upon the written request of each Holder given within 20 days
after the mailing of such notice by the Company, the Company shall. subject to
the provisions of subsection 1.3(b), cause to be registered under the Securities
Act all of the Registrable Securities that each such Holder has requested to be
registered.
(b) In connection with any offering involving an underwriting of
shares being issued by the Company, the Company shall not be required under this
Section 1.3 to include any of the Holders' securities in such underwriting
unless they accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it (or by other persons entitled to
select the underwriters), and then only in such quantity as will not, in the
opinion of the underwriters, jeopardize the success of the offering by the
Company. If the total amount of securities, including Registrable Securities,
requested by stockholders to be included in such offering exceeds the amount of
securities sold other than by the Company that the underwriters reasonably
believe compatible with the success of the offering, then the Company shall be
required to include in the offering only that number of such securities,
including Registrable Securities, which the underwriters believe will not
jeopardize the success of the offering (the securities so included to be
apportioned pro rata among the selling stockholders according to the total
amount of securities entitled to be included therein owned by each selling
stockholder or in such other proportions as shall mutually be agreed to by such
selling stockholders) but in no event shall (i) the amount of securities of the
selling Holders included in the offering be reduced below 30% of the total
amount of securities included in such offering or (ii) notwithstanding (i)
EXHIBIT A
4
<PAGE>
above, any shares being sold by a stockholder exercising a demand registration
right similar to that granted in Section 1.2 be excluded from such offering.
For purposes of the preceding parenthetical concerning apportionment, for any
selling stockholder that is a Holder of Registrable Securities and that is a
partnership or corporation, the partners, retired partners and stockholders of
such Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling stockholder," and any pro rata reduction with
respect to such "selling stockholder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "selling stockholder," as defined in this sentence.
1.4 OBLIGATIONS OF THE COMPANY.
Whenever required under this Section 1 to effect the registration of
any Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for a period (the
"Effectiveness Period") of up to 120 days. In the event that, in the judgment
of the Company, it is advisable to suspend use of the prospectus relating to
such registration statement for a discrete period of time (a "Deferral Period")
due to pending material corporate developments or similar material events that
have not yet been publicly disclosed and as to which the Company believes public
disclosure will be prejudicial to the Company, the Company shall deliver a
certified resolution of the Board of Directors of the Company or a duly
authorized committee thereof, signed by a duly authorized officer of the
Company, to each Holder, to the effect of the foregoing and, upon receipt of
such certificate, such Holders agree not to dispose of such Holders' Registrable
Securities covered by such registration or prospectus (other than in
transactions exempt from the registration requirements under the Securities
Act); provided, however, that such Deferral Period shall be no longer than 60
days. The Effectiveness Period shall be extended for a period of time equal to
such Deferral Period.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders of the Registrable Securities covered
by such registration statement such numbers of copies of a prospectus, including
a preliminary prospectus, and any amendment or supplement thereto and a
reasonable number of copies of the then-effective registration statement and any
post-effective amendment thereto, all in conformity with the requirements of the
Securities Act, and such other
EXHIBIT A
5
<PAGE>
documents as they may reasonably request in order to facilitate the disposition
of such Registrable Securities.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders
thereof, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and at the request of any such Holder prepare and furnish
to such Holder a reasonable number of copies of a supplement or an amendment to
such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing.
(g) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 1, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 1, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) in the case of an underwritten
public offering a letter dated such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters.
(h) Cause all Registrable Securities covered by the registration
statement to be listed on each securities exchange or automated quotation system
on which
EXHIBIT A
6
<PAGE>
shares of Common Stock are then listed. If any of such shares are not so
listed, the Company shall cause such shares to be listed on the securities
exchange or automated quotation system as may be reasonably requested by the
Holders of a majority of the Registrable Securities being registered.
(i) Permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review, at the Holders' expense, the registration
statement and all amendments and supplements thereto for a reasonable period of
time prior to their filing with the Commission and state authorities, which
documents shall not be filed in a form to which such counsel reasonably objects.
(j) Cause the Company's officers, directors and independent
certified public accountants to supply all information reasonably requested by a
representative of any Holder of Registrable Securities, and any attorney or
accountant retained by such Holder, in connection with such registration;
provided, however, that such representatives, attorneys or accountants enter
into a confidentiality agreement, in form and substance reasonably satisfactory
to the Company, prior to the release or disclosure of any such information.
1.5 OBLIGATIONS OF THE HOLDERS.
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Agreement that the selling Holders
shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them, and the intended method of disposition of
such securities as shall be required to effect the registration of the
Registrable Securities.
(b) Upon the receipt by a Holder of any notice from the Company
of (i) the existence of any fact or the happening of any event as a result of
which the prospectus included in a registration statement filed pursuant to
Section 2, as such registration statement is then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, (ii) the issuance by
the Commission of any stop order or injunction suspending or enjoining the use
or the effectiveness of such registration statement or the initiation of any
proceedings for that purpose, or the taking of any similar action by the
securities regulators of any state or other jurisdiction, or (iii) the request
by the Commission or any other federal or state governmental agency for
amendments or supplements to such registration statement or related prospectus
or for additional information related thereto, such Holder shall forthwith
discontinue disposition of such Holder's Registrable Securities covered by such
registration or prospectus (other than in transactions exempt from the
registration requirements under the Securities Act) until such Holder's receipt
of the supplemented or amended prospectus or until such Holder is advised in
writing by the
EXHIBIT A
7
<PAGE>
Company that the use of the applicable prospectus may be resumed. In such a
case, the Effectiveness Period shall be extended by the number of days from and
including the date of the giving of such notice to and including the date when
each Holder shall have received a copy of the supplemented or amended prospectus
or when such Holder is advised in writing by the Company that the use of the
applicable prospectus may be resumed. The Company shall use its best efforts to
limit the duration of any discontinuance of disposition of Registrable
Securities pursuant to this section.
1.6 EXPENSES. The Company shall bear and pay all expenses incurred
in connection with any registration, filing or qualification of Registrable
Securities with respect to the registrations pursuant to Section 1.2 and 1.3
hereof, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees relating or apportionable
thereto, fees and disbursements of counsel for the Company, blue sky fees and
expenses, including fees and disbursements of counsel related to all blue sky
matters, fees and expenses of listing any Registrable Securities on any
securities exchange or automated quotation system on which shares of Common
Stock are then listed, and the expenses of providing materials pursuant to
Section 1.4 hereof, but excluding the fees and disbursements of counsel for the
selling Holders, stock transfer taxes that may be payable by the selling
Holders, and all underwriting discounts and commissions relating to Registrable
Securities covered by such registration, which shall be borne by the Holders.
1.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.8 INDEMNIFICATION.
In the event any Registrable Securities are included in a registration
statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder of such Registrable Securities, the officers and
directors of each such Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities (joint or several) to which
they may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively, a "Violation"): (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading,
EXHIBIT A
8
<PAGE>
or (iii) any violation or alleged violation by the Company of the Securities
Act, the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any state securities
law; and the Company will reimburse each such Holder, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this subsection 1.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation that occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, officer, director, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter
and any other Holder selling securities in such registration statement or any of
its directors or officers or any person who controls such Holder, against any
losses, claims, damages or liabilities (joint or several) to which the Company
or any such director, officer, controlling person, or underwriter or controlling
person, or other such Holder or director, officer or controlling person may
become subject, under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, controlling person, underwriter or controlling person,
other Holder, officer, director, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this
subsection 1.8(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld;
provided, that, in no event shall any indemnity under this subsection 1.8(b)
exceed the net proceeds from the sale of the Registrable Securities received by
such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying
EXHIBIT A
9
<PAGE>
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.8 to the extent the indemnifying party
was actually damaged or suffered any loss or incurred any additional expense as
a result thereof, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.8. An indemnifying party
shall not, without the prior written consent of the indemnified parties, settle,
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder by such indemnified parties (whether or
not the indemnified parties are actual or potential parties to such claim or
action) unless such settlement, compromise or consent includes a release of such
indemnified party reasonably acceptable to such indemnified party from all
liability arising out of such claim, action, suit or proceeding or unless the
indemnifying party shall confirm in a written agreement reasonably acceptable to
such indemnified party, that notwithstanding any federal, state or common law,
such settlement, compromise or consent shall not adversely affect the right of
any indemnified party to indemnification as provided in this Section 1. The
indemnity provided for in this Section 1.8 shall apply to the Holders in their
capacities as such, and shall be independent of any other agreement, including
without limitation an underwriting agreement, entered into after the date hereof
between the Company and any Holder in its capacity as a Holder or otherwise.
(d) If the indemnification provided for in this Section 1.8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission. Notwithstanding the foregoing, no Holder shall be
required to contribute any amount in
EXHIBIT A
10
<PAGE>
excess of the amount of net proceeds from the sale of the Registrable Securities
received by such Holder.
(e) The obligations of the Company and Holders under this
Section 1.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned by a Holder to (i) any transferee or assignee of the Registrable
Securities that is a wholly-owned subsidiary of the Holder or (ii) a successor
to substantially all the business or assets of the Holder; provided that the
Company is, within a reasonable time after such transfer, furnished with written
notice of the name and address of such transferee, assignee or successor
("Permitted Assigns") and the securities with respect to which such registration
rights are being assigned.
1.10 REPORTS UNDER THE EXCHANGE ACT. With a view to making available
to the Holders the benefits of Rule 144 under the Securities Act and any other
rule or regulation of the Commission that may at any time permit a Holder to
sell securities of the Company to the public without registration, the Company
agrees that from and after the IPO Closing Date, it will:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times after the date hereof;
(b) file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, upon request (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested in availing any
Holder of any rule or regulation of the Commission which permits the selling of
any such securities without registration.
1.11 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company that would allow such holder or prospective holder preferential
rights (a) to include such securities in any registration filed under
Section 1.2 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only to
the
EXHIBIT A
11
<PAGE>
extent that the inclusion of such holder's securities will not reduce the amount
of the Registrable Securities of the Holders that is included or (b) to make a
demand registration that could result in such registration statement being
declared effective prior to the earlier of the date set forth in
subsection 1.2(a) or within 120 days of the effective date of any registration
effected pursuant to Section 1.2.
1.12 "MARKET STAND-OFF" AGREEMENT. If requested by the Company or the
representative of the underwriters of Common Stock (or other securities) of the
Company, each Holder shall agree that it will not sell or otherwise transfer or
dispose (other than to donees who agree to be similarly bound) of any
Registrable Securities (other than Registrable Securities to be sold pursuant to
the registration statement described below) for a period of time specified by
the representative of the underwriters not to exceed 180 days, following the
effective date of the registration statement of the Company filed under the
Securities Act relating to the IPO, provided that all executive officers and
directors of the Company and all persons holding 5% or more of the then
outstanding Common Stock enter into similar agreements.
1.13 TERMINATION OF REGISTRATION RIGHTS. The Company's obligations
pursuant to this Agreement shall terminate as to any Holder of Registrable
Securities on the earlier of (a) the third anniversary of the IPO Closing Date
and (b) as to a Holder that owns less than 1% of the outstanding Common Stock,
the date on which the Holder can sell all of such Holder's Registrable
Securities pursuant to Rule 144 under the Securities Act during any three month
period.
2. COVENANTS OF THE COMPANY.
2.1 DELIVERY OF FINANCIAL STATEMENTS. So long as the Investor and
its Permitted Assigns hereunder hold in the aggregate not less than 100,000
Shares (as appropriately adjusted for subsequent stock splits, stock dividends
and stock combinations and the like and for any exchange of such Shares into
Preferred Stock pursuant to Section 6 of the Stock Purchase Agreement), the
Company shall deliver to the Investor:
(a) as soon as practicable, but in any event within 90 days
after the end of each fiscal year of the Company, a statement of operations
for such fiscal year, a balance sheet of the Company as of the end of such
year, and a statement of cash flows for such year, such year-end financial
reports to be in reasonable detail, prepared in accordance with generally
accepted accounting principles ("GAAP"), and audited and certified by
independent public accountants of nationally recognized standing selected
by the Company;
(b) within 30 days of the end of each quarter, an unaudited
statement of operations, statement of cash flows and balance sheet for and
as of the end of such quarter, in reasonable detail; such quarterly
statements shall also contain the foregoing information on a year-to-date
basis; and
EXHIBIT A
12
<PAGE>
(c) after the IPO and, so long as the Company is subject to the
periodic reporting requirements of Section 13 or 15(d) of the Exchange Act
and the rules and regulations of the Commission thereunder, in lieu of the
documents required by (a) and (b) above, promptly after filing with the
Commission, the Company's reports (without exhibits) on Forms 10-K, 10-Q,
and 8-K.
2.2 RIGHT OF FIRST OFFER. Subject to the terms and conditions
specified in this Section 2.2, the Company agrees not to sell or issue any New
Securities (as hereinafter defined) without complying with the provisions of
this Section 2.2.
(a) In the event the Company proposes to sell or issue any New
Securities to a Competitor (as hereinafter defined), the Company hereby grants
to the Investor the right to purchase such New Securities. In the event the
Company proposes to sell or issue any New Securities to persons or entities
other than Competitors (as defined below in subsection 2.2(c)), the Company
hereby grants to the Investor a right of first offer to purchase a pro rata
share of New Securities (as hereinafter defined) that the Company may, from time
to time, propose to sell and issue. For purposes of this Section 2.2, the
Investor's pro rata share of New Securities is the ratio of the number of shares
of Common Stock owned by the Investor immediately prior to the issuance of New
Securities to the total number of shares of Common Stock outstanding immediately
prior to the issuance of New Securities (assuming full conversion of all
convertible securities).
(b) "New Securities" shall mean any capital stock (including
Common Stock) of the Company whether now authorized or not, and rights, options
or warrants to purchase capital stock of the Company, and securities of any type
whatsoever that are, or may become, convertible into capital stock of the
Company; provided, however, that the term "New Securities" does not include
(i) shares of Common Stock (or options therefor) issued or sold to employees,
directors, consultants or advisors of the Company for the primary purpose of
soliciting or retaining their services, provided each such person executes an
agreement, in substantially the form as approved by the Company's Board of
Directors, (ii) securities issued pursuant to the acquisition of another
business entity or business segment of any such entity by the Company by merger,
purchase of substantially all the assets or other reorganization whereby the
Company will own more than 50% of the voting power of such business entity or
business segment, (iii) securities issued in connection with any stock split,
stock dividend or recapitalization of the Company in which all holders of Common
Stock are entitled to receive their proportionate share of such issuance, and
(iv) any right, option or warrant to acquire any security convertible into the
securities excluded from the definition of New Securities pursuant to
clauses (i) through (iii) above.
(c) If the Company proposes to issue New Securities, the Company
shall give written notice to the Investor stating (i) its bona fide intention to
offer or issue New Securities, (ii) the number of such New Securities to be
offered, (iii) the price and general terms upon which it proposes to offer such
New Securities, and (iv) the identity of
EXHIBIT A
13
<PAGE>
the persons or entities or classes of persons or entities to whom such New
Securities are proposed to be issued. Within 20 calendar days after receipt of
such notice, the Investor may elect to purchase or obtain, at the price and on
the terms specified in the notice, (x) all of such New Securities, in the event
the Company proposes to issue such New Securities to an entity that is a
Competitor of the Investor (as defined in Exhibit 2.2 hereto, as such
Exhibit 2.2 may from time to time hereafter be amended by the Investor with the
reasonable concurrence of the Company's Board of Directors), or (y) up to its
pro rata share of such New Securities, as such pro rata share is calculated
pursuant to subsection 2.2(a) above, in the event the Company proposes to issue
such New Securities to persons or entities other than Competitors, by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased.
(d) If the Investor does not fully exercise its right to
purchase or obtain all such New Securities that the Investor has the right to
purchase or obtain pursuant to subsection 2.2(c) hereof, the Company may, during
the 60-day period following the expiration of the period provided in
subsection 2.2(c) hereof, offer the remaining unsubscribed New Securities to the
persons or entities or classes of persons or entities specified in the notice
sent to the Investor pursuant to subsection 2.2(c) at a price not less than
that, and upon terms no more favorable to the offeree than those, specified in
such notice. If the Company does not enter into an agreement for the sale of
the New Securities within such period, or if such agreement is not consummated
within 60 days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such New Securities shall not be offered unless first
reoffered to the Investor in accordance herewith.
(e) The right of first offer granted in this Section 2.2 shall
not apply to or after the initial closing of the IPO and shall be null and void
thereafter.
(f) For purposes of this Section 2.2, the term Investor includes
any Permitted Assigns. The Investor shall be entitled to assign, or to
apportion, the right of participation hereby granted it among itself and its
Permitted Assigns in such proportions as it deems appropriate.
2.3 STANDSTILL AGREEMENT. For a period of four (4) years after the
IPO Closing Date:
(a) The Investor will not, unless it has obtained the prior
written consent of the Company, acquire any shares of Common Stock (except by
way of stock dividends or other distributions or offerings made available to
holders of Common Stock generally) if the effect of such acquisition would be to
increase the aggregate number of shares of Common Stock then owned by the
Investor or which it has a right to acquire to more than 4.95% of all shares of
Common Stock then outstanding (assuming the exercise or conversion of all
outstanding rights or convertible securities to acquire Common Stock then held
by the Investor); provided, that the Investor will not be required to dispose of
any shares of Common Stock if the aggregate ownership percentage of the Investor
is increased
EXHIBIT A
14
<PAGE>
as a result of a recapitalization of or a repurchase of securities by the
Company or as a result of any other similar action taken by the Company.
(b) The Investor will advise the Board of Directors of the
Company as to the Investor's plans to acquire additional shares of Common Stock
or rights to acquire Common Stock reasonably in advance of any such acquisition.
(c) Notwithstanding the foregoing, the obligations of the
Investor under this Section 2.3 shall terminate immediately upon: (A) the
commencement or public announcement of an intent of any person or "group"
(within the meaning of Section 13(d) of the Exchange Act) to commence a tender
or exchange offer to acquire Common Stock that, if added to the Common Stock (if
any) already owned by such person or group, would result in such person or group
owning beneficially more than 30% of all shares of Common Stock then
outstanding; or (B) the acquisition or the public announcement of the proposed
acquisition by any person or group (other than a stockholder of the Company as
of the date of this Agreement and affiliates thereof) of beneficial ownership of
more than 30% of all shares of Common Stock then outstanding (all percentages in
this paragraph (c) shall be calculated assuming the exercise or conversion of
all outstanding rights or convertible securities to acquire Common Stock then
held by such person or group).
3. MISCELLANEOUS.
3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
3.2 NOTICES. Unless otherwise provided, any notice, request, demand
or other communication required or permitted under this Agreement shall be given
in writing and shall be deemed effectively given upon personal delivery to the
party to be notified, or when sent by telecopier (with receipt confirmed and
promptly confirmed by personal delivery, U.S. first class mail, or courier), or
overnight courier service, or upon deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed as follows (or at
such other address as a party may designate by notice to the other):
EXHIBIT A
15
<PAGE>
If to the Company:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, CA 94086
Attention: Michael Hoberg,
Vice President, Finance and Chief Financial
Officer
Telecopier: (408) 735-8571
with a copy to:
Buchalter, Nemer, Fields & Younger,
a Professional Corporation
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017
Attention: Stuart D. Buchalter, Esq.
Telecopier: (213) 896-0400
If to the Investor:
S3 Incorporated
2801 Mission College Boulevard
Santa Clara, CA 95052
Attention: Chief Financial Officer
Telecopier: (408) 980-5429
with a copy to:
Pillsbury Madison & Sutro LLP
2700 Sand Hill Road
Menlo Park, CA 94025
Attention: Jorge del Calvo, Esq.
Telecopier: (415) 233-4545
3.3 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable, invalid or void by a court of competent jurisdiction,
such provision shall be excluded from this Agreement and the balance of this
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms.
EXHIBIT A
16
<PAGE>
3.4 ENTIRE AGREEMENT; AMENDMENTS.
(a) This Agreement contains the entire understanding of the
parties with respect to the matters covered herein and supersedes all prior
agreements and understandings, written or oral, between the Parties relating to
the subject matter hereof.
(b) Any term of Section 1 of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the Holders of a majority of the
Registrable Securities then outstanding. Any other term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investor.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each Holder of any Registrable Securities then outstanding, each
future Holder of all such Registrable Securities, and the Company. No waiver of
any default with respect to any provision, condition or requirement hereof shall
be deemed to be a continuing waiver in the future thereof or a waiver of any
other provision, condition or requirement hereof; nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter.
3.5 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California (irrespective of its choice of law
principles).
3.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.7 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. Any reference in this Agreement to a
statutory provision or rule or regulation
EXHIBIT A
17
<PAGE>
promulgated thereunder shall be deemed to include any similar successor
statutory provision or rule or regulation promulgated thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
FAROUDJA. INC.
By /s/ Michael Moone
---------------------------------------
Name: Michael Moone
Title: President, CEO
S3 INCORPORATED
By /s/ Gary Johnson
---------------------------------------
Name: Gary Johnson
Title: President and CEO
EXHIBIT A
18
<PAGE>
EXHIBIT B
MATTERS TO BE ADDRESSED IN OPINION OF
BUCHALTER, NEMER, FIELDS & YOUNGER
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. The Company has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as currently conducted.
(b) All corporate action on the part of the Company necessary for the
authorization, execution and delivery of the Stock Purchase Agreement and the
Investor's Rights Agreement, the performance of all obligations of the Company
thereunder, and the authorization, issuance and delivery of the Shares has been
taken or will be taken on or prior to the Closing. The Stock Purchase Agreement
and the Investor's Rights Agreement each constitutes a legal, valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except for (i) the effect of bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting the rights of
creditors generally, (ii) limitations imposed by federal or state law or
equitable principles upon the specific enforceability of any of the remedies,
covenants or other provisions of the Stock Purchase Agreement and the Investor's
Rights Agreement and upon the availability of injunctive relief or other
equitable remedies, and (iii) limitations imposed by applicable federal or state
securities laws or principles of public policy upon the enforcement of the
provisions of the Investor's Rights Agreement relating to indemnification and
contribution.
(c) The Shares have been duly authorized and, when issued, sold and
delivered in accordance with the terms of the Stock Purchase Agreement for the
consideration expressed therein, will be validly issued, fully paid and
nonassessable. There are no preemptive or, to the best knowledge of such
counsel, similar contractual rights that have not been waived with respect to
the issuance and sale of the Shares and the Additional Shares, if any.
(d) The execution and delivery of the Stock Purchase Agreement and
the Investor's Rights Agreement and the consummation of the transactions
contemplated thereby (i) will not conflict with, or result in any breach or
violation of the Restated Certificate of Incorporation or the Bylaws of the
Company, and (ii) do not violate any provision of any applicable federal or
state law, rule or regulation and, to the best of such counsel's knowledge, do
not conflict with or constitute a default under the provision of any judgment,
writ, decree, order or agreement to which the Company is a party or by which it
is bound, which violation, conflict or default would be materially adverse to
the Company.
EXHIBIT B
1
<PAGE>
(e) All consents, approvals, orders or authorizations of, and all
qualifications, registrations, designations, declarations or filings with, any
federal or state governmental authority on the part of the Company required to
be made prior to the Closing in connection with the consummation of the
transactions contemplated by this Agreement and the Investor's Rights Agreement
have been obtained, and are effective, as of the Closing and such counsel is not
aware of any proceedings, or threat thereof, which question the validity
thereof.
