<PAGE>
As filed with the Securities and Exchange Commission on March 28, 2000
Registration No. 333-30556
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
LEXAR MEDIA, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3861 33-0723123
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
-------------------
47421 Bayside Parkway
Fremont, California 94538
(510) 413-1200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------
John H. Reimer
President and Chief Executive Officer
47421 Bayside Parkway
Fremont, California 94538
(510) 413-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
Copies to:
Dennis R. DeBroeck, Esq. Kenneth R. Lamb, Esq.
Scott J. Leichtner, Esq. Lisa A. Fontenot, Esq.
Larissa M. Cochron, Esq. Kelly Dodge, Esq.
John M. Shields, Esq. Gibson, Dunn & Crutcher LLP
Fenwick & West LLP One Montgomery Street
Two Palo Alto Square San Francisco, California 94104
Palo Alto, California 94306 (415) 393-8200
(650) 494-0600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, 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(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-------------------
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Class of Maximum Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Registration
Registered Registered Per Share(1) Offering Price Fee
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<S> <C> <C> <C> <C>
Common stock, par value
$0.0001 per share..... 8,625,000(2) $13.00 $112,125,000 $29,601(3)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Includes 1,125,000 shares subject to the underwriters' over-allotment
option.
(3) Includes a fee in the aggregate amount of $21,120 which has previously been
paid. Pursuant to Rule 457(b) of the Securities Act, such fee is credited
against the registration fee. Accordingly, an additional $8,481 is being
paid in connection with the filing of the Registration Statement.
-------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 27, 2000
PROSPECTUS
7,500,000 Shares
[LEXAR MEDIA LOGO]
Common Stock
This is the initial public offering of common stock by Lexar Media, Inc. The
estimated initial public offering price is between $11.00 and $13.00 per share.
--------
Prior to this offering, there has been no public market for our common stock.
We have applied to list our common stock on The Nasdaq National Market under
the symbol "LEXR."
--------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to us, before expenses................................. $ $
</TABLE>
We have granted the underwriters an option for a period of 30 days to
purchase up to an additional 1,125,000 shares of our common stock.
--------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 8.
--------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
CHASE H&Q J.P. MORGAN & CO.
PRUDENTIAL VOLPE TECHNOLOGY SG COWEN
a unit of Prudential Securities
, 2000
<PAGE>
Cover Artwork
Inside Front Cover of Prospectus:
Caption on top right of page: "LEXAR MEDIA"
In the background at the center of the page is a screen capture of an
Internet browser displaying our webpage at http://www.digitalfilm.com. At the
bottom of this background is an expanded image of the "Download" icon button,
as it appears on an Internet browser menu bar. In the background at the bottom
left of the page is an expanded image of the "Print" icon button and arrow
cursor image, as they would appear on an Internet browser menu bar.
On the right side of the page is a Nikon digital camera, into which our
digital film is shown partially inserted.
In the middle of the page, below the background image, is an arrangement of
nine objects relating to our products (clockwise from top):
. our digital film, as it appears when removed from its retail packaging;
. a 3.5-inch computer diskette, labeled with our logo;
. our retail product packaging for our "Professional Digital Film Pack;"
. our retail product packaging for our 8x digital film;
. our retail product packaging for our 4x digital film;
. our retail product packaging for our digital film reader;
. our digital film reader as it appears when removed from its packaging;
. our digital film, as it appears when removed from its retail packaging.
To the right and below is a picture of a photograph enclosed in a standing
desk frame. Below this frame is an array of four photographs of children,
arranged on top of a mailing envelope.
At the bottom right of the page is the Lexar Media logo
Gate fold
Main Caption at Top of Page: "The BIG Picture"
Subcaption at Top of Page Below Main Caption: "Lexar Media's Digital
Photography Solution"
5 Bullet Points, each of which is accompanied with images, arrayed in a
circle on the page:
. ""Consumer Education, Awareness, Branding" Above the bullet point
labeled "1"are two pictures of our print advertisements for our digital
film;
. ""A Wide Range of Digital Film for Every Digital Photographer" Above the
bullet point labeled "2" are pictures of our digital film;
. ""Bringing the Ultimate Performance Out of Today's Leading Digital
Equipment" To the left of the bullet point labeled "3" is a picture of
our digital film and an arrow pointing from the card to a digital
camera, shown from the front. To the right of this picture is a picture
of a digital camera,
<PAGE>
shown from the side and behind, showing our digital film partially
inserted into the camera. Arrayed below this picture are two additional
digital cameras. Below and to the right of the bullet point is an array
of four photographs taken in time lapse, below which is a bracket and
the caption "0.8 seconds." Above this array, one of the photographs is
reproduced and enlarged with the caption "Keeper" and an arrow pointing
to it.
. ""Award-Winning Connectivity Solutions Simplify the Image Download
Process" Above the bullet point labeled "4" is a picture of a computer
keyboard and terminal screen displaying a menu for editing and selecting
digital images on the computer. To the right of the bullet point is a
picture of our digital film reader, into which is inserted our digital
film, and which is shown connected by cable to the computer terminal.
. ""PrintRoom.com: Transforming Pictures to Prints" To the left of the
bullet point labeled "5" is a picture of a photograph inside a standing
frame. Below the framed photo there is an array of four photographs of a
child, arranged on top of a mailing envelope.
In the background, at the lower left of the page is a picture of a digital
camera, into which is shown partially inserted our digital film.
In the background and across the bottom right of the page is an array of 6
logos of awards given to our products:
. ""Best of What's New" logo
. ""PEI cool2 award 1999" logo
. ""The Eddy's: Dealerscope Editors' Choice Awards" logo
. ""PC Photo Editors' Choice" logo
. ""Popular Science Digital Focus Excellence in Imaging Award 1999" logo
. ""Mobile Computing 100 Best Products of 1999" logo
Inside back cover of prospectus:
Caption at bottom center of page: "Taking Pictures at the Speed of Life."
Above the caption is a photograph of a child holding our digital film.
Back cover of prospectus:
Caption at bottom center of page: "Taking Pictures at the Speed of Life."
Above the caption is the Lexar Media logo.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Forward-Looking Statements................................................ 23
Use of Proceeds........................................................... 23
Dividend Policy........................................................... 23
Capitalization............................................................ 24
Dilution.................................................................. 26
Selected Consolidated Financial Data...................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Business.................................................................. 36
Management................................................................ 47
Related Party Transactions................................................ 59
Principal Stockholders.................................................... 61
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 67
Underwriting.............................................................. 69
Legal Matters............................................................. 71
Experts................................................................... 71
Additional Information.................................................... 71
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with information that is different. We are not, and the underwriters are
not, making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information
contained in this prospectus is accurate only as of the date on the front cover
of this prospectus. Our business, financial condition, results of operations
and prospects may have changed since that date.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Until , 2000, which is the 25th day after the commencement of
this offering, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
The Lexar Media name and logo are trademarks that are federally registered
in the United States. The titles and logos associated with our products
appearing in this prospectus, including JumpShot, are either federally
registered trademarks or are subject to pending applications for registration.
Our trademarks may also be registered in other jurisdictions. All other
trademarks or trade names appearing elsewhere in this prospectus are the
property of their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary contains basic information about our business and this
offering. It may not contain all of the information that is important to you.
You should read the entire prospectus, including "Risk Factors" and our
consolidated financial statements and notes to the financial statements, before
making an investment decision.
Lexar Media, Inc.
We are a leading designer, developer and marketer of high-performance
digital film and connectivity products for the digital photography market. Our
broad line of high-performance digital film combines flash memory, a type of
reprogrammable memory that does not require a constant power source, from
leading suppliers with our patented controller technology to address the needs
of professional, commercial and consumer photographers. Our connectivity
products make it easy to transfer digital images from digital film to a
personal computer. Our online photofinishing site, PrintRoom.com, provides
consumers with high-quality prints of digital images and photo sharing
services. Collectively, our products and services provide an end-to-end
solution for digital photographers.
Digital photography offers several advantages over traditional photography.
The photographer can immediately preview digital images, select the best
digital image from multiple shots and delete unwanted images. Photographers can
also transfer the digital images to a personal computer where they can be
easily edited and shared. These attributes, together with the growing presence
of personal computers in the home and the ability to transmit images to friends
and family over the Internet, are stimulating demand for digital cameras.
Our digital film is a removable and reusable storage device that captures
images from a digital camera. We currently offer digital film in the three
primary media formats currently used by digital cameras: CompactFlash,
SmartMedia and PC Card. Our film is compatible with substantially all digital
cameras, including those manufactured by Agfa, Canon, Casio, Epson, Fuji,
Hewlett-Packard, Kodak, Konica, Minolta, Nikon, Olympus, Polaroid, Ricoh, Sony
and Yashica. Our digital film records images faster than most other digital
film, particularly when used in advanced digital cameras that have the ability
to take advantage of the rate at which our film is able to capture a digital
image. We believe that our digital film is the leading choice for professional
photographers. For example, Kodak packages our branded film with its
professional series cameras, the Associated Press has selected our digital film
for its affiliated photographers' use and professional photographers have cited
the merits of our digital film in the press.
Our digital film reader/writers are products that facilitate the transfer of
digital images to a personal computer and other devices without a direct
connection to the digital camera. Our new JumpShot cable connects the universal
serial bus, or USB, port to our USB-enabled CompactFlash digital film to
quickly and easily transfer images. It received the 1999 Best of What's New
Award from Popular Science and the Editor's Choice Award from PC Photo. We
protect the technology underlying our digital photography products through our
large patent portfolio consisting of 23 U.S. patents granted or allowed.
PrintRoom.com enables digital camera users to submit their digital images
for printing directly over the Internet in order to receive high-quality
photographic prints in the mail at prices competitive with traditional
photofinishing services. We also offer online photo sharing services through
which our customers are able to share their digital images with family and
friends.
Our products and services offer the following benefits:
. Superior Speed. Our digital film records images faster than most other
digital film, particularly when used in advanced digital cameras that
have the ability to take advantage of the rate at which our film is able
to capture a digital image.
4
<PAGE>
. Quick Connectivity. Our digital film reader/writers facilitate the
transfer of digital images to a personal computer and other devices
without a direct connection to the digital camera.
. High Capacity. Our digital film is available in capacities up to 320
megabytes to meet the requirements of high resolution digital cameras.
. Guaranteed Compatibility. Our extensive testing allows us to market our
entire line of digital film as "Digital Film Compliant," which is our
guarantee that our digital film will work seamlessly with any digital
camera that uses a particular format.
. Internet Photofinishing Services. PrintRoom.com offers a broad array of
photofinishing and photo sharing services over the Internet.
We generate product revenues primarily from the sale of digital film and
connectivity products to the professional, commercial and consumer markets and,
to a lesser extent, from the sale of controllers to suppliers of flash memory
products. Our customers include distributors, consumer retailers, original
equipment manufacturers and private label resellers. Our products are widely
available to consumers through leading retailers such as B&H Photo, Best Buy,
Camera World, CompUSA and Wal-Mart.
In addition to digital photography, our digital film technology can be
applied to a variety of consumer electronic applications, such as Internet
music players, laptop computers, personal digital assistants, telecommunication
and network devices and digital video recorders. In order to extend our digital
film technology into these markets, we intend to selectively license our
products and technology to third parties. We recently entered into an agreement
with Sony to combine our proprietary controller technology with their Memory
Stick media format.
Our objective is to establish our products and services as the industry
standard solution for capturing, storing, viewing, editing and distributing
digital images. We intend to capitalize on the anticipated growth and
development of the digital photography market by offering a broad range of
digital film and connectivity products and services and by leveraging our
proprietary technology into other consumer product applications. We aim to:
. leverage our technology to enhance the digital photography experience;
. build our brand;
. extend our patented controller technology to address new market
opportunities;
. capitalize on supply flexibility for our key components; and
. expand our international presence.
Our Corporate Information
We incorporated in California in September 1996 under the name Lexar
Microsystems, Inc. We changed our name to Lexar Media, Inc. in February 1998
and we intend to reincorporate in Delaware in March 2000. Our principal
executive offices are located at 47421 Bayside Parkway, Fremont, California
94538, and our telephone number is 510-413-1200.
5
<PAGE>
The Offering
Common stock offered by us.............
7,500,000 shares
Common stock to be outstanding after this offering.
56,629,501 shares
Use of proceeds........................ For general corporate purposes,
including working capital, capital
expenditures and the repayment of
debt.
LEXR
Proposed Nasdaq National Market
symbol...........................
The number of shares of our common stock that will be outstanding after this
offering is based on 49,129,501 shares outstanding as of March 17, 2000. This
number assumes the conversion of all of our outstanding preferred stock into
34,148,853 shares of common stock and includes the exercise of outstanding
warrants to purchase 346,300 shares of our common stock prior to the completion
of this offering.
The number of shares of our common stock that will be outstanding after this
offering excludes:
. 2,579,484 shares of our common stock subject to options outstanding as
of March 17, 2000 at a weighted average exercise price of $2.49 per
share;
. 155,000 shares of our common stock subject to warrants outstanding as of
March 17, 2000 at a weighted average exercise price of $0.84 per share;
. 10,521,527 additional shares of our common stock that have been reserved
for issuance upon future grants under our stock option and stock
purchase plans;
. up to 179,211 shares of our common stock that we would issue to Sony
upon conversion of the $2.0 million convertible promissory note that we
issued to Sony in March 2000, assuming an initial public offering price
of $12.00 per share; and
. up to 30,000 shares of our common stock that we would issue if we
complete the acquisition of Impact Peripherals.
Except as otherwise indicated, all information in this prospectus assumes:
. the conversion of each outstanding share of our Series A preferred
stock, Series B preferred stock, Series C preferred stock and Series D
preferred stock into one share of our common stock and the conversion of
each outstanding share of our Series E preferred stock into 0.838 shares
of our common stock upon the completion of this offering;
. no exercise of the underwriters' over-allotment option; and
. our reincorporation in Delaware prior to the completion of this
offering.
6
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
September 16,
1996 (date of
inception) to Years Ended December 31,
December 31, --------------------------
1996 1997 1998 1999
------------- ------- ------- --------
<S> <C> <C> <C> <C>
Consolidated Statement of Income
Data:
Revenues:
Product sales..................... $ 452 $ 1,938 $ 7,609 $ 29,219
Development fees.................. -- 1,005 -- --
------- ------- ------- --------
Total revenues................... 452 2,943 7,609 29,219
------- ------- ------- --------
Gross margin........................ 185 1,810 1,576 4,623
------- ------- ------- --------
Operating expenses:
Research and development (excludes
stock-based compensation of $274
in 1999)......................... 726 3,931 3,101 4,141
Sales and marketing (excludes
stock-based compensation of $285
in 1999)......................... 238 1,098 4,413 8,599
General and administrative
(excludes stock-based
compensation of $1,118 in 1999).. 709 1,650 2,733 5,241
In-process research and
development write-off............ 3,047 -- -- --
Stock-based compensation.......... -- -- -- 1,806
------- ------- ------- --------
Total operating expenses......... 4,720 6,679 10,247 19,787
------- ------- ------- --------
Loss from operations................ (4,535) (4,869) (8,671) (15,164)
------- ------- ------- --------
Net loss............................ $(4,555) $(5,157) $(9,090) $(15,281)
======= ======= ======= ========
Net loss per common share--basic and
diluted............................ $ (0.27) $ (0.52) $ (3.29) $ (2.87)
======= ======= ======= ========
Shares used in net loss per common
share calculation--basic and
diluted (see Note 2 to the
consolidated financial
statements)........................ 16,854 9,945 2,766 5,320
======= ======= ======= ========
Pro forma net loss per common
share--basic and diluted
(unaudited) ....................... $ (0.48)
========
Shares used in pro forma net loss
per common share calculation--basic
and diluted (unaudited) (see Note
12 to the consolidated financial
statements)........................ 32,163
========
</TABLE>
The pro forma consolidated balance sheet data below reflects the issuance of
up to 475,000 shares of common stock to the former shareholders of
PrintRoom.com in connection with our acquisition of PrintRoom.com in January
2000, the exercise of outstanding warrants to purchase 346,300 shares of our
common stock which expire upon the closing of this offering and the automatic
conversion of all shares of preferred stock into 34,148,853 shares of common
stock upon the closing of this offering. The pro forma as adjusted consolidated
balance sheet data below reflects the receipt of the net proceeds from the sale
of the 7,500,000 shares of common stock offered by us at an assumed initial
public offering price of $12.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us.
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- ------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 6,495 $ 7,307 $ 83,957
Short-term investments (includes $2,500 of
restricted securities).......................... 3,896 3,896 3,896
Working capital.................................. 19,574 20,386 102,186
Total assets..................................... 38,274 42,886 119,536
Short-term debt.................................. 5,224 5,224 74
Long-term debt................................... 96 96 96
Mandatorily redeemable convertible preferred
stock .......................................... 53,136 -- --
Total stockholders' equity (deficit)............. (31,429) 26,319 108,119
</TABLE>
7
<PAGE>
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following factors, as well as other information
contained in this prospectus, before deciding to invest in shares of our common
stock. If any of the following risks actually occurs, our business, financial
condition and results of operations would suffer. In this case, the trading
price of our common stock could decline and you may lose all or part of your
investment in our common stock. The risks described below are not the only ones
that we face. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also harm our business.
Risks Related to Our Business
Because we have a limited operating history and because we operate in a new and
rapidly evolving market, you may have difficulty assessing our business and
future prospects.
We were organized in September 1996 and have a short operating history. We
began marketing and selling our digital film products in mid-1997, introduced
the latest versions of our digital film products in August 1999 and have only
recently begun offering photofinishing services over the Internet as the result
of our acquisition of PrintRoom.com in January 2000. Because we have only
recently introduced our products and services and have limited historical
financial data, it is difficult to evaluate our business and future prospects.
In addition, because of our limited operating history and because the market
for digital cameras, digital film and Internet photofinishing is still in an
emerging stage and is characterized by an increasing number of competitors and
competing technologies and formats, we have limited insight into trends that
may emerge and affect our business. Our business will not succeed if we are
unable to execute our business strategy or if we do not successfully address
the risks we face.
We have a history of losses, anticipate incurring losses for the foreseeable
future and may never become profitable.
We incurred net losses of approximately $5.2 million, $9.1 million and $15.3
million for 1997, 1998 and 1999, respectively. As of December 31, 1999, we had
an accumulated deficit of approximately $34.1 million. We will incur losses for
this year and are likely to incur losses through at least the end of 2001. The
size of our future losses and our ability to become profitable substantially
depend on the rate of growth of the market for digital cameras and digital film
and the extent to which our products and services are accepted by this market.
Therefore, we believe it is critical to devote substantial resources to
developing the brand awareness of our digital film. In the future we expect
sales and marketing, general and administrative and research and development
expenses to increase significantly as we pursue our strategic objectives. We
may also continue to incur significant expenses in connection with our existing
patent litigation discussed elsewhere in this section and prospectus. In
addition, we have incurred non-cash deferred charges of $21.0 million as of
December 31, 1999 relating to stock-based compensation and the issuance of
warrants. As a result, we will need to significantly increase our revenues in
order to achieve profitability. Even if we do achieve profitability, we may not
be able to sustain or increase profitability on a quarterly or an annual basis.
Our quarterly operating results and gross margins may fluctuate significantly
in the future and are difficult to predict, and if our future results are below
the expectations of investors or securities analysts, the market price of our
common stock would likely decline significantly.
Our quarterly operating results and gross margins are likely to vary
significantly in the future based on a number of factors related to our
industry and the markets for our products. We will have little or no control
over many of these factors and any of these factors could cause the price of
our common stock to fluctuate significantly. These factors include, among
others:
. the rate of growth of the market for digital cameras, digital film and
Internet photofinishing;
8
<PAGE>
. fluctuation and seasonality in demand for our products, as the demand
for our digital film has historically increased during the third and
fourth quarters of the calendar year;
. the timing and amount of orders and cancellations from existing and new
retailers, distributors and original equipment manufacturer customers;
. the timing and amount of expenses related to obsolescence of unsold
inventory;
. increases in costs charged by our component suppliers, particularly our
flash memory suppliers;
. the timing and amount of any reductions in the average selling prices of
our products and services;
. the difficulty of forecasting and managing our inventory levels;
. the availability of flash memory, particularly high-performance flash
memory with increased memory capacity;
. the announcement or introduction of products and technologies by
competitors;
. market-driven changes in our customers and product mix;
. natural disasters, particularly earthquakes, affecting countries in
which we conduct our business or in which our products are manufactured;
and
. the evolution of industry standards.
In addition, as a result of our limited operating history and the emerging
nature of our market, we may be unable to accurately forecast our revenues and
gross margins. We incur expenses based predominately on operating plans and
estimates of future revenues. Our expenses are to a large extent fixed and we
may not be able to adjust them quickly to meet a shortfall in revenues during
any particular quarter. Any significant shortfall in revenues in relation to
our expenses would decrease our net income or increase our operating losses and
would also harm our financial condition. Fluctuations in our operating results
or gross margins may cause us to fail to meet the expectations of investors or
securities analysts. If this were to happen, the market price for our common
stock would likely decline significantly.
We are currently involved in litigation with our primary competitor that has
diverted management's time and attention, could be time-consuming and expensive
to defend and could limit our access to technology that is necessary for our
business.
We are currently involved in litigation with SanDisk Corporation, our
primary competitor in the digital film market, regarding allegations by SanDisk
that certain of our products infringe one of their patents. In its complaint,
SanDisk seeks preliminary and permanent injunctions against infringement and
damages relating to our CompactFlash and PC Card formats. SanDisk has alleged
that all of our controllers infringe their patent. Approximately 80% of our
revenues in 1999 were from sales of our controllers and parts incorporating
versions of our controllers and we expect this to be the case for the next
several years. While we are vigorously contesting these claims, we cannot
predict the ultimate outcome of the lawsuit. See "Business--Legal Proceedings"
for a more complete discussion of this litigation.
In the event that a permanent injunction were granted, we would be unable to
sell products incorporating those methods or parts found to infringe SanDisk's
patent. We would need to either negotiate a license with SanDisk or engage in a
redesign of those products. A redesign of those products would result in an
interruption in sales that could extend for some time. We cannot assure you
that any development or redesign efforts would be successful. Accordingly, a
permanent injunction would result in a substantial reduction in our revenues
and losses over an extended period of time. In addition, we also could be
required to pay damages to SanDisk, which could be subject to trebling were we
found to have willfully infringed the identified patent.