(f) Based in part upon the representations of the Investor, the offer
and sale of the Shares pursuant to the terms of the Stock Purchase Agreement are
exempt from the registration requirements of Section 5 of the Securities Act of
1933, as amended, and from the qualification requirements of the California
Corporate Securities Law of 1968, as amended. Such counsel need not express any
opinion as to compliance with applicable antifraud statutes, rules or
regulations of any applicable law governing the issue of securities.
(g) To the best of such counsel's knowledge, there is no action,
proceeding or investigation pending against the Company or any of its officers,
directors or employees and to the best of such counsel's knowledge none has
received any threat thereof, that questions the validity of the Stock Purchase
Agreement or the Investor's Rights Agreement or that could reasonably be
expected to result, either individually or in the aggregate, in any material
adverse change in the assets financial condition or operations of the Company.
EXHIBIT B
2
<PAGE>
SCHEDULE OF EXCEPTIONS
TO THE
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
FAROUDJA, INC.
AND
S3 INCORPORATED
JUNE 30, 1997
THE FOLLOWING SETS FORTH THE EXCEPTIONS TO THE REPRESENTATIONS AND WARRANTIES
CONTAINED IN SECTION 2 OF THE ABOVE REFERENCED STOCK PURCHASE AGREEMENT.
<PAGE>
Schedule 2.2
CAPITALIZATION
As of June 12, 1997, the Board of Directors of the Company reserved an
additional 250,000 options and underlying shares of common stock for future
grant under the Company's 1997 Performance Stock Option Plan, which such
resolution is being submitted to the Company's present stockholders for
approval.
2
<PAGE>
Schedule 2.8
LITIGATION IN WHICH THE COMPANY IS INVOLVED
FAROUDJA LABORATORIES, INC. V. SNELL & WILCOX, INC., Civil Action No. C-97 20422
RMW PVT, U.S. District Court, N.D. California.
Suit filed on May 6, 1997 alleging that defendant's "Interpolator" line
multiplier products infringe FLI's U.S. Patent No. 4,876,596 ("the 596 Patent")
entitled "Film-To-Video Converter with Scan Line Doubling." Defendant has not
yet answered.
YAMASHITA ENGINEERING MANUFACTURE, INC. ("YEM")
A letter was sent to YEM alleging that its Cinema Decoder infringes the 596
Patent. YEM's response letter indicated that it would cease development of the
product. YEM displayed a similar product at the Infocomm Show in Los Angeles in
early June. A cease and desist letter was delivered to YEM at the show.
FAROUDJA LABORATORIES, INC. V. DWIN ELECTRONICS, INC., Civil Action No. C-97
20010 SW PVT, U.S. District Court, N.D. California.
Suit filed on January 6, 1997 alleging that defendant's line multiplier products
infringe the 596 Patent. Defendant has denied the allegation and responded with
a variety of other defenses.
ROIZEN V. FAROUDJA LABORATORIES, INC. AND YVES FAROUDJA, Case No. CV764638,
Santa Clara County Superior Court.
Suit filed on March 7, 1997 alleging, among other things, that defendants failed
to pay commissions due under a consulting agreement. Defendants' demurrer was
sustained with leave to amend. Deficiencies cited included statute of
limitations problems; the suit is based on actions which conduct took place in
the late 1980's.
3
<PAGE>
Schedule 2.11
MATERIAL OPTIONS, LICENSES AND/OR AGREEMENTS
RELATED TO THE COMPANY'S PATENTS, TRADEMARKS, AND THE LIKE
1. Agreement, dated as of January 20, 1997, by and between Yves Faroudja and
Faroudja Laboratories, Inc. ("FLI").
2. Warrant to Purchase Shares of Faroudja, Inc. Common Stock, dated
January 20, 1997, issued to Yves Faroudja for the purchase of 100,000
shares of the Company's common stock at an exercise price of $7.50 per
share.
3. License Agreement, dated as of March 31, 1997, between FLI and S3
Incorporated.
4. Assignment of License Agreement, dated December 23, 1996, between Faroudja
Research Enterprises, Inc. ("FRE") and FLI.
5. License Agreement, dated March 6, 1996, between Yves Faroudja and FLI which
was cancelled pursuant to the Agreement, dated as of January 20, 1997, by
and between Yves Faroudja and FLI.
6. Assignment of Patent License Agreement, executed March 4, 1996, by and
between Yves Faroudja and FLI.
7. Assignment of License Agreement, dated as of April 1, 1995, by and between
Yves Faroudja and FRE.
8. Mutual Termination of License Agreements, dated March 8, 1996, by and
between Yves Faroudja, FLI and FRE.
9. Technology License Agreement, dated November 12, 1993, by and between FLI &
General Instrument Corporation of Delaware.
10. Patent License Agreement, dated November 25, 1987, by and between Yves
Faroudja, FLI & Matsushita Electric Industrial Co., Ltd.
11. Side Letter, dated December 1, 1987, by and between Yves Faroudja &
Matsushita Electric Industrial Co., Ltd.
12. Side Letter, dated August 8, 1988, by and between the FLI, Yves Faroudja
and Matsushita Electric Industrial Co., Ltd.
4
<PAGE>
13. Patent License Agreement, dated October 31, 1990, by and between Yves
Faroudja & Matsushita Electric Industrial Co., Ltd.
14. License Agreement, dated December 6, 1983, by and between Yves Faroudja,
FLI & Sony Corporation.
15. Patent License Agreement, dated October 21, 1985, by and between Yves
Faroudja, FLI & Sony Corporation.
16. License Agreement, dated January 15, 1987, by and between the FLI, Yves
Faroudja & Victor Company of Japan, Limited.
17. Letter of Agreement, dated March 28, 1988, by and between FLI and Victor
Company of Japan, Limited.
18. Patent License Agreement, dated April 15, 1991, by and between Yves
Faroudja and NAC Incorporated.
19. Patent Ownership Agreement, dated October 5, 1990, by and between Yves
Faroudja & Nippon Television Network Corporation.
20. Agreement, dated February 18, 1992, by and between Yves Faroudja & Grass
Valley Group, Inc.
21. License Agreement, dated August 15, 1987, by and between Yves Faroudja &
FLI.
22. YF License Agreement, dated July 1, 1989, by and between Yves Faroudja &
FRE.
23. FLI License Agreement, dated July 1, 1989, by and between FLI & FRE.
24. SuperNTSC Adapter License Agreement, dated September 6, 1991, by and
between FLI & FRE.
25. Amendment to SuperNTSC Adapter License Agreement, dated April 1, 1995, by
and between FLI & FRE.
26. Agency Agreement, dated January 31, 1986, by and between the Company, Yves
Faroudja & Sony Corporation.
27. Sub-License Agreement, dated October 5, 1987, by and between FLI, Yves
Faroudja & Sony Corporation.
28. License Agreement, dated September 2, 1986, by and between Yves Faroudja,
FLI & Ikegami Tsushinki Co., Ltd.
5
<PAGE>
29. License Agreement, dated May 19, 1990, by and between Yves Faroudja, FLI &
Ikegami Tsushinki Co., Ltd.
30. Chip Design, Development and Fabrication Agreement, dated November 5, 1993,
by and between FLI and General Instrument Corporation, Integrated Systems
Center.
31. Chip Design, Development and Fabrication Agreement, dated October 19, 1992,
by and between FLI and General Instrument Corporation, Integrated Systems
Center.
32. Chipset Design, Development and Fabrication Agreement, dated December 10,
1991, by and between FRE and General Instrument Corporation, Integrated
Systems Center.
33. Marketing Agreement, dated April 9, 1997, between FLI and NEC Technologies,
Inc. USA, with attached Addendum.
34. Agreement for Funding and a Framework of Cooperation, dated April 24, 1997,
between FLI and Texas Instruments Incorporated, as amended on June 13,
1997.
35. The Company intends on applying for a trademark for "Picture Plus" and the
"F" symbol, which name and symbol it currently uses in advertisements.
6
<PAGE>
Schedule 2.16
WARRANTS GRANTED BY THE COMPANY
1. Warrant to Purchase Shares of Faroudja, Inc. Common Stock, dated
January 20, 1997, issued to Yves Faroudja for the purchase of 100,000
shares of Faroudja Inc.'s common stock at $7.50 per share.
2. Three (3) Warrants to Purchase Common Stock of Faroudja Research
Enterprises, Inc. (which were assumed by Faroudja, Inc.), each dated
July 16, 1993, issued to John Sie for the purchase of a total of 14,449
shares of Faroudja, Inc.'s common stock at $3.40 per share.
3. Warrant to Purchase Shares of Faroudja, Inc. Common Stock, issued to Merv
Adelson for the purchase of 65,152 shares of Faroudja, Inc.'s common stock
at $0.15 per share upon the happening of certain events as set forth in the
Letter Agreement, dated December 31, 1996, between Faroudja Laboratories,
Inc. and Merv Adelson.
7
<PAGE>
INVESTOR'S RIGHTS AGREEMENT
THIS INVESTOR'S RIGHTS AGREEMENT (this "Agreement") is made as of the 30th
day of June 1997 by and among FAROUDJA, INC., a Delaware corporation (the
"Company") and S3 INCORPORATED, a Delaware corporation (the "Investor").
WHEREAS, the Company and the Investor have entered into that certain Stock
Purchase Agreement of even date herewith (the "Stock Purchase Agreement")
whereby the Company agreed to issue to the Investor shares (the "Shares" (which
term includes the Additional Shares that may be issued pursuant to the Stock
Purchase Agreement)) of common stock, $0.001 par value, of the Company ("Common
Stock"); and
WHEREAS, in connection with the issuance of the Shares, the Company and the
Investor desire to provide for the rights of the Investor with respect to the
registration of the Shares and certain other matters according to the terms of
this Agreement.
NOW THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS.
(a) The term "Commission" means the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(b) The term "Exchange Act" means the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(c) The term "Holder" means the Investor, as a holder of
Registrable Securities, and any holder of Registrable Securities to whom the
registration rights conferred by this Agreement have been transferred in
accordance with Section 1.9 hereof;
(d) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document by the
Commission.
(e) The term "Registrable Securities" means (i) the Shares,
(ii) any Common Stock issued upon conversion of any preferred stock, $0.001 par
value, of the Company ("Preferred Stock"), issued pursuant to Section 6 of the
Stock Purchase
<PAGE>
Agreement, and (iii) Common Stock issued as (or issuable upon the conversion or
exercise of any warrant, right or other security that is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of,
the Shares or for the Preferred Stock or Common Stock referred to in (ii) above,
excluding in all cases, however, any Common Stock sold by a person in a
transaction in which such person's registration rights are not assigned;
provided, however, that any shares that have been sold to the public pursuant to
a registered public offering or Rule 144 under the Securities Act shall cease to
be Registrable Securities.
(f) The term "Securities Act" means the Securities Act of 1933,
as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(g) All other capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Stock Purchase Agreement to
which this Exhibit A is attached.
1.2 REQUEST FOR REGISTRATION.
(a) So long as there are at least 100,000 shares of Registrable
Securities outstanding, if the Company shall receive, at any time after twelve
months after the effective date of the registration statement relating to the
IPO, a written request from the Holders of at least 40% of the Registrable
Securities then outstanding that the Company file a registration statement under
the Securities Act covering the registration of at least 20% of the Registrable
Securities then outstanding (or a lesser percentage if the anticipated aggregate
offering price, before deduction of any underwriting discounts and commissions,
would exceed $5,000,000), then the Company shall, within ten days of the receipt
thereof, give written notice of such request to all other Holders of Registrable
Securities and shall, subject to the limitations of subsection 1.2(b), use its
best efforts to effect as soon as practicable the registration under the
Securities Act of all Registrable Securities that the Holders request to be
registered under this Section 1.2(a) within 30 days of the mailing of such
notice by the Company in accordance with Section 3.2.
(b) If the Holders of Registrable Securities initiating the
registration request pursuant to subsection 1.2(a) ("Initiating Holders") intend
to distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to this Section 1.2 and the Company shall include such information in
the written notice referred to in subsection 1.2(a). The underwriter or
underwriters shall be selected by the Company and shall be reasonably acceptable
to a majority in interest of the Initiating Holders. In such event, the right of
any such Holder to include such Holder's Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the
2
<PAGE>
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company as provided in
Section 1.4(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. Notwithstanding any
other provision of this Section 1.2, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the number of
shares to be underwritten, then the Initiating Holders shall so advise all
Holders of Registrable Securities that would otherwise be underwritten pursuant
hereto, and the number of shares of Registrable Securities that may be included
in the underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities owned by each Holder; provided, however, that the number
of shares of Registrable Securities to be included in such underwriting shall
not be reduced unless all other securities are first entirely excluded from the
underwriting.
(c) If the Company shall receive, at any time after twelve
months after the effective date of the registration statement relating to the
IPO, a written request or requests from any Holder or Holders that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders, the Company shall, within ten days of the receipt thereof, give
written notice of such request to all other Holders of Registrable Securities
and shall use its best efforts to effect as soon as practicable such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within 20 days after receipt of such written notice from
the Company; provided, however, that the Company shall not be obligated to
effect any such registration, qualification or compliance pursuant to this
subsection 1.2(c): (i) if Form S-3 is not available for such offering by the
Holders or (ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
price to the public (before deduction of any underwriters' discounts or
commissions) of less than $3,000,000.
(d) The Company is obligated to effect only two registrations
pursuant to subsection 1.2(a) and one registration pursuant to
subsection 1.2(c).
(e) Notwithstanding the foregoing, if the Company shall furnish
to the Initiating Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of the Company
it would be seriously detrimental to the Company for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than 120 days after receipt of the request of the
Initiating Holders (or, if the Company is engaged or has fixed plans to engage
in a
3
<PAGE>
registered public offering as to which the Holders may include Registrable
Securities pursuant to Section 1.3, the Company may defer such filing for a
period beginning 60 days prior to the initial filing with the Commission of the
registration statement relating to such offering, and ending not more than 180
days (90 days in the case of a request pursuant to subsection 1.2(c)) after the
effective date of such registration statement); provided, however, that the
Company may not utilize this right more than once in any 12-month period.
1.3 COMPANY REGISTRATION.
(a) If (but without any obligation to do so), at any time after
twelve months after the effective date of the registration statement relating to
the IPO, the Company proposes to register (including for this purpose a
registration effected by the Company for stockholders other than the Holders)
any of its stock or other securities under the Securities Act in connection with
the public offering of such securities solely for cash (other than the IPO, a
registration relating solely to the sale of securities to participants in a
Company stock plan, or a registration on any form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Securities), the
Company shall, at such time, promptly give each Holder written notice of such
registration. Upon the written request of each Holder given within 20 days
after the mailing of such notice by the Company, the Company shall. subject to
the provisions of subsection 1.3(b), cause to be registered under the Securities
Act all of the Registrable Securities that each such Holder has requested to be
registered.
(b) In connection with any offering involving an underwriting of
shares being issued by the Company, the Company shall not be required under this
Section 1.3 to include any of the Holders' securities in such underwriting
unless they accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it (or by other persons entitled to
select the underwriters), and then only in such quantity as will not, in the
opinion of the underwriters, jeopardize the success of the offering by the
Company. If the total amount of securities, including Registrable Securities,
requested by stockholders to be included in such offering exceeds the amount of
securities sold other than by the Company that the underwriters reasonably
believe compatible with the success of the offering, then the Company shall be
required to include in the offering only that number of such securities,
including Registrable Securities, which the underwriters believe will not
jeopardize the success of the offering (the securities so included to be
apportioned pro rata among the selling stockholders according to the total
amount of securities entitled to be included therein owned by each selling
stockholder or in such other proportions as shall mutually be agreed to by such
selling stockholders) but in no event shall (i) the amount of securities of the
selling Holders included in the offering be reduced below 30% of the total
amount of securities included in such offering or (ii) notwithstanding (i)
above, any shares being sold by a stockholder exercising a demand registration
right similar to that granted in Section 1.2 be excluded from such offering.
For purposes of the preceding parenthetical concerning apportionment, for any
selling stockholder that is a
4
<PAGE>
Holder of Registrable Securities and that is a partnership or corporation, the
partners, retired partners and stockholders of such Holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
stockholder," and any pro rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
1.4 OBLIGATIONS OF THE COMPANY.
Whenever required under this Section 1 to effect the registration of
any Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for a period (the
"Effectiveness Period") of up to 120 days. In the event that, in the judgment
of the Company, it is advisable to suspend use of the prospectus relating to
such registration statement for a discrete period of time (a "Deferral Period")
due to pending material corporate developments or similar material events that
have not yet been publicly disclosed and as to which the Company believes public
disclosure will be prejudicial to the Company, the Company shall deliver a
certified resolution of the Board of Directors of the Company or a duly
authorized committee thereof, signed by a duly authorized officer of the
Company, to each Holder, to the effect of the foregoing and, upon receipt of
such certificate, such Holders agree not to dispose of such Holders' Registrable
Securities covered by such registration or prospectus (other than in
transactions exempt from the registration requirements under the Securities
Act); provided, however, that such Deferral Period shall be no longer than 60
days. The Effectiveness Period shall be extended for a period of time equal to
such Deferral Period.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders of the Registrable Securities covered
by such registration statement such numbers of copies of a prospectus, including
a preliminary prospectus, and any amendment or supplement thereto and a
reasonable number of copies of the then-effective registration statement and any
post-effective amendment thereto, all in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of such Registrable Securities.
5
<PAGE>
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders
thereof, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and at the request of any such Holder prepare and furnish
to such Holder a reasonable number of copies of a supplement or an amendment to
such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing.
(g) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 1, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 1, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) in the case of an underwritten
public offering a letter dated such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters.
(h) Cause all Registrable Securities covered by the registration
statement to be listed on each securities exchange or automated quotation system
on which shares of Common Stock are then listed. If any of such shares are not
so listed, the Company shall cause such shares to be listed on the securities
exchange or automated
6
<PAGE>
quotation system as may be reasonably requested by the Holders of a majority of
the Registrable Securities being registered.
(i) Permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review, at the Holders' expense, the registration
statement and all amendments and supplements thereto for a reasonable period of
time prior to their filing with the Commission and state authorities, which
documents shall not be filed in a form to which such counsel reasonably objects.
(j) Cause the Company's officers, directors and independent
certified public accountants to supply all information reasonably requested by a
representative of any Holder of Registrable Securities, and any attorney or
accountant retained by such Holder, in connection with such registration;
provided, however, that such representatives, attorneys or accountants enter
into a confidentiality agreement, in form and substance reasonably satisfactory
to the Company, prior to the release or disclosure of any such information.
1.5 OBLIGATIONS OF THE HOLDERS.
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Agreement that the selling Holders
shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them, and the intended method of disposition of
such securities as shall be required to effect the registration of the
Registrable Securities.
(b) Upon the receipt by a Holder of any notice from the Company
of (i) the existence of any fact or the happening of any event as a result of
which the prospectus included in a registration statement filed pursuant to
Section 2, as such registration statement is then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, (ii) the issuance by
the Commission of any stop order or injunction suspending or enjoining the use
or the effectiveness of such registration statement or the initiation of any
proceedings for that purpose, or the taking of any similar action by the
securities regulators of any state or other jurisdiction, or (iii) the request
by the Commission or any other federal or state governmental agency for
amendments or supplements to such registration statement or related prospectus
or for additional information related thereto, such Holder shall forthwith
discontinue disposition of such Holder's Registrable Securities covered by such
registration or prospectus (other than in transactions exempt from the
registration requirements under the Securities Act) until such Holder's receipt
of the supplemented or amended prospectus or until such Holder is advised in
writing by the Company that the use of the applicable prospectus may be resumed.
In such a case, the Effectiveness Period shall be extended by the number of days
from and including the date
7
<PAGE>
of the giving of such notice to and including the date when each Holder shall
have received a copy of the supplemented or amended prospectus or when such
Holder is advised in writing by the Company that the use of the applicable
prospectus may be resumed. The Company shall use its best efforts to limit the
duration of any discontinuance of disposition of Registrable Securities pursuant
to this section.
1.6 EXPENSES. The Company shall bear and pay all expenses incurred
in connection with any registration, filing or qualification of Registrable
Securities with respect to the registrations pursuant to Section 1.2 and 1.3
hereof, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees relating or apportionable
thereto, fees and disbursements of counsel for the Company, blue sky fees and
expenses, including fees and disbursements of counsel related to all blue sky
matters, fees and expenses of listing any Registrable Securities on any
securities exchange or automated quotation system on which shares of Common
Stock are then listed, and the expenses of providing materials pursuant to
Section 1.4 hereof, but excluding the fees and disbursements of counsel for the
selling Holders, stock transfer taxes that may be payable by the selling
Holders, and all underwriting discounts and commissions relating to Registrable
Securities covered by such registration, which shall be borne by the Holders.
1.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.8 INDEMNIFICATION.
In the event any Registrable Securities are included in a registration
statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder of such Registrable Securities, the officers and
directors of each such Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities (joint or several) to which
they may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively, a "Violation"): (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under the
8
<PAGE>
Securities Act, the Exchange Act or any state securities law; and the Company
will reimburse each such Holder, officer or director, underwriter or controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
subsection 1.8(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation that occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, officer, director, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter
and any other Holder selling securities in such registration statement or any of
its directors or officers or any person who controls such Holder, against any
losses, claims, damages or liabilities (joint or several) to which the Company
or any such director, officer, controlling person, or underwriter or controlling
person, or other such Holder or director, officer or controlling person may
become subject, under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, controlling person, underwriter or controlling person,
other Holder, officer, director, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this
subsection 1.8(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld;
provided, that, in no event shall any indemnity under this subsection 1.8(b)
exceed the net proceeds from the sale of the Registrable Securities received by
such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its
9
<PAGE>
own counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 1.8 to the extent the indemnifying party was actually damaged or
suffered any loss or incurred any additional expense as a result thereof, but
the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under this Section 1.8. An indemnifying party shall not, without the prior
written consent of the indemnified parties, settle, compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought hereunder
by such indemnified parties (whether or not the indemnified parties are actual
or potential parties to such claim or action) unless such settlement, compromise
or consent includes a release of such indemnified party reasonably acceptable to
such indemnified party from all liability arising out of such claim, action,
suit or proceeding or unless the indemnifying party shall confirm in a written
agreement reasonably acceptable to such indemnified party, that notwithstanding
any federal, state or common law, such settlement, compromise or consent shall
not adversely affect the right of any indemnified party to indemnification as
provided in this Section 1. The indemnity provided for in this Section 1.8
shall apply to the Holders in their capacities as such, and shall be independent
of any other agreement, including without limitation an underwriting agreement,
entered into after the date hereof between the Company and any Holder in its
capacity as a Holder or otherwise.
(d) If the indemnification provided for in this Section 1.8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission. Notwithstanding the foregoing, no Holder shall be
required to contribute any amount in excess of the amount of net proceeds from
the sale of the Registrable Securities received by such Holder.
10
<PAGE>
(e) The obligations of the Company and Holders under this
Section 1.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned by a Holder to (i) any transferee or assignee of the Registrable
Securities that is a wholly-owned subsidiary of the Holder or (ii) a successor
to substantially all the business or assets of the Holder; provided that the
Company is, within a reasonable time after such transfer, furnished with written
notice of the name and address of such transferee, assignee or successor
("Permitted Assigns") and the securities with respect to which such registration
rights are being assigned.