In connection with the SanDisk litigation, we have incurred and expect to
continue to incur substantial legal and other expenses. In addition, the
SanDisk litigation has diverted, and is expected to continue to divert, the
efforts and attention of our management and technical personnel. Patent
litigation is highly complex and can extend for a protracted period of time,
which can substantially increase the cost of litigation. Accordingly, the
expenses and diversion of resources associated with the SanDisk litigation
could
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significantly increase our general and administrative costs. Further, if the
SanDisk patent litigation were to be resolved by a settlement, we might need to
make substantial payments to SanDisk or grant a license to SanDisk to utilize
portions of our technology.
We may become subject to additional intellectual property claims which could
divert management's time and attention, could be time-consuming and expensive
to defend and could limit our access to important technology.
We may become a party to litigation with other third parties in the future
to protect our intellectual property or as a result of an alleged infringement
of others' intellectual property. These lawsuits could subject us to
significant liability for damages and invalidate our proprietary rights. These
lawsuits, regardless of their outcome, would likely be time-consuming and
expensive to resolve and would divert management's time and attention. Any
potential intellectual property litigation also could force us to do one or
more of the following:
. stop selling products or using technology that contain the allegedly
infringing intellectual property;
. attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and
. attempt to redesign those products that contain the allegedly infringing
intellectual property.
If we are forced to take any of the foregoing actions, we may be unable to
manufacture and sell our products.
We primarily depend upon two sources for our supply of flash memory, and if
they are unable to provide us with sufficient quantities of flash memory in a
timely manner, we would not be able to manufacture and deliver digital film to
our customers in accordance with their volume and schedule requirements.
We purchase substantially all of our flash memory from Toshiba America
Electronic Corporation and Samsung Semiconductor, Inc. We expect that the
demand for flash memory over the next several years will be substantially
greater than in past periods due to the increasing acceptance of digital
cameras and other digital consumer products. If we are unable to obtain
sufficient quantities of flash memory from Toshiba or Samsung in a timely
manner, we would not be able to manufacture and deliver digital film to satisfy
our customers' volume and schedule requirements. If we are not able to satisfy
the delivery requirements of our customers, they may reduce any future orders
or eliminate us as a supplier. Our reputation would likely also be harmed and
we may not be able to replace any lost business with new customers. Even if we
are able to obtain flash memory in sufficient volume and on schedules that
permit us to satisfy our delivery requirements, we cannot assure you that the
prices charged by these suppliers will enable us to compete effectively in our
market. Samsung and Toshiba are both located in Asia, a region that has
recently been, and in the future may be, affected by economic and political
instability that could adversely affect the price and supply of flash memory.
If we are unable to obtain flash memory from our current suppliers or others at
economical prices, our margins would decline unless we could raise the prices
of our products in a commensurate manner. The existing competitive conditions
may not permit us to do so, in which case we may suffer increasing losses or
reduced profits.
Our recent growth has placed a significant strain on our management systems and
resources, and the continued success of our business depends on our ability to
successfully manage future growth.
In recent periods, rapid growth and acceleration of our product development
and marketing efforts have imposed significant strains on our operations. Our
revenues have grown from $2.9 million for the year ended December 31, 1997 to
approximately $29.2 million for the year ended December 31, 1999. In
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addition, we have grown from 25 employees as of December 31, 1997 to 54
employees as of December 31, 1998 to 112 employees as of March 20, 2000, and we
anticipate further significant increases in the number of our employees as we
continue to grow. Our current facility is not adequate to meet our anticipated
growth and we are currently negotiating a lease to relocate our principal
executive offices to a larger space in Fremont. We expect the strains from this
growth to increase, and our financial performance and ability to compete
effectively will depend, in large part, on our ability to manage this growth
effectively. To that end, we must continually develop our budgeting and
forecasting procedures, develop administrative, accounting and management
information systems and controls, manage our research and development efforts,
manage appropriate levels of inventory, improve coordination among our
engineering, accounting, finance, marketing and operations personnel and hire
and train additional qualified personnel.
The rate of any future expansion, in combination with a rapidly evolving
market for our products, will require a high level of managerial effectiveness
in anticipating, planning, coordinating and satisfying our operational needs
and the demands of our customers. The continued development of our operations
in diverse locations may also affect our ability to manage our growth. If we
are unable to manage our growth effectively, we may not be able to successfully
compete in our market.
If we are unable to develop and introduce on a timely basis new products or
services that are accepted by our customers and consumers, we will not be able
to compete effectively in our market.
We operate in an industry that is subject to evolving industry standards,
rapid technological changes, rapid changes in consumer demands and the rapid
introduction of new, higher performance products that shorten product life
cycles and tend to decrease average selling prices. To remain competitive in
this demanding market, we must continually design, develop and introduce new
products and services that meet the performance and price requirements of our
customers and consumers. Any significant delay or failure in releasing new
products or services would harm our reputation, provide a competitor a first-
to-market opportunity or allow a competitor to achieve greater market share. We
also cannot assure you that any products or services we do introduce will gain
market acceptance. The introduction of new products is inherently risky because
it is difficult to foresee advances in technology and the adoption of new
standards, to coordinate our technical personnel and strategic relationships
and to identify and eliminate design and products flaws. We may not be able to
recoup research and development expenditures if our new products or services
are not widely accepted.
We have only recently begun offering Internet photofinishing services and, if
this service is not rapidly accepted or used by consumers, our revenues may
fall short of our expectations.
We have only recently begun offering Internet photofinishing services
through our acquisition of PrintRoom.com in January 2000. We cannot be certain
that there will be customer demand for this service or that we will be
successful in penetrating this market. If we are unable to successfully
implement this new service or this service is not rapidly accepted or used by
consumers, our revenues may fall short of our expectations.
If we are unable to develop or maintain the strategic relationships necessary
to develop, sell and market products that are commercially viable and widely
accepted, the growth and success of our business may be limited.
We may not be able to develop and sell products that are commercially viable
and widely accepted if we are unable to anticipate market trends and the price,
performance and functionality requirements of digital camera and flash memory
manufacturers. We must continue to collaborate closely with our customers,
digital camera manufacturers, flash memory manufacturers and other suppliers to
ensure that critical development, marketing and distribution projects proceed
in a coordinated manner. This collaboration is also important because our
ability to anticipate trends and plan our development activities depends to a
significant degree upon our continued access to information derived from
strategic relationships we currently have with digital camera and flash memory
manufacturers. This collaboration can be difficult because many
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of these companies are located overseas. If any of our current relationships
terminate or otherwise deteriorate, or if we are unable to enter into future
alliances that provide us with comparable insight into market trends, we will
be hindered in our product development efforts.
We depend on a few key customers and the loss of any of them could
significantly reduce our revenues.
Historically, a small number of our customers have accounted for a
significant portion of our product revenues. In 1997, 1998 and 1999, sales to
our top 10 customers accounted for approximately 99.7%, 83.7% and 79.2%,
respectively, of our total revenues. Four customers, Ingram Micro, Kodak,
Impact Peripherals and Tech Data, accounted for 12.8%, 11.4%, 10.0% and 8.8% of
sales in 1999, respectively. We believe that approximately 80% of the products
we sold to Ingram Micro and Tech Data were resold by those parties to CompUSA.
Our revenues could decline if one or more of these customers were to
significantly reduce, delay or cancel their orders, decide to purchase digital
film manufactured by one of our competitors or develop and manufacture their
own digital film. In addition, any difficulty in collecting outstanding amounts
due from our customers, particularly customers who place larger orders, would
also reduce our revenues. Because our sales are made by means of standard
purchase orders rather than long-term contracts, we cannot assure you that
these customers will continue to purchase quantities of our products at current
levels, or at all. Furthermore, our revenues include sales to original
equipment manufactures, some of which may in the future decide to compete
against us in the digital film market. We expect our operating results for at
least the next several years will continue to depend on sales to a relatively
small number of customers.
Our failure to successfully promote our brand and achieve strong brand
recognition in target markets could limit or reduce the demand for our products
and services.
We believe that brand recognition will be critical to our ability to be
successful as the digital photography market develops. We plan to significantly
increase our marketing expenditures to create and maintain prominent brand
awareness. If we fail to promote our brand successfully, or the expenses
associated with doing so become increasingly high, our business may not grow as
we anticipate. In addition, if our products exhibit poor performance or other
defects, our brand may be significantly diluted, which would inhibit our
ability to attract or retain customers.
Because many of our retail customers and distributors have rights of return, we
may be required to take back large quantities of unsold inventory which could
reduce our revenues in future periods.
Substantially all of our sales to end-users are made through distributors
and retailers. Our sales through these channels often include rights to return
unsold inventory. We generally recognize revenue upon shipment of our products,
although we establish reserves for estimated returns. Additionally, we permit
some of our customers to return products in their inventory for credit or in
exchange for new products. If there are significant inventories of old products
in our distribution channel when a new product is released, or if these
distributors and retailers are unsuccessful in selling our products, there
could be substantial product returns. If our reserves are insufficient to
account for these returns or if we are unable to resell these products on a
timely basis at similar prices, our revenues may be reduced in future periods.
Because the market for our products is rapidly evolving, we may not be able to
resell returned products at attractive prices or at all.
Because we protect many of our retail customers and distributors against the
effects of price decreases on their inventories of our products, we may be
required to make large price protection payments if we reduce our prices when
there are large quantities of our products in our distribution channel.
Approximately 40% of our sales in 1999 were made through distributors and
retailers to whom we provide price protection guarantees. Accordingly, if we
reduce our prices, we will pay these distributors and
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retailers for the difference between the new price and the price paid for the
same product still in their inventory. If our price protection reserves are
insufficient to account for these payments, our revenues may be reduced in
future periods.
Because we depend on single suppliers for some key components, and do not have
long-term supply contracts with those suppliers, we are exposed to the risks of
a potential inability to obtain an adequate supply of components, price
increases, late deliveries and poor component quality.
ZETEX Semiconductors is the sole manufacturer of transistors for our
CompactFlash, PC Card and connectivity products. In addition, Dual Systems,
Inc. is our only qualified supplier of enclosures used in our CompactFlash
product. Because we depend on single suppliers for these key components, and do
not have long-term supply contracts with these suppliers, we face the risk of
inadequate component supply, price increases, late deliveries and poor
component quality. These companies may terminate their relationships with us or
pursue other relationships with our competitors, and if we were to lose a
relationship with a single supplier, the lead time required to qualify new
suppliers could be as long as three months. Also, if we lose one of our single
suppliers or any of those suppliers is otherwise unable to satisfy our volume
and delivery schedule requirements, it may be difficult to locate any suppliers
who have the ability to develop, manufacture and deliver the specialized
components we need for our products. If we are unable to accurately predict our
supply needs, or if our supply of components is disrupted, our reputation may
be harmed and we may lose existing customers or be unable to attract new
customers.
Our products are characterized by average selling prices that have historically
declined over relatively short time periods, and if we are unable to
effectively manage our inventories, reduce our costs, introduce new products
with higher average selling prices or increase our sales volumes, our gross
margins will decline.
Although consumers have recently begun to purchase digital cameras in
volume, they still exert pressure on digital camera manufacturers and on us to
lower prices of digital photography products, like our digital film, to prices
comparable to those of traditional photography products. Our competitors also
impose pricing pressures on us. In addition, because a large percentage of our
sales is to a small number of customers that are primarily large original
equipment manufacturers, retail consumer chains and distributors, these
customers have exerted, and we expect they will continue to exert, pressure on
us to make price concessions. Any reduction in prices by us will cause our
gross margins to decline, unless we can manage our inventories to minimize such
price declines and reduce our costs. If we are unable to reduce our costs to
offset declines in average selling prices or increase the sales volume of our
existing products, our gross margins will decline. We anticipate that our
average selling prices will continue to decline for the foreseeable future.
If we are unable to adequately protect our intellectual property, our
competitors may gain access to our technology which could harm our ability to
successfully compete in our market.
We regard our intellectual property as critical to our success. If we are
unable to protect our intellectual property rights, we may be unable to
successfully compete in our market. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as confidentiality
agreements and other methods to protect our proprietary technologies. We have
been granted patents in the United States and other countries and have a number
of pending United States and foreign patent applications. We cannot assure you,
however, that:
. any of our existing or future patents will not be invalidated;
. patents will be issued for any of our pending applications;
. any claims allowed from existing or pending patents will have sufficient
scope or strength; or
. our patents will be issued in the primary countries where our products
are sold.
It may also be possible for a third party to copy or otherwise obtain and
use our products or technology without authorization, develop similar
technology independently or design around our patents.
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We depend on a single third-party wafer foundry to manufacture all of our
controllers, and if we are unable to obtain sufficient quantities of
controllers at acceptable quality, yields and prices, and in a timely manner,
we may not be able to meet customer demand for our products, which could limit
the growth and success of our business.
We do not own or operate a semiconductor fabrication facility. Instead, we
rely on a single outside foundry to produce all of our controller products. Our
reliance on an independent foundry involves a number of significant risks,
including:
. reduced control over delivery schedules, quality assurance,
manufacturing yields and production costs;
. lack of guaranteed production capacity or product supply; and
. unavailability of, or delayed access to, next-generation or key process
technologies.
Our controller wafers are currently manufactured by United Microelectronics
Corporation, or UMC, in Taiwan. We do not have a long-term supply agreement
with UMC and instead obtain manufacturing services on a purchase order basis.
UMC has no obligation to supply products to us for any specific period, in any
specific quantity or at any specific price, except as set forth in a particular
purchase order. Our requirements represent a small portion of the total
production capacity of UMC, and UMC may reallocate capacity to other customers
on short notice, even during periods of high demand for our products. If UMC
were to become unable or unwilling to continue manufacturing our controllers in
the required volumes, at acceptable quality, yields and prices, and in a timely
manner, we may not be able to meet customer demand for our products, which
could limit the growth and success of our business. Although we have attempted
to diversify our sources of controllers by qualifying two other foundries,
Taiwan Semiconductor Manufacturing Co. Ltd. and Chartered Semiconductor
Manufacturing, we cannot assure you that these foundries will have sufficient
capacity to accommodate our demand at any particular time.
In addition, if competition for foundry capacity increases, we may incur
significant expenses to secure access to manufacturing services, which in turn
may cause our product costs to increase substantially. We expect that the
demand for capacity at these facilities will increase substantially in the near
future due to increasing demand for consumer electronic and industrial products
that depend on semiconductors manufactured at these facilities. All of these
foundries are located in an area of the world that may be subject to political
and economic instability, especially in light of the results of the recent
election in Taiwan, and natural disasters, particularly earthquakes. While the
recent earthquake in Taiwan did not have a significant impact on deliveries to
us from UMC, a similar event in the future at one of their foundries could have
a significant impact.
We depend solely on third-party subcontractors for assembly and testing of our
digital film products, which could result in product shortages or delays or
increase our costs of manufacturing, assembling or testing our products.
Substantially all of our digital film is currently assembled and tested by
Flash Electronics, Inc. in Fremont, California and Samsung in Korea. Although
we have a written contract with Samsung, we do not have a long-term agreement
with Flash Electronics and typically obtain services from them on a per order
basis. Additionally, our controllers are assembled, tested and packaged
primarily by Advanced Semiconductor Engineering, Inc. in Taiwan. Multitech
Design & Test in Sunnyvale, California is currently the only company that
performs final testing of our controllers. Our reliance on these subcontractors
involves risks such as reduced control over delivery schedules, quality
assurance and costs. These risks could result in product shortages or increase
our costs of manufacturing, assembling or testing our products. If these
subcontractors are unable or unwilling to continue to provide assembly and test
services and deliver products of acceptable quality, at acceptable costs and in
a timely manner, we would have to identify and qualify additional substitute
subcontractors. This could be time-consuming and difficult and result in
unforeseen operations problems.
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If we are unable to license our controller technology for application in other
products, the growth of our business may be limited.
We currently derive all of our revenues from the sale of products and
services related to our digital film and connectivity products. We believe,
however, that our future growth depends to a large extent on our ability to
license our proprietary controller technology for use in new digital
photography applications or applications in other markets, such as music and
video. If we fail to market and license our technology to third parties for new
applications, or fail to generate significant licensing or other revenue from
these activities, we may not grow our revenues and our business as planned.
Several key members of our senior management team have recently joined us and
their failure to integrate into our operations effectively and in a timely
manner could impede the execution of our business strategy.
We have recently hired a significant number of executive officers, including
our Chief Financial Officer, our Chief Operating Officer and our Vice President
of Operations. We have also recently hired several other individuals who serve
important operational, marketing and sales functions. These individuals have
had a short amount of time to work together and have limited experience with us
and our operations. Our success will depend to a significant extent on the
ability of our new officers to integrate themselves into our daily operations,
to gain the trust and confidence of other employees and to work effectively as
a team. If any of them fails to do so, our ability to execute our business
strategy would be impeded.
If we encounter difficulties in attracting and retaining qualified personnel,
we may not be able to successfully execute our business strategy and we may
need to grant large stock-based incentives that could be dilutive to our
stockholders and may be required to pay significant salaries which would
increase our general and administrative costs.
Our future success will depend to a significant extent on the continued
services of our key employees, including John H. Reimer, our President and
Chief Executive Officer, Petro Estakhri, our Chief Technology Officer and
Executive Vice President of Engineering, and Eric B. Stang, our Chief Operating
Officer. Our success will also depend on our ability to identify, attract and
retain qualified technical, sales, marketing, finance and managerial personnel.
Our need to hire qualified personnel in these areas has become particularly
acute as a result of a recent period of rapid growth. We are currently seeking
to hire individuals to fill several key positions, including the head of our
Japan operations. If we are unable to find, hire and retain qualified
individuals, we may have difficulty implementing portions of our business
strategy in a timely manner, or at all. Petro Estakhri and Mike Assar, our
Senior Vice President Technology, are the only employees with whom we have
entered into employment agreements. In addition, we do not maintain key man
life insurance on the members of our senior management team, other than Mr.
Reimer and Mr. Estakhri.
The competition for qualified personnel is particularly intense in our
industry and in northern California, where there is a high concentration of
established and emerging growth technology companies. This competition makes it
more difficult to retain our key personnel and to recruit new highly-qualified
personnel. To attract and retain qualified personnel, we may be required to
grant large option or other stock-based incentive awards, which may be highly
dilutive to existing stockholders. We may also be required to pay significant
base salaries and cash bonuses to attract and retain these individuals, which
could harm our operating results. We have experienced, and may continue to
experience, difficulty in hiring and retaining candidates with appropriate
qualifications. If we do not succeed in hiring and retaining candidates with
appropriate qualifications, we will not be able to grow our business.
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Difficulty in identifying, acquiring and integrating acquisition candidates
could limit our growth or put a strain on our resources and, if financed by the
issuance of shares of our common stock, could cause dilution to our
stockholders.
We may supplement our internal growth by acquiring complementary businesses,
technologies, product lines or service offerings. For example, we recently
acquired PrintRoom.com and we must successfully integrate their operations into
our business. We may be unable to identify and acquire additional suitable
candidates on reasonable terms, if at all. We compete for acquisition
candidates with other companies that have substantially greater financial,
management and other resources than we do. Acquisitions, in particular multiple
acquisitions over a short period of time, involve a number of risks that may
result in our failure to achieve the desired benefits of the transaction. These
risks include, among others, the following:
. difficulties in assimilating the operations of the acquired businesses;
. potential disruption of our existing operations;
. an inability to integrate, train, retain and motivate key personnel of
the acquired business;
. diversion of management attention away from day-to-day operations;
. an inability to incorporate, develop, market or sell acquired
technologies or products;
. unexpected liabilities of the acquired business without sufficient
indemnification from the sellers;
. operating inefficiencies and difficulties associated with managing
companies in different geographical locations; and
. potential impairment of our relationships with our employees, customers,
suppliers and strategic partners.
We may finance acquisitions by issuing shares of our common stock, which
could dilute our existing stockholders. We may also use cash or incur
additional debt to pay for these acquisitions. In addition, we may be required
to expend substantial funds to develop acquired technologies and/or to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions.
If we are unable to obtain additional financing for our future capital needs,
we may be unable to develop or enhance our products, expand our operations or
respond to competitive pressures.
We expect the net proceeds from this offering and our current cash and cash
equivalents will meet our working capital and capital expenditure needs through
the end of 2001. We may need to raise additional funding at that time or
earlier if we decide to undertake more rapid expansion, including acquisitions
of complementary products or technologies, or if we increase our marketing
and/or research and development efforts in order to respond to competitive
pressures. We cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all. We may obtain additional financing by
issuing shares of our common stock, which could dilute our existing
stockholders. If we cannot raise needed funds on acceptable terms, or at all,
we may not be able to develop or enhance our products or respond appropriately
to competitive pressures.
If our products contain defects, we may incur unexpected and significant
operating expenses to correct the defects, we may be required to pay damages to
third parties and our reputation may suffer serious harm.
Although our digital film products are tested after they are assembled,
these products are extremely complex and may contain defects. These defects are
particularly likely when new versions or enhancements are released. The sale of
products with defects or reliability, quality or compatibility problems may
damage our reputation and our ability to retain existing customers and attract
new customers. For example, if there are defects in our products which cause
loss of data, customers may lose their digital images stored on our
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digital film. In addition, product defects and errors could result in
additional development costs, diversion of technical and management resources,
delayed product shipments, increased product returns, and product liability
claims against us which may not be fully covered by insurance.
We face foreign political and economic risks because a significant portion of
our revenues is derived from sales outside of the United States.
Sales outside of the United States accounted for 8.7%, 21.9% and 27.6% of
our revenues for 1997, 1998 and 1999, respectively. We generated a majority of
our international revenues in 1999 from Japan and the United Kingdom. Both of
these markets are intensely competitive, particularly Japan, and we have not
yet launched our brand in Japan. One of our principal growth strategies is to
expand our presence in these and other international markets both through
increased international sales and strategic relationships. Consequently, we
anticipate that sales outside of the United States will continue to account for
a significant portion of our revenue in future periods. Accordingly, we are
subject to international risks, including:
. transportation delays and interruptions;
. slower payment practices and difficulties in accounts receivable
collections;
. timing and availability of export licenses;
. changes in regulatory requirements, tariffs and other barriers;
. reduced or limited protection of our intellectual property;
. the burden of complying with complex foreign laws and treaties;
. foreign currency exchange fluctuations;
. political and economic instability, particularly in light of recent
economic volatility encountered by Japan; and
. natural disasters affecting those countries in which we conduct
business.