1.10 REPORTS UNDER THE EXCHANGE ACT. With a view to making available
to the Holders the benefits of Rule 144 under the Securities Act and any other
rule or regulation of the Commission that may at any time permit a Holder to
sell securities of the Company to the public without registration, the Company
agrees that from and after the IPO Closing Date, it will:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times after the date hereof;
(b) file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, upon request (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested in availing any
Holder of any rule or regulation of the Commission which permits the selling of
any such securities without registration.
1.11 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company that would allow such holder or prospective holder preferential
rights (a) to include such securities in any registration filed under
Section 1.2 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only to
the extent that the inclusion of such holder's securities will not reduce the
amount of the Registrable Securities of the Holders that is included or (b) to
make a demand registration that could result in such registration statement
being declared effective prior to the earlier
11
<PAGE>
of the date set forth in subsection 1.2(a) or within 120 days of the effective
date of any registration effected pursuant to Section 1.2.
1.12 "MARKET STAND-OFF" AGREEMENT. If requested by the Company or the
representative of the underwriters of Common Stock (or other securities) of the
Company, each Holder shall agree that it will not sell or otherwise transfer or
dispose (other than to donees who agree to be similarly bound) of any
Registrable Securities (other than Registrable Securities to be sold pursuant to
the registration statement described below) for a period of time specified by
the representative of the underwriters not to exceed 180 days, following the
effective date of the registration statement of the Company filed under the
Securities Act relating to the IPO, provided that all executive officers and
directors of the Company and all persons holding 5% or more of the then
outstanding Common Stock enter into similar agreements.
1.13 TERMINATION OF REGISTRATION RIGHTS. The Company's obligations
pursuant to this Agreement shall terminate as to any Holder of Registrable
Securities on the earlier of (a) the third anniversary of the IPO Closing Date
and (b) as to a Holder that owns less than 1% of the outstanding Common Stock,
the date on which the Holder can sell all of such Holder's Registrable
Securities pursuant to Rule 144 under the Securities Act during any three month
period.
2. COVENANTS OF THE COMPANY.
2.1 DELIVERY OF FINANCIAL STATEMENTS. So long as the Investor and
its Permitted Assigns hereunder hold in the aggregate not less than 100,000
Shares (as appropriately adjusted for subsequent stock splits, stock dividends
and stock combinations and the like and for any exchange of such Shares into
Preferred Stock pursuant to Section 6 of the Stock Purchase Agreement), the
Company shall deliver to the Investor:
(a) as soon as practicable, but in any event within 90 days
after the end of each fiscal year of the Company, a statement of operations
for such fiscal year, a balance sheet of the Company as of the end of such
year, and a statement of cash flows for such year, such year-end financial
reports to be in reasonable detail, prepared in accordance with generally
accepted accounting principles ("GAAP"), and audited and certified by
independent public accountants of nationally recognized standing selected
by the Company;
(b) within 30 days of the end of each quarter, an unaudited
statement of operations, statement of cash flows and balance sheet for and
as of the end of such quarter, in reasonable detail; such quarterly
statements shall also contain the foregoing information on a year-to-date
basis; and
(c) after the IPO and, so long as the Company is subject to the
periodic reporting requirements of Section 13 or 15(d) of the Exchange Act
and the
12
<PAGE>
rules and regulations of the Commission thereunder, in lieu of the
documents required by (a) and (b) above, promptly after filing with the
Commission, the Company's reports (without exhibits) on Forms 10-K, 10-Q,
and 8-K.
2.2 RIGHT OF FIRST OFFER. Subject to the terms and conditions
specified in this Section 2.2, the Company agrees not to sell or issue any New
Securities (as hereinafter defined) without complying with the provisions of
this Section 2.2.
(a) In the event the Company proposes to sell or issue any New
Securities to a Competitor (as hereinafter defined), the Company hereby grants
to the Investor the right to purchase such New Securities. In the event the
Company proposes to sell or issue any New Securities to persons or entities
other than Competitors (as defined below in subsection 2.2(c)), the Company
hereby grants to the Investor a right of first offer to purchase a pro rata
share of New Securities (as hereinafter defined) that the Company may, from time
to time, propose to sell and issue. For purposes of this Section 2.2, the
Investor's pro rata share of New Securities is the ratio of the number of shares
of Common Stock owned by the Investor immediately prior to the issuance of New
Securities to the total number of shares of Common Stock outstanding immediately
prior to the issuance of New Securities (assuming full conversion of all
convertible securities).
(b) "New Securities" shall mean any capital stock (including
Common Stock) of the Company whether now authorized or not, and rights, options
or warrants to purchase capital stock of the Company, and securities of any type
whatsoever that are, or may become, convertible into capital stock of the
Company; provided, however, that the term "New Securities" does not include
(i) shares of Common Stock (or options therefor) issued or sold to employees,
directors, consultants or advisors of the Company for the primary purpose of
soliciting or retaining their services, provided each such person executes an
agreement, in substantially the form as approved by the Company's Board of
Directors, (ii) securities issued pursuant to the acquisition of another
business entity or business segment of any such entity by the Company by merger,
purchase of substantially all the assets or other reorganization whereby the
Company will own more than 50% of the voting power of such business entity or
business segment, (iii) securities issued in connection with any stock split,
stock dividend or recapitalization of the Company in which all holders of Common
Stock are entitled to receive their proportionate share of such issuance, and
(iv) any right, option or warrant to acquire any security convertible into the
securities excluded from the definition of New Securities pursuant to
clauses (i) through (iii) above.
(c) If the Company proposes to issue New Securities, the Company
shall give written notice to the Investor stating (i) its bona fide intention to
offer or issue New Securities, (ii) the number of such New Securities to be
offered, (iii) the price and general terms upon which it proposes to offer such
New Securities, and (iv) the identity of the persons or entities or classes of
persons or entities to whom such New Securities are proposed to be issued.
Within 20 calendar days after receipt of such notice, the Investor
13
<PAGE>
may elect to purchase or obtain, at the price and on the terms specified in the
notice, (x) all of such New Securities, in the event the Company proposes to
issue such New Securities to an entity that is a Competitor of the Investor (as
defined in Exhibit 2.2 hereto, as such Exhibit 2.2 may from time to time
hereafter be amended by the Investor with the reasonable concurrence of the
Company's Board of Directors), or (y) up to its pro rata share of such New
Securities, as such pro rata share is calculated pursuant to subsection 2.2(a)
above, in the event the Company proposes to issue such New Securities to persons
or entities other than Competitors, by giving written notice to the Company and
stating therein the quantity of New Securities to be purchased.
(d) If the Investor does not fully exercise its right to
purchase or obtain all such New Securities that the Investor has the right to
purchase or obtain pursuant to subsection 2.2(c) hereof, the Company may, during
the 60-day period following the expiration of the period provided in
subsection 2.2(c) hereof, offer the remaining unsubscribed New Securities to the
persons or entities or classes of persons or entities specified in the notice
sent to the Investor pursuant to subsection 2.2(c) at a price not less than
that, and upon terms no more favorable to the offeree than those, specified in
such notice. If the Company does not enter into an agreement for the sale of
the New Securities within such period, or if such agreement is not consummated
within 60 days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such New Securities shall not be offered unless first
reoffered to the Investor in accordance herewith.
(e) The right of first offer granted in this Section 2.2 shall
not apply to or after the initial closing of the IPO and shall be null and void
thereafter.
(f) For purposes of this Section 2.2, the term Investor includes
any Permitted Assigns. The Investor shall be entitled to assign, or to
apportion, the right of participation hereby granted it among itself and its
Permitted Assigns in such proportions as it deems appropriate.
2.3 STANDSTILL AGREEMENT. For a period of four (4) years after the
IPO Closing Date:
(a) The Investor will not, unless it has obtained the prior
written consent of the Company, acquire any shares of Common Stock (except by
way of stock dividends or other distributions or offerings made available to
holders of Common Stock generally) if the effect of such acquisition would be to
increase the aggregate number of shares of Common Stock then owned by the
Investor or which it has a right to acquire to more than 4.95% of all shares of
Common Stock then outstanding (assuming the exercise or conversion of all
outstanding rights or convertible securities to acquire Common Stock then held
by the Investor); provided, that the Investor will not be required to dispose of
any shares of Common Stock if the aggregate ownership percentage of the Investor
is increased as a result of a recapitalization of or a repurchase of securities
by the Company or as a result of any other similar action taken by the Company.
14
<PAGE>
(b) The Investor will advise the Board of Directors of the
Company as to the Investor's plans to acquire additional shares of Common Stock
or rights to acquire Common Stock reasonably in advance of any such acquisition.
(c) Notwithstanding the foregoing, the obligations of the
Investor under this Section 2.3 shall terminate immediately upon: (A) the
commencement or public announcement of an intent of any person or "group"
(within the meaning of Section 13(d) of the Exchange Act) to commence a tender
or exchange offer to acquire Common Stock that, if added to the Common Stock (if
any) already owned by such person or group, would result in such person or group
owning beneficially more than 30% of all shares of Common Stock then
outstanding; or (B) the acquisition or the public announcement of the proposed
acquisition by any person or group (other than a stockholder of the Company as
of the date of this Agreement and affiliates thereof) of beneficial ownership of
more than 30% of all shares of Common Stock then outstanding (all percentages in
this paragraph (c) shall be calculated assuming the exercise or conversion of
all outstanding rights or convertible securities to acquire Common Stock then
held by such person or group).
3. MISCELLANEOUS.
3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
3.2 NOTICES. Unless otherwise provided, any notice, request, demand
or other communication required or permitted under this Agreement shall be given
in writing and shall be deemed effectively given upon personal delivery to the
party to be notified, or when sent by telecopier (with receipt confirmed and
promptly confirmed by personal delivery, U.S. first class mail, or courier), or
overnight courier service, or upon deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed as follows (or at
such other address as a party may designate by notice to the other):
If to the Company:
Faroudja, Inc.
750 Palomar Avenue
Sunnyvale, CA 94086
Attention: Michael Hoberg,
Vice President, Finance and Chief Financial Officer
Telecopier: (408) 735-8571
15
<PAGE>
with a copy to:
Buchalter, Nemer, Fields & Younger,
a Professional Corporation
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017
Attention: Stuart D. Buchalter, Esq.
Telecopier: (213) 896-0400
If to the Investor:
S3 Incorporated
2801 Mission College Boulevard
Santa Clara, CA 95052
Attention: Chief Financial Officer
Telecopier: (408) 980-5429
with a copy to:
Pillsbury Madison & Sutro LLP
2700 Sand Hill Road
Menlo Park, CA 94025
Attention: Jorge del Calvo, Esq.
Telecopier: (415) 233-4545
3.3 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable, invalid or void by a court of competent jurisdiction,
such provision shall be excluded from this Agreement and the balance of this
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms.
3.4 ENTIRE AGREEMENT; AMENDMENTS.
(a) This Agreement contains the entire understanding of the
parties with respect to the matters covered herein and supersedes all prior
agreements and understandings, written or oral, between the Parties relating to
the subject matter hereof.
(b) Any term of Section 1 of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the Holders of a majority of the
Registrable Securities then outstanding. Any other term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the
16
<PAGE>
Investor. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each Holder of any Registrable Securities then
outstanding, each future Holder of all such Registrable Securities, and the
Company. No waiver of any default with respect to any provision, condition or
requirement hereof shall be deemed to be a continuing waiver in the future
thereof or a waiver of any other provision, condition or requirement hereof; nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right accruing to it thereafter.
3.5 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California (irrespective of its choice of law
principles).
3.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.7 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. Any reference in this Agreement to a
statutory provision or rule or regulation promulgated thereunder shall be deemed
to include any similar successor statutory provision or rule or regulation
promulgated thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
FAROUDJA. INC.
By /s/ Michael Moone
-------------------------------------
Name: Michael Moone
Title: President, CEO
S3 INCORPORATED
By /s/ Gary Johnson
-------------------------------------
Name: Gary Johnson
Title: President, CEO
17
<PAGE>
EXHIBIT 2.2
TO
INVESTOR'S RIGHTS AGREEMENT
BY AND BETWEEN
FAROUDJA, INC.
AND
S3 INCORPORATED
JUNE 30, 1997
The following entities are Competitors of the Investor for purposes of
Section 2.2 of the above-described Investor's Rights Agreement:
Acer
ARK Logic, Inc.
ATI Technologies, Inc.
Avance Logic, Inc.
Chips & Technologies, Inc.
Cirrus Logic, Inc.
ESS Technology, Inc.
Intel Corporation
Lockheed Martin Corporation
LSI Logic Corporation
Matrox Graphics Inc.
NeoMagic Corporation
NVIDEA Corporation
Oak Technology, Inc.
OPTi Inc.
PMC-Sierra, Inc.
Rendition, Inc.
Rockwell Semiconductor Systems
Samsung Semiconductor
Silicon Integrated Systems Corporation
Silicon Magic Corporation
3Dfx Interactive, Inc.
3Dlabs Inc., Ltd.
Trident Microsystems, Inc.
Tseng Labs Inc.
United Microelectronics Group
VLSI Technology, Inc.
Western Digital Corporation
The foregoing list may be updated from time to time by S3 Incorporated with
the reasonable concurrence of the Board of Directors of Faroudja, Inc.
<PAGE>
BUSINESS LOAN AGREEMENT
BORROWER: FAROUDJA LABORATORIES, INC.
750 PALOMAR AVENUE
SUNNYVALE, CA 94086
LENDER: SILICON VALLEY BANK
3003 TASMAN DRIVE
SANTA CLARA, CA 95054
THIS BUSINESS LOAN AGREEMENT BETWEEN FAROUDJA LABORATORIES, INC.
("BORROWER') AND SILICON VALLEY BANK ("LENDER") IS MADE AND EXECUTED ON THE
FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS
FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER
FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT
OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM
LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN"
AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN
GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT;
(B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES
SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH
LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF
THIS AGREEMENT.
TERM. This Agreement shall be effective as of APRIL 5, 1997, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
BORROWER. The word "Borrower" means Faroudja Laboratories, Inc. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
1
<PAGE>
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes any and all
Indebtedness of Borrower to Lender, now or hereafter arising or incurred,
including, without limitation, the Indebtedness evidenced by the Note,
including all principal and interest, together with all other indebtedness
and costs and expenses for which Borrower is responsible under this
Agreement or under any Related Documents.
LENDER. The word "Lender" means Silicon Valley Bank, its successors and
assigns.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security
2
<PAGE>
agreements, mortgages, deeds of trust, and all other instruments, agreements
and documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral,
(c) Financing Statements perfecting Lender's Security Interests;
(d) evidence of insurance as required below; and (e) any other documents
required under this Agreement or by Lender or its counsel, including
without limitation any guaranties described below.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
3
<PAGE>
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified
as a foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and
Safety Code, Section 25100, et seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened release of
any hazardous waste or substance by any person on, under, about or from any
of the properties. (b) Borrower has no knowledge of, or reason to believe
that there has been (i) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous waste
or substance on, under, about or from the properties by any prior owners or
occupants of any of the properties, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such matters.
(c) Neither Borrower nor any tenant, contractor, agent or other authorized
user of any of the
4
<PAGE>
properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of the
properties; and any such activity shall be conducted in compliance with all
applicable federal, state, and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances
described above. Borrower authorizes Lender and its agents to enter upon
the properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section of
the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be construed
to create any responsibility or liability on the part of Lender to Borrower
or to any other person. The representations and warranties contained herein
are based on Borrower's due diligence in investigating the properties for
hazardous waste and hazardous substances. Borrower hereby (a) releases and
waives any future claims against Lender for indemnity or contribution in the
event Borrower becomes liable for cleanup or other costs under any such
laws, and (b) agrees to indemnify and hold harmless Lender against any and
all claims, losses, liabilities, damages, penalties, and expenses which
Lender may directly or indirectly sustain or suffer resulting from a breach
of this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or not
the same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration of
this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
5
<PAGE>
INVESTMENT COMPANY ACT. Borrower is not an "investment company" or a
company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
PUBLIC UTILITY HOLDING COMPANY ACT. Borrower is not a "holding company",
or a "subsidiary company" of a "holding company", or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company",
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
REGULATIONS G, T AND U. Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulations G, T and U of the Board of Governors of the Federal Reserve
System).
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 750 Palomar Avenue, Sunnyvale, CA 94086. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
CLAIMS AND DEFENSES. There are no defenses or counterclaims, offsets or
other adverse claims, demands or actions of any kind, personal or
otherwise, that Borrower, Grantor, or any Guarantor could assert with
respect to the Note, Loan, Indebtedness, this Agreement, or the Related
Documents.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon the
above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force and
effect until such time as Borrower's Indebtedness shall be paid in full, or
until this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than thirty (30) days after the end of
each fiscal quarter, Borrower's balance sheet and profit and loss statement
for the period ended, prepared and certified as correct to the best
6
<PAGE>
knowledge and belief by Borrower's chief financial officer or other officer
or person acceptable to Lender. All financial reports required to be
provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
FISCAL YEAR END 1996 FINANCIAL STATEMENT. Prior to any disbursements under
the line of credit facility, Borrower shall provide Lender with Borrower's
balance sheet and income statement for the year ended 1996, audited by a
certified public accountant satisfactory to Lender.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios: Borrower shall maintain on a quarterly basis, a minimum quick
ratio of 2.00 to 1.00; a minimum Tangible Net Worth of $6,000,000.00; and a
maximum total Debt to Tangible Net Worth ratio of 0.75 to 1.00.
Furthermore, Borrower shall achieve profitability on a quarterly basis;
provided that Borrower may incur one quarterly loss not to exceed
$500,000.00 during Borrower's fiscal year ending December 31, 1997,
provided that, however, Borrower is profitable for the fiscal year.
Except as provided above, all computations made to determine compliance
with the requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon
request of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantor named
below, on Lender's forms, and in the amount and under the conditions
spelled out in those guaranties.
Guarantor Amount
--------- ------
Faroudja, Inc. Unlimited
7
<PAGE>
OTHER AGREEMENTS. Comply with all material terms and conditions of all
other agreements, whether now or hereafter existing, between Borrower and
any other party and notify Lender immediately in writing of any default in
connection with any other such agreements that would permit the other party
to terminate said agreement, accelerate the obligations of Borrower
thereunder, or result in an Event of Default under this Agreement or the
Related Documents.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
ENVIRONMENTAL STUDIES. Promptly conduct and complete, at Borrower's
expense, all such investigations, studies, samplings and testings as may be
requested by Lender or any governmental authority relative to any substance
defined as toxic or a hazardous substance under any applicable federal,
state, or local law, rule, regulation, order or directive, or any waste or
by-product thereof, at or affecting any property or any facility owned,
leased or used by Borrower.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrowers books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software
programs for the generation of such records) in the possession of a third
party, Borrower, upon request of Lender, shall notify such party to permit
Lender free access to such records at all reasonable times and to provide
Lender with copies of any records it may request, all at Borrower's
expense.
8
<PAGE>
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
quarterly, within thirty (30) days of the last day of each fiscal quarter,
and at the time of each disbursement of Loan proceeds with a certificate
executed by Borrower's chief financial officer, or other officer or person
acceptable to Lender, certifying that the representations and warranties
set forth in this Agreement are true and correct as of the date of the
certificate and further certifying that, as of the date of the certificate,
no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part or
on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender, which consent shall not be unreasonably withheld:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
(b) except as allowed as a Permitted Lien, sell, transfer, mortgage,
assign, pledge, lease, grant a security interest in, or encumber any of
Borrower's assets, or (c) sell with recourse any of Borrower's accounts,
except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
9
<PAGE>
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender.
LOAN ADVANCES. Lender, in its discretion, will make loans to Borrower, in
amounts determined by Lender, up to the amounts as defined and permitted in this
Agreement and the Related Documents, including, but not limited to, any
Promissory Notes, executed by Borrower (the "Credit Limit"). Borrower is
responsible for monitoring the total amount of Loans and Indebtedness
outstanding from time to time, and Borrower shall not permit the same, at any
time to exceed the Credit Limit. If at any time the total of all outstanding
Loans and Indebtedness exceeds the Credit Limit, Borrower shall immediately pay
the amount of the excess to Lender, without notice or demand.
BORROWING BASE FORMULA. Funds shall be advanced under the Borrower's line of
credit facility according to a borrowing base formula, as determined by Lender,
defined as follows: the lesser of (i) $1,000,000.00, or (ii) seventy five
percent (75%) of Eligible Accounts Receivable. Eligible Accounts Receivable
shall be defined as those accounts that arise in the ordinary course of
Borrower's business, including those accounts outstanding less than 90 days from
the date of invoice, but shall exclude foreign, government, contra and
intercompany accounts, and exclude accounts wherein 50% or more of the account
is outstanding more than 90 days from the date of invoice. Any account which
alone exceeds 25% of total accounts will be ineligible to the extent said
account exceeds 25% of total accounts. Lender shall also deem ineligible any
credit balances which are aged past 90 days, and accounts generated by the sale
of demonstration or promotional equipment. The standards of eligibility shall
be fixed from time to time by Lender, in Lender's reasonable judgment upon
notification to Borrower. Lender reserves the right to exclude any accounts the
collection of which Lender reasonably determines to be doubtful.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. Provide to Lender not later than
twenty (20) days after and as of the end of each month, with a borrowing base
certificate and aged lists of accounts receivable and accounts payable. Lender
shall conduct an initial audit of Borrower's accounts receivable, prior to any
disbursements under the Note, thereafter, such audits shall be conducted on a
semi-annual basis. Borrower's deposit account will be debited for the audit
expense and a notification will be mailed to Borrower. Such costs shall not
exceed $800.00 for the initial accounts receivable audit and $500.00 for each
semi-annual audit.
EVENT OF DEFAULT. Each of the following shall constitute an Event of Default:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower to perform, keep, or observe any other
material term, provision, condition, covenant, or agreement contained in
this Agreement (except with regard to those set forth within the paragraphs
of this Agreement entitled Negative Covenants, Borrowing Base Formula,
Accounts Receivable and Accounts Payable, and Financial Covenants), in any
of the Related Documents, or in any other present or future agreement
between Borrower and Lender, and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, to cure such
default within ten (10) days after the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the ten
(10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional reasonable
period (which shall not in any case
10
<PAGE>
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Loan Advances will be required
to be made during such cure period).
DEFAULT IN FAVOR OF THIRD PARTIES. If there is a default in any agreement
to which Borrower is a party with a third party or parties resulting in a
right by such third party or parties, whether or not exercised, to
accelerate the maturity of any indebtedness in any amount in excess of One
Hundred Thousand and 00/100 Dollars ($100,000.00) or that could result in a
material adverse change.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of an
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
INSOLVENCY. Borrower becomes insolvent, or any insolvency proceeding is
commenced by Borrower, or if an insolvency proceeding is commenced against
Borrower and is not dismissed or stayed within thirty (30) days (provided
that no Loan Advances will be required to be made during such cure period).
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on
or of any of Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness.
CHANGE IN OWNERSHIP. ANY CHANGE IN OWNERSHIP OF TWENTY-FIVE PERCENT (25%)
OF THE COMMON STOCK OF BORROWER OR GUARANTOR, EXCEPT FOR A CHANGE IN
OWNERSHIP RESULTING FROM AN INITIAL PUBLIC OFFERING OF THE COMMON STOCK OF
BORROWER OR GUARANTOR.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except when
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its right and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
11
<PAGE>
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED
BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER
AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF
SANTA CLARA COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY
WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER.
(INITIAL HERE MH) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, which
purchasers shall not be competitors of Borrower, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters so long as the purchaser(s) agree to keep such
information and knowledge confidential. Borrower additionally waives any
and all notices of sale of participation interests, as well as all notices
of any repurchase of such participation interests. Borrower also agrees
that the purchasers of any such participation interests will be considered
as the absolute owners of such interests in the Loans and will have all the
rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
BORROWER INFORMATION. Borrower consents to the release of information on
or about Borrower by Lender in accordance with any court order, law or
regulation and in response to credit inquiries concerning Borrower.
NON-LIABILITY OF LENDER. The relationship between Borrower and Lender is a
debtor and creditor relationship and not fiduciary in nature, nor is the
relationship to be construed as creating any partnership or joint venture
between Lender and Borrower. Borrower is exercising its own judgment with
respect to Borrower's business. All information supplied to Lender is for
Lender's protection only and no other party is entitled to rely on such
information. There is no duty for Lender to review, inspect, supervise, or
inform Borrower of any matter with respect to Borrower's business. Lender
and Borrower intend that Lender may reasonably rely on all information
supplied by Borrower to Lender, together with all representations and
warranties given by Borrower to Lender, without investigation or
confirmation by Lender and that any investigation or failure to investigate
will not diminish Lender's right to so rely.
NOTICE OF LENDER'S BREACH. Borrower must notify Lender in writing of any
breach of this Agreement or the Related Documents by Lender and any other
claim, cause of action or offset against
12
<PAGE>
Lender within thirty (30) days after the occurrence of such breach or after
the accrual of such claim, cause of action or offset. Borrower waives any
claim, cause of action or offset for which notice is not given in accordance
with this paragraph. Lender is entitled to rely on any failure to give such
notice.
BORROWER INDEMNIFICATION. Borrower shall indemnify and hold Lender
harmless from and against all claims, costs, expenses, losses, damages, and
liabilities of any kind, including but not limited to reasonable attorneys'
fees and expenses, arising out of any matter relating directly or
indirectly to the Indebtedness, whether resulting from internal disputes of
the Borrower, disputes between Borrower and any Guarantor, or whether
involving any third parties, or out of any other matter whatsoever related
to this Agreement or the Related Documents, but excluding any claim or
liability which arises as a direct result of Lender's gross negligence or
willful misconduct. This indemnity shall survive full repayment and
satisfaction of the Indebtedness and termination of this Agreement.
COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which, when so executed, shall be deemed an original, but all such
counterparts, taken together, shall constitute one and the same Agreement.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation reasonable attorneys' fees, incurred
in connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that amount.
This includes, subject to any limits under applicable law, Lender's
reasonable attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including reasonable attorneys' fees for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other
sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower,
except under no circumstances shall the term subsidiaries and affiliates be
deemed to include the officers, directors or shareholders of Borrower
(unless such officers, directors or shareholders are otherwise personally
liable under a guaranty or other agreement). Notwithstanding the foregoing
13
<PAGE>
however, under no circumstances shall this Agreement be construed to
require Lender to make any Loan or other financial accommodation to any
subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provision of this Agreement. No prior waiver by Lender, nor
any course of dealing between Lender and Borrower, or between Lender and
any Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing
14
<PAGE>
consent in subsequent instances where such consent is required, and in all
cases such consent may be granted or withheld in the sole discretion of
Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
APRIL 5, 1997.
BORROWER:
FAROUDJA LABORATORIES, INC.
BY: /s/ MICHAEL HOBERG
-----------------------------------
NAME: MICHAEL HOBERG
TITLE: VP-CFO
LENDER:
SILICON VALLEY BANK
BY: /s/ JULIE SCHNEIDER
-----------------------------------
AUTHORIZED OFFICER
15
<PAGE>
COMMERCIAL GUARANTY
BORROWER: FAROUDJA LABORATORIES, INC.
750 PALOMAR AVENUE
SUNNYVALE, CALIFORNIA 94086
GUARANTOR: FAROUDJA, INC.
750 PALOMAR AVENUE
SUNNYVALE, CALIFORNIA 94086
LENDER: SILICON VALLEY BANK
3003 TASMAN DRIVE
SANTA CLARA, CALIFORNIA 95054
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AMOUNT OF GUARANTY. THE AMOUNT OF THIS GUARANTY IS UNLIMITED.
CONTINUING UNLIMITED GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION,
FAROUDJA, INC. ("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND
PROMISES TO PAY TO SILICON VALLEY BANK ("LENDER") OR ITS ORDER, IN LEGAL TENDER
OF THE UNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS DEFINED
BELOW) OF FAROUDJA LABORATORIES, INC. ("BORROWER") TO LENDER ON THE TERMS AND
CONDITIONS SET FORTH IN THIS GUARANTY. UNDER THIS GUARANTY, THE LIABILITY OF
GUARANTOR IS UNLIMITED AND THE OBLIGATIONS OF GUARANTOR ARE CONTINUING.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The word "Borrower" means Faroudja Laboratories, Inc.
GUARANTOR. The word "Guarantor" means Faroudja, Inc.
GUARANTY. The word "Guaranty" means this Guaranty made by Guarantor for
the benefit of Lender dated April 5, 1997.
INDEBTEDNESS. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrower's liabilities,
obligations, debts, and indebtedness to Lender, now existing or hereinafter
incurred or created, including, without limitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card indebtedness,
lease obligations, other obligations, and liabilities of Borrower, or any
of them, and any present or future judgments against Borrower, or any of
them; and whether any such Indebtedness is voluntarily or involuntarily
incurred, due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined; whether Borrower may be liable
individually or jointly with others, or primarily or secondarily, or as
guarantor or surety; whether recovery on the Indebtedness may be or may
become barred or unenforceable against Borrower for any reason whatsoever;
and whether the Indebtedness arises from transactions which may be voidable
on account of infancy, insanity, ultra vires, or otherwise.
LENDER. The word "Lender" means Silicon Valley Bank, its successors and
assigns.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security
<PAGE>
agreements, mortgages, deeds of trust, and all other instruments, agreements
and documents, whether now or hereafter existing, executed in connection with
the Indebtedness.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open and
continuous for so long as this Guaranty remains in force. Guarantor intends to
guarantee at all times the performance and prompt payment when due, whether at
maturity or earlier by reason of acceleration or otherwise, of all Indebtedness.
Accordingly, no payments made upon the Indebtedness will discharge or diminish
the continuing liability of Guarantor in connection with any remaining portions
of the Indebtedness or any of the Indebtedness which subsequently arises or is
thereafter incurred or contacted. Any married person who signs this Guaranty
hereby expressly agrees that recourse may be had against both his or her
separate property and community property.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice of revocation shall have been
fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. If Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be mailed to Lender, by certified mail, at the address
of Lender listed above or such other place as Lender may designate in writing.
Written revocation of this Guaranty will apply only to advances or new
Indebtedness created after actual receipt by Lender of Guarantor's written
revocation. For this purpose and without limitation, the term "new
Indebtedness" does not include Indebtedness which at the time of notice of
revocation is contingent, unliquidated, undetermined or not due and which later
becomes absolute, liquidated, determined or due. This Guaranty will continue to
bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender
prior to receipt of Guarantor's written notice of revocation, including any
extensions, renewals, substitutions or modifications of the Indebtedness. All
renewals, extensions, substitutions, and modifications of the Indebtedness
granted after Guarantor's revocation, are contemplated under this Guaranty and,
specifically will not be considered to be new Indebtedness. This Guaranty shall
bind the estate of Guarantor as to Indebtedness created both before and after
the death or incapacity of Guarantor, regardless of Lender's actual notice of
Guarantor's death. Subject to the foregoing, Guarantor's executor or
administrator or other legal representative may terminate this Guaranty in the
same manner in which Guarantor might have terminated it and with the same
effect. Release of any other guarantor or termination of any other guaranty of
the Indebtedness shall not affect the liability of Guarantor under this
Guaranty. A revocation received by Lender from any one or more Guarantors shall
not affect the liability of any remaining Guarantors under this Guaranty. The
obligations of Guarantor under this Guaranty shall be in addition to any
obligations of Guarantor, or any of them, under any other guaranties of the
Indebtedness of Borrower or any other person heretofore or hereafter given to
Lender unless such other guaranties are modified or revoked in writing; and this
Guaranty shall not, unless herein provided, affect, invalidate, or supersede any
such other guaranty. IT IS ANTICIPATED THAT FLUCTUATIONS MAY OCCUR IN THE
AGGREGATE AMOUNT OF INDEBTEDNESS COVERED BY THIS GUARANTY, AND IT IS
SPECIFICALLY ACKNOWLEDGED AND AGREED BY GUARANTOR THAT REDUCTIONS IN THE AMOUNT
OF INDEBTEDNESS, EVEN TO ZERO DOLLARS ($0.00), PRIOR TO WRITTEN REVOCATION OF
THIS GUARANTY BY GUARANTOR SHALL NOT CONSTITUTE A TERMINATION OF THIS GUARANTY.
THIS GUARANTY IS BINDING UPON GUARANTOR AND GUARANTOR'S HEIRS, SUCCESSORS AND
ASSIGNS SO LONG AS ANY OF THE GUARANTEED INDEBTEDNESS REMAINS UNPAID AND EVEN
THOUGH THE INDEBTEDNESS GUARANTEED MAY FROM TIME TO TIME BE ZERO DOLLARS
($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. GUARANTOR AUTHORIZES LENDER, EITHER BEFORE
OR AFTER ANY REVOCATION HEREOF, WITHOUT NOTICE OR DEMAND AND WITHOUT LESSENING
GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM TIME TO TIME: (a) PRIOR TO
REVOCATION AS SET FORTH ABOVE, TO MAKE ONE OR MORE ADDITIONAL SECURED OR
UNSECURED LOANS TO BORROWER, TO LEASE EQUIPMENT OR OTHER GOODS TO BORROWER, OR
OTHERWISE TO EXTEND ADDITIONAL CREDIT TO BORROWER; (b) TO ALTER, COMPROMISE,
RENEW, EXTEND, ACCELERATE, OR OTHERWISE CHANGE ONE OR MORE TIMES THE TIME FOR
PAYMENT OR OTHER TERMS OF THE INDEBTEDNESS OR ANY PART OF THE INDEBTEDNESS,
INCLUDING INCREASES AND DECREASES OF THE RATE OF INTEREST ON THE INDEBTEDNESS;
EXTENSIONS MAY BE REPEATED AND MAY BE FOR LONGER THAN THE ORIGINAL LOAN TERM;
(c) TO TAKE AND HOLD
2
<PAGE>
SECURITY FOR THE PAYMENT OF THIS GUARANTY OR THE INDEBTEDNESS, AND EXCHANGE,
ENFORCE, WAIVE, SUBORDINATE, FAIL OR DECIDE NOT TO PERFECT, AND RELEASE ANY
SUCH SECURITY, WITH OR WITHOUT THE SUBSTITUTION OF NEW COLLATERAL; (d) TO
RELEASE, SUBSTITUTE, AGREE NOT TO SUE, OR DEAL WITH ANY ONE OR MORE OF
BORROWER'S SURETIES, ENDORSERS, OR OTHER GUARANTORS ON ANY TERMS OR IN ANY
MANNER LENDER MAY CHOOSE; (e) TO DETERMINE HOW, WHEN AND WHAT APPLICATION OF
PAYMENTS AND CREDITS SHALL BE MADE ON THE INDEBTEDNESS; (f) TO APPLY SUCH
SECURITY AND DIRECT THE ORDER OR MANNER OF SALE THEREOF, INCLUDING WITHOUT
LIMITATION, ANY NONJUDICIAL SALE PERMITTED BY THE TERMS OF THE CONTROLLING
SECURITY AGREEMENT OR DEED OF TRUST, AS LENDER IN ITS DISCRETION MAY
DETERMINE; (g) TO SELL, TRANSFER, ASSIGN, OR GRANT PARTICIPATIONS IN ALL OR
ANY PART OF THE INDEBTEDNESS: AND (h) TO ASSIGN OR TRANSFER THIS GUARANTY IN
WHOLE OR IN PART.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Lender that (a) no representations or agreements of any kind have been made
to Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has full power, right and authority to enter into this
Guaranty; (d) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order
applicable to Guarantor; (e) Guarantor has not and will not, without the prior
written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially all of Guarantor's assets, or any
interest therein; (f) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial information which currently has been, and all future financial
information which will be provided to Lender is and will be true and correct in
all material respects and fairly present the financial condition of Guarantor as
of the dates the financial information is provided; (g) no material adverse
change has occurred in Guarantor's financial condition since the date of the
most recent financial statements provided to Lender and no event has occurred
which may materially adversely affect Guarantor's financial condition; (h) no
litigation, claim, investigation, administrative proceeding or similar action
(including those for unpaid taxes) against Guarantor is pending or threatened;
(i) Lender has made no representation to Guarantor as to the creditworthiness of
Borrower; and (j) Guarantor has established adequate means of obtaining from
Borrower on a continuing basis information regarding Borrower's financial
condition. Guarantor agrees to keep adequately informed from such means of any
facts, events, or circumstances which might in any way affect Guarantor's risks
under this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender to (a) make any presentment, protest, demand, or
notice of any kind, including notice of change of any terms of repayment of the
Indebtedness, default by Borrower or any other guarantor or surety, any action
or nonaction taken by Borrower, Lender, or any other guarantor or surety of
Borrower, or the creation of new or additional Indebtedness; (b) proceed against
any person, including Borrower, before proceeding against Guarantor; (c) proceed
against any collateral for the Indebtedness, including Borrower's collateral,
before proceeding against Guarantor; (d) apply any payments or proceeds received
against the Indebtedness in any order; (e) give notice of the terms, time, and
place of any sale of the collateral pursuant to the Uniform Commercial Code or
any other law governing such sale; (f) disclose any information about the
Indebtedness, the Borrower, the collateral, or any other guarantor or surety, or
about any action or nonaction of Lender; or (g) pursue any remedy or course of
action in Lender's power whatsoever.
Guarantor also waives any and all rights or defenses arising by reason of
(h) any disability or other defense of Borrower, any other guarantor or surety
or any other person; (i) the cessation from any cause whatsoever, other than
payment in full, of the Indebtedness; (j) the application of proceeds of the
Indebtedness by Borrower for purposes other than the purposes understood and
intended by Guarantor and Lender; (k) any act of omission or commission by
Lender which directly or indirectly results in or contributes to the discharge
of Borrower or any other guarantor or surety, or the Indebtedness, or the loss
or release of any collateral by operation of law or otherwise; (l) any statute
of limitations in any action under this Guaranty or on the Indebtedness; or
(m) any modification or change in terms of the Indebtedness, whatsoever,
including without
3
<PAGE>
limitation, the renewal, extension, acceleration, or other change in the time
payment of the Indebtedness is due and any change in the interest rate, and
including any such modification or change in terms after revocation of this
Guaranty on Indebtedness incurred prior to such revocation.
Guarantor waives all rights and any defenses arising out of an election of
remedies by Lender even though that election of remedies, such as a nonjudicial
foreclosure with respect to security for a guaranteed obligation, has destroyed
Guarantor's rights of subrogation and reimbursement against Borrower by
operation of Section 580d of the California Code of Civil Procedure or
otherwise.
Guarantor waives all rights and defenses that Guarantor may have because
Borrower's obligation is secured by real property. This means among other
things: (1) Lender may collect from Guarantor without first foreclosing on any
real or personal property collateral pledged by Borrower; (2) If Lender
forecloses on any real property collateral pledged by Borrower: (A) The amount
of Borrower's obligation may be reduced only by the price for which the
collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price; (B) Lender may collect from Guarantor even if Lender, by
foreclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower. This is an unconditional waiver of any
rights and defenses Guarantor may have because Borrower's obligation is secured
by real property. These rights and defenses include, but are not limited to,
any rights and defenses based upon Section 580a, 580b, 580d, or 726 of the Code
of Civil Procedure.
Guarantor understands and agrees that the foregoing waivers are waivers of
substantive rights and defenses to which Guarantor might otherwise be entitled
under state and federal law. The rights and defenses waived include, without
limitation, those provided by California laws of suretyship and guaranty
anti-deficiency laws, and the Uniform Commercial Code. Guarantor acknowledges
that Guarantor has provided these waivers of rights and defenses with the
intention that they be fully relied upon by Lender. Until all Indebtedness is
paid in full, Guarantor waives any right to enforce any remedy Lender may have
against Borrower or any other guarantor, surety, or other person, and further,
Guarantor waives any right to participate in any collateral for the Indebtedness
now or hereafter held by Lender.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and
agrees that each of the waivers set forth above is made with Guarantor's full
knowledge of its significance and consequences and that, under the
circumstances, the waivers are reasonable and not contrary to public policy or
law. If any such waiver is determined to be contrary to any applicable law or
public policy, such waiver shall be effective only to the extent permitted by
law or public policy.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets
of Borrower, through bankruptcy, by an assignment for the benefit of creditors,
by voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full
4
<PAGE>
payment in legal tender of the Indebtedness. If Lender so requests, any
notes or credit agreements now or hereafter evidencing any debts or
obligations of Borrower to Guarantor shall be marked with a legend that the
same are subject to this Guaranty and shall be delivered to Lender. Guarantor
agrees, and Lender hereby is authorized, in the name of Guarantor, from time
to time to execute and file financing statements and continuation statements
and to execute such other documents and to take such other actions as Lender
deems necessary or appropriate to perfect, preserve and enforce its rights
under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
INTEGRATION, AMENDMENT. Guarantor warrants, represents and agrees that
this Guaranty, together with any exhibits or schedules incorporated herein,
fully incorporates the agreements and understandings of Guarantor with
Lender with respect to the subject matter hereof and all prior
negotiations, drafts, and other extrinsic communications between Guarantor
and Lender shall have no evidentiary effect whatsoever. Guarantor further
agrees that Guarantor has read and fully understands the terms of this
Guaranty; Guarantor has had the opportunity to be advised by Guarantor's
attorney with respect to this Guaranty; the Guaranty fully reflects
Guarantor's intentions and parol evidence is not required to interpret the
terms of this Guaranty. Guarantor hereby indemnifies and holds Lender
harmless from all losses, claims, damages, and costs (including Lender's
reasonable attorneys' fees) suffered or incurred by Lender as a result of
any breach by Guarantor of the warranties, representations and agreements
of this paragraph. No alteration or amendment to this Guaranty shall be
effective unless given in writing and signed by the parties sought to be
charged or bound by the alteration or amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Guarantor agrees
upon Lender's request to submit to the jurisdiction of the courts of Santa
Clara County, State of California. Lender and Guarantor hereby waive the
right to any jury trial in any action, proceeding, or counterclaim brought
by either Lender or Guarantor against the other. (INITIAL HERE MH) This
Guaranty shall be governed by and construed in accordance with the laws of
the State of California.
ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including reasonable attorneys' fees and
Lender's legal expenses, incurred in connection with the enforcement of
this Guaranty. Lender may pay someone else to help enforce this Guaranty,
and Guarantor shall pay the costs and expenses of such enforcement. Costs
and expenses include Lender's reasonable attorneys' fees and legal expenses
whether or not there is a lawsuit, including reasonable attorneys' fees and
legal expenses for bankruptcy proceedings (and including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Guarantor also shall pay all court
costs and such additional fees as may be directed by the court.
NOTICES. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimile, and,
except for revocation notices by Guarantor, shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier, or when deposited in the United States mail, first class postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above or to such other addresses as either party may
designate to the other in writing. All revocation notices by Guarantor
shall be in writing and shall be effective only upon delivery to Lender as
provided above in the section titled "DURATION OF GUARANTY." If there is
more than one Guarantor, notice to any Guarantor will constitute notice to
all Guarantors. For notice purposes, Guarantor agrees to keep Lender
informed at all times of Guarantor's current address.
INTERPRETATION. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used in the plural where the
5
<PAGE>
context and construction so require; and where there is more than one
Borrower named in this Guaranty or when this Guaranty is executed by more
than one Guarantor, the words "Borrower" and "Guarantor" respectively
shall mean all and any one or more of them. The words "Guarantor,"
"Borrower," and "Lender" include the heirs, successors, assigns, and
transferees of each of them. Caption headings in this Guaranty are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Guaranty. If a court of competent jurisdiction
finds any provision of this Guaranty to be invalid or unenforceable as to
any person or circumstance, such finding shall not render that provision
invalid or unenforceable as to any other persons or circumstances, and
all provisions of this Guaranty in all other respects shall remain valid
and enforceable. If any one or more of Borrower or Guarantor are
corporations or partnerships, it is not necessary for Lender to inquire
into the powers of Borrower or Guarantor or of the officers, directors,
partners, or agents acting or purporting to act on their behalf, and any
Indebtedness made or created in reliance upon the professed exercise of
such powers shall be guaranteed under this Guaranty.
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Guaranty shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Guaranty. No prior waiver by
Lender, nor any course of dealing between Lender and Guarantor, shall
constitute a waiver of any of Lender's rights or of any of Guarantor's
obligations as to any future transactions. Whenever the consent of
Lender is required under this Guaranty the granting of such consent by
Lender in any instance shall not constitute continuing consent to
subsequent instances where such consent is required and in all cases such
consent may be granted or withheld in the sole discretion of Lender.
FINANCIAL INFORMATION. Upon Lender's request, Guarantor will promptly deliver
to Lender complete and current financial statements and tax returns and such
other financial information about Guarantor as Lender may reasonably request.
REVIVAL OF GUARANTY. Guarantor's liability under this Guaranty shall be
reinstated and revived with respect to any amount paid by any party on account
of the Indebtedness which shall thereafter be required to be restored or
returned by Lender as a result of bankruptcy, or reorganization of such party or
for any other reason all as though such amount had never been paid.
SECURITY. This Commercial Guaranty is secured by the assets of Guarantor
pursuant to that certain Commercial Security Agreement being executed
concurrently herewith.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THIS
MANNER SET FORTH IN THE SECTION TITLED
6
<PAGE>
"DURATION OF GUARANTY." NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE
THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED APRIL 5, 1997.
GUARANTOR:
Faroudja, Inc.
By: /s/ Michael Hoberg
--------------------------
Name: Michael Hoberg
Title: Vice President-Chief Financial Officer
7
<PAGE>
COMMERCIAL SECURITY AGREEMENT
BORROWER: FAROUDJA LABORATORIES, INC.
750 PALOMAR AVENUE
SUNNYVALE, CA 94086
GRANTOR: FAROUDJA, INC.
750 PALOMAR AVENUE
SUNNYVALE, CA 94086
LENDER: SILICON VALLEY BANK
3003 TASMAN DRIVE
SANTA CLARA, CA 95054
==============================================================================
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO AMONG FAROUDJA
LABORATORIES, INC. (REFERRED TO BELOW AS "BORROWER"); FAROUDJA, INC.
(REFERRED TO BELOW AS "GRANTOR"); AND SILICON VALLEY BANK (REFERRED TO BELOW
AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A
SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES
THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO
THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security
Agreement, as this Commercial Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules
attached to this Commercial Security Agreement from time to time.