The sales of our products are denominated primarily in United States
dollars. As a result, increases in the value of the United States dollar
relative to foreign currencies could cause our products to become less
competitive in international markets and could result in a reduction in sales
and profitability. After we complete our acquisition of Impact Peripherals, we
will have product sales denominated in British pounds. To the extent that we
change our pricing practices to denominate sales in foreign currencies,
particularly the British pound and Japanese yen, we will be exposed to
increased risks of currency fluctuations. We have no hedging policies in place
to mitigate these potential risks, and we cannot assure you that any policies
or techniques implemented in the future will be successful or that our business
and financial condition will not be harmed by exchange rate fluctuations.
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Risks Related to Our Industry
Our business will not succeed unless the digital photography market continues
to grow and is accepted by professional, commercial and consumer users.
We currently depend on sales of digital film and connectivity products for
the substantial majority of our revenues, which exposes us to substantial risk
in the event the digital photography market does not grow rapidly. The digital
photography market is in an early stage of development and is rapidly evolving.
The success of this market depends on many factors, including:
. the ability of digital cameras to take high-quality photographs;
. the availability of digital cameras at prices and with performance
characteristics comparable to traditional cameras;
. the availability of digital film that meet users' requirements with
respect to speed, connectivity, capacity and compatibility;
. the speed at which digital cameras are able to take successive
photographs;
. the ease with which digital files can be transferred to a personal
computer or printer; and
. the availability of digital image prints comparable in quality and price
to traditional photographs.
In addition to the above factors related to the digital photography market
as a whole, we believe the following additional factors will affect the
successful adoption of digital photography by consumers:
. marketing campaigns that increase brand awareness in end-user markets,
both domestically and internationally;
. increased association between brand names and attractive price and
performance characteristics; and
. heightened consumer confidence in digital photography technology.
If the digital photography market does not continue to grow and be accepted
by professional, commercial and consumer users, our business will not succeed.
If digital camera manufacturers do not develop and promote products that are
able to take advantage of our fastest digital film products, the growth and
success of our business may be limited.
We depend on the research and development, marketing and sales efforts of
digital camera manufacturers in developing, marketing and selling digital
cameras that can use our more advanced existing and future products. Most of
the digital cameras currently available on the market do not incorporate
technologies that can take advantage of the speed available in our fastest
digital film products. If digital camera manufacturers do not successfully
develop, market and sell digital cameras that take full advantage of our most
advanced products, from which we realize higher gross margins, the growth and
success of our business may be limited.
Increased competition in the digital film market may lead to a decrease in
revenues and market share.
We currently compete in an industry characterized by intense competition,
rapid technological change, evolving industry standards, declining average
selling prices and rapid product obsolescence. Our existing competitors include
many large domestic and international companies that have longer operating
histories and greater brand name recognition, greater access to flash memory,
substantially greater financial, technical, marketing and other resources,
broader product lines and longer standing relationships with customers. As a
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result, these competitors may be able to adapt more quickly to new or emerging
technologies or devote greater resources to the promotion and sale of their
products than we may. This may lead to a decrease in sales, profits and market
share.
Our primary competitors are companies that sell digital film into the
consumer and original equipment manufacturer digital film markets. These
companies are primarily manufacturers with both controller and flash memory
capabilities, such as SanDisk and Hitachi Semiconductor (America), Inc. SanDisk
recently announced that it has entered into a non-binding memorandum of
understanding with Toshiba to jointly develop and manufacture high-performance
flash memory. Because flash memory represents a significant portion of the cost
of digital film, SanDisk may have a competitive advantage in that it will have
access to high-capacity flash memory at prices that may be substantially below
the prices that Toshiba or Samsung will charge us.
We also compete with manufacturers, package or card assemblers and resellers
who combine controllers and flash memory developed by others, such as Hitachi,
into flash memory cards, including Kingston Technology, Simple Technology,
Smart Modular Technologies and Viking. Additionally, Hitachi as well as flash
controller developers such as Feiya Technology, Tokyo Electronic and M-Systems
compete with our controller sales.
Kodak and Fuji, the largest and best known manufacturers of traditional film
products, have not as yet entered the digital film market. Kodak is, in fact,
one of our largest customers for digital film. If either Kodak or Fuji decide
to acquire or develop the requisite technology and manufacture digital film,
their resources and worldwide brand recognition would likely make them
formidable competitors for our core business. We also expect to face
competition from existing or future competitors that design and market similar
or alternative data storage solutions that may be less costly or provide
additional features. If a manufacturer of digital cameras or other consumer
electronic devices designs one of these alternative competing standards into
its products, our digital film as currently configured will not be compatible
with that product and our revenues may decline.
Competition in the Internet photofinishing market is intense, and we may not be
able to maintain or expand our customer base which may make it difficult for us
to generate revenues and establish market share.
We are faced with growing competition in the area of Internet photofinishing
which could make it difficult for us to generate revenues and establish market
share. Our primary competitors in these areas are Internet digital
photofinishing companies such as EZ Prints, Kodak, Ofoto, PhotoAccess, Seattle
Film Works, Shutterfly and Wolf Camera, which process digital images
transferred to them by customers over the Internet and mail finished prints to
them. These companies also provide traditional prints from scanned traditional
photographs, or digital camera images and photo-image management services
allowing consumers to archive, edit and share uploaded images and create on-
line photo albums. Additionally, digital imaging kiosks, such as those from
Kodak, Fuji, Pixel Magic and Telepix, allow consumers to scan traditional
images or download digital images for processing and output. Traditional film
processors with strong brand recognition such as Kodak will pose a significant
challenge if they begin to focus their efforts on direct digital-to-paper
photofinishing processing and leverage their advantage in brand recognition.
Moreover, Internet photo-image archiving and sharing services such as Club
Photo, PhotoIsland, PhotoLoft and Zing present additional competition through
their current and potential alliances with digital photo labs to directly
compete with the services we offer.
The manufacturing of our products is complex and subject to yield problems,
which could decrease available supply and increase costs.
The manufacture of flash memory and controllers is a complex process, and it
is often difficult for companies to achieve acceptable product yields. Reduced
flash memory yields could decrease available supply and increase costs.
Controller yields depend on both our product design and the manufacturing
19
<PAGE>
process technology unique to the semiconductor foundry. Because low yields may
result from either design defects or process difficulties, we may not identify
yield problems until well into the production cycle, when an actual product
exists and can be analyzed and tested. In addition, many of these yield
problems are difficult to diagnose and time consuming or expensive to remedy.
Risks Related to this Offering
Management might apply the net proceeds from this offering to uses that do not
improve our operating results or increase the value of your investment.
The net proceeds from the sale of our common stock in this offering will be
added to our general working capital. We currently have no definite plans to
use the net proceeds from the offering, other than to repay outstanding
indebtedness. Our management will therefore have significant flexibility in
applying the net proceeds of this offering and may apply those proceeds in ways
with which you may disagree. The net proceeds may be used for corporate
purposes that do not improve our operating results or market value and you will
not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the proceeds. Pending
application of the proceeds, they might be placed in investments that do not
produce income or that lose value.
The liquidity of our common stock is uncertain because it has never been
publicly traded, and you may not be able to resell your shares at or above the
price you paid.
There has not been a public market for our common stock. As a result, the
initial public offering price will be determined by negotiations among the
underwriters and us, and may not be indicative of prices that will prevail in
the public trading markets. We also cannot predict the extent to which a
trading market for our common stock will develop or how liquid that market will
be. You may not be able to resell your shares at or above the initial public
offering price.
The market price of our common stock may fluctuate significantly as a result of
market volatility, which could result in a decline in the value of your
investment.
We believe that the market price of our common stock, like that of other
early-stage technology companies, is likely to be highly volatile and may
fluctuate substantially. The price of the common stock that will prevail in the
market after the offering may be higher or lower than the price you pay,
depending on many factors, including:
. changes in financial estimates of our operating results by securities
analysts;
. announcements by us or our competitors of new products, significant
acquisitions or strategic partnerships;
. a loss of or decrease in sales to major customers or a failure to
complete significant transactions;
. additions or departures of key personnel; and
. commencement of or involvement in litigation.
In addition, stock markets, particularly the Nasdaq National Market on which
we have applied to have our common stock listed have from time to time
experienced significant price and volume fluctuations that have affected the
market prices for the securities of technology companies. As a result,
investors in our common stock may experience a decrease in the value of their
common stock regardless of our operating performance or prospects. The
fluctuations in the price of our common stock may affect our visibility and
credibility in the digital photography market and may affect our ability to
secure additional financing on acceptable terms, if at all.
20
<PAGE>
We could be subject to securities class action litigation if our stock price is
volatile, which could be costly and time-consuming to defend and could damage
our reputation.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Those companies, like us, that are involved in rapidly changing
technology markets are particularly subject to this risk. We may be the target
of litigation of this kind in the future. Any securities litigation could
result in substantial costs, divert management's attention and resources and
negatively affect our public image and reputations.
Future sales of our common stock by existing stockholders could cause the price
of our common stock to decline.
Sales of a large number of shares of our common stock in the market after
this offering, or the belief that these sales could occur, could cause a drop
in the market price of our common stock. Upon completion of this offering, we
will have outstanding 56,629,501 shares of our common stock. Of these shares,
all of the 7,500,000 shares of our common stock sold in this offering will be
freely tradable, unless the shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act.
The remaining 49,129,501 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Our directors, executive officers and substantially
all of our stockholders have executed lock-up agreements in which they have
agreed not to sell or otherwise dispose of any shares of our common stock for a
period of at least 180 days after the date of this prospectus without the prior
written approval of Chase Securities Inc. When the lock-up agreements expire,
these shares will become eligible for sale, in some cases only subject to the
volume, manner of sale and notice requirements of Rule 144. Assuming that this
prospectus will be dated April 19, 2000, the "restricted securities" will be
eligible for resale in the public market as follows:
. approximately 41,852,342 shares will become eligible for resale
beginning October 17, 2000; and
. approximately 7,277,159 additional shares will become eligible for
resale upon the expiration of applicable one-year holding periods under
Rule 144 and Rule 145 at various times after October 17, 2000.
In addition, we intend to file a registration on Form S-8 under the
Securities Act after the date of this offering to register shares of our common
stock issued or reserved for issuance under our various stock plans.
Our executive officers, directors and principal stockholders will continue to
hold a substantial portion of our stock subsequent to the completion of this
offering, and, consequently, could make some transactions more difficult or
impossible to complete without their support.
Immediately after the offering, it is anticipated that our executive
officers, directors and principal stockholders will beneficially own or control
approximately 49.6% of the outstanding shares of our common stock or 48.6% if
the underwriters' overallotment option is exercised in full. Accordingly, if
these persons act together, they will significantly influence, and likely
control, the election of our directors and the outcome of any corporate
transaction or other matter submitted to the stockholders for approval,
including mergers, consolidations and the sale of all or substantially all of
our assets. The voting power of these persons could also have the effect of
delaying or preventing a change in control. The interests of these stockholders
may differ from the interests of the other stockholders.
Our charter documents and Delaware law could delay or prevent a takeover of us
that stockholders may consider favorable, which could cause the market price of
our common stock to decline.
There are provisions in our certificate of incorporation, bylaws and
Delaware law that may have the effect of delaying or preventing a change of
control or changes in our management that stockholders consider favorable or
beneficial. You should refer to the information in the section entitled
"Description of
21
<PAGE>
Capital Stock" for more information regarding these provisions. If a change of
control or change in management is delayed or prevented, the market price of
our common stock could suffer.
You will suffer immediate and substantial dilution in the book value of your
investment, which could negatively affect the value of your investment.
The initial public offering price per share of our common stock will
significantly exceed the net tangible book value per share. Accordingly,
investors purchasing shares in this offering will suffer immediate and
substantial dilution of $10.04 per share in their investment, assuming an
initial public offering price of $12.00 per share. In the past, we issued
options and warrants to acquire our common stock at prices significantly below
the initial offering price. To the extent these outstanding options and
warrants are ultimately exercised, there will be further dilution to investors
in this offering.
22
<PAGE>
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and in other sections of this prospectus
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as "may," "might," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "projects," "potential" or "continue," the negative of these terms
and other comparable terminology. These forward-looking statements, which are
subject to risks, uncertainties, and assumptions about us, may include, among
other things, projections of our future financial performance, our anticipated
growth strategies and anticipated trends in our business. These statements are
only predictions based on our current expectations and projections about future
events. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause our actual results,
level of activity, performance or achievements to differ materially from the
results, level of activity, performance or achievements expressed or implied by
the forward-looking statements, including those factors discussed under the
caption entitled "Risk Factors." You should specifically consider the numerous
risks outlined under "Risk Factors."
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
these forward-looking statements after the date of this prospectus to conform
our prior statements to actual results or revised expectations.
USE OF PROCEEDS
We estimate that the net proceeds from our sale of the 7,500,000 shares of
common stock we are offering will be approximately $81.8 million, assuming an
initial public offering price of $12.00 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters' over-allotment option is exercised
in full, we estimate that our net proceeds will be approximately $94.4 million.
The principal purposes of this offering are to obtain additional working
capital, establish a public market for our common stock and facilitate our
future access to public capital markets. We currently expect to use the net
proceeds from this offering for working capital and other general corporate
purposes. We have not yet determined our expected use of these proceeds, but we
currently anticipate that we will use approximately $5.2 million to repay
indebtedness outstanding under secured promissory notes with three of our
stockholders. Promissory notes in the aggregate principal amount of $4.8
million have a maturity date of July 31, 2000 and bear interest at a rate of
10% per year, and a promissory note in the principal amount of $400,000 has a
maturity date of July 31, 2000 and bears interest at a rate of 5.5% per year.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses, technologies, products or services. We have no
present commitments or agreements with respect to any acquisition or
investment. Pending these uses, we intend to invest the net proceeds in short-
term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain earnings, if any, to finance the growth and
development of our business. Therefore, we do not anticipate declaring or
paying cash dividends on our common stock for at least the next several years.
23
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1999 our short-term debt
and capitalization:
. on an actual basis;
. on a pro forma basis to reflect the issuance of up to 475,000 shares of
our common stock to the former of PrintRoom.com in connection with our
acquisition of PrintRoom.com in January 2000, the exercise of
outstanding warrants to purchase 346,300 shares of our common stock
which expire upon the closing of this offering and the automatic
conversion of all shares of preferred stock into 34,148,853 shares of
common stock upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the sale of the 7,500,000
shares of our common stock offered by us at an assumed initial public
offering price of $12.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Short-term debt:
Notes payable to stockholders................ $ 5,224 $ 5,224 $ 74
-------- -------- --------
Total short-term debt...................... $ 5,224 $ 5,224 $ 74
======== ======== ========
Notes payable to stockholders, net of current
portion(1).................................... $ 96 $ 96 $ 96
-------- -------- --------
Mandatorily redeemable convertible preferred
stock(2)...................................... 53,136 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value per share;
no shares authorized, issued or outstanding,
actual and pro forma; 10,000,000 shares
authorized, no shares issued or outstanding
pro forma as adjusted....................... -- -- --
-------- -------- --------
Common stock, $0.0001 par value per share;
75,000,000 shares authorized, 12,664,322
shares issued and outstanding, actual;
75,000,000 shares authorized, 47,634,477
shares issued and outstanding, pro forma;
200,000,000 shares authorized,
55,134,477 shares issued and outstanding,
pro forma as adjusted....................... 1 5 6
Additional paid-in capital................... 24,566 82,310 164,109
Unearned stock-based compensation............ (19,158) (19,158) (19,158)
Notes receivable from stockholders........... (2,756) (2,756) (2,756)
Accumulated deficit.......................... (34,082) (34,082) (34,082)
-------- -------- --------
Total stockholders' (deficit) equity....... (31,429) 26,319 108,119
-------- -------- --------
Total capitalization..................... $ 27,027 $ 31,639 $108,289
======== ======== ========
</TABLE>
- -------------------
(1) See Note 4 of notes to consolidated financial statements.
(2) See Note 6 of notes to consolidated financial statements.
The number of shares of our common stock outstanding set forth in the table
above excludes the following:
. 1,471,992 shares of our common stock subject to options outstanding as
of December 31, 1999 at a weighted average exercise price of $0.47 per
share;
. 1,200,000 shares of our common stock subject to restricted stock grants
which were outstanding but unexercised as of December 31, 1999 at a
weighted average exercise price of $2.00 per share;
. 155,000 shares of our common stock subject to warrants outstanding as of
December 31, 1999 at a weighted average exercise price of $0.84 per
share;
24
<PAGE>
. 11,964,046 additional shares of our common stock that have been reserved
for issuance upon future grants of options under our stock option and
stock purchase plans; and
. up to 30,000 shares of our common stock that we would issue if we
complete the acquisition of Impact Peripherals.
Subsequent to December 31, 1999 and through March 17, 2000, we granted
options to purchase 1,503,061 shares of our common stock at a weighted average
exercise price of $4.56 per share, issued 335,027 shares of our common stock
pursuant to the exercise of options and cancelled options to purchase 60,542
shares of our common stock.
25
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $26.1 million, or $0.55 per share of our common stock. Our pro
forma net tangible book value per share represents our total tangible assets
less total liabilities divided by the pro forma total number of shares of
common stock outstanding at such date, after giving effect to the issuance of
up to 475,000 shares of our common stock to the former shareholders of
PrintRoom.com in connection with our acquisition of PrintRoom.com in
January 2000, the exercise of warrants to purchase 346,300 shares of our common
stock and the conversion of all outstanding shares of preferred stock into
shares of common stock. The dilution in pro forma net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of our common stock in this offering and the net tangible book value
per share of our common stock immediately following this offering.
Without taking into account any changes in pro forma net tangible book value
after December 31, 1999, other than to give effect to the sale of the shares of
common stock offered by us at an assumed initial public offering price of
$12.00 per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value as of December 31, 1999 would have been approximately
$107.9 million or $1.96 per share of common stock. This amount represents an
immediate increase in pro forma net tangible book value of $1.41 per share to
the existing stockholders and an immediate and substantial dilution in pro
forma net tangible book value of $10.04 per share to new investors purchasing
shares in this offering. The following table illustrates the dilution in pro
forma net tangible book value per share to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $12.00
Pro forma net tangible book value per share as of December
31, 1999.................................................... $0.55
Increase per share attributable to new investors............. 1.41
Pro forma net tangible book value per share after the offering. 1.96
------
Dilution per share to new investors............................ $10.04
======
</TABLE>
The following table summarizes, as of December 31, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing stockholders and to be paid by new investors purchasing shares of
common stock in this offering at an assumed initial public offering price of
$12.00 per share, before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 47,634,477 86.4% $ 62,713,000 41.0% $1.32
New investors........... 7,500,000 13.6 90,000,000 59.0 12.00
---------- ----- ------------ -----
Total................. 55,134,477 100.0% 152,713,000 100.0%
========== ===== ============ =====
</TABLE>
The above information assumes no exercise of the underwriters' over-
allotment option and excludes exercises of stock options or warrants after
December 31, 1999. As of December 31, 1999, we had outstanding options to
purchase 1,471,992 shares of our common stock at a weighted average exercise
price of $0.47 per share and warrants to purchase 155,000 shares of our common
stock at a weighted average exercise price of $0.84 per share. At December 31,
1999, we also had 1,200,000 shares of our common stock subject to restricted
stock grants outstanding but unexercised at a weighted average exercise price
of $2.00 per share. Between December 31, 1999 and March 17, 2000, we issued
options to purchase 1,376,061 shares of our common stock at a weighted average
exercise price of $4.56. Assuming the exercise of all of these options,
warrants and grants, the pro forma net tangible book value per share of common
stock would be $1.99.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
related notes thereto included elsewhere in this prospectus. The selected
consolidated balance sheet data as of December 31, 1998 and 1999 and the
selected consolidated statements of operations data for each of the three years
in the period ended December 31, 1999 have been derived from our consolidated
financial statements, which have been audited by PricewaterhouseCoopers LLP,
independent accountants, and are included elsewhere in this prospectus. The
selected consolidated balance sheet data as of December 31, 1996 and December
31, 1997 and the selected consolidated statements of operations data for the
period from September 16, 1996 (date of inception) to December 31, 1996 were
derived from audited financial statements that are not included in this
prospectus.
<TABLE>
<CAPTION>
Period from
September 16,
1996 (date of
inception) to Years Ended December 31,
December 31, ---------------------------
1996 1997 1998 1999
------------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues:
Product sales..................... $ 452 $ 1,938 $ 7,609 $ 29,219
Development fees.................. -- 1,005 -- --
-------- ------- -------- --------
Total revenues................... 452 2,943 7,609 29,219
-------- ------- -------- --------
Gross margin........................ 185 1,810 1,576 4,623
-------- ------- -------- --------
Operating expenses:
Research and development (excludes
stock-based compensation of $274
in 1999)......................... 726 3,931 3,101 4,141
Sales and marketing (excludes
stock-based compensation of $285
in 1999)......................... 238 1,098 4,413 8,599
General and administrative
(excludes stock-based
compensation of $1,118 in 1999).. 709 1,650 2,733 5,241
In-process research and
development write-off............ 3,047 -- -- --
Stock-based compensation.......... -- -- -- 1,806
-------- ------- -------- --------
Total operating expenses......... 4,720 6,679 10,247 19,787
-------- ------- -------- --------
Loss from operations................ (4,535) (4,869) (8,671) (15,164)
-------- ------- -------- --------
Net loss............................ $ (4,555) $(5,157) $ (9,090) $(15,281)
======== ======= ======== ========
Net loss per common share--basic and
diluted............................ $ (0.27) $ (0.52) $ (3.29) $ (2.87)
======== ======= ======== ========
Shares used in net loss per common
share calculation--basic and
diluted (see Note 2 to the
consolidated financial statements). 16,854 9,945 2,766 5,320
======== ======= ======== ========
Pro forma net loss per common
share--basic and diluted
(unaudited) ....................... $ (0.48)
========
Shares used in pro forma net loss
per common share calculation--basic
and diluted (unaudited) (see Note
12 to the consolidated financial
statements)........................ 32,163
========
<CAPTION>
December 31,
-----------------------------------------
1996 1997 1998 1999
------------- ------- -------- --------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........... $ 94 $ 341 $ 9,824 $ 6,495
Short-term investments.............. -- -- -- 3,896
Working capital (deficit)........... (4,975) (751) 10,382 19,574
Total assets........................ 1,048 2,102 16,814 38,274
Short-term debt..................... 3,500 61 67 5,224
Long-term debt...................... -- 6,400 5,326 96
Mandatorily redeemable convertible
preferred stock.................... -- 2,922 24,653 53,136
Total stockholders' deficit......... (4,446) (9,329) (18,411) (31,429)
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto and other financial information
appearing elsewhere in this prospectus.