BORROWER. The word "Borrower" means each and every person or entity
signing the Note, including without limitation Faroudja Laboratories,
Inc.
Page 1
<PAGE>
COLLATERAL. The word "Collateral" means the following described
property of Grantor, whether now owned or hereafter acquired, whether
now existing or hereafter arising, and wherever located:
INVENTORY, CHATTEL PAPER, ACCOUNTS, CONTRACT RIGHTS, DEPOSIT
ACCOUNTS, INSTRUMENTS, DOCUMENTS, EQUIPMENT, GENERAL INTANGIBLES
(EXCLUDING INTELLECTUAL PROPERTY) AND FIXTURES
In addition, the word "Collateral" includes all the following, whether
now owned or hereafter acquired, whether now existing or hereafter
arising, and wherever located:
(a) All attachments, accessions, accessories, tools, parts,
supplies, increases, and additions to and all replacements of and
substitutions for any property described above.
(b) All products and produce of any of the property described in
this Collateral section.
(c) All accounts, general intangibles (excluding Intellectual
Property), instruments, rents, monies, payments, and all other
rights, arising out of a sale, lease, or other disposition of any
of the property described in this Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described
in this Collateral section, whether in the form of a writing,
photograph, microfilm, microfiche, or electronic media, together
with all of Grantor's right, title, and interest in and to all
computer software required to utilize, create, maintain, and
process any such records or data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means Faroudja, Inc. Any Grantor who signs
this Agreement, but does not sign the Note, is signing this Agreement
only to grant a security interest in Grantor's interest in the
Collateral to Lender and is not personally liable under the Note except
as otherwise provided by contract or law (e.g., personal liability under
a guaranty or as a surety).
Page 2
<PAGE>
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means any and all Indebtedness of
Borrower to Lender, now or hereafter arising or incurred, including,
without limitation, the Indebtedness evidenced by the Note, including
all principal and interest, together with all other indebtedness and
costs and expenses for which Borrower is responsible under this
Agreement or under any Related Documents.
INTELLECTUAL PROPERTY. The words "Intellectual Property mean any and
all copyrights, patents, mask works, trademarks, trade secrets, know-how
and technology (and all proceeds and rights related thereto) belonging
to Borrower.
LENDER. The word "Lender" means Silicon Valley Bank, its successors and
assigns.
NOTE. The word "Note" means the notes, letters of credit or credit
agreements in any principal amount from Borrower to lender, together
with all renewals of, extensions of, modifications of, refinancings of,
consolidations of and substitutions for the notes, letters of credit or
credit agreements.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under
this Agreement or by applicable law, (a) Borrower agrees that Lender need not
tell Borrower about any action or inaction Lender takes in connection with
this Agreement; (b) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (c) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without
limitation any failure of Lender to realize upon the Collateral or any delay
by Lender in realizing upon the Collateral; and Borrower agrees to remain
liable under the Note no matter what action Lender takes or fails to take
under this Agreement.
GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (a) this
Agreement is executed at Borrower's request and not at the request of Lender;
(b) Grantor has the full right, power and authority to enter into this
Agreement and to pledge the Collateral to Lender; (c) Grantor has established
adequate means of obtaining from Borrower on a continuing basis information
about Borrower's financial condition; and (d) Lender has made no
representation to Grantor about Borrower or Borrower's creditworthiness.
Page 3
<PAGE>
GRANTOR'S WAIVERS. Except as prohibited by applicable law, Grantor waives
any right to require Lender to (a) make any presentment, protest, demand, or
notice of any kind, including notice of change of any terms of repayment of
the Indebtedness, default by Borrower or any other guarantor or surety, any
action or nonaction taken by Borrower, Lender, or any other guarantor or
surety of Borrower, or the creation of new or additional Indebtedness; (b)
proceed against any person, including Borrower, before proceeding against
Grantor; (c) proceed against any collateral for the Indebtedness, including
Borrower's collateral, before proceeding against Grantor; (d) apply any
payments or proceeds received against the Indebtedness in any order; (e) give
notice of the terms, time, and place of any sale of any collateral pursuant
to the Uniform Commercial Code or any other law governing such sale; (f)
disclose any information about the Indebtedness, the Borrower, any
collateral, or any other guarantor or surety, or about any action or
nonaction of Lender; or (g) pursue any remedy or course of action in Lender's
power whatsoever.
Grantor also waives any and all rights or defenses arising by reason of (h)
any disability or other defense of Borrower, any other guarantor or surety or
any other person; (i) the cessation from any cause whatsoever, other than
payment in full, of the Indebtedness; (j) the application of proceeds of the
Indebtedness by Borrower for purposes other than the purposes understood and
intended by Grantor and Lender; (k) any act of omission or commission by
Lender which directly or indirectly results in or contributes to the
discharge of Borrower or any other guarantor or surety, or the Indebtedness,
or the loss or release of any collateral by operation of law or otherwise;
(I) any statute of limitations in any action under this Agreement or on the
Indebtedness; or (m) any modification or change in terms of the Indebtedness,
whatsoever, including without limitation, the renewal, extension,
acceleration, or other change in the time payment of the Indebtedness is due
and any change in the interest rate.
Grantor waives all rights and defenses arising out of an election of remedies
by Lender, even though that election of remedies, such as nonjudicial
foreclosure with respect to security for a guaranteed obligation, has
destroyed Grantor's rights of subrogation and reimbursement against Borrower
by the operation of Section 580d of the California Code of Civil Procedure,
or otherwise.
This waiver includes, without limitation, any loss of rights Grantor may suffer
by reason of any rights or protections of Borrower in connection with any
anti-deficiency laws, or other laws limiting or discharging the Indebtedness or
Borrower's obligations (including, without limitation, Section 726, 580a, 580b,
and 580d of the California Code of Civil Procedure). Grantor waives all rights
and protections of any kind which Grantor may have for any reason, which would
affect or limit the amount of any recovery by Lender from Grantor following a
nonjudicial sale or judicial foreclosure of any real or personal property
security for the Indebtedness including, but not limited to, the right to any
fair market value hearing pursuant to California Code of Civil Procedure Section
580a.
Grantor understands and agrees that the foregoing waivers are waivers of
substantive rights and defenses to which Grantor might otherwise be entitled
under state and federal law. The
Page 4
<PAGE>
rights and defenses waived include, without limitation, those provided by
California laws of suretyship and guaranty, anti-deficiency laws, and the
Uniform Commercial Code. Grantor acknowledges that Grantor has provided
these waivers of rights and defenses with the intention that they be fully
relied upon by Lender. Until all Indebtedness is paid in full, Grantor
waives any right to enforce any remedy Lender may have against Borrower or
any other guarantor, surety, or other person, and further, Grantor waives any
right to participate in any collateral for the Indebtedness now or hereafter
held by Lender.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Grantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right
to payment Grantor may now have or hereafter have or acquire against
Borrower, by subrogation or otherwise, so that at no time shall Grantor be or
become a "creditor" of Borrower within the meaning of 11 U.S.C. section
547(b), or any successor provision of the Federal bankruptcy laws.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory
security interest in and hereby assigns, conveys, delivers, pledges, and
transfers all of Grantor's right, title and interest in and to Grantor's
accounts with Lender (whether checking, savings, or some other account),
including all accounts held jointly with someone else and all accounts
Grantor may open in the future, excluding, however, all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Grantor authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all Indebtedness against any
and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lender's security interest in the
Collateral. Upon request of Lender, Grantor will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Grantor will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Grantor hereby
appoints Lender as its irrevocable attorney-in-fact for the purpose of
executing any documents necessary to perfect or to continue the security
interest granted in this Agreement. Lender may at any time, and without
further authorization from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as
a financing statement. Grantor will reimburse Lender for all expenses
for the perfection and the continuation of the perfection of Lender's
security interest in the Collateral. Grantor promptly will notify Lender
before any change in Grantor's name including any change to the assumed
business names of Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND
WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS
IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME BORROWER MAY NOT BE
INDEBTED TO LENDER.
Page 5
<PAGE>
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its articles or agreements relating to entity incorporation,
organization or existence do not prohibit any term or condition of this
Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral
have authority and capacity to contract and are in fact obligated as
they appear to be on the Collateral.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will
deliver to Lender in form satisfactory to Lender a schedule of real
properties and Collateral locations relating to Grantor's operations,
including without limitation the following: (a) all real property owned
or being purchased by Grantor; (b) all real property being rented or
leased by Grantor; (c) all storage facilities owned, rented, leased, or
being used by Grantor; and (d) all other properties where Collateral is
or may be located. Except in the ordinary course of its business,
Grantor shall not remove the Collateral from its existing locations
without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the
extent the Collateral consists of intangible property such as accounts,
the records concerning the Collateral) at Grantor's address shown above,
or at such other locations as are acceptable to Lender. Except in the
ordinary course of its business, including the sales of inventory,
Grantor shall not remove the Collateral from its existing locations
without the prior written consent of Lender. To the extent that the
Collateral consists of vehicles, or other titled property, Grantor shall
not take or permit any action which would require application for
certificates of title for the vehicles outside the State of California,
without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or
accounts collected in the ordinary course of Grantor's business, Grantor
shall not sell, offer to sell, or otherwise transfer or dispose of the
Collateral. While Grantor is not in default under this Agreement,
Grantor may sell inventory, but only in the ordinary course of its
business and only to buyers who qualify as a buyer in the ordinary
course of business. A sale in the ordinary course of Grantor's business
does not include a transfer in partial or total satisfaction of a debt
or any bulk sale. Grantor shall not pledge, mortgage, encumber or
otherwise permit the Collateral to be subject to any lien, security
interest, encumbrance, or charge, other than the security interest
provided for in this Agreement or the Related Documents, without the
prior written consent of Lender. This includes security interests even
if junior in right to the security interests granted under this
Agreement. Unless waived by Lender, all proceeds from any disposition
of the Collateral (for whatever reason) shall be held in trust for
Lender and shall not be commingled with any other funds; provided
Page 6
<PAGE>
however, this requirement shall not constitute consent by Lender to any
sale or other disposition. Upon receipt, Grantor shall immediately
deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement and any other
permitted liens as set forth within the Related Documents. No financing
statement covering any of the Collateral is on file in any public office
other than those which reflect the security interest created by this
Agreement or to which Lender has specifically consented. Grantor shall
defend Lender's rights in the Collateral against the claims and demands
of all other persons.
COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists
of inventory, Grantor shall deliver to Lender, as often as Lender may
reasonably require, such lists, descriptions, and designations of such
Collateral as Lender may reasonably require to identify the nature,
extent, and location of such Collateral. Such information shall be
submitted for Grantor and each of its subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not
commit or permit damage to or destruction of the Collateral or any part
of the Collateral. Lender and its designated representatives and agents
shall have the right at all reasonable times to examine, inspect, and
audit the Collateral wherever located. Grantor shall immediately notify
Lender of all cases involving the return, rejection, repossession, loss
or damage of or to any Collateral with a value of more than $50,000.00;
of any request for credit or adjustment or of any other dispute arising
with respect to the Collateral; and generally of all happenings and
events affecting the Collateral or the value or the amount of the
Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon
this Agreement, upon any promissory note or notes evidencing the
Indebtedness, or upon any of the other Related Documents. Grantor may
withhold any such payment or may elect to contest any lien if Grantor is
in good faith conducting an appropriate proceeding to contest the
obligation to pay and so long as Lender's interest in the Collateral is
not jeopardized in Lender's sole opinion. If the Collateral is
subjected to a lien which is not discharged or bonded against within
fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient
corporate surety bond or other security satisfactory to Lender in an
amount adequate to provide for the discharge of the lien plus any
interest, costs, reasonable attorneys' fees or other charges that could
accrue as a result of foreclosure or sale of the Collateral. In any
contest Grantor shall defend itself and Lender and shall satisfy any
final adverse judgment before enforcement against the Collateral.
Grantor shall name Lender as an additional obligee under any surety bond
furnished in the contest proceedings.
Page 7
<PAGE>
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply
promptly with all laws, ordinances, rules and regulations of all
governmental authorities, now or hereafter in effect, applicable to the
ownership, production, disposition, or use of the Collateral. Grantor
may contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate
appeals, so long as Lender's interest in the Collateral, in Lender's
opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the
Collateral never has been within the last ten years, and never will be
so long as this Agreement remains a lien on the Collateral, used for the
generation, manufacture, storage, transportation, treatment, disposal,
release or threatened release of any hazardous waste or substance, as
those terms are defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section
9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization
Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters
6.5 through 7.7 of Division 20 of the California Health and Safety Code,
Section 25100, et seq., or other applicable state or Federal laws,
rules, or regulations adopted pursuant to any of the foregoing. The
terms "hazardous waste" and "hazardous substance" shall also include,
without limitation, petroleum and petroleum by-products or any fraction
thereof and asbestos. The representations and warranties contained
herein are based on Grantor's due diligence in investigating the
Collateral for hazardous wastes and substances. Grantor hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims and losses resulting from a breach of
this provision of this Agreement. This obligation to indemnify shall
survive the payment of the Indebtedness and the satisfaction of this
Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain
all risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may
require with respect to the Collateral, in form, amounts, coverages and
basis reasonably acceptable to Lender and issued by a company or
companies reasonably acceptable to Lender. Grantor, upon request of
Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without
at least ten (10) days' prior written notice to Lender and not including
any disclaimer of the insurer's liability for failure to give such a
notice. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Grantor or any other person. In
connection with all policies covering assets in which Lender holds or is
offered a security interest, Grantor will provide Lender with such loss
payable or other endorsements as Lender may require.
Page 8
<PAGE>
If Grantor at any time fails to obtain or maintain any insurance as
required under this Agreement, Lender may (but shall not be obligated
to) obtain such insurance as Lender deems appropriate, including if it
so chooses "single interest insurance," which will cover only Lender's
interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender
of any loss or damage to the Collateral. Lender may make proof of loss
if Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed
Collateral, which consent will not be unreasonably withheld in instances
where the proceeds are $50.000.00 or less, Lender shall, upon
satisfactory proof of expenditure, pay or reimburse Grantor from the
proceeds for the reasonable cost of repair or restoration. If Lender
does not consent to repair or replacement of the Collateral, Lender
shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which
have not been disbursed within six (6) months after their receipt and
which Grantor has not committed to the repair or restoration of the
Collateral shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender to
be sufficient to produce, at least fifteen (15) days before the premium
due date, amounts at least equal to the insurance premiums to be paid.
If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender.
The reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for
Grantor, and Lender is not the agent of Grantor for payment of the
insurance premiums required to be paid by Grantor. The responsibility
for the payment of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (e) the then current value on the
basis of which insurance has been obtained and the manner of determining
that value; and (f) the expiration date of the policy. In addition,
Grantor shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to Lender
determine, as applicable, the cash value or replacement cost of the
Collateral.
Page 9
<PAGE>
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of
the tangible personal property and beneficial use of all the Collateral and
may use it in any lawful manner not inconsistent with this Agreement or the
Related Documents, provided that Grantor's right to possession and beneficial
use shall not apply to any Collateral where possession of the Collateral by
Lender is required by law to perfect Lender's security interest in such
Collateral. If Lender at any time has possession of any Collateral, whether
before or after an Event of Default, Lender shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral of Lender
takes such action for that purpose as Grantor shall request or as Lender, in
Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior
parties, nor to protect, preserve or maintain any security interest given to
secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender
for such purposes will then bear interest at the rate charged under the Note
from the date incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the Indebtedness and, at Lender's
option, will (a) be payable on demand, (b) be added to the balance of the
Note and be apportioned among and be payable with any installment payments to
become due during either (i) the term of any applicable insurance policy or
(ii) the remaining term of the Note, or (c) be treated as a balloon payment
which will be due and payable at the Note's maturity. This Agreement also
will secure payment of these amounts. Such right shall be in addition to all
other rights and remedies to which Lender may be entitled upon the occurrence
of an Event of Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Indebtedness.
OTHER DEFAULTS. Failure of Grantor or Borrower to comply with or to
perform any other term, obligation, covenant or condition contained in
this Agreement or in any of the Related Documents or failure of Borrower
to comply with or to perform any term, obligation, covenant or condition
contained in any other agreement between Lender and Borrower. As to any
default under such other term, provision, condition, covenant or
agreement or agreement that can be cured, to cure such default within
ten (10) days after the occurrence thereof, provided, however, that if
the default cannot by its nature be cured within the ten (10) day period
or cannot after diligent attempts by Grantor or Borrower be cured within
such ten (10) day
Page 10
<PAGE>
period and such default is likely to be cured within a reasonable time,
then Grantor or Borrower shall have an additional reasonable period (which
shall not in any case exceed thirty (30) days) to attempt to cure such
default, and within such reasonable time period the failure to have
cured such default shall not be deemed an Event of Default (provided
that no Loan Advances will be required to be made during such cure
period).
DEFAULT IN FAVOR OF THIRD PARTIES. If there is a default in any
agreement to which Borrower or any Grantor is a party with a third party
or parties resulting in a right by such third party or parties, whether
or not exercised, to accelerate the maturity of any indebtedness in an
amount in excess of One Hundred Thousand and 00/100 Dollars
($100,000.00) or that could result in a Material Adverse Change.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor or Borrower under this
Agreement, the Note or the Related Documents is false or misleading in
any material respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any collateral documents to create a valid and perfected security
interest or lien) at any time and for any reason.
INSOLVENCY. Grantor or Borrower becomes insolvent, or any insolvency
proceeding is commenced by Borrower, or if an insolvency proceeding is
commenced against Grantor or Borrower and is not dismissed or stayed
within thirty (30) days (provided that no Loan Advances will be required
to be made during such cure period).
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or Borrower
or by any governmental agency against the Collateral or any other
collateral securing the Indebtedness. This includes a garnishment of
any of Grantor or Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness, or such Guarantor
dies or becomes incompetent.
ADVERSE CHANGE. A Material Adverse Change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under
Page 11
<PAGE>
the California Uniform Commercial Code. In addition and without limitation,
Lender may exercise any one or more of the following rights and remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Borrower would be required to
pay, immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender
all or any portion of the Collateral and any and all certificates of
title and other documents relating to the Collateral. Lender may
require Grantor to assemble the Collateral and make it available to
Lender at a place to be designated by Lender. Lender also shall have
full power to enter upon the property of Grantor to take possession of
and remove the Collateral. If the Collateral contains other goods not
covered by this Agreement at the time of repossession, Grantor agrees
Lender may take such other goods, provided that Lender makes reasonable
efforts to return them to Grantor after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in
its own name or that of Grantor. Lender may sell the Collateral at
public auction or private sale. Unless the Collateral threatens to
decline speedily in value or is of a type customarily sold on a
recognized market, Lender will give Grantor reasonable notice of the
time after which any private sale or any other intended disposition of
the Collateral is to be made. The requirements of reasonable notice
shall be met if such notice is given at least ten (10) days, or such
lesser time as required by state law, before the time of the sale or
disposition. All expenses relating to the disposition of the
Collateral, including without limitation the expenses of retaking,
holding, insuring, preparing for sale and selling the Collateral, shall
become a part of the Indebtedness secured by this Agreement and shall be
payable on demand, with interest at the Note rate from date of
expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender
shall have the following rights and remedies regaining the appointment
of a receiver: (a) Lender may have a receiver appointed as a matter of
right in compliance with applicable law, (b) the receiver may be an
employee of Lender and may serve without bond, and (c) all fees of the
receiver and his or her attorney shall become part of the indebtedness
secured by this Agreement and shall be payable on demand, with interest
at the Note rate from date of expenditure until repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness
in such order of preference as Lender may determine. Insofar as the
Page 12
<PAGE>
Collateral consists of accounts, general intangibles, insurance
policies, instruments, chattel paper, choses in action, or similar
property, Lender may demand, collect, receipt for, settle, compromise,
adjust, sue for, foreclose, or realize on the Collateral as Lender may
determine, whether or not Indebtedness or Collateral is then due. For
these purposes, Lender may, on behalf of and in the name of Grantor,
receive, open and dispose of mail addressed to Grantor; change any
address to which mail and payments are to be sent; and endorse notes,
checks, drafts, money orders, documents of title, instruments and items
pertaining to payment, shipment, or storage of any Collateral. To
facilitate collection, Lender may notify account debtors and obligors on
any Collateral to make Payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Borrower for any
deficiency remaining on the Indebtedness due to Lender after application
of all amounts received from the exercise of the rights provided in this
Agreement. Borrower shall be liable for a deficiency even if the
transaction described in this subsection is a sale of accounts or
chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and
remedies of a secured creditor under the provisions of the Uniform
Commercial Code, as may be amended from time to time. In addition,
Lender shall have and may exercise any or all other rights and remedies
it may have available at law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor or Borrower under this
Agreement, after Grantor or Borrower's failure to perform, shall not
affect Lender's right to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and
accepted by Lender in the State of California. If there is a lawsuit,
Grantor and Borrower agree upon Lender's request to submit to the
jurisdiction of the courts of Santa Clara County, the State of
California. LENDER, GRANTOR AND BORROWER HEREBY WAIVE THE RIGHT TO ANY
JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY
Page 13
<PAGE>
EITHER LENDER, GRANTOR OR BORROWER AGAINST THE OTHER. (INITIAL HERE MH)
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA.
ATTORNEYS' FEES; EXPENSES. Grantor and Borrower agree to pay upon
demand all of Lender's costs and expenses, including reasonable
attorneys' fees and Lender's legal expenses, incurred in connection with
the enforcement of this Agreement. Lender may pay someone else to help
enforce this Agreement, and Grantor and Borrower shall pay the costs and
expenses of such enforcement. Costs and expenses include Lender's
reasonable attorneys' fees and legal expenses whether or not there is a
lawsuit, including reasonable attorneys' fees and legal expenses for
bankruptcy proceedings (and including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor and Borrower also shall pay
all court costs and such additional fees as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor and
Borrower under this Agreement shall be joint and several, and all
references to Borrower shall mean each and every Borrower, and all
references to Grantor shall mean each and every Grantor.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if there
is more than one Grantor or Borrower, notice to any Grantor or Borrower
will constitute notice to all Grantor and Borrowers. For notice
purposes, Grantor and Borrower will keep Lender informed at all times of
Grantor and Borrower's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and
lawful attorney-in-fact, irrevocably, with full power of substitution to
do the following: (a) upon and during the occurrence of an Event of
Default to demand, collect, receive, receipt for, sue and recover all
sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse
any and all claims, instruments, receipts, checks, drafts or warrants
issued in payment for the Collateral; (c) upon and during the occurrence
of an Event of Default to settle or compromise any and all claims
arising under the Collateral, and,
Page 14
<PAGE>
in the place and stead of Grantor, to execute and deliver its release
and settlement for the claim; and (d) to file any claim or claims or to
take any action or institute or take part in any proceedings, either in
its own name or in the name of Grantor, or otherwise, which in the
discretion of Lender may seem to be necessary or advisable. This power
is given as security for the Indebtedness, and the authority hereby
conferred is and shall be irrevocable and shall remain in full force and
effect until renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be within
the limits of enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid
and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this Agreement.