Overview
We design, develop and market high-performance digital film and connectivity
products for the digital photography market. Our products and services allow
customers to capture digital images and download them quickly to a personal
computer for editing, distributing and printing.
We were formed in September 1996 to purchase the Solid-State Storage
Business unit of Cirrus Logic, Inc. This business unit was started as a small
team of engineers in 1993. By September 1996, the group had grown to
approximately 30 engineers conducting research and development. From the
inception of the business unit to September 1996, the business unit was engaged
principally in research and development activities and recorded approximately
$250,000 and $659,000 of revenues in 1995 and in the period from January 1,
1996 to September 15, 1996, respectively. After the acquisition and through the
middle of 1997, we focused primarily on the sale of controllers and PC Cards
for general flash memory applications. Commencing in the middle of 1997, we
began to focus our products as well as marketing and sales efforts on the
digital film market.
Revenues. We generate revenues primarily from the sale of digital film and
connectivity products for the professional, commercial and consumer markets.
Our digital film is offered in the three primary media formats currently used
by digital cameras: CompactFlash, PC Card and SmartMedia. In 2000, we expect to
begin receiving a modest to small amount of revenues from the licensing of our
technology. In addition, as a result of our acquisition of Printroom.com in
January 2000, we offer photofinishing services over the Internet and will begin
to recognize modest revenues from these services in 2000.
Our customers include original equipment manufacturers, private label
resellers, consumer retailers and distributors. Some of these customers have
return and price protection rights. We protect some of our customers against
the effects of price decreases on their inventories. Accordingly, if we reduce
our prices, we pay certain distributors and consumer retailers for the
difference between the new price and the price paid for the same product still
in their inventory. We permit some of our customers to return products still in
their inventory for credit or new products. We recognize revenue where there is
a contract or purchase order, upon shipment or delivery depending on the terms
of sale and collectibility of the resulting receivable is probable. We provide
for estimated future returns and price protection based on historical
experience at the time the corresponding revenue is recognized. At the time of
sale, we also provide for the estimated costs of meeting product warranty
obligations. For one of our distributors, revenues and cost of revenues are
deferred until the distributor has sold the product to its customers.
A majority of our sales have been to a limited number of customers. Product
sales to our top 10 customers accounted for approximately 99.7% of our product
sales in 1997, 83.7% in 1998 and 79.2% in 1999. We expect that sales of our
products to a limited number of customers will continue to account for a
substantial portion of our product sales for at least the next several years.
Domestic sales account for the majority of our revenues. Product sales in the
United States represented 78.1% of total revenues in 1998 and 72.4% in 1999. We
expect that international sales, especially in Japan, will become a larger
percentage of our revenues in the future.
Cost of Revenues. Our cost of revenues consists primarily of material costs,
with flash memory accounting for most of those costs. We maintain relationships
with key suppliers, which we believe will be able to provide us with sufficient
quantities of flash memory during 2000. However, we expect to continue to face
price fluctuations for flash memory. In addition, cost of revenues includes
expenses related to materials procurement, inventory management and
manufacturing.
28
<PAGE>
Research and Development. Our research and development expenses include
salaries and related expenses for research and development personnel, fees for
outside consultants, patent costs and prototype development costs. We believe
that continued investment in research and development is important to attain
our strategic objectives, and we anticipate that our research and development
expenses will continue to increase significantly in absolute dollars due to our
product development efforts.
Sales and Marketing. Our sales and marketing expenses include salaries and
related expenses for sales and marketing personnel, advertising, customer
service, technical support, distribution and travel and trade show expenses. We
expect sales and marketing expenses to increase significantly as we add sales
staff and expand our promotional and branding efforts, both domestically and
internationally, primarily in Japan and Europe.
General and Administrative. Our general and administrative expenses include
salaries and related expenses for executive, administrative and operational
personnel, fees for professional services and other corporate expenses. We have
incurred significant legal expenses related to patent litigation with SanDisk,
which we expect to continue in 2000. We expect general and administrative
expenses to increase significantly as we add personnel to support the expansion
of our operations, incur additional expenses related to the anticipated growth
of our business, assume the responsibilities of a public company and continue
to incur expenses in ongoing litigation.
Stock-based Compensation. Stock-based compensation represents the aggregate
difference, at the date of grant, between the deemed fair market value of the
stock underlying options and the exercise prices of these options. Stock-based
compensation is amortized over the vesting period of the underlying options
based on an accelerated vesting method.
Our History of Losses
We have incurred significant losses to date. As of December 31, 1999, we had
an accumulated deficit of approximately $34.1 million. We intend to continue to
expend significant financial and management resources on developing additional
products and services, increasing sales and marketing activities, improving our
technologies and expanding our operations. As a result, we expect to continue
to incur additional losses and negative cash flow through 2000 and possibly
beyond. In view of the rapidly changing nature of our market and our limited
operating history, we believe that period-to-period comparisons of our revenues
and other operating results are not necessarily meaningful and should not be
relied upon as indications of future performance. Our historic revenue growth
rates are not necessarily sustainable or indicative of our future growth.
29
<PAGE>
Results of Operations
The following table sets forth our statement of operations data as a
percentage of total revenues for the years indicated.
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenues:
Product sales..................................... 65.9 % 100.0 % 100.0 %
Development fees.................................. 34.1 -- --
------ ------ ------
Total revenues.................................. 100.0 100.0 100.0
Cost of revenues.................................... 38.5 79.3 84.2
------ ------ ------
Gross margin........................................ 61.5 20.7 15.8
Operating expenses:
Research and development (excludes stock-based
compensation of $274 in 1999).................... 133.6 40.8 14.2
Sales and marketing (excludes stock-based
compensation of $285 in 1999).................... 37.3 58.0 29.4
General and administrative (excludes stock-based
compensation of $1,118 in 1999).................. 56.1 35.9 17.9
Stock-based compensation.......................... -- -- 6.2
------ ------ ------
Total operating expenses........................ 227.0 134.7 67.7
------ ------ ------
Loss from operations................................ (165.5) (114.0) (51.9)
Interest expense and other.......................... (9.7) (4.5) (0.4)
------ ------ ------
Net loss........................................ (175.2)% (118.5)% (52.3)%
====== ====== ======
</TABLE>
Year Ended December 31, 1998 versus Year Ended December 31, 1999
Revenues. Total revenues increased 284.2% from $7.6 million in 1998 to $29.2
million in 1999. This increase was the result of continued increases in sales
of our digital film and connectivity products, including our USB-enabled
CompactFlash digital film and the JumpShot product introduced in the last half
of the year. In addition, in 1999, we added several new customers that
generated significant sales, including Best Buy, Nikon, Tech Data and Wal-Mart.
Product sales in 1999 were predominantly to customers in the United States
(72.4%), Japan (14.6%) and the United Kingdom (11.7%). Product sales in 1998
were predominantly to customers in the United States (78.1%) and Japan (19.3%).
Four customers, Ingram Micro, Kodak, Impact Peripherals and Tech Data,
accounted for 12.8%, 11.4%, 10.0% and 8.8% of product sales in 1999. Four
customers, Kodak, ADTEC, Ingram Micro and Viking, accounted for 24.6%, 18.1%,
13.2% and 10.6% of product sales in 1998. We believe that a substantial
majority of the products we sold to Ingram Micro and Tech Data were resold by
those parties to CompUSA.
Cost of Revenues. Cost of revenues increased 310.0% from $6.0 million in
1998 to $24.6 million in 1999. The increase in cost of revenues was due to
increased sales of digital film and connectivity products and higher material
costs. Overall, cost of revenues increased from 79.3% of total revenues in 1998
to 84.2% of total revenues in 1999. Our gross margins decreased from 20.7% in
1998 to 15.8% in 1999 due to a number of factors, the most significant factor
related to price competition during the first three quarters of 1999 which
reduced average sales prices. Gross margins were also impacted in 1999 due to
the decline in sales of higher gross margin controllers. Finally, we
experienced higher product costs than anticipated related to the introduction
of certain new products in 1999.
Research and Development. Research and development expenses increased 33.5%
from $3.1 million in 1998 to $4.1 million in 1999. The increase in research and
development expenses was primarily due to an increase in the number of
development projects that we pursued and an increase in the use of outside
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consultants. We may continue to use consultants in the future from time to
time. Our research and development efforts continue to focus on product
enhancement and new product development. Research and development expenses
decreased from 40.8% of total revenues in 1998 to 14.2% of total revenues in
1999.
Sales and Marketing. Sales and marketing expenses increased 94.9% from $4.4
million in 1998 to $8.6 million in 1999. The increased level of expenditures
was primarily due to increases in advertising and marketing, increase in
commissions as sales increased and personnel-related costs due to increased
hiring. Overall, sales and marketing expenses decreased from 58.0% of total
revenues in 1998 to 29.4% of total revenues in 1999.
General and Administrative. General and administrative expenses increased
91.8% from $2.7 million in 1998 to $5.2 million in 1999. This increase was the
result of increasing personnel and facilities costs to support our growing
operations and increased costs in connection with ongoing litigation matters.
General and administrative costs decreased from 35.9% of total revenues in 1998
to 17.9% of total revenues in 1999.
Stock-based Compensation. The unamortized stock-based compensation recorded
for all option grants through December 31, 1999 totaled $21.0 million. In 1999,
we recognized stock-based compensation of $1.8 million associated with these
options. The remainder of the unamortized stock-based compensation will be
amortized as follows: $11.4 million in 2000; $4.8 million in 2001; $2.3 million
in 2002; and $0.7 million in 2003.
Interest Expense and Other. Interest expense and other, which is comprised
primarily of net interest expense and foreign currency fluctuation, decreased
72.3% from $419,000 in 1998 to $117,000 in 1999. The decrease was the result of
interest earned on temporary deposits resulting from the proceeds of our
preferred stock offerings.
Income Taxes. No provision for federal and state income taxes was recorded,
since we incurred net operating losses from inception through December 31,
1999. As of December 31, 1999, we had approximately $25.7 million of federal
and state net operating loss carryforwards, which expire in varying amounts
beginning in 2003 and ending in 2019, if not utilized. Due to the uncertainty
regarding the ultimate utilization of the net operating loss carryforwards, we
have not recorded any benefit for losses and a valuation allowance has been
recorded for the entire amount of the net deferred tax asset. In addition,
sales of our stock, including shares sold in this offering, may further
restrict our ability to utilize our net operating loss carryforwards.
Year Ended December 31, 1997 versus Year Ended December 31, 1998
Revenues. Total revenues increased 162% from $2.9 million in 1997 to $7.6
million in 1998. The increase was the result of a 292.6% increase in product
revenues. No development fees were recognized in 1998. The product revenue
increase was due primarily to increasing sales from new media formats such as
CompactFlash, PC Card and SmartMedia for use in digital cameras. In 1998,
substantially all of our product sales related to sales of digital film whereas
in 1997 product sales related primarily to sales of controllers and, to a
lesser degree, digital film. Product sales in 1997 were substantially all to
customers in the United States. Product sales in 1998 were primarily to
customers in the United States (78.1%) and Japan (19.3%). Four customers,
Kodak, ADTEC, Ingram Micro and Viking, accounted for 24.6%, 18.1%, 13.2% and
10.6% of product sales in 1998. Three customers, Simple Technologies, Hitachi
and Mitsubishi, accounted for 47.8%, 20.4% and 14.9% of product sales in 1997.
We recognized $1.0 million in development fees in 1997 from three major
semiconductor manufacturers.
Cost of Revenues. The cost of development fee revenue for 1997 has been
included in research and development costs. These costs were not allocated to
cost of revenue as they represented internal research and development projects
that we were already undertaking as part of the development of our own core
technology. Accordingly, our gross margin has been measured based on a
percentage of product sales.
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<PAGE>
Cost of product revenues increased 445.4% from $1.1 million in 1997 to $6.0
million in 1998. The increase in cost of product revenues was primarily due to
increased sales of digital photography products and higher material costs for
our digital film. Cost of product revenues increased from 58.5% of product
sales in 1997 to 79.3% of product sales in 1998, largely due to changes in our
product mix.
Research and Development. Research and development expenses decreased 21.1%
from $3.9 million in 1997 to $3.1 million in 1998. The decrease was primarily
due to reductions in research and development personnel and the number of
development projects that we pursued. Research and development costs decreased
from 202.9% of product sales in 1997 to 40.8% of product sales in 1998.
Sales and Marketing. Sales and marketing expenses increased 301.9% from $1.1
million in 1997 to $4.4 million in 1998. The increase was primarily due to
higher expenses associated with selling and promoting our new digital film and
connectivity products in the U.S. market. Sales and marketing expenses
increased from 56.6% of product sales in 1997 to 57.9% of product sales in
1998.
General and Administrative. General and administrative expenses increased
65.6% from $1.7 million in 1997 to $2.7 million in 1998. This increase was the
result of increasing personnel and facilities costs to support our growing
operations. In addition, we incurred significant legal expenses in 1998 related
to our patent litigation with SanDisk. General and administrative costs
decreased from 85.2% of product sales in 1997 to 35.9% of product sales in
1998.
Interest Expense and Other. Net interest expense increased 45.5% from
$288,000 in 1997 to $419,000 in 1998. The increase was primarily due to the
timing of borrowings from related parties.
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<PAGE>
Quarterly Results of Operations
The following table sets forth quarterly statement of operations data for
the eight quarters in 1998 and 1999. This quarterly information has been
derived from our unaudited financial statements and, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods covered. The quarterly data should be read in conjunction with our
consolidated financial statements and related notes. The operating results for
any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product sales........... $ 215 $ 1,235 $ 2,072 $ 4,087 $ 3,726 $ 5,511 $ 8,176 $11,806
Cost of revenues........ 212 858 1,457 3,507 3,240 4,695 7,059 9,602
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 3 377 615 580 486 816 1,117 2,204
Operating expenses:
Research and
development........... 577 719 788 1,017 944 1,019 1,069 1,109
Sales and marketing.... 661 873 1,151 1,728 1,757 1,758 2,260 2,824
General and
administrative........ 380 587 727 1,038 997 1,373 1,018 1,853
Stock-based
compensation.......... -- -- -- -- 23 275 140 1,368
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,618 2,179 2,666 3,783 3,721 4,425 4,487 7,154
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,615) (1,802) (2,051) (3,203) (3,235) (3,609) (3,370) (4,950)
Interest expense and
other.................. (129) (93) (134) (63) (20) (93) (54) 51
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,744) $(1,895) $(2,185) $(3,266) $(3,255) $(3,702) $(3,424) $(4,899)
======= ======= ======= ======= ======= ======= ======= =======
The following table sets forth our statement of operations data as a
percentage of total revenues for the periods indicated.
<CAPTION>
Quarters Ended
-------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product sales........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 98.6 69.4 70.3 85.8 87.0 85.2 86.3 81.3
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 1.4 30.6 29.7 14.2 13.0 14.8 13.7 18.7
Operating expenses:
Research and
development........... 268.4 58.2 38.0 24.9 25.3 18.5 13.1 9.4
Sales and marketing.... 307.4 70.7 55.6 42.3 47.2 31.9 27.6 23.9
General and
administrative........ 176.7 47.6 35.1 25.4 26.8 24.9 12.5 15.7
Stock-based
compensation.......... -- -- -- -- 0.6 5.0 1.7 11.6
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 752.5 176.5 128.7 92.6 99.9 80.3 54.9 60.6
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (751.1) (145.9) (99.0) (78.4) (86.9) (65.5) (41.2) (41.9)
Interest expense and
other.................. (60.0) (7.5) (6.5) (1.5) (0.5) (1.7) (0.7) 0.4
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ (811.1)% (153.4)% (105.5)% (79.9)% (87.4)% (67.2)% (41.9)% (41.5)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Product sales have increased each of the past eight quarters, except for the
first quarter of 1999. We expect our quarterly operating results to fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside of our control. These factors include, for example, changes in
component costs, manufacturing yields, the prices at which we sell our products
and the mix of the products we sell. Historically, our quarterly gross margins
have varied significantly. For example, our gross margins for the fourth
quarter in 1999 were significantly higher than in previous quarters. We believe
our fourth quarter 1999 gross margin benefited from improved yields for some of
our components, stable prices, more favorable margins on recently introduced
USB products and a more favorable product mix. We do not anticipate benefiting
from all of these events at the same time in the foreseeable future. We expect
to
33
<PAGE>
continue to experience fluctuations and pressure on our gross margins due to a
number of factors, including changes in our product and customer mix, flash
memory costs and the prices of competitive products and higher costs in the
introduction of new products.
We plan to significantly increase our research and development, sales and
marketing and general and administrative expenses in 2000 and beyond. Our
expenses are partially based on our expectations regarding future revenues,
and are largely fixed in nature, particularly in the short term. As a result,
if our revenues in a period do not meet our expectations, our financial
results will likely suffer. We believe that comparisons of our historical
quarterly operating results are neither meaningful nor predictive of future
performance.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of our common stock and preferred stock, which through December 31, 1999
totaled approximately $54.9 million. Net cash used in operating activities was
approximately $4.6 million in 1997, $10.3 million in 1998 and $26.3 million in
1999. Net cash used in operating activities resulted primarily from our net
losses, increases in inventory and, in 1998 and 1999, increases in accounts
receivable, offset in part by increases in accounts payable and accrued
liabilities.
Net cash used in investing activities was $738,000 in 1997, $631,000 in 1998
and $5.6 million in 1999. Net cash used in investing activities in 1997 and
1998 primarily represented purchases of property, equipment and software. In
1999, net cash used in investing activities resulted from purchases of short-
term investments and property, equipment and software.
Net cash provided by financing activities was $5.6 million in 1997, $20.4
million in 1998 and $28.5 million in 1999. Net cash provided by financing
activities in 1997 was from the proceeds of notes payable and other loans,
offset by cash used to repurchase stock. Net cash provided by financing
activities in 1998 and 1999 consisted primarily of proceeds from preferred
stock offerings and from new investor loans later converted into preferred
stock.
As of December 31, 1999, we had $6.5 million of cash and $3.9 million of
short-term investments, $2.5 million of which is restricted, because it is
pledged as security for an outstanding letter of credit. As of that date, our
principal commitments consisted of obligations outstanding under noncancelable
operating leases for $3.2 million, including contractual commitments of
$612,000 for 2000. We anticipate a substantial increase in our lease
commitments and our cash needs, consistent with the anticipated growth in
operations and infrastructure.
We currently anticipate that the net proceeds of this offering, together with
current balances of cash, cash equivalents and short-term investments, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures through the end of 2001. We may need to raise additional funds
prior to the expiration of this period if, for example, we pursue acquisitions
or experience operating losses that exceed our current expectations. We cannot
be certain that additional financing will be available to us on favorable
terms when required, or at all.
Quantitative and Qualitative Disclosure of Market Risks
We sell our products primarily to customers in the U.S. and to a lesser extent
Japan and the U.K. All of our sales are currently denominated in U.S. dollars,
with the exception of one Japanese customer that accounted for approximately
5.3% of sales in 1999 whose sales are denominated in Japanese yen. As a
result, it is unlikely that our financial results could be directly affected
to a significant extent by changes in foreign currency exchange rates,
although the prices of our products would become more expensive in a
particular foreign market if the value of the U.S. dollar rises in comparison
to the local currency, which may make it more difficult to sell our products
in that market. We may face foreign currency exchange risk in the future.
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<PAGE>
Approximately 27.6% of our total revenues for the year ended December 31, 1999
were derived from countries other than the United States. Therefore, our
financial results could be directly affected by weak economic conditions in
foreign markets. These risks may change if we acquire businesses outside the
U.S. or if we sell in non-U.S. dollar denominated currencies.
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest expense we must pay on our
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited to the exposure related to those debt instruments and
credit facilities that are tied to market rates. We do not plan to use
derivative financial instruments in our investment portfolio. We plan to
ensure the safety and preservation of our invested principal funds by limiting
default risk and market risk. We plan to mitigate default risk by investing in
investment-grade securities. We have historically invested in investment-
grade, short-term securities that we have held until maturity to limit our
market risk.
Year 2000 Readiness Disclosure
We have not experienced any Year 2000-related disruption in the operation of
our systems. Although most Year 2000 problems should have become evident on
January 1, 2000, additional Year 2000-related problems may become evident only
after that date. For example, some software programs may have difficulty
resolving the so-called "century leap year" algorithm which will also occur
during the Year 2000.
Recently Issued Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position 98-1, or SOP 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 does
not have a material impact on our financial statements.
In April 1998, AcSEC issued Statement of Position 98-5, or SOP 98-5,
"Reporting on the Costs of Start-Up Activities." This standard requires
companies to expense the costs of start-up activities and organization costs
as incurred. In general, SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. The adoption of SOP 98-5 does not have a material
impact on our results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a components of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. We do not currently hold derivative instruments or engage in hedging
activities.
35
<PAGE>
BUSINESS
We are a leading designer, developer and marketer of high-performance
digital film and connectivity products for the digital photography market. Our
broad line of high-performance digital film combines flash memory from leading
suppliers with our patented controller technology to address the needs of
professional, commercial and consumer photographers. Our connectivity products
make it easy to transfer digital images from digital film to a personal
computer. PrintRoom.com provides consumers with high-quality prints of digital
images and photo sharing services. Collectively, our products and services
provide an end-to-end solution for the digital photographer.
Our high-performance digital film can record images faster than most other
digital film. This performance advantage is particularly noticeable when used
in advanced digital cameras that take advantage of our write speed, or the rate
at which our film can capture a digital image. We believe that our digital film
is the leading choice for professional photographers. We offer digital film for
substantially all digital cameras, including those manufactured by Agfa, Canon,
Casio, Epson, Fuji, Hewlett-Packard, Kodak, Konica, Minolta, Nikon, Olympus,
Polaroid, Ricoh, Sony and Yashica. We currently offer digital film in the three
primary media formats currently used by digital cameras: CompactFlash,
SmartMedia and PC Card.