No prior waiver by Lender, nor any course of dealing between Lender and
Grantor, shall constitute a waiver of any of Lender's rights or of any
of Grantor's obligations as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of such
consent by Lender in any instance shall not constitute continuing
consent to subsequent instances where such consent is required and in
all cases such consent may be granted ar withheld in the sole discretion
of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for
the Indebtedness, Borrower irrevocably waives, disclaims and
relinquishes all claims against such other person which Borrower has or
would otherwise have by virtue of payment of the Indebtedness or any
part thereof, specifically including but not limited to all rights of
indemnity, contribution or exoneration.
Page 15
<PAGE>
ADDITIONAL PROVISION. If any law is passed that requires additional action
on the part of Lender, Borrower and/or Grantor shall fully cooperate with
Lender in complying with the law and accordingly, shall reimburse Lender for
all costs and expenses which Lender incurs in compliance with the law.
COMMERCIAL GUARANTY. This Commercial Security Agreement is given to secure
the obligation of Faroudja, Inc. under that certain Commercial Guaranty
agreement of even date.
BORROWER AND GRANTOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
COMMERCIAL SECURITY AGREEMENT, AND BORROWER AND GRANTOR AGREE TO ITS TERMS.
THIS AGREEMENT IS DATED APRIL 5, 1997.
BORROWER:
Faroudja Laboratories, Inc.
By: /s/ Michael Hoberg
--------------------------------------
Name: Michael Hoberg
Title: VP-CFO
GRANTOR:
Faroudja, Inc.
By: /s/ Michael Hoberg
--------------------------------------
Name: Michael Hoberg
Title: VP-CFO
Page 16
<PAGE>
PROMISSORY NOTE
BORROWER: FAROUDJA LABORATORIES, INC.
750 PALOMAR AVENUE
SUNNYVALE, CA 94086
LENDER: SILICON VALLEY BANK
3003 TASMAN DRIVE
SANTA CLARA, CALIFORNIA 95054
==============================================================================
PRINCIPAL AMOUNT: $1,000,000.00 INITIAL RATE: 10.000% DATE OF NOTE: APRIL 5,1997
PROMISE TO PAY. FAROUDJA LABORATORIES, INC. ("BORROWER") PROMISES TO PAY
TO SILICON VALLEY BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED
STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION & 00/100 DOLLARS
($1,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON
THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL
OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON APRIL 4, 1998. IN
ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID
INTEREST BEGINNING MAY 4, 1997, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE
ON THE SAME DAY OF EACH MONTH AFTER THAT. Interest on this Note is computed
on a 365/360 simple interest basis; that is, by applying the ratio of the
annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal
balance is outstanding. Borrower will pay Lender at Lender's address shown
above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to
change from time to time based on changes in an index which is Lender's Prime
Rate (the "Index"). This is the rate Lender charges, or would charge, on
90-day unsecured loans to the most creditworthy corporate customers. This
rate may or may not be the lowest rate available from Lender at any given
time. Lender will tell Borrower the current Index rate upon Borrower's
request. Borrower understands that Lender may make loans based on other rates
as well. The interest rate change will not occur more often than each time the
prime
<PAGE>
rate is adjusted by Silicon Valley Bank. THE INDEX CURRENTLY IS 8.500% PER
ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF
THIS NOTE WILL BE AT A RATE OF 1.500 PERCENTAGE POINTS OVER THE INDEX,
RESULTING IN AN INITIAL RATE OF 10.000% PER ANNUM. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum
rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid
finance charges are earned fully as of the date of the loan and will not be
subject to refund upon early payment (whether voluntary or as a result of
default), except as otherwise required by law. Except for the foregoing,
Borrower may pay without penalty all or a portion of the amount owed earlier
than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid interest. Rather, they will reduce the principal
balance due.
DEFAULT. Shall have the same meaning as set forth in the Business Loan
Agreement of even date herewith.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately
due, without notice, and then Borrower will pay that amount. Upon Borrower's
failure to pay all amounts declared due pursuant to this section, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, do the following: add any unpaid accrued
interest to principal and such sum will bear interest therefrom until paid at
the rate provided in this Note (including any increased rate). Lender may
hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any
limits under applicable law, Lender's reasonable attorneys' fees and Lender's
legal expenses whether or not there is a lawsuit, including reasonable
attorneys' fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals, and
any anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law. THIS NOTE HAS
BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.
IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF SANTA CLARA COUNTY, THE STATE OF CALIFORNIA.
LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE
OTHER. (INITIAL HERE MH) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note, as well as directions for payment from Borrower's accounts,
may be requested orally or in writing by Borrower or by an authorized person.
Lender may, but need not, require that all oral requests be confirmed in
writing. Borrower agrees to be liable for all sums either: (a) advanced in
accordance with the instructions of an authorized person or (b) credited to
any of Borrower's accounts with Lender. The unpaid principal balance owing on
this Note at any time may be evidenced by endorsements on this Note or by
2
<PAGE>
Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note
or any other loan with Lender; or (d) Borrower has applied funds provided
pursuant to this Note for purposes other than authorized by Lender.
REQUEST TO DEBIT ACCOUNTS. Borrower will regularly deposit funds received
from its business activities in accounts maintained by Borrower at Silicon
Valley Bank. Borrower hereby requests and authorizes Lender to debit any of
Borrower's accounts with Lender, specifically, without limitation,
Account Number ________________, for payments of principal and interest due on
the loan and any other obligations owing by Borrower to Lender. Lender will
notify Borrower of all debits which Lender makes against Borrower's accounts.
Any such debits against Borrower's accounts in no way shall be deemed a
set-off.
BUSINESS LOAN AGREEMENT. This Note is subject to and shall be governed by
all the terms and conditions of the Business Loan Agreement of even date
herewith, between Lender and Borrower, as such agreement may be amended from
time to time, which Business Loan Agreement is incorporated herein by
reference.
PAYMENT OF LOAN FEE. This Note is subject to a loan fee in the amount of
Seven Thousand Five Hundred and 00/100 Dollars ($7,500.00) plus all
out-of-pocket expenses.
CONDITION. Advances under this Note are conditioned upon an accounts
receivable audit, satisfactory to Lender.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower to the extent allowed
by law, waives any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who
signs this Note, whether as maker, guarantor, accommodation maker or endorser,
shall be released from liability. (In no event shall any individual signing
in the capacity of an officer, director, or shareholder of Borrower be
personally liable on this Note unless such individual otherwise is liable
under a guaranty or other agreement). All such parties agree that Lender may
renew or extend (repeatedly and for any length of time) this loan, or release
any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other
action deemed necessary by Lender without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER HAS READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST
3
<PAGE>
RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES
RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
FAROUDJA LABORATORIES, INC.
BY: /s/ Michael Hoberg
-----------------------------
NAME: Michael Hoberg
TITLE: VP - CFO
4
<PAGE>
PROMISSORY NOTE
BORROWER: FAROUDJA LABORATORIES, INC.
750 PALOMAR AVENUE
SUNNYVALE, CA 94086
LENDER: SILICON VALLEY BANK
3003 TASMAN DRIVE
SANTA CLARA, CALIFORNIA 95054
==============================================================================
PRINCIPAL AMOUNT: $500,000.00 INITIAL RATE: 10.000% DATE OF NOTE: JUNE 6, 1997
PROMISE TO PAY. FAROUDJA LABORATORIES, INC. ("BORROWER") PROMISES TO PAY TO
SILICON VALLEY BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES
OF AMERICA, THE PRINCIPAL AMOUNT OF FIVE HUNDRED THOUSAND & 00/100 DOLLARS
($500,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE
UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ACCORDANCE WITH THE FOLLOWING PAYMENT
SCHEDULE:
THE DRAW PERIOD SHALL BEGIN AS OF THIS DATE AND SHALL END ON
DECEMBER 6, 1997 (THE "DRAW PERIOD"). DURING THE DRAW PERIOD,
BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID
INTEREST DUE AS OF EACH PAYMENT DATE BEGINNING ON JULY 5, 1997, AND
ALL SUBSEQUENT INTEREST PAYMENTS WILL BE DUE ON THE SAME DAY OF EACH
MONTH THEREAFTER. THE OUTSTANDING PRINCIPAL BALANCE ON DECEMBER 6,
1997, WILL BE PAYABLE IN THIRTY-SIX (36) EVEN PAYMENTS OF PRINCIPAL
PLUS INTEREST DUE AS OF EACH PAYMENT DATE BEGINNING ON JANUARY 5,
1998, AND ALL SUBSEQUENT PAYMENTS OF PRINCIPAL PLUS INTEREST WILL BE
DUE ON THE SAME DAY OF EACH MONTH THEREAFTER. THE FINAL PAYMENT, DUE
ON DECEMBER 5, 2000, WILL BE FOR ALL OUTSTANDING PRINCIPAL PLUS ALL
ACCRUED INTEREST NOT YET PAID.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other
<PAGE>
place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid
collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each time the prime rate is adjusted by
Silicon Valley Bank. THE INDEX CURRENTLY IS 8.500% PER ANNUM. THE INTEREST
RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A
RATE OF 1.500 PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF
10.000% PER ANNUM. NOTICE: Under no circumstances will the interest rate on
this Note be more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay
without penalty all or a portion of the amount owed earlier than it is due.
Early payments will not, unless agreed to by Lender in writing, relieve Borrower
of Borrower's obligation to continue to make payments of accrued unpaid
interest. Rather, they will reduce the principal balance due.
DEFAULT. Shall have the same meaning as set-forth in the Business Loan
Agreement of even date herewith.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Lender may hire or pay someone
else to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable law,
Lender's reasonable attorneys' fees and Lender's reasonable legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other sums
provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER
IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON
LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF SANTA CLARA
COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO
ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
LENDER OR BORROWER AGAINST THE OTHER. (INITIAL HERE MH) THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.
2
<PAGE>
LINE OF CREDIT. This Note evidences a straight line of credit through the end
of the Draw Period. Once the total amount of principal has been advanced,
Borrower is not entitled to further loan advances. Advances under this Note, as
well as directions for payment from Borrower's accounts, may be requested orally
or in writing by Borrower or by an authorized person. Lender may, but need not,
require that all oral requests be confirmed in writing. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions of
an authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; or (d) Borrower has
applied funds provided pursuant to this Note for purposes other than those
authorized by Lender.
REQUEST TO DEBIT ACCOUNTS. Borrower will regularly deposit funds received from
its business activities in accounts maintained by Borrower at Silicon Valley
Bank. Borrower hereby requests and authorizes Lender to debit any of Borrower's
accounts with Lender, specifically, without limitation, Account
Number _____________, for payments of principal and interest due on the loan and
any other obligations owing by Borrower to Lender. Lender will notify Borrower
of all debits which Lender makes against Borrower's accounts. Any such debits
against Borrower's accounts in no way shall be deemed a set-off.
BUSINESS LOAN AGREEMENT. This Note is subject to and shall be governed by all
the terms and conditions of that certain Business Loan Agreement dated April 5,
1997, between Lender and Borrower, as such agreement may be amended from time to
time, which Business Loan Agreement is incorporated herein by reference.
PAYMENT OF LOAN FEE. This Note is subject to a loan fee in the amount of Three
Thousand Seven Hundred Fifty and 00/100 Dollars ($3,750.00) plus all
out-of-pocket expenses.
ADVANCE RATE. At any time from the date hereof through the end of the Draw
Period, Borrower may request advances (each an "Advance" and collectively the
"Advances") from Lender in an aggregate amount not to exceed the principal
amount of this Note. To evidence the Advances, Borrower shall deliver to
Lender, at the time of each Advance request, an invoice for the asset acquired.
The Advances shall be used only to acquire assets and shall not exceed eighty
percent (80%) of the invoice amount approved from time to time by Lender,
excluding amounts related to taxes, freight, and soft costs.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower, to the extent allowed
by law,
3
<PAGE>
waives any applicable statute of limitations, presentment, demand for
payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who
signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability (in no event shall any individual
signing in the capacity of an officer, director, or shareholder of Borrower
be personally liable on this Note unless such individual otherwise is liable
under a Guaranty or other agreement). All such parties agree that Lender may
renew or extend (repeatedly and for any length of time) this loan, or release
any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other
action deemed necessary by Lender without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
FAROUDJA LABORATORIES, INC.
BY: /s/ Michael Hoberg
--------------------------
NAME: Michael Hoberg
TITLE: VP - CFO
4
<PAGE>
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of June 6, 1997, by
and between Faroudja Laboratories, Inc. ("Borrower") whose address is 750
Palomar Avenue, Sunnyvale, CA 94086, and Silicon Valley Bank ("Lender") whose
address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness
which may be owing by Borrower to Lender, Borrower is indebted to Lender
pursuant to, among other documents, a Promissory Note, dated April 5, 1997,
in the original principal amount of One Million and 00/100 Dollars
($1,000,000.00), as may be amended from time to time (the "Line of Credit")
and being executed concurrently herewith, a Promissory Note, dated June 6,
1997, in the original principal amount of Five Hundred Thousand and 00/100
Dollars ($500,000.00) as may be amended from time to time (the "Term Note").
The Line of Credit and the Term Note shall be referred to collectively herein
as the "Notes." The Notes, together with other promissory notes from
Borrower to Lender, are governed by the terms of a Business Loan Agreement,
dated April 5, 1997, as such agreement may be amended from time to time,
between Borrower and Lender (the "Loan Agreement"). Defined terms used but
not otherwise defined herein shall have the same meanings as in the Loan
Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be
referred to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the
Indebtedness is secured by a Commercial Security Agreement, dated April 5,
1997. Additionally, repayment of the Indebtedness is guaranteed by Faroudja,
Inc. (the "Guarantor") pursuant to a Commercial Guaranty (the "Guaranty").
The Guaranty is secured by a Commercial Security Agreement, dated April 5,
1997, executed by Guarantor. In addition, both Borrower and Guarantor have
agreed not to further encumber any of their intellectual property, pursuant
to two (2) Negative Pledge Agreements, each dated April 5,1997.
Hereinafter, the above-described security documents and guaranties,
together with all other documents securing repayment of the Indebtedness
shall be referred to as the "Security Documents." Hereinafter, the Security
Documents, together with all other documents evidencing or securing the
Indebtedness shall be referred to as the "Existing Loan Documents."
<PAGE>
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO LINE OF CREDIT.
1. The principal amount is hereby increased to Two Million and
00/100 Dollars ($2,000,000.00).
B. MODIFICATION(S) TO LOAN AGREEMENT.
1. The first sentence of the paragraph entitled "Borrowing Base
Formula" is hereby amended in its entirety to read as
follows:
Funds shall be advanced under the Line of Credit facility
according to a Borrowing Base Formula, as determined by
Lender, defined as follows: the lesser of
(a) $2,000,000.00, minus the Cash Management Services
Sublimit or (b) seventy five percent (75%) of Eligible
Accounts Receivable, minus (i) the face amount of all
outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit), minus (ii) the Foreign
Exchange Reserve.
2. The following paragraphs are hereby incorporated, and shall
read as follows:
LETTERS OF CREDIT. Subject to the terms and conditions of
this Agreement, Lender agrees to issue or cause to be issued
Letters of Credit for the account of Borrower in an
aggregate face amount not to exceed (i) the lesser of
$2,000,000.00 or the Borrowing Base Formula minus (ii) the
then outstanding principal balance of the Line of Credit
facility; PROVIDED that the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters
of Credit) shall not in any case exceed Two Million and
00/100 Dollars ($2,000,000.00). Each such Letter of Credit
shall have an expiry date no later than one hundred eighty
(180) days after the maturity date of the Line of Credit
facility, provided that Borrower's Letter of Credit
reimbursement obligation shall be secured by cash on terms
acceptable to Lender at any time after the maturity date if
the term of the Line of Credit facility is not extended by
Lender. All such Letters of Credit shall be, in form and
substance, acceptable to Lender in its sole discretion and
shall be subject to the terms and conditions of Lender's
form of application and Letter of Credit agreement.
2
<PAGE>
Borrower shall indemnify, defend and hold Lender harmless
from any loss, cost, expense or liability, including,
without limitation, reasonable attorneys' fees, arising out
of or in connection with any Letters of Credit.
Borrower may request that Lender issue a Letter of Credit
payable in a currency other than United States Dollars. If
a demand for payment is made under any such Letter of
Credit, Lender shall treat such demand as an advance to
Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing
rate of exchange in San Francisco, California, for sales of
that other currency for cable transfer to the country of
which it is the currency.
Upon the issuance of any Letter of Credit payable in a
currency other than United States Dollars, Lender shall
create a reserve (the "Letter of Credit Reserve") under the
Line of Credit facility for Letters of Credit against
fluctuations in currency exchange rates, in an amount equal
to ten percent (10%) of the face amount of such Letter of
Credit. The amount of such reserve may be amended by Lender
from time to time to account for fluctuations in the
exchange rate. The availability of funds under the Line of
Credit facility shall be reduced by the amount of such
reserve for so long as such Letter of Credit remains
outstanding.
FOREIGN EXCHANGE SUBLIMIT. Subject to the terms and
conditions of this Agreement, Borrower may utilize up to the
lesser of (i) $2,000,000.00 or (ii) the Borrowing Base
Formula for spot and future foreign exchange contracts (the
"Exchange Contracts"). Borrower shall not request an
Exchange Contract at any time it is not in compliance with
any of the terms of this Agreement. All Exchange Contracts
must provide for delivery of settlement on or before the
maturity date of the Line of Credit facility. The limit
available at any time shall be reduced by the following
amounts (the "Foreign Exchange Reserve") on each day (the
"Determination Date"): (i) on all outstanding Exchange
Contracts on which delivery is to be effected or settlement
allowed more than two business days from the Determination
Date, 10% of the gross amount of the Exchange Contracts;
plus (ii) on all outstanding Exchange Contracts on which
delivery is to be effected or settlement allowed within two
business days after the Determination Date, 100% of the
gross amount of the Exchange Contracts. In lieu of the
Foreign
3
<PAGE>
Exchange Reserve for 100% of the gross amount of any
Exchange Contract, the Borrower may request that Lender
debit Borrower's bank account with Lender for such amount,
provided Borrower has immediately available funds in such
amounts in its bank account.
Lender may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs or
(b) that there is not sufficient availability under the Line
of Credit facility and Borrower does not have available
funds in its bank account to satisfy the Foreign Exchange
Reserve. If Lender terminates the Exchange Contracts, and
without limitation of the FX Indemnity Provisions (as
referred to below), Borrower agrees to reimburse Lender for
any and all fees, costs and expenses relating thereto or
arising in connection therewith.
Borrower shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected and
settlement allowed in any two business day period to be more
than $2,000,000.00 nor shall Borrower permit the total gross
amount of all Exchange Contracts to which Borrower is a
party, outstanding at any one time, to exceed $2,000,000.00.
Borrower shall execute all standard form applications and
agreements of Lender in connection with the Exchange
Contracts, and without limiting any of the terms of such
applications and agreements, Borrower will pay all standard
fees and charges of Lender in connection with the Exchange
Contracts.
Without limiting any of the other terms of this Agreement or
any such standard form applications and agreement of Lender,
Borrower agrees to indemnify Lender and hold it harmless,
from and against any and all claims, debts, liabilities,
demands, obligations, actions, costs and expenses
(including, without limitation, attorneys' fees of counsel
of Lender's choice), of every nature and description which
it may sustain or incur, based upon, arising out of, or in
any way relating to any of the Exchange Contracts or any
transactions relating thereto or contemplated thereby
(collectively referred to as the "FX Indemnity Provisions").
CASH MANAGEMENT SERVICES SUBLIMIT. Subject to the terms and
conditions of this Agreement, Borrower may utilize up to the
4
<PAGE>
lesser of (i) $2,000,000.00 or (ii) the Borrowing Base
Formula for Cash Management Services provided by Lender,
which services may include, but are not limited to, merchant
services, PC-ACH, direct deposit of payroll, Business Visa,
Firstax, and other related check cashing services as defined
in that certain Cash Management Services Agreement provided
to Borrower in connection herewith (a "Cash Management
Service," or the "Cash Management Services"). All amounts
actually paid by Lender in respect of a Cash Management
Service or Cash Management Services shall, when paid,
constitute an advance under the Line of Credit facility.
3. Notwithstanding anything to the contrary contained in the
paragraph entitled "Loan Advances" the aggregate total of
(a) the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) plus
(b) the Foreign Exchange Reserve plus (c) the Cash
Management Services Sublimit shall not, at any one time,
exceed $2,000,000.00.
4. The following covenant is hereby added to the paragraph
entitled "Financial Covenants" and shall read as follows:
Maintain on a quarterly and annual basis, a minimum Cash
Flow Coverage ratio of 1.50 to 1.00, provided, however, that
in the event Borrower incurs one quarterly loss equal to or
less than $500,000.00, the Cash Flow Coverage ratio for such
quarter will not be tested.
For purposes of the foregoing, "Cash Flow" shall be defined
as net income plus depreciation and amortization. For
purposes of quarterly evaluation, "Cash Flow Coverage" shall
be defined as quarterly Cash Flow divided by one-fourth of
the current portion of long term debt. For purposes of
annual evaluation, "Cash Flow Coverage" shall be defined as
annual Cash Flow divided by the current portion of long term
debt.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the
amount of Seven Thousand Five Hundred and 00/100 Dollars ($7,500.00) (the
"Loan Fee") plus all out-of-pocket expenses.
5
<PAGE>
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that it has no defenses against the obligations to pay
any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor
signing below) understands and agrees that in modifying the existing
Indebtedness, Lender is relying upon Borrower's representations, warranties,
and agreements, as set forth in the Existing Loan Documents. Except as
expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released
by Lender in writing. No maker, endorser, or guarantor will be released by
virtue of this Loan Modification Agreement. The terms of this paragraph
apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement
is conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
FAROUDJA LABORATORIES, INC. SILICON VALLEY BANK
By: /S/ MICHAEL HOBERG By: /S/ JULIE SCHNEIDER
----------------------------- -----------------------------
Name: Michael Hoberg Name: Julie Schneider
Title: VP - CFO Title: Asst. Vice President
6
<PAGE>
The undersigned hereby consents to the modifications to the Indebtedness
pursuant to this Loan Modification Agreement, hereby ratifies all the
provisions of the Guaranty and Security Agreement and confirms that all
provisions of those documents are in full force and effect.
GUARANTOR/GRANTOR:
FAROUDJA, INC.
By: /S/ MICHAEL HOBERG Date:
----------------------------- ---------------------
Name: Michael Hoberg
Title: VP - CFO
7
<PAGE>
AMENDED AND RESTATED OPTION
TO PURCHASE SHARES OF COMMON STOCK OF FAROUDJA, INC.
THIS AMENDED AND RESTATED OPTION TO PURCHASE SHARES OF COMMON STOCK OF
FAROUDJA, INC. dated as of March 7, 1997 (the "Option"), is made and entered
into by and among Yves Faroudja and Isabell Faroudja ("Y&I"), Faroudja, Inc., a
Delaware corporation ("FI"), Adelson Investors, LLC ("Holder") and Faroudja
Images, Inc., a Delaware corporation ("FII").
WHEREAS, Y&I granted separate options to purchase 2,120,192 shares of
common stock of Faroudja Laboratories ("FLI"), Inc., a California corporation
("FLI Option") and 480,264 shares of common stock of Faroudja Research
Enterprises ("FRE"), Inc., a California corporation ("FRE Option") to FII on
March 8, 1996.