Our technology can be applied to a variety of consumer electronic
applications, including digital cameras, Internet music players, laptop
computers, personal digital assistants, telecommunication and network devices
and digital video recorders. As an example of how we intend to leverage our
digital film technology into some of these markets, we have entered into an
agreement with Sony to combine our proprietary controller technology with their
Memory Stick media format and include the Memory Stick as one of our digital
film products.
Industry Background
Traditional Photography Market. According to a joint report by
Photofinishing News and Lyra Research, the worldwide photography market,
consisting of cameras and ancillary products, film and photofinishing services,
exceeded $85 billion in 1998. Participants in this global market include
leading providers of traditional photography products and services, such as
Canon, Fuji, Kodak, Minolta, Nikon and Olympus. According to this report, over
60 million traditional film cameras were sold worldwide in 1998. In addition,
this report estimates that there were approximately 3.4 billion rolls of
traditional film sold during this period, resulting in approximately 88 billion
total exposures.
Digital Photography. Digital photography offers several advantages over
traditional photography: the photographer can immediately preview digital
images, select the best digital image from multiple shots and easily edit the
image. Photographers can also transfer the digital images to a personal
computer where they can be easily edited and shared. Initially, the demand for
digital images was driven primarily by professional and commercial users in
such fields as photojournalism, advertising, publishing, insurance and real
estate. These users obtained digital images either by using digital scanners to
capture traditional film photographs or by using relatively expensive digital
cameras with high-resolution capabilities.
Although early digital cameras were typically too expensive or offered poor
resolution capabilities, recent technological improvements have resulted in
both reduced prices and improved image quality. The growing presence of
personal computers in the home and the increasing use of the Internet by
consumers to transmit images to friends and family are stimulating the demand
for and use of digital cameras. International Data Corporation, or IDC,
estimates that the number of Internet users worldwide will increase from
approximately 200 million in 1999 to approximately 500 million by 2003. This
penetration could further increase if historical bandwidth constraints are
successfully addressed by improved delivery systems such as digital cable,
satellite and digital subscriber lines.
Digital Camera Market. IDC projects that the photo-quality digital camera
market will be the fastest growing digital camera segment from 1998 to 2003,
with an estimated compound annual growth rate of
36
<PAGE>
approximately 62% during this period. It expects this segment to drive the
growth of the entire digital camera market. IDC defines photo-quality digital
cameras as those cameras that approximate both the cost and image quality of a
traditional 35mm camera. The sale of photo-quality digital cameras accounted
for approximately 64% of total digital camera sales in 1998 and is projected to
account for nearly all digital camera sales by the end of 2002. IDC projects
that the number of photo-quality digital camera units shipped will increase
from approximately 2.0 million in 1998 to 21.8 million in 2003.
The Digital Film Market. Digital cameras typically store images on removable
and reusable flash memory cards called digital film. An integral part of most
digital film are the controllers that write the image onto the digital film.
Controllers either reside on the flash memory card or permanently in the
digital camera. The CompactFlash, Memory Stick and PC Card formats contain a
controller, while the SmartMedia format does not. When the controller resides
in the digital camera, as is the case with SmartMedia, the ability of that
camera to utilize the latest advances in flash memory technology is limited.
The inclusion of the controller on the flash memory card allows the latest
advances in controller technology to be combined with the latest advances in
flash memory technology. We believe this inclusion allows digital film
manufacturers to more quickly design and market digital film products with
higher capacity and faster write speeds. CompactFlash and PC Cards accounted
for approximately 77% of flash memory-based digital film market revenue in
1997.
We believe the increasing acceptance of digital cameras will continue to
drive the growth of the digital film market. Semico Research, Inc., a
technology market research firm, estimates that the digital film market will
increase from approximately $80 million in 1998 to over $1.2 billion in 2003,
representing an estimated compound annual growth rate of approximately 72%. The
acceptance of digital cameras depends in large part upon achieving lower prices
and higher resolution. It also depends on the availability of digital film
products and services that meet the following consumer needs:
. Speed. The speed with which a user can take successive photographs is a
critical element of digital photography. The factors that limit this
speed include image file size, the processing speed of the camera and
the sustained write speed of the digital film. As digital cameras with
faster processing speeds enter the market, we believe sustained write
capabilities will distinguish competing brands of digital film.
. Connectivity. According to IDC, the speed at which digital images can be
transferred to a personal computer or another device is one of the most
important characteristics for consumers when considering the overall
usability of a digital camera. Today, there are relatively few options
for quickly and easily transferring digital images to a personal
computer. The most common method, and also the slowest, is to transfer
images via the serial port on the camera, which can often take over 30
minutes to transmit 32 megabytes of digital images. Several digital
camera manufacturers have recently introduced cameras with connectivity
solutions utilizing the universal serial bus, or USB port, of the
personal computer. These solutions, however, are inherently complex and
require a direct physical connection between the digital camera and the
personal computer to transfer images. This connection draws from and
drains the power supply of the camera.
. Capacity. The emergence of digital cameras with increasingly higher
resolution capabilities is driving the need for higher capacity digital
film. The images produced by these high-resolution digital cameras have
greater memory requirements, which limit the storage capacity of
existing digital film products to a few pictures. Most digital cameras
are currently shipped with an eight megabyte storage card, which means
that typically fewer than 10 to 15 pictures can be stored from existing
photo-quality cameras shooting at the highest resolution.
. Compatibility. Not all digital film of a particular format is compatible
with each digital camera requiring that format. Accordingly, the
consumer who purchases a new digital camera or who owns multiple cameras
requires digital film that is compatible in terms of format and
functionality with each model.
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<PAGE>
Digital Photofinishing Market. Consumers currently obtain prints from
digital images primarily by home printing or through Internet sites offering
photofinishing services. The majority of consumers currently choose to use
traditional inkjet printers at home to print their digital images. These
printers produce prints that vary in image quality or resolution and can fade.
The industry has recently experienced a substantial increase in the number of
companies offering Internet photofinishing services. These services allow
consumers to submit their digital images online and receive photographic prints
in the mail. These services are convenient, cost-effective and produce high-
quality prints that are comparable to traditional photofinishing services. Many
of these Internet photofinishing services also provide image archiving and
sharing services. Additionally, digital imaging kiosks, such as those from
Kodak, Fuji, Pixel Magic and Telepix, allow consumers to scan traditional
images or download digital images for processing and output.
Our Solution
We provide an extensive array of digital film and connectivity products and
services that improve the overall digital photography experience. We combine
flash memory from leading suppliers with our patented controller technology to
offer a broad line of high-performance digital film that addresses the needs of
professional, commercial and consumer photographers. Our connectivity products
make it easy for consumers to transfer digital images from their camera to a
personal computer. We also offer high-quality photofinishing services over the
Internet. Our products and services offer the following benefits:
Superior Speed. Our digital film records images faster than most other flash
memory cards, particularly when used in advanced digital cameras that have the
ability to take advantage of our increased write speed. We currently offer
digital film with write speeds ranging from 600 kilobytes per second to
1.5 megabytes per second for our CompactFlash product. Currently, our
competitors generally offer speeds of 600 kilobytes per second or below. This
means that consumers using our digital film are able to take more pictures in
less time, increasing the likelihood of capturing the desired image. Higher
resolution cameras produce larger image files that must be stored in a short
amount of time in order to rapidly take successive pictures. We believe the
faster write speeds of our digital film will become increasingly important as
digital cameras incorporate higher resolution capabilities.
Quick Connectivity. We offer a line of digital film reader/writers that
facilitate the transfer of digital images to a personal computer and other
devices without a direct connection to the digital camera. Our connectivity
products include parallel port and USB port universal reader/writers that are
compatible with all types of digital film formats, as well as with the
Macintosh and PC platforms. Our USB-enabled CompactFlash product, which
received The 1999 Best of What's New award from Popular Science and The
Editor's Choice Award from PC Photo, was the first digital film product to
integrate the USB-protocol directly onto the controller of the digital film.
Our USB-enabled digital film combined with our JumpShot cable provide the
convenience of plug-and-play operation and image transfer rates up to 25 times
faster than connectivity products using the serial port of a digital camera.
High Capacity. Our ability to reprogram our controller allows us to purchase
flash memory from the manufacturer that offers the highest capacity flash
memory. We currently offer digital film with capacities of up to 320 megabytes
in the PC Card format, 160 megabytes in the CompactFlash format and 32
megabytes in the SmartMedia format. Our high-capacity digital film addresses
the needs of those consumers who wish to replicate or surpass the number of
pictures that can be captured with traditional film products, particularly as
digital cameras incorporating higher resolution capabilities are introduced
into market. For example, our 160 megabyte CompactFlash digital film is capable
of storing the equivalent of 229 images using the Epson 850z digital camera in
its highest resolution mode.
Guaranteed Compatibility. We offer digital film for substantially all
digital cameras, including those manufactured by Agfa, Canon, Casio, Epson,
Fuji, Hewlett-Packard, Kodak, Konica, Minolta, Nikon, Olympus, Polaroid, Ricoh,
Sony and Yashica. We currently offer digital film in the three primary media
formats currently used by digital cameras: CompactFlash, SmartMedia and PC
Card. The patented
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<PAGE>
programmability of our controller technology allows us to meet a wide range of
digital camera compatibility specifications without physically altering our
digital film. We maintain a laboratory where we test prototypes of digital
camera models from manufacturers prior to their introduction to market to
ensure their compatibility with our digital film. This testing enables us to
market our entire line of digital film as "Digital Film Compliant," which is
our guarantee that our digital film will work seamlessly with any digital
camera that uses the particular format.
Internet Photofinishing Services. Through our recent acquisition of
PrintRoom.com, we offer a broad array of photofinishing and ancillary services
over the Internet. Our service enables digital camera users to submit their
digital images for printing directly over the Internet and to receive high-
quality photographic prints in the mail at prices competitive with traditional
photofinishing services. We also offer online photo-sharing services through
which our customers are able to share their digital images with family and
friends over the Internet.
Our Strategy
Our objective is to establish our products and services as the industry
standard solution for capturing, storing, viewing, editing and distributing
digital images. We intend to capitalize on the anticipated growth and
development of the digital photography market by offering a broad range of
digital film and connectivity products and services and by leveraging our
proprietary technology into other consumer product applications. The key
elements of our business strategy include the following:
Leverage Our Technology to Enhance the Digital Photography Experience. Our
primary focus is to develop, market and sell digital film and connectivity
products and services. We intend to continue our research and development
efforts to further increase the performance of our digital film and
connectivity products and to work with digital camera manufacturers to improve
the design of their next generation cameras to take advantage of our high-speed
digital film. In addition, to enhance the overall digital photography
experience of our customers, we intend to combine our digital film and
connectivity products with our recently introduced Internet photo-sharing and
photofinishing services to create a seamless solution for our customers who
wish to capture, edit, distribute and print their digital images.
Build Our Brand. We believe that our brand of digital film is the leading
choice of professional photographers. We will continue to focus our marketing
efforts on leveraging this position and using our products' superior
performance to extend our brand recognition in the commercial and consumer
markets. We actively promote our brand in the commercial and consumer markets
through merchandising, packaging and print advertising. A number of digital
camera manufacturers such as Epson, Kodak, Minolta, Nikon, Olympus and Yashica
bundle our branded digital film with their digital cameras. In addition, we
actively work with leading retailers such as B&H Photo, Best Buy, Camera World,
CompUSA and Wal-Mart to promote our branded digital film by deploying joint
advertising campaigns, sponsoring in-store promotions and rebate programs,
designing product displays and demonstrations and training sales associates. To
promote PrintRoom.com, we intend to establish relationships with digital camera
manufacturers and retailers, as well as with online photography communities. We
intend to cross-promote our digital film and connectivity products and our
Internet photofinishing services to capitalize on our growing brand awareness.
Extend Our Patented Controller Technology to Address New Market
Opportunities. Our controller technology and products can be licensed for use
in a number of significant emerging markets, outside of digital film, that
require high-speed digital memory. For example, Internet music players, laptop
computers, personal digital assistants, digital video recorders,
telecommunication and network devices and other consumer electronic products
utilize flash memory devices. We believe that many original equipment
manufacturers that address these markets will be attracted to the
programmability, compatibility, high-performance and ease of connectivity of
our controller. Our agreement with Sony demonstrates how we plan to leverage
our digital film technology into emerging markets. We intend to selectively
pursue similar relationships and licensing arrangements.
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<PAGE>
Capitalize on Supply Flexibility for Our Key Components. Our patented
programmable controller technology is compatible with multiple sources of flash
memory. This flexibility enables us to outsource and draw on the highest
capacity or otherwise available flash memory at competitive prices. We believe
that outsourcing, rather than internally designing, developing and
manufacturing components, allows us to focus on our core competencies of
product design and development. Furthermore, we are able to take advantage of
the substantial expenditures made, and economies of scale achieved, by our
suppliers as well as their direct and more timely access to advancing
technology. We are committed to maintaining strong relationships with leading
suppliers to provide technologically superior products.
Expand Our International Presence. We intend to rapidly expand our
international presence. We currently sell our products in Europe and Asia
primarily through distributors. As part of our European expansion, we recently
agreed to acquire Impact Peripherals Limited, our primary European distributor
based in the United Kingdom. In addition, we recently established a small sales
group in Japan and plan on significantly expanding our direct sales and
marketing presence in Asia. PrintRoom.com currently has a limited customer base
of domestic and international customers. We intend to rapidly expand our
services in selected international markets. When such markets achieve a certain
size, we may establish local photofinishing operations to serve our customers
more quickly and more cost-efficiently.
Our Products and Services
Digital Film. We offer digital film in a variety of speeds and capacities in
the CompactFlash, PC Card and SmartMedia formats. Through our recently
announced agreement with Sony, we intend to expand our digital film offerings
to include the Memory Stick media format. Our entire line of digital film
products is subjected to rigorous design and testing procedures that we believe
are more comprehensive than the standards for compatibility set by the industry
in general. These procedures guarantee that our digital film will work
seamlessly with any digital camera that uses the particular format.
We label each of our digital film products for write speed performance in
which 1x is equal to a write speed of 150 kilobytes per second, nomenclature
similar to that used in the CD-ROM industry. For example, our 4x digital film
products are capable of sustained write speeds of at least 600 kilobytes per
second. Currently, we offer digital film products with write speeds ranging
from 4x to 10x.
The table below provides information on our principal digital film products:
Digital Film Products
<TABLE>
<CAPTION>
Sustained Write Storage Capacity Target U.S. Suggested
Format Speed (Megabytes) Market Retail Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CompactFlash 4x 8, 16, 32, 48, 64 and 80 Consumer $69 to $299
--------------------------------------------------------------------------
8x 32, 48, 64, 80, 128 and 160 Enthusiast $179 to $749
--------------------------------------------------------------------------
10x 128 and 160 Professional $649 to $799
- ----------------------------------------------------------------------------------------
SmartMedia Camera Dependent 8, 16 and 32 Consumer $29 to $129
- ----------------------------------------------------------------------------------------
PC Card 8x 160 and 320 Professional $629 to $1,199
</TABLE>
Connectivity Products. We offer a complete line of digital film
reader/writers that facilitate the transfer of digital images to a personal
computer and other devices without a direct connection to the digital camera.
We recently introduced our USB-enabled CompactFlash digital film, which
received the 1999 Best of What's New Award from Popular Science and the
Editor's Choice Award from PC Photo. With our USB-enabled digital film, the
consumer simply removes the digital film from the camera and slips it into our
40
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JumpShot cable, which is then plugged into the universal serial bus port of the
computer. When used with our JumpShot cable, our USB-enabled CompactFlash card
functions as a removable drive, thus enabling the consumer to easily transfer
digital images from our digital film to a personal computer.
The table below provides information on our connectivity products:
Connectivity Products
<TABLE>
<CAPTION>
U.S.
Suggested
Type of Product Description Retail Price
- ----------------------------------------------------------------------------------------
<C> <C> <S>
Digital Film Readers CompactFlash Adapter $11.99
-----------------------------------------------------------------
Universal (CompactFlash, SmartMedia and $49
PC Card) Reader/Writer for the Parallel Port
-----------------------------------------------------------------
CompactFlash Reader/Writer for the USB Port $99
- ----------------------------------------------------------------------------------------
JumpShot Connectivity Cable used to connect our USB-enabled
Kit* CompactFlash digital film to a personal
computer via a USB Port $19.95
</TABLE>
* Currently bundled with our USB-enabled CompactFlash digital film.
Photofinishing Services. Our Internet photofinishing services offer high-
quality digital prints as well as online photo-sharing capabilities. Through
PrintRoom.com, we enable our users to easily submit digital images over the
Internet and to receive high-quality photographic prints in one or more
destinations. Our photofinishing lab offers image enhancement and a full range
of print sizes ranging from wallet size to 8X10 inches. We also offer the
ability to create and share online albums and guest books with family and
friends.
Sales and Marketing
We sell our digital film and connectivity products to end-users primarily
through original equipment manufacturer and consumer retail channels. The
original equipment manufacturer channel consists of digital camera
manufacturers and other private label resellers. The consumer channel includes
national and regional retailers and select corporate accounts. We use a direct
sales force, as well as distributors, value-added resellers and independent
sales representatives for the consumer market. Our direct sales force includes
10 individuals based in Fremont, California and three in Japan. We currently
distribute products directly in Japan and Europe and other parts of the world
through international distributors. We also market our products through our
website. In 1999, distributors, independent sales representatives, direct sales
force and resellers accounted for 51%, 29%, 14% and 6%, respectively, of our
consumer revenues. In connection with the majority of our distributor sales, we
pay commissions to independent contractors based upon the sales to their
clients from our distributors.
To support our sales efforts, we conduct marketing programs designed to
educate our target markets about the differences in digital film offerings. Our
retail marketing programs include merchandising programs, in-store promotions,
trade events and print advertising. We also support our marketing strategy by
establishing and maintaining close relationships with original equipment
manufacturers. For example, several major digital camera manufacturers,
including Epson, Minolta, Nikon and Yashica, recently began bundling our Lexar
branded USB-enabled CompactFlash digital film with their digital cameras.
41
<PAGE>
Customers
The following chart illustrates the consumer retailers, original equipment
manufacturers and private label resellers and distributors that sell our
products and accounted for more than $300,000 in total revenues in 1999.
<TABLE>
<CAPTION>
Original Equipment
Consumer Manufacturers and
Retailers Private Label Resellers Distributors
--------- ----------------------- ------------
<S> <C> <C>
Best Buy ADTEC Argraph
B&H Photo Epson Associated Press
Camera World Hagiwara Impact Peripherals
CompUSA Kodak Ingram Micro
Fry's Electronics Nikon Tech Data
Wal-Mart Viking
Widget
</TABLE>
Four customers, Ingram Micro, Kodak, Impact Peripherals and Tech Data,
accounted for 12.8%, 11.4%, 10.0% and 8.8% of our product sales in 1999,
respectively. Four customers, Kodak, ADTEC, Ingram Micro and Viking, accounted
for 24.6%, 18.1%, 13.2% and 10.6% of our product sales in 1998, respectively.
We believe that a substantial majority of the products we sold to Ingram Micro
and Tech Data were resold by those parties to CompUSA.
We protect some of our customers against the effects of price decreases on
their inventories. Accordingly, if we reduce our prices, we pay certain
distributors and consumer retailers for the difference between the price paid
for the product still in their inventory and the new price. Additionally, we
permit some of our customers to return products still in their inventory for
credit or in exchange for new products.
Competition
Our primary competitors are companies that sell digital film into the
consumer and original equipment manufacturer digital film markets. These
companies are primarily manufacturers with both controller and flash memory
capabilities, such as SanDisk and Hitachi. We believe that SanDisk is our
primary competitor. SanDisk currently holds the largest market share position
in the flash media market, selling primarily CompactFlash and PC Cards. We
believe that SanDisk's strategy is to sell flash memory products into a broad
range of storage applications, one of which is digital cameras. We expect to
compete with SanDisk both for retail accounts and in the original equipment
manufacturer market. SanDisk's products generally have lower prices than our
products. We believe the principal competitive factors in this market are
performance and price. We believe we compete favorably with SanDisk by offering
premium products with superior performance rather than low cost solutions.
SanDisk is larger than we are and, because it manufactures its own controllers
and flash memory, it does not depend as we do on third parties to supply it
with flash memory or assemble its final products. We are currently in
litigation with SanDisk regarding some of our products. You should refer to
"Business--Legal Proceedings" for a discussion of our current litigation with
SanDisk.
We also compete with manufacturers, package or card assemblers and resellers
that combine controllers and flash memory chips developed by others, such as
Hitachi, into flash storage cards, including Kingston Technology, Simple
Technology, Smart Modular Technologies and Viking. Some of these competitors,
however, from time to time are customers of ours because they either buy
digital film on a private label basis or controllers. Additionally, Hitachi, as
well as flash controller developers such as Feiya Technology, Tokyo Electronic
and M-Systems, compete with our controller sales.
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Several companies have introduced competing technologies for use in digital
cameras. These include Sony's Memory Stick, Iomega Corporation's Clik!, and IBM
Corporation's MicroDrive. Some competing technologies are mechanically and
electronically incompatible with the CompactFlash, PC Card and SmartMedia
formats, which means our products do not work in digital cameras incorporating
those technologies.
In addition to competition in our traditional markets, with our recent
acquisition of PrintRoom.com, we compete with a growing number of companies in
the areas of photofinishing and on-line photo-image management. Our primary
competitors in these areas are on-line digital photofinishing companies such as
EZ Prints, Kodak, Ofoto, PhotoAccess, Seattle Film Works, Shutterfly and Wolf
Camera. These companies provide traditional prints from scanned traditional
photographs, or digital camera images and photo-image management services
allowing consumers to archive, edit and share downloaded images and create on-
line photo albums. Additionally, digital imaging kiosks, such as those from
Kodak, Fuji, Pixel Magic and Telepix, allow consumers to scan traditional
images or download digital images for processing and output. Traditional film
processors with strong brand recognition such as Kodak, through its PhotoNet
network, will pose a significant challenge if they begin to focus their efforts
in direct digital-to-paper photofinishing processing. Moreover, Internet photo-
image archiving and sharing services, such as Club Photo, PhotoIsland,
PhotoLoft and Zing, present additional competition through their current and
potential alliances with digital photofinishing companies.
Technology
Our technology is a result of over ten years of research and development.
Our engineering group initially developed controller devices to work with
magnetic and optical storage devices. This experience expanded our knowledge
and expertise in solid-state storage systems, and more specifically in flash
memory. Solid-state storage systems have no moving parts. As of February 10,
2000, we have filed for 35 United States patents, of which 23 have been granted
or allowed while 12 are pending in the United States Patent and Trademark
Office. We have also filed 26 corresponding foreign applications. Most of our
patents revolve around our core expertise in developing and designing a
programmable controller.
Our patented system and circuit technology and proprietary Space Manager
enable high write speed operations to the flash memory without long,
corresponding erase cycles. We achieve this by using our proprietary indirect
mapping methodology, or method for storing, accessing and erasing information
within a flash memory device. Our high-speed technology provides a major
advantage when used in applications requiring large amounts of data to be
transferred quickly, such as digital imaging and digital sound recordings. Our
controller integrates various digital and advanced analog modules by using
proprietary tools. We believe our controller technology enables us to provide a
high-performance solution to our customers, while remaining cost-effective.
Our patented controller architecture also allows the controller's operating
software, which we refer to as firmware, to reside in the flash storage device.
The firmware is downloaded into the controller's internal random access memory
for execution and can easily be upgraded using simple utilities. This feature
allows us to reprogram the firmware for any digital camera or other digital
device. As a result, we provide digital film solutions with high-performance
and low power consumption without physically altering the digital storage
device.
Our USB-enabled CompactFlash digital film combined with our JumpShot cable
enables users to transfer their digital images or data to or from the computer
with ease at higher performance and lower cost than standard digital film
reader/writers. Our JumpShot cable does not require the user to connect the
camera to a computer, which avoids the drain on digital camera batteries caused
by using the serial port or USB port of the digital camera to transfer digital
images. Our digital film also uses less power per shot than most other flash
memory cards, which means consumers do not have to change their camera
batteries as often.
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<PAGE>
We also sell our controllers as a stand-alone product to other flash storage
manufacturers and may license this technology to other original equipment
manufacturers. These controllers and the underlying technology are applicable
to numerous applications such as digital cameras, Internet music players,
laptop computers, telecommunication and network devices, personal digital
assistants, digital video recorders and other portable consumer electronics
products.
Research and Development
We believe that in order to compete successfully, we must continually
design, develop and introduce new product innovations that take advantage of
market opportunities and address emerging standards. As of March 20, 2000, we
had a staff of 26 research and development personnel, 15 of which were involved
in system architecture development, six of which were involved in proprietary
circuit and cell design and process development and five of which were involved
in digital image processing and printing at PrintRoom.com. In addition, we
have, on occasion, engaged outside consultants to assist in the development of
technologies to our specifications. We intend to continue this selective use of
outside consultants in the future. During 1997, 1998 and 1999, we spent
approximately $3.9 million, $3.1 million and $4.1 million, respectively, on
research and development activities.
In addition, we endeavor to develop and maintain close relationships with
key suppliers of components and technologies in order to enable us to quickly
introduce new products that incorporate the latest technologies. We have worked
closely with our flash memory suppliers to develop customized flash memory. We
also consistently receive prototypes of digital camera models from
manufacturers prior to their market introduction to ensure compatibility with
our digital film. We have also worked with some digital camera manufacturers to
optimize the performance of their digital camera when used with our digital
film. We believe our relationships with digital camera manufacturers provide
valuable insights into their current and future digital film requirements.
Manufacturing and Operations
We contract with independent foundries and assembly and testing
organizations to manufacture all of our products. This allows us to focus on
our design efforts, minimize fixed costs and capital expenditures and gain
access to advanced manufacturing capabilities. We maintain a comprehensive
quality testing program to help ensure that our products meet our quality
standards. We also require and certify that all subcontractors are ISO 9002
certified.
There are three major types of flash memory: NAND, AND and NOR. We use
industry standard NAND flash memory. Although we currently purchase almost all
of our NAND flash memory from Toshiba and Samsung, we have the ability to use
NAND flash memory produced by Advanced Micro Devices, Inc. and Fujitsu. Our
controllers can also be configured to work with AND flash memory produced by
Hitachi. Our controller technology can also be applied to other types of flash
memory including NOR and other proprietary types of flash memory.
UMC, based in Taiwan, currently manufactures our controller chips. Other
foundries that can produce our controller chip include Taiwan Semiconductor
Manufacturing and Chartered Semiconductor Manufacturing. Our flash memory cards
are assembled at Flash Electronics, in Fremont, California, and Samsung
Electro-Mechanical Corporation, in Seoul, Korea.
Legal Proceedings
We are a party to SanDisk Corporation v. Lexar Media, Inc., an action filed
in March 1998 in the United States District Court for the Northern District of
California, Case No. C98-01115 CRB. The suit involves allegations by SanDisk
that our CompactFlash cards and PC Cards are infringing its U.S. Patent
No. 5,602,987. In its complaint, SanDisk alleges that it will seek preliminary
and permanent injunctions against infringement, damages for infringement,
increased damages for willful infringement up to treble
44
<PAGE>
damages, attorneys' fees and costs. SanDisk has alleged that all of our
controllers infringe their patent. Approximately 80% of our revenues in 1999
were from sales of our controllers and parts incorporating versions of our
controllers, and we expect this to be the case for the next several years.
To date, SanDisk has not sought a preliminary injunction. At our request,
the district court conducted an expedited claim construction proceeding.
SanDisk identified Claims 1, 10, 17, 23 and 35 of U.S. Patent No. 5,602,987 as
being at issue. On March 4, 1999, the Court issued a memorandum and order
regarding the construction of these claims of U.S. Patent No. 5,602,987. In
that memorandum and order, the district court adopted some of the claim
construction positions advanced by SanDisk and some of the claim construction
positions advanced by Lexar, and did not rule on some of the issues raised by
the parties. On September 20, 1999, SanDisk updated its disclosures to assert
solely Claims 1 and 10 of U.S. Patent No. 5,602,987, with a reservation of
rights with respect to the other claims originally asserted.
On July 29, 1999, SanDisk filed a motion for partial summary judgment that
the identified products contribute to the infringement of Claim 10 of U.S.
Patent No. 5,602,987. We believe that SanDisk's arguments are incorrect and,
accordingly, we filed an opposition to this motion on December 30, 1999. We
also filed our own motions that there is no infringement of this claim and that
it is invalid. These motions were heard by the District Court on March 17,
2000. At the hearing, the Court indicated that it will render a decision on the
motions but has not specified a date for a decision.
We believe that the SanDisk complaint is without merit and that we have
meritorious defenses. We intend to vigorously defend the SanDisk litigation. We
do not believe that our products infringe U.S. Patent No. 5,602,987. We further
believe that U.S. Patent No. 5,602,987 is invalid and/or unenforceable. We have
received a written opinion from our patent counsel regarding non-infringement
and invalidity of U.S. Patent No. 5,602,987. While we are vigorously contesting
these claims, we cannot predict the ultimate outcome of the lawsuit.
In the event that a permanent injunction were granted, we would be unable to
sell products incorporating those methods and parts found to infringe U.S.
Patent No. 5,602,987. We would need to either negotiate a license with SanDisk
or engage in a redesign of those products. A redesign of those products would
result in an interruption in sales that could extend for some time. Other than
our regular product development efforts, we are not currently engaged in any
development or redesign efforts in this regard, and there can be no assurance
that any such efforts would be successful. Accordingly, a permanent injunction
would result in a substantial reduction in our revenues and losses over an
extended period of time, and our business would suffer. In the event of an
adverse ruling, we also could be required to pay damages to SanDisk, which
could be subject to trebling were we found to have willfully infringed U.S.
Patent No. 5,602,987.
In connection with the SanDisk litigation, we have incurred and expect to
continue to incur substantial legal and other expenses. In addition, the
SanDisk litigation has diverted and is expected to continue to divert the
efforts and attention of our management and technical personnel. Patent
litigation is highly complex and can extend for a protracted period of time,
which can substantially increase the cost of litigation. Accordingly, the
expenses and diversion of resources associated with the SanDisk litigation
could seriously harm our business and financial condition and could affect our
ability to raise capital in the future. Further, if the SanDisk patent
litigation were to be resolved by a settlement, we might need to make
substantial payments to SanDisk or grant a license to SanDisk to utilize
portions of our technology, which could have a material adverse effect on our
business and financial condition.
In addition, new patent applications may be currently pending or be filed in
the future by SanDisk. All pending United States patent applications are
confidential until patents are issued, and thus it is impossible to ascertain
all possible patent infringement issues that may be raised.
We are also a party to Lexar Media, Inc. v. SanDisk Corporation, Case No.
C99-02463 CRB. On May 25, 1999, we filed a complaint in the United States
District Court for the Northern District of California alleging that SanDisk
has engaged in false advertising, unfair competition, trade libel and
45
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interference with our prospective business advantage. We sought a preliminary
injunction against the anticompetitive conduct of SanDisk and its use of false
and misleading advertising, which the District Court granted in September 1999.
SanDisk has retracted its false and misleading advertising. We are also seeking
damages incurred as a result of the false advertising and anticompetitive
conduct. On October 1, 1999, SanDisk answered our complaint and has filed four
counterclaims for false advertising. On November 19, 1999, we filed a motion to
dismiss two of the counterclaims of SanDisk. The motion was heard on December
3, 1999 and two of SanDisk's counterclaims were dismissed.
We were also involved in a patent interference proceeding, Patent
Interference No. 103,607, in which SanDisk and Western Digital Corporation are
real parties in interest. The interference involved conflicting claims between
us and SanDisk and Western Digital relating to rights claimed in Claims 1 and
10 of our U.S. Patent No. 5,388,083. Our U.S. Patent No. 5,388,083 relates to
our wear-leveling technology, a technique that extends the life of flash memory
cells. On October 26, 1999, the Board of Patent Appeals and Interferences
determined that the prior claims of SanDisk and Western Digital are
unpatentable. SanDisk and Western Digital have indicated that they are not
going to pursue an appeal of this decision.
Facilities
Our corporate headquarters and principal operating facility are located in
Fremont, California. Our headquarters is comprised of approximately 34,400
square feet and is the location for all our engineering, operations,
administrative and worldwide sales and marketing functions. We occupy this
facility under a lease that expires on December 31, 2003 and have option to
renew this lease for an additional five-year period. Our current facility is
not adequate to meet our anticipated growth and we are currently negotiating a
lease to relocate our principal executive offices to a larger space in Fremont.
We also currently lease a facility in San Jose, California for our Internet
photofinishing business and in Tokyo, Japan for our sales and marketing
organization there. The lease for our San Jose facility expires on March 31,
2000 and the lease for our Tokyo facility expires on September 30, 2001. Upon
the expiration of our San Jose facility lease, we intend to consolidate those
operations in our Fremont facility.
Employees
At March 20, 2000, we had 112 full-time employees and 15 part-time
employees, of which 40 were employed in marketing and sales, 26 in engineering
and research and development, 31 in operations and 30 in corporate
administration. Of these employees, three are based in our Japanese marketing
subsidiary, based in Tokyo. Our continued success will depend, in part, on our
ability to attract and retain skilled and motivated personnel who are in great
demand throughout the industry. None of our employees are represented by labor
unions. We believe that we have good relations with our employees.
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MANAGEMENT
Executive Officers, Directors and Other Key Employees
The following table presents information concerning our executive officers,
directors and other key employees as of March 17, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers and Directors:
Petro Estakhri................... 42 Chairman, Chief Technology Officer and
Executive Vice President, Engineering
John H. Reimer................... 42 President, Chief Executive Officer and
Director
Eric B. Stang.................... 40 Chief Operating Officer and Director
Ronald H. Bissinger.............. 49 Vice President, Finance and Chief
Financial Officer
J. Scott Case.................... 32 Director
William T. Dodds................. 52 Director
Brian D. Jacobs.................. 38 Director
John A. Rollwagen................ 59 Director
William J. Stewart............... 39 Director
Key Employees:
Mahmud (Mike) Assar.............. 56 Senior Vice President, Technology
Robert N. Leibowitz.............. 41 Vice President, Product Marketing
Paul D. McGuire.................. 36 Vice President, Original Equipment
Manufacturers and International Sales
Jack H. Peterson................. 35 Vice President, Consumer Products
Joseph A. Young.................. 42 Vice President, Operations
Carlton X. Osborne............... 30 General Counsel, Director of Business
Development and Strategic Alliances and
Secretary
</TABLE>
Petro Estakhri has served as our Chief Technology Officer since April 1999
and as our Chairman and Executive Vice President, Engineering since August
1997. Mr. Estakhri also served as our Vice President, Systems from September
1996 to August 1997. From January 1993 to August 1996, Mr. Estakhri served as
the Senior Director of Mass Storage Controller Engineering at Cirrus Logic.
Mr. Estakhri is a co-author of many patents related to magnetic media, flash
storage controller and systems architecture. Mr. Estakhri holds a B.S. and an
M.S. in electrical and computer engineering from the University of California
at Davis.
John H. Reimer has served as our President and Chief Executive Officer since
joining us in August 1997 and as a director since May 1997. From May 1994 to
August 1997, Mr. Reimer served as the Senior Director of WorldWide Operations
for the Mobile Computing Products Division of Motorola. Prior to this time, Mr.
Reimer served as the Vice President of Marketing at SanDisk. Mr. Reimer was a
founder and four-time Chairman of Personal Computer Memory Card International
Association, the organization that sets the worldwide standard for PC Cards.
Mr. Reimer has also held management positions at Texas Instruments and Fujitsu
Microelectronics. Mr. Reimer holds a B.S. in electrical engineering from the
University of Illinois at Champaign.
Eric B. Stang has served as our Chief Operating Officer since joining us in
November 1999 and as a director since January 2000. From June 1998 to November
1999, Mr. Stang was Vice President and General Manager of the Radiation Therapy
Products Division of ADAC Laboratories, a medical equipment and software
company. From January 1995 to May 1998, he was Director of Operations at
Raychem Corporation, a material science company. Prior to joining Raychem, Mr.
Stang co-founded Monitor Company Europe Limited, an international strategic
consulting firm. Mr. Stang holds a B.A. in economics from Stanford University
and an M.B.A. from the Harvard Business School.
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Ronald H. Bissinger has served as our Vice President, Finance and Chief
Financial Officer since December 1999. From October 1999 to December 1999, Mr.
Bissinger was independently employed as a financial consultant. From March 1998
until October 1999, Mr. Bissinger was Vice President of Finance and Business
Development and Chief Financial Officer of Ultradata Corp., an enterprise
software company. From July 1997 to March 1998, he was independently employed
as a financial consultant. From March 1996 to July 1997, he was Chief Financial
Officer of The Alta Group, a wireless design software company, from May 1995 to
March 1996, he was Chief Financial Officer of Biosym/MSI, a simulation software
company, and from July 1994 to May 1995, he was Chief Financial Officer of
Crystal Graphics, a multimedia software company. Mr. Bissinger holds a B.S. in
chemical engineering from Clarkson University, an M.S. in chemical engineering
from the University of California at Berkeley and an M.B.A. from the University
of Denver.
J. Scott Case has served as a member of our board of directors since
September 1999. Since July 1997, Mr. Case has been a Senior Vice President with
GE Capital Equity Capital Group, Inc., the private equity group of General
Electric Capital Corporation. From September 1994 to July 1997, he was an
associate with J.P. Morgan & Co. Mr. Case holds a B.A. in English from Wake
Forest University and an M.B.A. from the University of North Carolina at Chapel
Hill.
William T. Dodds has served as a member of our board of directors since
February 1998. Since February 1980, Mr. Dodds has been Vice President and
Secretary of The Woodbridge Company Limited, a Toronto, Canada based holding
company. The Woodbridge Company Limited owns a majority interest in The Thomson
Corporation, an information publishing company. Mr. Dodds is also Vice
President and Secretary of Thomvest Holdings Inc., a venture capital firm. Mr.
Dodds serves on the board of directors of Certicom Corporation, a provider of
encryption technology for computing and communication applications, and OCI
Communications Inc., a telecommunications company. Mr. Dodds holds a B.A. in
economics from the University of Waterloo and has a Canadian Chartered
Accountant's Designation.
Brian D. Jacobs has served as a member of our board of directors since
February 1998. Mr. Jacobs has been a general partner and Executive Vice
President of St. Paul Venture Capital, a venture capital firm, since 1992. Mr.
Jacobs serves on the board of directors of several private companies. Mr.
Jacobs hold a B.S. and an M.S. in mechanical engineering from the Massachusetts
Institute of Technology and an M.B.A. from Stanford University.
John A. Rollwagen has served as a member of our board of directors since
February 1998. From May 1993 to December 1999, Mr. Rollwagen was a venture
partner with St. Paul Venture Capital. From 1981 to January 1993, Mr. Rollwagen
served as the Chairman and Chief Executive Officer of Cray Research, Inc., a
worldwide supplier of supercomputers. Mr. Rollwagen was a founding member of
the Computer Systems Policy Project, an organization of chief executive
officers of 12 leading computer systems companies in the United States that was
created to identify and advocate industry positions on trade and technology
policy. Mr. Rollwagen also serves on the board of directors of Computer Network
Technology Corporation, a supplier of computer networking hardware and
software, and Diva Systems, a video-on-demand service provider. Mr. Rollwagen
holds a B.S. in electrical engineering from the Massachusetts Institute of
Technology and an M.B.A. from the Harvard Business School.
William J. Stewart has served as a member of our board of directors since
February 1998. Mr. Stewart has been the President of Asia Pacific Ventures, a
consulting and technology transfer firm that he founded, since October 1989.
Mr. Stewart is also a general partner of APV Technology Partners, a venture
capital firm. Mr. Stewart also serves on the board of directors of Certicom
Corporation, a provider of encryption technology for computing and
communication applications. Mr. Stewart holds a B.A. in economics from
St. Anselm College and an M.B.A. from Suffolk University.
Mahmud (Mike) Assar has served as our Senior Vice President, Technology
since our inception in September 1996. From November 1994 to September 1996,
Mr. Assar served as the Vice President of Engineering at Cirrus Logic. Mr.
Assar is a co-author of several patents related to Mass Storage Flash
controller architecture and circuits. Mr. Assar holds a B.S. in electrical
engineering from the University of Illinois at Champaign.
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Robert N. Leibowitz has served as our Vice President, Product Marketing
since December 1998. From December 1997 to December 1998, Mr. Leibowitz was
Business Director of WorldWide TDMA Digital Cellphones for the Cellular
Subscriber Group of Motorola. From January 1995 to December 1997, Mr. Leibowitz
was Director of Marketing for the Information Systems Group at Motorola. Mr.
Leibowitz holds a B.S. in physics from New York State University at Oneonta and
an M.S. in electrical engineering from California State University at
Northridge.
Paul D. McGuire has served as our Vice President, Original Equipment
Manufacturers and International Sales since October 1998. From June 1991 to
October 1998, Mr. McGuire served as a member of the sales management team at
SanDisk. Mr. McGuire holds a B.S. in electrical engineering from Dublin
University, Trinity College in Dublin, Ireland.
Jack H. Peterson has served as our Vice President, Consumer Products since
February 1998. From February 1994 to February 1998, Mr. Peterson was the
Director of Strategic Alliances for Macmillan Publishing USA, a software and
book publisher. Mr. Peterson holds a B.S. in electrical and computer
engineering from the University of Texas at Austin, Texas.
Joseph A. Young has served as our Vice President, Operations since December
1999. From June 1998 to December 1999, Mr. Young was Director of Operations for
the OEM Electronics Division of Raychem Corporation. From 1983 to June 1998,
Mr. Young held various management positions with Raychem, including World Wide
Director of Operations and Operations Manager of Raychem's Polyswitch Division.
Mr. Young holds a B.S. in industrial engineering from Rensselaer Polytechnic
Institute, an M.S. in operations research from the University of New Haven and
an M.B.A. from the Wharton School of the University of Pennsylvania.
Carlton X. Osborne has served as our General Counsel, Director of Business
Development and Strategic Alliances and Secretary since August 1999. From
January 1999 to August 1999, Mr. Osborne was our Acting General Counsel. From
December 1996 to August 1998, Mr. Osborne was in private law practice with
Fenwick & West LLP. From September 1995 to December 1996, Mr. Osborne was in
private law practice with Latham & Watkins. Prior to joining Latham & Watkins,
Mr. Osborne attended law school at Stanford University from September 1992 to
May 1995. Mr. Osborne holds a B.A. in philosophy from the University of
Pennsylvania and a J.D. from Stanford Law School.
Composition of Board of Directors
Our bylaws currently provide for a board of directors consisting of eight
members. Our current directors were elected pursuant to a voting agreement
between us and some of our principal stockholders. The holders of the Series C
preferred stock were entitled to elect two directors. Messrs. Stewart and
Jacobs serve on our board pursuant to this right. The holders of the Series E
preferred stock were entitled to elect one director. Mr. Case serves on our
board pursuant to this right. The holders of our common stock, voting as a
separate class were entitled to elect one director. Mr. Estakhri serves on our
board pursuant to this right. Finally, the holders of our preferred stock and
common stock, voting together as a single class, were entitled to elect four
directors. Messrs. Reimer, Stang, Rollwagen and Dodds serve on our board
pursuant to this right. Upon the closing of the offering, these board
representation rights will terminate and no stockholders will have any special
rights with respect to board representation.
Our certificate of incorporation and bylaws that will take effect upon
completion of this offering provide that our board will consist of eight
directors divided into three classes, Class I, Class II and Class III, that
serve staggered three-year terms. The Class I directors, initially Messrs.
Case, Stewart and Rollwagen, will stand for reelection at the 2001 annual
meeting of stockholders. The Class II directors, initially Messrs. Jacobs,
Dodds and Stang, will stand for reelection at the 2002 annual meeting of
stockholders. The Class III directors, initially Messrs. Reimer and Estakhri,
will stand for reelection at the 2003 annual meeting of stockholders. As a
result, only one class of directors will be elected at each annual meeting of
our
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stockholders, with the other classes continuing for the remainder of their
respective terms. This classification of our board could make it more difficult
for a third party to acquire, or could discourage a third party from acquiring,
control of Lexar Media.