WHEREAS, pursuant to the merger of FRE with and into FLI ("FLI/FRE
Merger"), all of the common stock of FRE was converted into FLI common stock at
the conversion ratio of .2125782 of a share of FLI common stock for each
outstanding FRE share of common stock;
WHEREAS, pursuant to the merger ("FLI/FAI Merger") of Faroudja Acquisition,
Inc., a California corporation and indirect wholly-owned subsidiary of FLI, with
and into FLI following the FLI/FRE Merger, all of the common stock of FLI was
converted into common stock of FI at the conversion ratio of .6918552 of a share
of FI common stock for each outstanding FLI share of common stock, which
resulted in an aggregate of 1,537,500 shares of common stock of FI at an
aggregate exercise price of $6,000,000 subject to the FLI Option and FRE Option;
WHEREAS, pursuant to the FLI/FRE Merger and the FLI/FAI Merger
(collectively, the "Mergers"), FLI became a wholly-owned subsidiary of FI;
WHEREAS, FII liquidated effective December 31, 1996 (the "FII Liquidation")
and the assets, including the FLI Option and FRE Option, were distributed to
Roger K. Baumberger as liquidating trustee ("Liquidating Trustee") for Faroudja
Images, Inc., which are subsequently being distributed to the parties named in
the table below (collectively, the "Option Holders"), whose names, the number of
shares of Common Stock of FI subject to the portion of the FLI Option and FRE
Option being distributed to such Option Holder, as amended and restated ("FI
Option") and the aggregate exercise price of each such FI Option to be held by
each Option Holder, is set forth in the table below:
<PAGE>
OPTION HOLDER NO. OF FI EXERCISE PRICE
------------- SHARES --------------
---------
Adelson Investors, LLC 486,875 $1,900,000
Images Partners, LP 384,375 $1,500,000
Faroudja Images Investors, LLC 666,250 $2,600,000
--------- ----------
1,537,500 $6,000,000
WHEREAS, Y&I are concurrently entering into options ("Other Options") with
holders of the Other Options ("Other Holders") on the same terms as the Holder
to reflect the grant of separate options for the number of FI shares and at the
exercise price set forth in the preceding table;
WHEREAS, Y&I, FII and Holder want to amend and restate and confirm the
distribution from FII of the FLI Option and the FRE Option by entering into this
Agreement to reflect transactions resulting from the FLI/FRE Merger, the FLI/FAI
Merger (collectively, the "Mergers") and the FII Liquidation;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
Y&I (collectively, the "Sellers") hereby grant to the Holder an option to
purchase from the Sellers, at any time or from time to time on or after
December 31, 1996 (the "Commencement Date") but not later than the earlier of
(i) the initial closing date of the sale of shares by FI to the public pursuant
to a registration statement filed with the SEC in compliance with the Securities
Act of 1933, as amended ("IPO") or (ii) September 5, 1997 (the "Expiration
Date"), for a price of $1,900,000 (the "Stock Purchase Price"), 486,875 shares
of common stock of FI (the "Shares"), free and clear of all claims, liens,
security interests, restrictions, rights and other encumbrances ("Liens"). The
Sellers are granting this option pursuant to the letter agreement dated
November 13, 1995 among the Sellers and Spencer Trask Holdings, Inc. ("ST"), as
amended by the amendment to letter agreement dated February 9, 1996 among the
Sellers, ST and FII and pursuant to the Mergers and the FII Liquidation.
This Option is subject to the following terms and conditions:
1. TERM AND EXERCISE. The Holder shall have the right, at any time or
from time to time on or after the Commencement Date but not later than the
Expiration Date, to give notice to the Sellers, of the purchase of all, but not
fewer than all, the Shares, upon written notice (the "Option Exercise Notice")
given to the Sellers on one occasion; provided, however, that such right to
exercise this Option is conditioned upon all Other Holders simultaneously
providing an Option Exercise Notice under the Other Options and
2
<PAGE>
closing the purchase and sale under the Other Options on the same date,
unless Y&I waive this condition as to this Option and/or either or both of
the Other Options.
2. PAYMENT; DELIVERY OF SHARES. If the Holder exercises the Option prior
to the Expiration Date, the Holder and the Sellers shall consummate the purchase
and sale at FI's office at 10:00 a.m. (California time) on the business day
designated by, and mutually agreeable to, the Holder and the Other Holders by
written notice given to the Sellers, which shall not be fewer than five or more
than ten business days after the delivery of the Option Exercise Notice. At the
closing (the "Option Closing"):
(a) the Sellers shall deliver or cause to be delivered to the Buyer
certificates representing all the Shares, free and clear of all Liens, together
with duly executed stock powers, with all required stock transfer tax stamps
attached and all appropriate estate tax waivers; and
(b) the Holder shall deliver, to an account or accounts designated by
both Sellers, the Stock Purchase Price.
3. NO ISSUANCES OR OTHER DILUTIVE ACTIONS.
3.1 Prior to the Expiration Date, neither Seller nor Holder (either
as a shareholder or through directors elected to represent such parties) shall
take any action to permit FI, without the prior written consent of (i) Yves
Faroudja and (ii) the Holder and Other Holders holding in aggregate Options and
Other Options exercisable for a majority of the shares of FI subject to this
Option and the Other Options, to issue any securities to any person, other than
upon the exercise or conversion of options, warrants or other rights outstanding
on the date of this Option, or to distribute any securities or other property to
its securityholders, or to consolidate or merge with or into another entity or
to sell all or substantially all of its assets.
3.2 Prior to an initial public offering of the common stock of FI (at
some later date) the parties hereto agree that the capitalization of FI and the
respective share ownership of the parties to this Option and other listed
shareholders and/or categories shall remain the same as set forth in Exhibit "A"
attached hereto, except that the FI Options may be exercised, and further agree
that the share capitalization of FI cannot be changed without the prior written
consent of (i) Yves Faroudja and (ii) the Holder and Other Holders holding in
aggregate Options and Other Options exercisable for a majority of the shares of
FI subject to this Option and the Other Options.
4. ESCROW AGREEMENTS. Subject to the terms and conditions of the escrow
agreement among FII and to add the Holder and Other Holders as parties in
substitution for FII, the Sellers and Bank of the West Trust and Investment
Services Division, as successor escrow agent (the "Escrow Agreement"), as
amended, the Sellers are authorizing the
3
<PAGE>
Escrow Agent to exchange the shares of FLI and FRE held pursuant to the FLI
Option and FRE Option for the Shares and shares subject to the Other Options.
5. MISCELLANEOUS.
5.1 NOTICES. All notices and other communications under this Option
shall be in writing and may be given by any of the following methods:
(a) personal delivery; (b) facsimile transmission; (c) registered or certified
mail, postage prepaid, return receipt requested; or (d) overnight delivery
service. Notices shall be sent to the appropriate party at its, his or her
address or facsimile number given below (or at such other address or facsimile
number for that party as shall be specified by notice given under this Section
5.1):
if to either Seller, to him or her at:
Faroudja, Inc.
c/o Faroudja Laboratories, Inc.
750 Palomar Avenue
Sunnyvale, CA 94086
Fax: (408) 735-8571
with a copy to:
Bank of the West Trust and Investment
Services Division
50 West San Fernando Street, 2nd Floor
San Jose, CA 95113
Attn: Chris Bachtel
Fax: (408) 971-0933
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
Coudert Brothers
Four Embarcadero Center, Suite 3300
San Francisco, CA 94111
Attention: Greg L. Pickrell, Esq.
Fax: (415) 986-0320
4
<PAGE>
if to the Holder, to it at:
the address set forth on the signature page of this Option
with a copy to:
Spencer Trask Securities, Inc.
535 Madison Avenue
New York, NY 10022
Attention: Kevin B. Kimberlin
Fax: (212) 751-3362
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, NY 10036
Attention: Edward W. Kerson, Esq.
Fax: (212) 969-2900
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or
(c) in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming the
number of pages constituting the notice having been transmitted without error.
In the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided above. However, such mailing shall in no way alter the time at which
the facsimile notice is deemed received.
5.2 AMENDMENT. This Option may be modified or amended or the
provisions of this Option may be waived only with the written consent of the
Sellers and the Holder (it being understood that the Sellers shall, at the
request of the Holder, cooperate with the Holder to modify this Option or to
restructure this Option in any manner that does not adversely affect the
Sellers).
5.3 GOVERNING LAW. This Option shall be governed by the law of the
State of California, without regard to provisions thereof relating to conflicts
of laws.
5
<PAGE>
5.4 ASSIGNMENT. This Option may not be assigned, in any manner,
without the written consent of Sellers.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Option to be duly executed as of the date first hereinabove written
above.
FAROUDJA, INC.,
a Delaware corporation
By: /s/ Michael Moone
------------------------
Michael Moone, President
/s/ Yves Faroudja
------------------------
Yves Faroudja
/s/ Isabell Faroudja
------------------------
Isabell Faroudja
Accepted and Agreed:
ADELSON INVESTORS, LLC
By: /s/ Paul Nadel
-----------------------------
Address: 10900 Wilshire Blvd., #750
Los Angeles, CA 90024
Fax: (310) 209-6160
FAROUDJA IMAGES, INC.
By: /s/ Kevin Kimberlin
-----------------------------
Kevin Kimberlin, Secretary
6
<PAGE>
EXHIBIT "A"
FI CAPITALIZATION
SECURITY HOLDER FI C/S PERCENT
- --------------- ------ -------
Stock Option Plans(1) 1,800,000 17.86%
Y&I Direct Ownership 2,050,000 20.34%
Y&I Option Shares 1,537,500
Adelson Investors, LLC 486,875 4.83%
Images Partners, LP 384,375 3.81%
Faroudja Images Investors, LLC 666,250 6.61%
FII Direct Ownership 4,612,500 45.76%
Adelson Contingent Warrant 65,152 0.65%
John Sie Warrant 14,449 0.14%
---------- ------
TOTAL 10,079,960 100%
(1) The Stock Option Plans for FI break down as follows:
STOCK OPTION PLAN RESERVED C/S GRANTED OPTIONS
- ----------------- ------------ ---------------
1995 Stock Option Plan 1,400,000 1,386,578
1997 Performance Stock Option Plan 300,000 0
1997 Non-Employee Director Stock 100,000 26,060
Option Plan
7
<PAGE>
AMENDED AND RESTATED OPTION
TO PURCHASE SHARES OF COMMON STOCK OF FAROUDJA, INC.
THIS AMENDED AND RESTATED OPTION TO PURCHASE SHARES OF COMMON STOCK OF
FAROUDJA, INC. dated as of March 7, 1997 (the "Option"), is made and entered
into by and among Yves Faroudja and Isabell Faroudja ("Y&I"), Faroudja, Inc., a
Delaware corporation ("FI"), Faroudja Images Investors, LLC ("Holder") and
Faroudja Images, Inc., a Delaware corporation ("FII").
WHEREAS, Y&I granted separate options to purchase 2,120,192 shares of
common stock of Faroudja Laboratories ("FLI"), Inc., a California corporation
("FLI Option") and 480,264 shares of common stock of Faroudja Research
Enterprises ("FRE"), Inc., a California corporation ("FRE Option") to FII on
March 8, 1996.
WHEREAS, pursuant to the merger of FRE with and into FLI ("FLI/FRE
Merger"), all of the common stock of FRE was converted into FLI common stock at
the conversion ratio of .2125782 of a share of FLI common stock for each
outstanding FRE share of common stock;
WHEREAS, pursuant to the merger ("FLI/FAI Merger") of Faroudja Acquisition,
Inc., a California corporation and indirect wholly-owned subsidiary of FLI, with
and into FLI following the FLI/FRE Merger, all of the common stock of FLI was
converted into common stock of FI at the conversion ratio of .6918552 of a share
of FI common stock for each outstanding FLI share of common stock, which
resulted in an aggregate of 1,537,500 shares of common stock of FI at an
aggregate exercise price of $6,000,000 subject to the FLI Option and FRE Option;
WHEREAS, pursuant to the FLI/FRE Merger and the FLI/FAI Merger
(collectively, the "Mergers"), FLI became a wholly-owned subsidiary of FI;
WHEREAS, FII liquidated effective December 31, 1996 (the "FII Liquidation")
and the assets, including the FLI Option and FRE Option, were distributed to
Roger K. Baumberger as liquidating trustee ("Liquidating Trustee") for Faroudja
Images, Inc., which are subsequently being distributed to the parties named in
the table below (collectively, the "Option Holders"), whose names, the number of
shares of Common Stock of FI subject to the portion of the FLI Option and FRE
Option being distributed to such Option Holder, as amended and restated ("FI
Option") and the aggregate exercise price of each such FI Option to be held by
each Option Holder, is set forth in the table below:
<PAGE>
OPTION HOLDER NO. OF FI EXERCISE PRICE
------------- SHARES --------------
---------
Adelson Investors, LLC 486,875 $1,900,000
Images Partners, LP 384,375 $1,500,000
Faroudja Images Investors, LLC 666,250 $2,600,000
--------- ----------
1,537,500 $6,000,000
WHEREAS, Y&I are concurrently entering into options ("Other Options") with
holders of the Other Options ("Other Holders") on the same terms as the Holder
to reflect the grant of separate options for the number of FI shares and at the
exercise price set forth in the preceding table;
WHEREAS, Y&I, FII and Holder want to amend and restate and confirm the
distribution from FII of the FLI Option and the FRE Option by entering into this
Agreement to reflect transactions resulting from the FLI/FRE Merger, the FLI/FAI
Merger (collectively, the "Mergers") and the FII Liquidation;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
Y&I (collectively, the "Sellers") hereby grant to the Holder an option to
purchase from the Sellers, at any time or from time to time on or after
December 31, 1996 (the "Commencement Date") but not later than the earlier of
(i) the initial closing date of the sale of shares by FI to the public pursuant
to a registration statement filed with the SEC in compliance with the Securities
Act of 1933, as amended ("IPO") or (ii) September 5, 1997 (the "Expiration
Date"), for a price of $2,600,000 (the "Stock Purchase Price"), 666,250 shares
of common stock of FI (the "Shares"), free and clear of all claims, liens,
security interests, restrictions, rights and other encumbrances ("Liens"). The
Sellers are granting this option pursuant to the letter agreement dated
November 13, 1995 among the Sellers and Spencer Trask Holdings, Inc. ("ST"), as
amended by the amendment to letter agreement dated February 9, 1996 among the
Sellers, ST and FII and pursuant to the Mergers and the FII Liquidation.
This Option is subject to the following terms and conditions:
1. TERM AND EXERCISE. The Holder shall have the right, at any time or
from time to time on or after the Commencement Date but not later than the
Expiration Date, to give notice to the Sellers, of the purchase of all, but not
fewer than all, the Shares, upon written notice (the "Option Exercise Notice")
given to the Sellers on one occasion; provided, however, that such right to
exercise this Option is conditioned upon all Other Holders simultaneously
providing an Option Exercise Notice under the Other Options and
2
<PAGE>
closing the purchase and sale under the Other Options on the same date,
unless Y&I waive this condition as to this Option and/or either or both of
the Other Options.
2. PAYMENT; DELIVERY OF SHARES. If the Holder exercises the Option prior
to the Expiration Date, the Holder and the Sellers shall consummate the purchase
and sale at FI's office at 10:00 a.m. (California time) on the business day
designated by, and mutually agreeable to, the Holder and the Other Holders by
written notice given to the Sellers, which shall not be fewer than five or more
than ten business days after the delivery of the Option Exercise Notice. At the
closing (the "Option Closing"):
(a) the Sellers shall deliver or cause to be delivered to the Buyer
certificates representing all the Shares, free and clear of all Liens, together
with duly executed stock powers, with all required stock transfer tax stamps
attached and all appropriate estate tax waivers; and
(b) the Holder shall deliver, to an account or accounts designated by
both Sellers, the Stock Purchase Price.
3. NO ISSUANCES OR OTHER DILUTIVE ACTIONS.
3.1 Prior to the Expiration Date, neither Seller nor Holder (either
as a shareholder or through directors elected to represent such parties) shall
take any action to permit FI, without the prior written consent of (i) Yves
Faroudja and (ii) the Holder and Other Holders holding in aggregate Options and
Other Options exercisable for a majority of the shares of FI subject to this
Option and the Other Options, to issue any securities to any person, other than
upon the exercise or conversion of options, warrants or other rights outstanding
on the date of this Option, or to distribute any securities or other property to
its securityholders, or to consolidate or merge with or into another entity or
to sell all or substantially all of its assets.
3.2 Prior to an initial public offering of the common stock of FI (at
some later date) the parties hereto agree that the capitalization of FI and the
respective share ownership of the parties to this Option and other listed
shareholders and/or categories shall remain the same as set forth in Exhibit "A"
attached hereto, except that the FI Options may be exercised, and further agree
that the share capitalization of FI cannot be changed without the prior written
consent of (i) Yves Faroudja and (ii) the Holder and Other Holders holding in
aggregate Options and Other Options exercisable for a majority of the shares of
FI subject to this Option and the Other Options.
4. ESCROW AGREEMENTS. Subject to the terms and conditions of the escrow
agreement among FII and to add the Holder and Other Holders as parties in
substitution for FII, the Sellers and Bank of the West Trust and Investment
Services Division, as successor escrow agent (the "Escrow Agreement"), as
amended, the Sellers are authorizing the
3
<PAGE>
Escrow Agent to exchange the shares of FLI and FRE held pursuant to the FLI
Option and FRE Option for the Shares and shares subject to the Other Options.
5. MISCELLANEOUS.
5.1 NOTICES. All notices and other communications under this Option
shall be in writing and may be given by any of the following methods:
(a) personal delivery; (b) facsimile transmission; (c) registered or certified
mail, postage prepaid, return receipt requested; or (d) overnight delivery
service. Notices shall be sent to the appropriate party at its, his or her
address or facsimile number given below (or at such other address or facsimile
number for that party as shall be specified by notice given under this Section
5.1):
if to either Seller, to him or her at:
Faroudja, Inc.
c/o Faroudja Laboratories, Inc.
750 Palomar Avenue
Sunnyvale, CA 94086
Fax: (408) 735-8571
with a copy to:
Bank of the West Trust and Investment
Services Division
50 West San Fernando Street, 2nd Floor
San Jose, CA 95113
Attn: Chris Bachtel
Fax: (408) 971-0933
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
Coudert Brothers
Four Embarcadero Center, Suite 3300
San Francisco, CA 94111
Attention: Greg L. Pickrell, Esq.
Fax: (415) 986-0320
4
<PAGE>
if to the Holder, to it at:
the address set forth on the signature page of this Option
with a copy to:
Spencer Trask Securities, Inc.
535 Madison Avenue
New York, NY 10022
Attention: Kevin B. Kimberlin
Fax: (212) 751-3362
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, NY 10036
Attention: Edward W. Kerson, Esq.
Fax: (212) 969-2900
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or
(c) in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming the
number of pages constituting the notice having been transmitted without error.
In the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided above. However, such mailing shall in no way alter the time at which
the facsimile notice is deemed received.
5.2 AMENDMENT. This Option may be modified or amended or the
provisions of this Option may be waived only with the written consent of the
Sellers and the Holder (it being understood that the Sellers shall, at the
request of the Holder, cooperate with the Holder to modify this Option or to
restructure this Option in any manner that does not adversely affect the
Sellers).
5.3 GOVERNING LAW. This Option shall be governed by the law of the
State of California, without regard to provisions thereof relating to conflicts
of laws.
5
<PAGE>
5.4 ASSIGNMENT. This Option may not be assigned, in any manner,
without the written consent of Sellers.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Option to be duly executed as of the date first hereinabove written
above.
FAROUDJA, INC.,
a Delaware corporation
By: /s/ Michael Moone
------------------------
Michael Moone, President
/s/ Yves Faroudja
------------------------
Yves Faroudja
/s/ Isabell Faroudja
------------------------
Isabell Faroudja
Accepted and Agreed:
FAROUDJA IMAGES INVESTORS, LLC
By: /s/ Roger K. Baumberger
-----------------------------
Address: 535 Madison Ave., 18th Floor
New York, NY 10022
Fax No.: (212) 751-3483
FAROUDJA IMAGES, INC.
By: /s/ Kevin Kimberlin
-----------------------------
Kevin Kimberlin, Secretary
6
<PAGE>
EXHIBIT "A"
FI CAPITALIZATION
SECURITY HOLDER FI C/S PERCENT
- --------------- ------ -------
Stock Option Plans(1) 1,800,000 17.86%
Y&I Direct Ownership 2,050,000 20.34%
Y&I Option Shares 1,537,500
Adelson Investors, LLC 486,875 4.83%
Images Partners, LP 384,375 3.81%
Faroudja Images Investors, LLC 666,250 6.61%
FII Direct Ownership 4,612,500 45.76%
Adelson Contingent Warrant 65,152 0.65%
John Sie Warrant 14,449 0.14%
---------- ------
TOTAL 10,079,960 100%
(1) The Stock Option Plans for FI break down as follows:
STOCK OPTION PLAN RESERVED C/S GRANTED OPTIONS
- ----------------- ------------ ---------------
1995 Stock Option Plan 1,400,000 1,386,578
1997 Performance Stock Option Plan 300,000 0
1997 Non-Employee Director Stock 100,000 26,060
Option Plan
7
<PAGE>
AMENDED AND RESTATED OPTION
TO PURCHASE SHARES OF COMMON STOCK OF FAROUDJA, INC.
THIS AMENDED AND RESTATED OPTION TO PURCHASE SHARES OF COMMON STOCK OF
FAROUDJA, INC. dated as of March 7, 1997 (the "Option"), is made and entered
into by and among Yves Faroudja and Isabell Faroudja ("Y&I"), Faroudja, Inc., a
Delaware corporation ("FI"), Images Partners, LP ("Holder") and Faroudja Images,
Inc., a Delaware corporation ("FII").
WHEREAS, Y&I granted separate options to purchase 2,120,192 shares of
common stock of Faroudja Laboratories ("FLI"), Inc., a California corporation
("FLI Option") and 480,264 shares of common stock of Faroudja Research
Enterprises ("FRE"), Inc., a California corporation ("FRE Option") to FII on
March 8, 1996.