Committees of Board of Directors
Our board of directors has a compensation committee and an audit committee.
Compensation Committee. The current members of our compensation committee
are Messrs. Jacobs and Stewart. The compensation committee reviews and makes
recommendations to our board of directors concerning salaries and incentive
compensation for our officers and employees. The compensation committee also
administers the issuance of stock options and other awards under our 1996 Stock
Option/ Stock Issuance Plan and will administer our 2000 Equity Incentive Plan
and our 2000 Employee Stock Purchase Plan.
Audit Committee. The current members of our audit committee are Messrs.
Dodds, Rollwagen and Case. The audit committee reviews and monitors our
financial statements and accounting practices, makes recommendations to our
board regarding the selection of independent auditors and reviews the results
and scope of the audit and other services provided by our independent auditors.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since our
formation been an officer or employee of ours. None of our executive officers
currently serves or in the past has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board or compensation committee. Prior to the
creation of our compensation committee, all compensation decisions were made by
our full board. None of Messrs. Estakhri, Reimer or Stang participated in
discussions by our board with respect to his own compensation. You should refer
to "Related Party Transactions" for a description of transactions between us
and entities affiliated with the members of the compensation committee.
Director Compensation
Our directors do not receive cash compensation for their services as
directors, but are reimbursed for their reasonable and necessary expenses in
attending board and committee meetings. All board members are eligible to
receive stock options pursuant to the discretionary option grant program in
effect under our 1996 Stock Option/Stock Issuance Plan. In March 1998, we
granted Mr. Rollwagen an option to purchase a total of 150,000 shares of our
common stock at an exercise price of $0.08 per share, which he exercised in
full on May 23, 1999. The option was immediately exercisable and subject to
vesting over a four-year period. We have the right to repurchase the unvested
shares of this option if Mr. Rollwagen ceases to provide services to us as one
of our directors. In the event of a change of control of 50% or more of our
outstanding stock, any unvested shares will vest immediately.
Each member of the board who is not our employee, or an employee of a
parent, subsidiary or affiliate of ours, will be eligible to participate in our
2000 Equity Incentive Plan. Under this plan, the option grants to directors are
automatic and nondiscretionary. Each non-employee director who became a member
of our board of directors before the date of this offering will receive an
option to purchase 25,000 shares of our common stock. Each non-employee
director who becomes a member of our board of directors on or after the date of
this offering will be granted an option to purchase 50,000 shares of our common
stock. Immediately after each annual meeting of our stockholders, each non-
employee director will automatically be granted an additional option to
purchase 25,000 shares if the director has served continuously as a member of
our board since the date of the director's initial grant and for a period of at
least one year before the annual meeting. The board may also make discretionary
supplemental grants to a non-employee director
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who has served for less than one year from the date of the director's initial
grant, provided that no director may receive options to purchase more than
75,000 shares of our common stock in any calendar year.
Each option will have an exercise price equal to the fair market value of
our common stock on the date of grant. The options will have ten year terms and
will terminate three months following the date the director ceases to be a
director or 12 months if the termination is due to death or disability. Each of
these options will vest and become exercisable as to 25% of the shares on the
one year anniversary of the date of grant and as to 2.083% of the shares per
month after this anniversary so long as the director continues to be a member
of the board. In the event of our liquidation or dissolution or a change of
control of 50% or more of our outstanding stock, the options granted to each
non-employee director under this plan will become fully vested and exercisable.
Executive Compensation
The following table presents the compensation earned, awarded or paid for
services rendered to us in all capacities during 1999 by our Chief Executive
Officer and by each person who was an executive officer in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual
Compensation Awards
---------------- ------------
Shares of
Common Stock
Underlying All Other
Name and Principal Position Salary Bonus Options Compensation(1)
- --------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
John H. Reimer.................. $252,000 $45,000 -- $ 5,496
President and Chief Executive
Officer
Petro Estakhri.................. $180,105 $45,000 -- $ 4,513
Chief Technology Officer and
Executive Vice President,
Engineering
Robert J. Netter, Jr. (2)....... $141,750 $15,000 -- $96,033
Former Vice President, Finance
and Chief Financial Officer
Eric B. Stang (3)............... $200,000 $ -- 800,000 $ 2,151
Chief Operating Officer
Ronald H. Bissinger (4)......... $165,000 $ -- 400,000 $ 1,546
Vice President, Finance and
Chief Financial Officer
</TABLE>
- ---------------------
(1) These amounts consist of (a) supplemental payments made by us to the named
individuals to subsidize medical expenses not reimbursed by insurance, (b)
the fair market value of a digital camera given by us to each of the named
individuals and (c) in the case of Mr. Netter, a performance bonus payment
and loan forgiveness in the aggregate amount of $93,663 as a result of his
successful efforts to obtain and close a private placement financing for
us.
(2) Mr. Netter resigned as our Vice President, Finance and Chief Financial
Officer in November 1999.
(3) Mr. Stang joined us on November 8, 1999. As of December 31, 1999, we paid
Mr. Stang an actual salary of $30,769.
(4) Mr. Bissinger joined us on December 20, 1999. As of December 31, 1999, we
paid Mr. Bissinger an actual salary of $3,273.
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Option Grants in Last Fiscal Year
The following table sets forth grants of stock options made during 1999 to
the executive officers listed in the Summary Compensation Table.
Potential realizable values are calculated by:
. Multiplying the number of shares of common stock subject to a given
option by the deemed fair market value of our common stock at December
31, 1999;
. Assuming that the aggregate option exercise price derived from that
calculation compounds at the annual 5% or 10% rates shown in the table
for the entire ten-year term of the option; and
. Subtracting from that result the aggregate option exercise price.
The 5% and 10% assumed annual rates of stock price appreciation are required
by the rules of the Securities and Exchange Commission and do not reflect our
estimate or projections of future stock price growth.
The percentage of total options granted to employees in the last fiscal year
is based on options to purchase an aggregate of 3,290,906 shares of common
stock granted to employees during 1999. All options were granted at fair market
value on the date of grant as determined by our board of directors. Our board
of directors determined the fair market value at a given date by considering
our operating performance, significant milestones in the development of our
business and, where applicable, the price paid by third parties in preferred
stock financings.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
-------------------------------------------- ---------------------
Shares of % of Total
Common Options
Stock Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted Year Per Share Date 5% 10%
- ---- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John H. Reimer.......... -- -- -- -- -- --
Petro Estakhri.......... -- -- -- -- -- --
Robert J. Netter, Jr. .. -- -- -- -- -- --
Eric B. Stang........... 800,000 24.31% $0.50 11/28/09 $2,206,232 $3,749,988
Ronald H. Bissinger..... 400,000 12.16% $2.00 12/20/09 $ 503,116 $1,274,994
</TABLE>
The options granted in 1999 and 2000 to Messrs. Stang and Bissinger are
under our 1996 Stock Option/Stock Issuance Plan, are immediately exercisable
and are either incentive stock options or nonqualified stock options.
Messrs. Stang and Bissinger exercised these options on November 30, 1999 and
December 27, 1999, respectively. We have a right to repurchase these shares
upon termination of their employment with us. This right lapses as to 25% of
the shares subject to the option one year from the date of grant and as to
2.083% of the shares each succeeding month. In January 2000, Messrs. Stang and
Bissinger were granted additional options to purchase 100,000 and 50,000 shares
of our common stock, respectively, at an exercise price of $3.00 per share. For
information regarding restricted stock purchases by Messrs. Reimer and
Estakhri, please refer to "--Employment Contracts and Change of Control
Arrangements."
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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth the number of shares of common stock acquired
and the value realized upon exercise of stock options during 1999 by each of
the executive officers named in the Summary Compensation Table. As of December
31, 1999, none of these individuals held any unexercised stock options. Value
at fiscal year-end is the difference between the exercise price and the deemed
fair market value of the underlying common stock at December 31, 1999.
<TABLE>
<CAPTION>
Common Stock
Acquired on Value
Name Exercise(#)(1) Realized($)
- ---- -------------- -----------
<S> <C> <C>
John H. Reimer....................................... -- --
Petro Estakhri....................................... 602,324 $1,108,276
Robert J. Netter, Jr. ............................... -- --
Eric B. Stang........................................ 800,000 $1,200,000
Ronald H. Bissinger.................................. 400,000 --
</TABLE>
- ---------------------
(1) The options granted to the named individuals vest over a four-year period.
As of December 31, 1999, we had a right to repurchase 112,936 of Mr.
Estakhri's shares of common stock acquired upon exercise of options and all
of Mr. Stang's and Mr. Bissinger's shares of common stock acquired upon
exercise of options.
Employment Contracts and Change of Control Arrangements
All of our employees are at-will employees, which means that either we or
our employees may terminate the employment relationship at any time for any
reason.
We entered into an employment offer letter on September 4, 1997 with John H.
Reimer, our President and Chief Executive Officer. This letter established Mr.
Reimer's initial annual base salary at $240,000 and his eligibility for a bonus
of up to $120,000 per year based upon his achievement of certain performance
goals. The offer letter also provided for Mr. Reimer's election to the board of
directors and for reimbursement of his relocation expenses. On June 5, 1998,
Mr. Reimer purchased 2,400,000 shares of our common stock at a purchase price
of $0.08 per share. The shares purchased by Mr. Reimer are subject to our right
to repurchase the shares upon termination of his employment. Our repurchase
right lapsed with respect to 600,000 shares on June 5, 1998 and 600,000 shares
on July 15, 1998. The repurchase right expires ratably as to the remaining
shares over a 24-month period. Our repurchase right also expires as to all of
the shares if Mr. Reimer is terminated after a change of control of Lexar
Media. On June 5, 1998, we loaned Mr. Reimer $192,000, all of which remains
outstanding. This loan is secured by a stock pledge and security agreement in
connection with this purchase of our common stock. This loan accrues interest
at a rate of 6.23% and is due on or before the earlier of July 15, 2002 or the
termination of Mr. Reimer's employment. On January 17, 2000, Mr. Reimer
purchased an additional 400,000 shares of common stock at a purchase price of
$2.00 per share which is subject to the same repurchase rights described above.
In connection with this purchase of our common stock, on January 17, 2000, we
loaned Mr. Reimer $800,000 secured by a stock pledge and security agreement.
This loan accrues interest at a rate of 6.21% and is due on or before the
earlier of (1) January 17, 2004, (2) the termination of Mr. Reimer's employment
or (3) a change of control of Lexar Media. If we terminate Mr. Reimer's
employment without cause, we must continue to pay his base salary for twelve
months or until he finds other employment, whichever occurs first, and Mr.
Reimer will be granted an additional 18 months of vesting with respect to his
outstanding stock.
We executed an employment agreement on September 19, 1996 with Petro
Estakhri, our Chief Technology Officer and Executive Vice President,
Engineering. This agreement established Mr. Estakhri's initial annual base
salary at $125,000. On November 19, 1996, we granted Mr. Estakhri an option to
purchase 602,324 shares of our common stock at an exercise price of $0.16 per
share. Of these shares, 150,581 vested on November 19, 1997 and the remainder
vests ratably over a 36-month period. In the event
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<PAGE>
that Mr. Estakhri is terminated following a change of control of Lexar Media,
100% of the shares issued upon exercise of the options will vest immediately.
On December 2, 1999, we loaned Mr. Estakhri $96,372, all of which remains
outstanding. This loan is secured by a stock pledge and security agreement in
connection with the exercise of these options. The loan accrues interest at a
rate of 6.20% and is due on or before the earlier of (1) December 2, 2003,
(2) the termination of Mr. Estakhri's employment or (3) a change of control of
Lexar Media.
On June 5, 1998, Mr. Estakhri purchased 1,076,284 shares of our common stock
at a purchase price of $0.08 per share. The shares purchased by Mr. Estakhri
are subject to our right to repurchase the shares upon termination of his
employment. Our repurchase right lapsed with respect to 269,071 shares on July
15, 1998 and expires ratably as to the remaining shares over a 36-month period.
Our repurchase right also expires as to all of the shares if Mr. Estakhri is
terminated after a change of control of Lexar Media. On June 5, 1998, we loaned
Mr. Estakhri $86,103, all of which remains outstanding. This loan is secured by
a stock pledge and security agreement in connection with this purchase of our
common stock. This loan accrues interest at a rate of 6.23% and is due on or
before the earlier of July 15, 2002 or the termination of Mr. Estakhri's
employment. On January 17, 2000, Mr. Estakhri purchased an additional 400,000
shares of common stock at a purchase price of $2.00 per share which is subject
to the same repurchase rights described above. In connection with this purchase
of our common stock, on January 17, 2000, we loaned Mr. Estakhri $800,000
secured by a stock pledge and security agreement. This loan accrues interest at
a rate of 6.21% and is due on or before the earlier of (1) January 17, 2004,
(2) the termination of Mr. Estakhri's employment or (3) a change of control of
Lexar Media. If we terminate Mr. Estakhri's employment without cause, we must
continue to pay his base salary for 12 months or until he finds other
employment, whichever comes first, and Mr. Estakhri will be granted an
additional 18 months of vesting with respect to his outstanding stock and
options.
We also entered into an employment offer letter on December 15, 1999 with
Ronald Bissinger, our Chief Financial Officer and Executive Vice President,
Finance. This letter established Mr. Bissinger's initial annual base salary at
$165,000 and his eligibility for a bonus based upon his achievement of certain
performance goals. Under this offer letter, on December 20, 1999, Mr. Bissinger
was granted an option to purchase 400,000 shares of our common stock at an
exercise price of $2.00 per share. Of these shares, 100,000 will vest on
December 20, 2000 and the remainder will vest ratably over a 36-month period.
In the event of Mr. Bissinger's termination, we have agreed to repurchase all
of his unvested shares. In the event that Mr. Bissinger is terminated following
a change of control of Lexar Media, 100% of the shares issued upon exercise of
the option will vest immediately. On December 27, 1999 we loaned Mr. Bissinger
$800,000, all of which remains outstanding. This loan is secured by a stock
pledge and security agreement in connection with the exercise of these options.
This loan accrues interest at a rate of 6.20% and is due on or before the
earlier of (1) December 27, 2003, (2) 45 days after the termination of Mr.
Bissinger's employment or (3) a change of control of Lexar Media. On January
21, 2000, Mr. Bissinger was granted an additional option to purchase 50,000
shares of our common stock at an exercise price of $3.00 per share. Of these
shares, 12,500 will vest on January 21, 2001 and the remainder will vest
ratably over a 36-month period. In the event that Mr. Bissinger is terminated
following a change of control of Lexar Media, 100% of the shares issued upon
exercise of the option will vest immediately. If we terminate Mr. Bissinger's
employment without cause, we must continue to pay his base salary for six
months or until he finds other employment, whichever occurs first and Mr.
Bissinger will be granted an additional 12 months of vesting with respect to
his outstanding stock and options.
We also entered into an employment offer letter on November 8, 1999 with
Eric Stang, our Chief Operating Officer. This letter established Mr. Stang's
initial annual base salary at $200,000 and his eligibility for a bonus based
upon his achievement of certain performance goals. The offer letter also
provided for Mr. Stang's election to the board of directors. Under this offer
letter, on November 29, 1999, Mr. Stang was granted an option to purchase
800,000 shares of our common stock at an exercise price of $0.50 per share. Of
these shares, 200,000 will vest on November 8, 2000 and the remainder will vest
ratably over a 36-month period. In the event of Mr. Stang's termination, we
have agreed to repurchase all of his unvested shares. In
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<PAGE>
the event that Mr. Stang is terminated following a change of control of Lexar
Media, 100% of the shares issued upon exercise of the option will vest
immediately. On November 30, 1999, we loaned Mr. Stang $400,000, all of which
remains outstanding. This loan is secured by a stock pledge and security
agreement in connection with the exercise of this option. This loan accrues
interest at a rate of 6.08% and is due on or before the earlier of (1) November
30, 2003, (2) 45 days after the termination of Mr. Stang's employment or (3) a
change of control of Lexar Media. On January 21, 2000, Mr. Stang was granted an
additional option to purchase 100,000 shares of common stock at an exercise
price of $3.00 per share. Of these shares, 25,000 will vest on January 21, 2001
and the remainder will vest ratably over a 36-month period. In the event that
Mr. Stang is terminated following a change of control of Lexar Media, 100% of
the shares issued upon exercise of the option will vest immediately. If we
terminate Mr. Stang's employment without cause, we must continue to pay his
base salary for six months or until he finds other employment, whichever occurs
first and Mr. Stang will be granted an additional 12 months of vesting with
respect to his outstanding stock and options.
In connection with the termination of Robert J. Netter Jr.'s employment as
our Vice President, Finance and Chief Financial Officer, we entered into a
Separation Agreement with Mr. Netter dated October 7, 1999. Pursuant to our
agreement, we paid Mr. Netter his full salary for consulting services that he
provided to us through the end of February 2000, and we will continue to pay
Mr. Netter his full salary as severance payments through the end of September
2000, subject to reduction for payments Mr. Netter may receive from another
employer. In connection with his successful efforts to obtain and close a
private placement financing for us, Mr. Netter also received a performance
bonus of $70,875, six months of accelerated vesting of shares of our common
stock owned by Mr. Netter, constituting 37,500 shares, and forgiveness of
$22,788 he owed to us under a promissory note for the purchase of shares of our
common stock. We also accelerated 12 months of the vesting of shares of our
common stock owned by Mr. Netter, constituting 75,000 shares.
Each sale of securities described in this section was granted at fair market
value on the date of grant as determined by our board of directors.
Employee Benefit Plans
1996 Stock Option/Stock Issuance Plan. We have historically granted options
to purchase our common stock pursuant to our 1996 Stock Option/Stock Issuance
Plan. Our board of directors adopted our 1996 Stock Option/Stock Issuance Plan
on December 19, 1996. Subject to adjustments for stock splits and similar
events, the total number of shares of our common stock that may be issued under
the plan is 13,038,082. As of December 31, 1999, there were 2,964,046 shares
available for issuance under this plan and options to purchase 1,471,992 shares
of our common stock currently outstanding under this plan. The board of
directors has resolved, however, that this plan will terminate immediately
prior to the completion of this offering and no further options will be
granted. The termination of this plan will not affect any outstanding options.
Those options will remain outstanding until they are exercised, terminate or
expire.
2000 Equity Incentive Plan. On January 21, 2000, our board of directors
adopted the 2000 Equity Incentive Plan subject to stockholder approval. The
2000 Equity Incentive Plan will become effective on the date of this prospectus
and will serve as the successor to our 1996 Stock Option/Stock Issuance Plan.
The 2000 Equity Incentive Plan authorizes the award of options, restricted
stock awards and stock bonuses.
The 2000 Equity Incentive Plan will be administered by the compensation
committee of our board of directors, which currently consists of Mr. Jacobs and
Mr. Stewart, each of whom is an outside director as defined under applicable
federal tax laws. The compensation committee will have the authority to
interpret this plan and any agreement entered into under the plan, grant awards
and make all other determinations for the administration of the plan.
Our 2000 Equity Incentive Plan will provide for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. The incentive stock options
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<PAGE>
may be granted only to our employees or employees of any of our subsidiaries.
The nonqualified stock options, and all other awards other than incentive stock
options, may be granted to employees, officers, directors, consultants,
independent contractors and advisors of ours or any of our subsidiaries.
However, consultants, independent contractors and advisors are only eligible to
receive awards if they render bona fide services not in connection with the
offer and sale of securities in a capital-raising transaction. The exercise
price of incentive stock options must be at least equal to the fair market
value of our common stock on the date of grant. The exercise price of incentive
stock options granted to 10% stockholders must be at least equal to 110% of the
fair market value of our common stock on the date of grant. The exercise price
of nonqualified stock options must be at least equal to 85% of the fair market
value of our common stock on the date of grant.
The maximum term of the options granted under our 2000 Equity Incentive Plan
is ten years. The awards granted under this plan may not be transferred in any
manner other than by will or by the laws of descent and distribution and may be
exercised during the lifetime of the optionee only by the optionee. The
compensation committee may allow exceptions to this restriction with respect to
awards that are not incentive stock options. Options granted under our 2000
Equity Incentive Plan generally expire three months after the termination of
the optionee's service to us or to a parent or subsidiary of ours, or 12 months
if the termination is due to death or disability. In the event of a
liquidation, dissolution or "change in control" in which the successor does not
assume the options, the options granted under the plan will vest and become
exercisable as to 25% of the unvested shares with the remaining shares vesting
over the original vesting term.
We have reserved 8,000,000 shares of our common stock for issuance under the
2000 Equity Incentive Plan. The number of shares reserved for issuance under
this plan will be increased to include:
. any shares of our common stock reserved under our 1996 Stock
Option/Stock Issuance Plan that are not issued or subject to outstanding
grants on the date of this prospectus;
. any shares of our common stock issued under our 1996 Stock Option/Stock
Issuance Plan that are repurchased by us at the original purchase price;
and
. any shares of our common stock issuable upon exercise of options granted
under our 1996 Stock Option/Stock Issuance Plan that expire or become
unexercisable without having been exercised in full at any time after
this offering.
In addition, under the terms of the 2000 Equity Incentive Plan, the number
of shares of our common stock reserved for issuance under the plan will
increase automatically on January 1 of each year by an amount equal to 5% of
our total outstanding shares of common stock as of the immediately preceding
December 31. Our board of directors or our Compensation Committee may reduce
the amount of the increase in any particular year.
Shares available for grant and issuance under our 2000 Equity Incentive Plan
include:
. shares of our common stock issuable upon exercise of an option granted
under the plan that is terminated or cancelled before the option is
exercised;
. shares of our common stock issued upon exercise of an option granted
under this plan that are subsequently repurchased by us at the original
purchase price;
. shares of our common stock subject to awards granted under this plan
that are subsequently forfeited or repurchased by us at the original
issue price; and
. shares of our common stock subject to stock bonuses granted under this
plan that otherwise terminate without shares being issued.
During any calendar year, no person will be eligible to receive more than
2,000,000 shares, or 3,000,000 shares in the case of a new employee, under the
2000 Equity Incentive Plan. The 2000 Equity Incentive Plan will terminate on
January 20, 2010, unless it is terminated earlier by our board of directors.