WHEREAS, pursuant to the merger of FRE with and into FLI ("FLI/FRE
Merger"), all of the common stock of FRE was converted into FLI common stock at
the conversion ratio of .2125782 of a share of FLI common stock for each
outstanding FRE share of common stock;
WHEREAS, pursuant to the merger ("FLI/FAI Merger") of Faroudja Acquisition,
Inc., a California corporation and indirect wholly-owned subsidiary of FLI, with
and into FLI following the FLI/FRE Merger, all of the common stock of FLI was
converted into common stock of FI at the conversion ratio of .6918552 of a share
of FI common stock for each outstanding FLI share of common stock, which
resulted in an aggregate of 1,537,500 shares of common stock of FI at an
aggregate exercise price of $6,000,000 subject to the FLI Option and FRE Option;
WHEREAS, pursuant to the FLI/FRE Merger and the FLI/FAI Merger
(collectively, the "Mergers"), FLI became a wholly-owned subsidiary of FI;
WHEREAS, FII liquidated effective December 31, 1996 (the "FII Liquidation")
and the assets, including the FLI Option and FRE Option, were distributed to
Roger K. Baumberger as liquidating trustee ("Liquidating Trustee") for Faroudja
Images, Inc., which are subsequently being distributed to the parties named in
the table below (collectively, the "Option Holders"), whose names, the number of
shares of Common Stock of FI subject to the portion of the FLI Option and FRE
Option being distributed to such Option Holder, as amended and restated ("FI
Option") and the aggregate exercise price of each such FI Option to be held by
each Option Holder, is set forth in the table below:
<PAGE>
OPTION HOLDER NO. OF FI EXERCISE PRICE
------------- SHARES --------------
---------
Adelson Investors, LLC 486,875 $1,900,000
Images Partners, LP 384,375 $1,500,000
Faroudja Images Investors, LLC 666,250 $2,600,000
--------- ----------
1,537,500 $6,000,000
WHEREAS, Y&I are concurrently entering into options ("Other Options") with
holders of the Other Options ("Other Holders") on the same terms as the Holder
to reflect the grant of separate options for the number of FI shares and at the
exercise price set forth in the preceding table;
WHEREAS, Y&I, FII and Holder want to amend and restate and confirm the
distribution from FII of the FLI Option and the FRE Option by entering into this
Agreement to reflect transactions resulting from the FLI/FRE Merger, the FLI/FAI
Merger (collectively, the "Mergers") and the FII Liquidation;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
Y&I (collectively, the "Sellers") hereby grant to the Holder an option to
purchase from the Sellers, at any time or from time to time on or after
December 31, 1996 (the "Commencement Date") but not later than the earlier of
(i) the initial closing date of the sale of shares by FI to the public pursuant
to a registration statement filed with the SEC in compliance with the Securities
Act of 1933, as amended ("IPO") or (ii) September 5, 1997 (the "Expiration
Date"), for a price of $1,500,000 (the "Stock Purchase Price"), 384,375 shares
of common stock of FI (the "Shares"), free and clear of all claims, liens,
security interests, restrictions, rights and other encumbrances ("Liens"). The
Sellers are granting this option pursuant to the letter agreement dated November
13, 1995 among the Sellers and Spencer Trask Holdings, Inc. ("ST"), as amended
by the amendment to letter agreement dated February 9, 1996 among the Sellers,
ST and FII and pursuant to the Mergers and the FII Liquidation.
This Option is subject to the following terms and conditions:
1. TERM AND EXERCISE. The Holder shall have the right, at any time or
from time to time on or after the Commencement Date but not later than the
Expiration Date, to give notice to the Sellers, of the purchase of all, but not
fewer than all, the Shares, upon written notice (the "Option Exercise Notice")
given to the Sellers on one occasion; provided, however, that such right to
exercise this Option is conditioned upon all Other Holders simultaneously
providing an Option Exercise Notice under the Other Options and
2
<PAGE>
closing the purchase and sale under the Other Options on the same date,
unless Y&I waive this condition as to this Option and/or either or both of
the Other Options.
2. PAYMENT; DELIVERY OF SHARES. If the Holder exercises the Option prior
to the Expiration Date, the Holder and the Sellers shall consummate the purchase
and sale at FI's office at 10:00 a.m. (California time) on the business day
designated by, and mutually agreeable to, the Holder and the Other Holders by
written notice given to the Sellers, which shall not be fewer than five or more
than ten business days after the delivery of the Option Exercise Notice. At the
closing (the "Option Closing"):
(a) the Sellers shall deliver or cause to be delivered to the Buyer
certificates representing all the Shares, free and clear of all Liens, together
with duly executed stock powers, with all required stock transfer tax stamps
attached and all appropriate estate tax waivers; and
(b) the Holder shall deliver, to an account or accounts designated by
both Sellers, the Stock Purchase Price.
3. NO ISSUANCES OR OTHER DILUTIVE ACTIONS.
3.1 Prior to the Expiration Date, neither Seller nor Holder (either
as a shareholder or through directors elected to represent such parties) shall
take any action to permit FI, without the prior written consent of (i) Yves
Faroudja and (ii) the Holder and Other Holders holding in aggregate Options and
Other Options exercisable for a majority of the shares of FI subject to this
Option and the Other Options, to issue any securities to any person, other than
upon the exercise or conversion of options, warrants or other rights outstanding
on the date of this Option, or to distribute any securities or other property to
its securityholders, or to consolidate or merge with or into another entity or
to sell all or substantially all of its assets.
3.2 Prior to an initial public offering of the common stock of FI (at
some later date) the parties hereto agree that the capitalization of FI and the
respective share ownership of the parties to this Option and other listed
shareholders and/or categories shall remain the same as set forth in Exhibit "A"
attached hereto, except that the FI Options may be exercised, and further agree
that the share capitalization of FI cannot be changed without the prior written
consent of (i) Yves Faroudja and (ii) the Holder and Other Holders holding in
aggregate Options and Other Options exercisable for a majority of the shares of
FI subject to this Option and the Other Options.
4. ESCROW AGREEMENTS. Subject to the terms and conditions of the escrow
agreement among FII and to add the Holder and Other Holders as parties in
substitution for FII, the Sellers and Bank of the West Trust and Investment
Services Division, as successor escrow agent (the "Escrow Agreement"), as
amended, the Sellers are authorizing the
3
<PAGE>
Escrow Agent to exchange the shares of FLI and FRE held pursuant to the FLI
Option and FRE Option for the Shares and shares subject to the Other Options.
5. MISCELLANEOUS.
5.1 NOTICES. All notices and other communications under this Option
shall be in writing and may be given by any of the following methods:
(a) personal delivery; (b) facsimile transmission; (c) registered or certified
mail, postage prepaid, return receipt requested; or (d) overnight delivery
service. Notices shall be sent to the appropriate party at its, his or her
address or facsimile number given below (or at such other address or facsimile
number for that party as shall be specified by notice given under this Section
5.1):
if to either Seller, to him or her at:
Faroudja, Inc.
c/o Faroudja Laboratories, Inc.
750 Palomar Avenue
Sunnyvale, CA 94086
Fax: (408) 735-8571
with a copy to:
Bank of the West Trust and Investment
Services Division
50 West San Fernando Street, 2nd Floor
San Jose, CA 95113
Attn: Chris Bachtel
Fax: (408) 971-0933
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
Coudert Brothers
Four Embarcadero Center, Suite 3300
San Francisco, CA 94111
Attention: Greg L. Pickrell, Esq.
Fax: (415) 986-0320
4
<PAGE>
if to the Holder, to it at:
the address set forth on the signature page of this Option
with a copy to:
Spencer Trask Securities, Inc.
535 Madison Avenue
New York, NY 10022
Attention: Kevin B. Kimberlin
Fax: (212) 751-3362
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, NY 10036
Attention: Edward W. Kerson, Esq.
Fax: (212) 969-2900
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or
(c) in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming the
number of pages constituting the notice having been transmitted without error.
In the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided above. However, such mailing shall in no way alter the time at which
the facsimile notice is deemed received.
5.2 AMENDMENT. This Option may be modified or amended or the
provisions of this Option may be waived only with the written consent of the
Sellers and the Holder (it being understood that the Sellers shall, at the
request of the Holder, cooperate with the Holder to modify this Option or to
restructure this Option in any manner that does not adversely affect the
Sellers).
5.3 GOVERNING LAW. This Option shall be governed by the law of the
State of California, without regard to provisions thereof relating to conflicts
of laws.
5
<PAGE>
5.4 ASSIGNMENT. This Option may not be assigned, in any manner,
without the written consent of Sellers.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Option to be duly executed as of the date first hereinabove written
above.
FAROUDJA, INC.,
a Delaware corporation
By: /s/ Michael Moone
------------------------
Michael Moone, President
/s/ Yves Faroudja
------------------------
Yves Faroudja
/s/ Isabell Faroudja
------------------------
Isabell Faroudja
Accepted and Agreed:
IMAGES PARTNERS, LP
By: /s/ Kevin Kimberlin
-----------------------------
Address: 535 Madison Ave., 18th Floor
New York, NY 10022
Fax No.: (212) 751-3483
FAROUDJA IMAGES, INC.
By: /s/ Kevin Kimberlin
-----------------------------
Kevin Kimberlin, Secretary
6
<PAGE>
EXHIBIT "A"
FI CAPITALIZATION
SECURITY HOLDER FI C/S PERCENT
- --------------- ------ -------
Stock Option Plans(1) 1,800,000 17.86%
Y&I Direct Ownership 2,050,000 20.34%
Y&I Option Shares 1,537,500
Adelson Investors, LLC 486,875 4.83%
Images Partners, LP 384,375 3.81%
Faroudja Images Investors, LLC 666,250 6.61%
FII Direct Ownership 4,612,500 45.76%
Adelson Contingent Warrant 65,152 0.65%
John Sie Warrant 14,449 0.14%
---------- ------
TOTAL 10,079,960 100%
(1) The Stock Option Plans for FI break down as follows:
STOCK OPTION PLAN RESERVED C/S GRANTED OPTIONS
- ----------------- ------------ ---------------
1995 Stock Option Plan 1,400,000 1,386,578
1997 Performance Stock Option Plan 300,000 0
1997 Non-Employee Director Stock 100,000 26,060
Option Plan
7
<PAGE>
AMENDED AND RESTATED OPTION
TO PURCHASE SHARES OF COMMON STOCK OF FAROUDJA, INC.
THIS AMENDED AND RESTATED OPTION TO PURCHASE SHARES OF COMMON STOCK OF
FAROUDJA, INC. dated as of December 31, 1996 (the "Option"), is made and
entered into by and among Yves Faroudja and Isabell Faroudja ("Y&I"),
Faroudja, Inc., a Delaware corporation ("FI"), Roger K. Baumberger as
liquidating trustee ("Liquidating Trustee") for Faroudja Images, Inc.
("Holder") and Faroudja Images, Inc., a Delaware corporation ("FII").
WHEREAS, Y&I granted separate options to purchase 2,120,192 shares of
common stock of Faroudja Laboratories ("FLI"), Inc., a California corporation
("FLI Option") and 480,264 shares of common stock of Faroudja Research
Enterprises ("FRE"), Inc., a California corporation ("FRE Option") to FII on
March 8, 1996.
WHEREAS, pursuant to the merger of FRE with and into FLI ("FLI/FRE
Merger"), all of the common stock of FRE was converted into FLI common stock
at the conversion ratio of .2125782 of a share of FLI common stock for each
outstanding FRE share of common stock;
WHEREAS, pursuant to the merger ("FLI/FAI Merger") of Faroudja
Acquisition, Inc., a California corporation and indirect wholly-owned
subsidiary of FLI, with and into FLI following the FLI/FRE Merger, all of the
common stock of FLI was converted into common stock of FI at the conversion
ratio of .6918552 of a share of FI common stock for each outstanding FLI
share of common stock, which resulted in an aggregate of 1,537,500 shares of
common stock of FI at an aggregate exercise price of $6,000,000 subject to
the FLI Option and FRE Option;
WHEREAS, pursuant to the FLI/FRE Merger and the FLI/FAI Merger
(collectively, the "Mergers"), FLI became a wholly-owned subsidiary of FI;
WHEREAS, FII liquidated effective December 31, 1996 (the "FII
Liquidation") and the assets, including the FLI Option and FRE Option, were
distributed to the Liquidating Trustee of FII to be subsequently distributed
at a later date to the shareholders of FII, including Faroudja Image
Investors LLC which is contemplated to be later formed (collectively, the
"Option Holders"), whose names, the number of shares of Common Stock of FI
subject to the portion of the FLI Option and FRE Option to be distributed to
such Option Holder, as amended and restated ("FI Option") and the aggregate
exercise price of each such FI Option which will be held by each Option
Holder, is set forth in the table below:
<PAGE>
NO. OF FI
OPTION HOLDER SHARES EXERCISE PRICE
------------- ----------- --------------
Adelson Investors, LLC 486,875 $1,900,000
Images Partners, LP 384,375 $1,500,000
Faroudja Images Investors, LLC 666,250 $2,600,000
--------- ----------
1,537,500 $6,000,000
WHEREAS, upon the subsequent distribution by the Liquidating Trustee Y&I
will concurrently enter into options ("Other Options") with holders of the
Other Options ("Other Holders") on the same terms as the Holder to reflect
the grant of separate options for the number of FI shares and at the exercise
price set forth in the preceding table;
WHEREAS, Y&I, FII and Holder want to amend and restate and confirm the
distribution from FII of the FLI Option and the FRE Option by entering into
this Agreement to reflect transactions resulting from the FLI/FRE Merger, the
FLI/FAI Merger (collectively, the "Mergers") and the FII Liquidation;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
Y&I (collectively, the "Sellers") hereby grant to the Holder an option to
purchase from the Sellers, at any time or from time to time on or after
December 31, 1996 (the "Commencement Date") but not later than the earlier of
(i) the initial closing date of the sale of shares by FI to the public
pursuant to a registration statement filed with the SEC in compliance with
the Securities Act of 1933, as amended ("IPO") or (ii) September 5, 1997 (the
"Expiration Date"), for a price of $6,000,000 (the "Stock Purchase Price"),
1,537,500 shares of common stock of FI (the "Shares"), free and clear of all
claims, liens, security interests, restrictions, rights and other
encumbrances ("Liens"). The Sellers are granting this option pursuant to the
letter agreement dated November 13, 1995 among the Sellers and Spencer Trask
Holdings, Inc. ("ST"), as amended by the amendment to letter agreement dated
February 9, 1996 among the Sellers, ST and FII and pursuant to the Mergers
and the FII Liquidation.
This Option is subject to the following terms and conditions:
1. TERM AND EXERCISE. The Holder shall have the right, at any time or
from time to time on or after the Commencement Date but not later than the
Expiration Date, to give notice to the Sellers, of the purchase of all, but
not fewer than all, the Shares, upon written notice (the "Option Exercise
Notice") given to the Sellers on one occasion; provided, however, that such
right to exercise this Option is conditioned upon all Other Holders
simultaneously providing an Option Exercise Notice under the Other Options
and closing the purchase and sale under the Other Options on the same date,
unless Y&I waive this condition as to this Option and/or either or both of
the Other Options.
2
<PAGE>
2. PAYMENT; DELIVERY OF SHARES. If the Holder exercises the Option
prior to the Expiration Date, the Holder and the Sellers shall consummate the
purchase and sale at FI's office at 10:00 a.m. (California time) on the
business day designated by, and mutually agreeable to, the Holder and the
Other Holders by written notice given to the Sellers, which shall not be
fewer than five or more than ten business days after the delivery of the
Option Exercise Notice. At the closing (the "Option Closing"):
(a) the Sellers shall deliver or cause to be delivered to the Buyer
certificates representing all the Shares, free and clear of all Liens,
together with duly executed stock powers, with all required stock transfer
tax stamps attached and all appropriate estate tax waivers; and
(b) the Holder shall deliver, to an account or accounts designated
by both Sellers, the Stock Purchase Price.
3. NO ISSUANCES OR OTHER DILUTIVE ACTIONS.
3.1 Prior to the Expiration Date, neither Seller nor Holder (either
as a shareholder or through directors elected to represent such parties)
shall take any action to permit FI, without the prior written consent of (i)
Yves Faroudja and (ii) the Holder and Other Holders holding in aggregate
Options and Other Options exercisable for a majority of the shares of FI
subject to this Option and the Other Options, to issue any securities to any
person, other than upon the exercise or conversion of options, warrants or
other rights outstanding on the date of this Option, or to distribute any
securities or other property to its securityholders, or to consolidate or
merge with or into another entity or to sell all or substantially all of its
assets.
3.2 Prior to an initial public offering of the common stock of FI
(at some later date) the parties hereto agree that the capitalization of FI
and the respective share ownership of the parties to this Option and other
listed shareholders and/or categories shall remain the same as set forth in
Exhibit "A" attached hereto, except that the FI Options may be exercised, and
further agree that the share capitalization of FI cannot be changed without
the prior written consent of (i) Yves Faroudja and (ii) the Holder and Other
Holders holding in aggregate Options and Other Options exercisable for a
majority of the shares of FI subject to this Option and the Other Options.
4. ESCROW AGREEMENTS. Subject to the terms and conditions of the
escrow agreement among FII (which will be amended to add the Holder and Other
Holders as parties in substitution for FII), the Sellers and Escrow Agent
(which will be amended to substitute Bank of the West Trust and Investment
Services Division, as successor escrow agent) (the "Escrow Agreement"), as
amended, the Sellers will be authorizing the Escrow Agent to exchange the
shares of FLI and FRE held pursuant to the FLI Option and FRE Option for the
Shares and shares subject to the Other Options.
3
<PAGE>
5. MISCELLANEOUS.
5.1 NOTICES. All notices and other communications under this
Option shall be in writing and may be given by any of the following methods:
(a) personal delivery; (b) facsimile transmission; (c) registered or
certified mail, postage prepaid, return receipt requested; or (d) overnight
delivery service. Notices shall be sent to the appropriate party at its, his
or her address or facsimile number given below (or at such other address or
facsimile number for that party as shall be specified by notice given under
this Section 5.1):
if to either Seller, to him or her at:
Faroudja, Inc.
c/o Faroudja Laboratories, Inc.
750 Palomar Avenue
Sunnyvale, CA 94086
Fax: (408) 735-8571
with a copy to:
Bank of the West Trust and Investment
Services Division
50 West San Fernando Street, 2nd Floor
San Jose, CA 95113
Attn: Chris Bachtel
Fax: (408) 971-0933
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017-5704
Attention: Mark A. Bonenfant, Esq.
Fax: (213) 896-0400
Coudert Brothers
Four Embarcadero Center, Suite 3300
San Francisco, CA 94111
Attention: Greg L. Pickrell, Esq.
Fax: (415) 986-0320
if to the Holder, to it at:
the address set forth on the signature page of this Option
4
<PAGE>
with a copy to:
Spencer Trask Securities, Inc.
535 Madison Avenue
New York, NY 10022
Attention: Kevin B. Kimberlin
Fax: (212) 751-3362
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, NY 10036
Attention: Edward W. Kerson, Esq.
Fax: (212) 969-2900
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or
(c) in the case of a facsimile transmission, upon transmission by the sender
and issuance by the transmitting machine of a confirmation slip confirming
the number of pages constituting the notice having been transmitted without
error. In the case of notices sent by facsimile transmission, the sender
shall contemporaneously mail a copy of the notice to the addressee at the
address provided above. However, such mailing shall in no way alter the time
at which the facsimile notice is deemed received.
5.2 AMENDMENT. This Option may be modified or amended or the
provisions of this Option may be waived only with the written consent of the
Sellers and the Holder (it being understood that the Sellers shall, at the
request of the Holder, cooperate with the Holder to modify this Option or to
restructure this Option in any manner that does not adversely affect the
Sellers).
5.3 GOVERNING LAW. This Option shall be governed by the law of the
State of California, without regard to provisions thereof relating to
conflicts of laws.
5
<PAGE>
5.4 ASSIGNMENT. This Option may not be assigned, in any manner,
without the written consent of Sellers, except that the Liquidating Trustee
may assign this Option to the entities (and in the amounts) as listed in the
Fifth whereas clause of this Option.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Option to be duly executed as of the date first hereinabove written
above.
FAROUDJA, INC.,
a Delaware corporation
By: /S/ MICHAEL MOONE
--------------------------------
Michael Moone, President
/S/ YVES FAROUDJA
--------------------------------
Yves Faroudja
/S/ ISABELL FAROUDJA
--------------------------------
Isabell Faroudja
Accepted and Agreed:
Roger Baumberger as Liquidating Trustee for Faroudja Images, Inc.
By: /S/ ROGER BAUMBERGER
-----------------------------
Address: 535 Madison Ave.
18th Floor
New York, NY 10022
Fax: (212) 751-3483
FAROUDJA IMAGES, INC.
By: /S/ KEVIN KIMBERLIN
-----------------------------
Kevin Kimberlin, Secretary
6
<PAGE>
EXHIBIT "A"
FI CAPITALIZATION
SECURITY HOLDER FI C/S PERCENT
- --------------- ------ -------
Stock Option Plans(1) 1,800,000 17.86%
Y&I Direct Ownership 2,050,000 20.34%
Y&I Option Shares 1,537,500
Adelson Investors, LLC 486,875 4.83%
Images Partners, LP 384,375 3.81%
Faroudja Images Investors, LLC 666,250 6.61%
FII Direct Ownership 4,612,500 45.76%
Adelson Contingent Warrant 65,152 0.65%
John Sie Warrant 14,449 0.14%
---------- ------
TOTAL 10,079,960 100%
(1) The Stock Option Plans for FI break down as follows:
STOCK OPTION PLAN RESERVED C/S GRANTED OPTIONS
- ----------------- ------------ ---------------
1995 Stock Option Plan 1,400,000 1,386,578
1997 Performance Stock Option Plan 300,000 0
1997 Non-Employee Director Stock Option 100,000 26,060
Plan
7
<PAGE>
EXHIBIT 11.1
FAROUDJA, INC.
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, --------------------------
1996 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net income............................................................. N/A N/A $ 534,308
------------
------------
Pro forma net income................................................... $ 1,318,721 $ 615,967 N/A
------------- ------------
------------- ------------
Weighted-average shares of Common Stock outstanding.................... 7,976,892 7,753,783 8,200,000
Dilutive effect of options and warrants................................ 212,260 208,107 560,195
Shares related to staff accounting bulletin topic 4D:
Stock options and warrants........................................... 455,187 455,187 455,187
Common stock......................................................... 526,316 526,316 526,316
------------- ------------ ------------
Shares used in per share computations.................................. 9,170,655 8,943,393 9,741,698
------------- ------------ ------------
------------- ------------ ------------
Net income per share................................................... $ 0.05
------------
------------
Pro forma net income per share......................................... $ 0.14 $ 0.07
------------- ------------
------------- ------------
</TABLE>
<PAGE>
Subsidiaries of the Company
Faroudja Laboratories, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated July 18, 1997,
except for Note 12 as to which the date is July 22, 1997 in the Registration
Statement (Form S-1) and related Prospectus of Faroudja, Inc. for the
registration of shares of its Common Stock.
Our audits also included the financial statement schedule of Faroudja, Inc.
listed in Item 16(b). 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.
ERNST & YOUNG, LLP
San Jose, California
July 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 1,215,591 7,520,481
<SECURITIES> 1,867,896 272,227
<RECEIVABLES> 2,767,331 2,644,616
<ALLOWANCES> 110,000 181,000
<INVENTORY> 1,683,550 2,093,922
<CURRENT-ASSETS> 8,220,313 13,486,454
<PP&E> 1,503,404 1,503,404
<DEPRECIATION> 1,434,795 1,569,476
<TOTAL-ASSETS> 9,604,120 15,224,995
<CURRENT-LIABILITIES> 2,359,229 2,301,905
<BONDS> 0 0
0 0
0 0
<COMMON> 8,200 8,734
<OTHER-SE> 7,236,691 12,914,356
<TOTAL-LIABILITY-AND-EQUITY> 9,604,120 15,224,995
<SALES> 12,626,183 6,863,531
<TOTAL-REVENUES> 13,126,183 7,863,531
<CGS> 4,797,515 2,285,785
<TOTAL-COSTS> 4,797,515 2,285,785
<OTHER-EXPENSES> 6,213,977 4,811,077
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,197,869 861,780
<INCOME-TAX> 687,054 327,472
<INCOME-CONTINUING> 1,510,815 534,308
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,510,815 534,308
<EPS-PRIMARY> .14 .05
<EPS-DILUTED> .14 .05
</TABLE>