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<PAGE>
2000 Employee Stock Purchase Plan. On January 21, 2000, our board of
directors adopted the 2000 Employee Stock Purchase Plan subject to stockholder
approval. The 2000 Employee Stock Purchase Plan will become effective on the
first day on which price quotations are available for our common stock on the
Nasdaq National Market. The employee stock purchase plan is designed to enable
eligible employees to purchase shares of our common stock at a discount on a
periodic basis through payroll deductions.
Our compensation committee will administer the 2000 Employee Stock Purchase
Plan. Our employees generally will be eligible to participate in this plan if
they are employed by us, or a subsidiary of ours that we designate, for more
than 20 hours per week and more than five months in a calendar year. Our
employees are not eligible to participate in our 2000 Employee Stock Purchase
Plan if they are 5% stockholders or would become 5% stockholders as a result of
their participation in the plan. Under the 2000 Employee Stock Purchase Plan,
eligible employees may acquire shares of our common stock through payroll
deductions. Our eligible employees may select a rate of payroll deduction
between 1% and 15% of their cash compensation. An employee's participation in
this plan will end automatically upon termination of employment for any reason.
No participant will be able to purchase shares having a fair market value of
more than $25,000, determined as of the first day of the applicable offering
period, in any calendar year in which the employee participates in the 2000
Employee Stock Purchase Plan. Each offering period will be for two years and
will consist of four six-month purchase periods. The first offering period is
expected to begin on the first business day on which price quotations for our
common stock are available on the Nasdaq National Market. The first purchase
period may be more or less than six months long. The offering periods
thereafter will begin on February 1 and August 1. The purchase price for shares
of our common stock purchased under the 2000 Employee Stock Purchase Plan will
be 85% of the lesser of the fair market value of our common stock on the first
day of the applicable offering period or the last day of each purchase period.
Our compensation committee will have the power to change the starting date of
any subsequent offering period, the purchase date of a purchase period and the
duration of any offering period or purchase period without stockholder approval
if this change is announced before the relevant offering period or purchase
period. Our 2000 Employee Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code.
We have initially reserved 1,000,000 shares of our common stock for issuance
under the 2000 Employee Stock Purchase Plan. The number of shares reserved for
issuance under the plan will increase automatically on January 1 of each year
by an amount equal to 1% of our total outstanding shares as of the immediately
preceding December 31. Our board of directors or compensation committee may
reduce the amount of the increase in any particular year. The 2000 Employee
Stock Purchase Plan will terminate on January 20, 2010, unless it is terminated
earlier by our board of directors.
401(k) Plan. We sponsor a defined contribution plan intended to qualify
under Section 401(k) of the Internal Revenue Code. All employees who are at
least 21 years old are generally eligible to participate and may enter the
401(k) on January 1, April 1, July 1, and October 1 of each year. Participants
may make pre-tax contributions to the plan of up to 20% of their eligible
compensation, subject to a statutorily prescribed annual limit. Participants
are fully vested in their contributions and the investment earnings. The plan
does not provide for any matching contributions by us. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Indemnification of Directors and Executive Officers and Limitation on Liability
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that a
director of a corporation will not be personally liable to us or our
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
57
<PAGE>
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Delaware law regarding unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
As permitted by Delaware law, our bylaws will provide that:
. we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, provided that each indemnified officer and
director acted in good faith and in a manner that the officer or
director reasonably believed to be in or not opposed to our best
interests;
. we may indemnify our other employees and agents; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
In addition to the indemnification provisions in our certificate of
incorporation and bylaws, we intend to enter into indemnification agreements
with each of our current directors and executive officers prior to the
completion of this offering. These agreements will provide for the
indemnification of our executive officers and directors for all expenses and
liabilities incurred in connection with any action or proceeding brought
against them by reason of the fact that they are or were our agents. We have
also obtained directors' and officers' insurance to cover our directors,
executive officers and some of our employees for specific liabilities,
including public securities matters. We believe that these indemnification
provisions and agreements and this insurance are necessary to attract and
retain qualified directors and officers.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty.
They may also reduce the likelihood of derivative litigation against directors
and officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, your investment may be negatively affected to the
extent we pay the costs of settlement and damage awards against directors and
officers as required by these indemnification provisions.
There is presently no pending litigation or proceeding involving any of our
directors, officers or employees for which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
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<PAGE>
RELATED PARTY TRANSACTIONS
Other than the transactions described in "Management" and the transactions
described below, since we were incorporated in September 1996, there has not
been nor is there currently proposed any transaction or series of similar
transactions to which we were or will be a party in which the amount involved
exceeded or will exceed $60,000 and in which any director, executive officer,
holder of more than 5% of our common stock or any member of his or her
immediate family had or will have a direct or indirect material interest.
Financing Transactions
In May 1997, we sold an aggregate of 6,000,000 shares of our Series A
preferred stock at a purchase price of $1.00 per share, 3,000,000 shares of
which we subsequently repurchased. In August 1997, we sold (1) convertible
secured promissory notes that were convertible into shares of our Series B
preferred stock, at a conversion price of $0.41667 per share, in the aggregate
principal amount of $1,250,000 and (2) secured promissory notes in the
aggregate principal amount of $4,750,000 which we intend to repay with a
portion of the net proceeds from this offering. In February 1998, the note
holders converted their secured convertible promissory notes into 3,000,048
shares of our Series B preferred stock simultaneously with the sale of an
aggregate of 11,443,750 shares of our Series C preferred stock at a purchase
price of $0.80 per share. In November 1998 and January 1999, we sold an
aggregate of 6,943,618 shares of our Series D preferred stock at a purchase
price of $1.685 per share. In September 1999, we sold an aggregate of
11,648,493 shares of our Series E preferred stock at a purchase price of $2.59
per share.
The following table summarizes, as of March 17, 2000, private placement
transactions of our preferred stock to, among others, the following executive
officers, directors and holders of more than 5% of our outstanding stock. You
should refer to "Principal Stockholders" for more detail on shares of our
common stock held by these purchasers and their affiliations with our directors
and officers.
<TABLE>
<CAPTION>
Preferred Stock(1)
------------------------------------------------
Stockholder Series A Series B Series C Series D Series E
- ----------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers
John A. Rollwagen............ 150,000 10,645
5% Stockholders
Toshiba America Electronic
Components, Inc............. 3,000,000
APV Technology Partners II,
L.P. ....................... 3,750,000 1,186,943 873,591
Entities affiliated with St.
Paul Venture Capital, Inc. . 3,750,000 1,186,943 1,617,761
Thomvest Holdings Inc........ 3,750,000 1,186,943 1,067,722
1267104 Ontario, Limited..... 3,264,094
GE Capital Equity
Investments, Inc. .......... 2,426,641
</TABLE>
- ---------------------
(1) Shown on an as-if-converted to common stock basis.
In January 1998, in connection with a bridge financing, we issued warrants
to purchase shares of our common stock at an exercise price of $0.80 per share
to some of our stockholders who hold more than 5% of our outstanding stock.
These warrants have not been exercised. These holders, who are identified
below, are affiliated with certain of our directors. You should refer to
"Principal Stockholders" for more detail on their affiliations with our
directors.
<TABLE>
<CAPTION>
Common Stock
Warrant Holder Subject to Warrant Expiration Date
-------------- ------------------ -----------------
<S> <C> <C>
APV Technology Partners II, L.P........ 62,500 December 31, 2002
Entities affiliated with St. Paul
Venture Capital, Inc. ................ 62,500 December 31, 2002
</TABLE>
59
<PAGE>
In August 1999, in connection with a bridge financing, we issued warrants to
purchase shares of our Series E preferred stock at an exercise price of $2.59
per share to some of our stockholders who hold more than 5% of our outstanding
stock. These warrants have not been exercised. These holders, who are
identified below, are affiliated with certain of our directors. You should
refer to "Principal Stockholders" for more detail on their affiliations with
our directors.
<TABLE>
<CAPTION>
Common Stock
Warrant Holder Subject to Warrant Expiration Date
-------------- ------------------ ---------------
<S> <C> <C>
John A. Rollwagen........................ 1,064 August 6, 2003
Entities affiliated with St. Paul Venture
Capital, Inc............................ 17,793 August 6, 2003
Thomvest Holdings Inc.................... 21,022 August 6, 2003
APV Technology Partners II, L.P.......... 21,288 August 9, 2003
</TABLE>
Loans to Executive Officers
In addition to the loans described in "Management--Employment Contracts and
Change of Control Arrangements," we loaned to Petro Estakhri, our Chairman of
the Board, Chief Technology Officer and Executive Vice President, Engineering,
a total of $40,000, all of which remains outstanding as of December 31, 1999.
This loan is secured by a stock pledge agreement and bears interest at a rate
of 5.7% per year. The principal is due on or before the earlier of (1) April
2002 or (2) a change of control of Lexar Media.
Transactions with Stockholders
Toshiba America Electronic Components, Inc. In June and July 1997, we
received a cash advance for working capital in the amount of $400,000 from
Toshiba America Electronic Components, Inc., a holder of more than 5% of our
common stock and, from May 1997 until September 1999, a shareholder with rights
under our articles of incorporation to elect a representative to serve on our
board of directors. The advance bears interest at a rate of 5.5% per year and
is payable in July 2000. As of December 31, 1999, the total amount outstanding,
including accrued interest, was approximately $406,000. We intend to repay this
advance with a portion of the net proceeds from this offering. Toshiba is also
the guarantor of a promissory note that we sold to MetLife Capital Corporation
in the aggregate principal amount of $348,423 which is more fully described
below. On April 15, 1998, we entered into a Consignment Agreement with Toshiba
for the supply of flash memory. In 1998, we purchased approximately $5.3
million of materials from Toshiba pursuant to this agreement and, as of
December 31, 1998, had payables to Toshiba of approximately $1.8 million. The
agreement had a one-year term renewable at our option, and we renewed the
agreement with Toshiba in April 1999. In 1999, we purchased approximately $18.5
million of materials from Toshiba, and as of December 31, 1999, we had payables
to Toshiba of approximately $3.4 million.
Our agreement with Toshiba was negotiated at arm's length and contains terms
no less favorable to us than we could have obtained from unaffiliated third
parties.
GE Capital Equity Investments, Inc. In March 1997, we issued and sold a
promissory note in the aggregate principal amount of $348,423 to MetLife
Capital Corporation, which was purchased by General Electric Capital Business
Asset Funding Corporation, an affiliate of GE Capital Equity Investments, Inc.,
a holder of more than 5% of our common stock. This note is secured by software
that we own and is guaranteed by Toshiba, a holder of more than 5% of our
common stock. The note accrues interest at a rate of 9.68% per year and is due
and payable on March 8, 2002. As of December 31, 1999, the total amount
outstanding, was approximately $170,353.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 17, 2000, and as adjusted to reflect
the sale of the shares in this offering for:
. each person known by us to own beneficially more than 5% of our common
stock;
. each director and executive officer; and
. all directors and executive officers as a group.
The percentage of beneficial ownership for the following table is based on
49,129,501 shares of common stock outstanding on March 17, 2000, assuming the
exercise of outstanding warrants to purchase 346,300 shares of our common stock
prior to the completion of this offering and the conversion of all outstanding
shares of our preferred stock into our common stock, and 56,629,501 shares of
our common stock outstanding after the completion of this offering, assuming no
exercise of the underwriters' over-allotment option.
Unless otherwise indicated below, to our knowledge, all persons listed below
have sole voting and investment power with respect to their shares of our
common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, each entity or person listed below
maintains a mailing address of c/o Lexar Media, Inc., 47421 Bayside Parkway,
Fremont, California 94538.
The number of shares beneficially owned by each stockholder is determined in
accordance with the rules of the Securities and Exchange Commission and is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares of common stock over
which the stockholder has sole or shared voting or investment power and any
shares of common stock that the stockholder has a right to acquire within 60
days after March 17, 2000 through the exercise of any option, warrant or other
right. The percentage ownership of the outstanding common stock, however, is
based on the assumption, expressly required by the rules of the Securities and
Exchange Commission, that only the person or entity whose ownership is being
reported has converted options or warrants into shares of our common stock.
<TABLE>
<CAPTION>
Percent of Shares
Number of Beneficially Owned
Shares ----------------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------ ------------ --------- ---------
<S> <C> <C> <C>
Executive Officers and Directors:
Petro Estakhri (1).................... 2,800,000 5.7% 4.9%
John H. Reimer........................ 2,800,000 5.7 4.9
Eric B. Stang (2)..................... 900,000 1.8 1.6
Robert J. Netter, Jr. ................ 268,750 * *
Ronald H. Bissinger (3)............... 450,000 * *
J. Scott Case (4)..................... 2,426,641 5.0 4.3
GE Capital Equity Investments, Inc.
William T. Dodds (5).................. 6,025,687 12.3 10.6
Thomvest Holdings, Inc.
Brian D. Jacobs (6)................... 6,634,998 13.6 11.7
Entities affiliated with St. Paul
Venture Capital, Inc.
John A. Rollwagen (7)................. 311,709 * *
William J. Stewart (8)................ 5,894,322 12.1 10.4
APV Technology Partner II, L.P.
Executive Officers and Directors as a
group (9 persons) (9)................ 28,243,357 57.5 49.6
5% Stockholders:
1267104 Ontario, Limited.............. 3,264,094 6.7 5.8
Toshiba America Electronic Components,
Inc.................................. 3,000,000 6.2 5.3
</TABLE>
- ---------------------
* Less than 1%
61
<PAGE>
(1) Includes 1,323,716 shares of our common stock held directly by Mr. Estakhri
and 1,076,284 shares of our common stock held jointly between Mr. Estakhri
and his wife.
(2) Includes an option to purchase 100,000 shares of our common stock which is
immediately exercisable.
(3) Includes an option to purchase 50,000 shares of our common stock which is
immediately exercisable.
(4) Represents shares of our common stock owned by GE Capital Equity
Investments, Inc., with which Mr. Case is affiliated by virtue of his being
a Senior Vice President of GE Capital Equity Capital Group, Inc., which is
under common control with such entity. Mr. Case disclaims any beneficial
interest or ownership of such shares. The address of GE Capital Equity
Investments, Inc. is 120 Long Ridge Road Stamford, Connecticut 06927.
(5) Represents 6,004,665 shares of our common stock and includes a warrant to
purchase 21,022 shares of our common stock, which is immediately
exercisable, owned by Thomvest Holdings, Inc., with which Mr. Dodds is
affiliated by virtue of his being a Vice President thereof. Mr. Dodds
disclaims any beneficial interest of such shares except to the extent of
any individual interest in such shares. The address of Thomvest Holdings
Inc. is 65 Queen Street West, Suite 2400, Toronto, Ontario, Canada M5H 2M8.
(6) Represents 180,254 shares of our common stock owned by St. Paul Venture
Capital Affiliates Fund I, LLC, 4,801,177 shares of our common stock owned
by St. Paul Venture Capital IV, LLC and 1,573,273 shares of our common
stock owned by St. Paul Venture Capital V, LLC. Also includes warrants to
purchase 2,207 shares of our common stock held by St. Paul Venture Capital
Fund I, LLC, a warrant to purchase 60,781 shares of our common stock held
by St. Paul Venture Capital IV, LLC and a warrant to purchase 17,305 shares
of our common stock held by St. Paul Venture Capital V, LLC, each of which
is immediately exercisable. Mr. Jacobs is affiliated with the funds by
virtue of his being a general partner, manager or principal, or a general
partner, manager or principal of the general partner or managing member, of
each of the funds. Mr. Jacobs shares voting control over each of the funds
with Patrick A. Hopf, Frederic Boswell, Evertt Cox, Michael Gorman, James
Simons, Nancy Olson and Zenco Hutcheson, each of whom is a general partner
in St. Paul Venture Capital. Mr. Jacobs and the other general partners of
St. Paul Venture Capital disclaim any beneficial interest of such shares
except to the extent of any individual interest in such shares. The address
of each of the St. Paul Venture Capital entities is 10400 Viking Drive,
Suite 550, Eden Prairie, MN 55344.
(7) Includes 160,645 shares of our common stock owned by the John A. Rollwagen
Revocable Trust, 75,000 shares of our common stock owned by an individual
retirement account for the benefit of Mr. Rollwagen, 75,000 shares of our
common stock owned by the Rollwagen Family Limited Partnership and a
warrant owned by the John A. Rollwagen Revocable Trust to purchase 1,064
shares of our common stock, which is immediately exercisable.
(8) Represents shares of our common stock owned by APV Technology Partner II,
L.P., with which Mr. Stewart is affiliated by virtue of his being a general
partner, manager or principal, or a general partner, manager or principal
of the general partner or managing member, of such fund. Peter G. Bodine
and Spencer C. Tall are each Managing Members of APV Technology Partners
II, L.P. and share voting control of such fund with Mr. Stewart. Messrs.
Stewart, Bodine and Tall disclaim any beneficial interest of such shares
except to the extent of any individual interest in such shares. Also
includes warrants to purchase 83,788 shares of our common stock, each of
which is immediately exercisable. The address of APV Technology Partners
II, L.P. is 535 Middlefield Road, Suite 150, Menlo Park, CA 94025.
(9) Includes warrants to purchase 186,167 shares of our common stock, each of
which are immediately exercisable and options to purchase an aggregate of
150,000 shares of our common stock which are immediately exercisable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 200,000,000 shares of common stock, par value $0.0001 per
share, and 10,000,000 shares of preferred stock, par value $0.0001 per share.
As of March 17, 2000, assuming the conversion of all of our outstanding
preferred stock into 34,148,853 shares of common stock and the exercise of
outstanding warrants to purchase 346,300 shares of our common stock prior to
the completion of this offering, there were outstanding 49,129,501 shares of
our common stock held of record by approximately 120 stockholders, options to
purchase 2,579,484 shares of our common stock and warrants to purchase 155,000
shares of our common stock. The following description of our capital stock does
not purport to be complete and is subject to and qualified by our certificate
of incorporation and bylaws, which are included as exhibits to the Registration
Statement of which this prospectus forms a part, and by the provisions of
applicable Delaware law.
Common Stock
Voting Rights. Each holder of our common stock is entitled to one vote for
each share held of record on all matters submitted to a vote of the
stockholders, including the election of directors. We do not provide in our
certificate of incorporation for cumulative voting in the election of
directors. Therefore, in accordance with Section 2115 of the California
Corporations Code, commencing at the first annual meeting of stockholders
following the date on which we first shall have had at least 800 holders of our
common stock, the holders of a majority of the shares of our common stock can
elect all of the directors then standing for election. Prior to that time,
however, cumulative voting in the election of directors will be in effect,
meaning that each holder of our common stock is entitled to a number of votes
equal to the number of votes to which that share of common stock is normally
entitled multiplied by the number of directors to be elected. In essence, a
stockholder then would be permitted to cast all of its votes for a single
candidate or allocate its votes among as many candidates as the stockholder may
choose.
Dividend Rights. Subject to preferences that may be applicable to any
outstanding series of our preferred stock, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets that are
legally available for distribution at the times and in the amounts that our
board of directors may determine.
Liquidation Rights. In case of our liquidation, dissolution or winding up,
the holders of our common stock will be entitled to share ratably in the assets
legally available for distribution to stockholders, in each case after payment
of all of our liabilities and subject to preferences that may be applicable to
any series of our preferred stock then outstanding.
Other Rights. The holders of our common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to our common stock. The rights, preferences
and privileges of holders of our common stock are subject to the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future.
Preferred Stock
Upon the completion of this offering, our outstanding preferred stock will
convert into 34,148,853 shares of our common stock, assuming that each
outstanding share of our Series A preferred stock, Series B preferred stock,
Series C preferred stock and Series D preferred stock will be converted into
one share of our common stock and each outstanding share of our Series E
preferred stock will be converted into 0.838 shares of our common stock.
Our board of directors has the authority, without further action by our
stockholders, to issue, from time to time, shares of our preferred stock in one
or more series. Our board of directors may fix the number of shares,
designations, preferences, powers and other special rights of the preferred
stock. The preferences, powers, rights and restrictions of different series of
preferred stock may differ. The issuance of preferred
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<PAGE>
stock could decrease the amount of earnings and assets available for
distribution to holders of our common stock or impair the rights and powers,
including voting rights, of the holders of common stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, may also have the effect of
discouraging, delaying or preventing a change in control of Lexar Media,
regardless of whether the transaction may be beneficial to stockholders. After
the completion of this offering, there will be no shares of preferred stock
outstanding, and we have no current plans to issue any shares of preferred
stock.
Warrants
As of March 17, 2000, we had the following outstanding warrants to purchase
our stock:
<TABLE>
<CAPTION>
Total Number
of Shares
Subject to Exercise Price
Type of Stock Warrants(1) Per Share Expiration Date
- ------------- ------------ -------------- ----------------------------------
<S> <C> <C> <C>
Common Stock............ 10,583 $0.30 Upon consummation of this offering
Common Stock............ 125,000 $0.80 December 31, 2002
Common Stock............ 30,000 $1.00 January 31, 2005
Series C Preferred
Stock.................. 100,000 $0.80 Upon consummation of this offering
Series E Preferred
Stock.................. 235,717 $3.09 Upon consummation of this offering
</TABLE>
- ---------------------
(1) Shown on an as-if-converted to common stock basis.
Registration Rights
Immediately after the completion of this offering, in accordance with an
Investors' Rights Agreement dated September 28, 1999, as amended, certain of
our stockholders and warrantholders beneficially owning 34,377,796 shares of
our common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act, as described below.
Demand Registration Rights. At any time after six months following the
completion of this offering, both the holders of at least a majority of the
shares having registration rights and the holders of at least one-fifth of the
shares of the Series E preferred stock can request that we register all or a
portion of their shares so long as the total offering price of the shares to
the public is at least $5,000,000. We will only be required to file two
registration statements in response to a demand for registration by the holders
of a majority of the shares having registration rights and one registration
statement in response to a demand for registration by the holders of at least
one-fifth of the shares of the Series E preferred stock. We are not required to
file more than one registration statement in any six-month period. We may
postpone the filing of any registration statement for up to 90 days if we
determine that the filing would be seriously detrimental to us and our
stockholders, although we may only exercise this right once in any 12-month
period.
Piggyback Registration Rights. If we register any securities for public
sale, the stockholders with registration rights will have the right to include
their shares in this registration. This right, however, does not apply to a
registration statement relating to any of our employee benefit plans or to a
corporate reorganization. If marketing reasons dictate, the managing
underwriter of any underwritten offering will have the right to limit the
number of shares registered by these holders to be included in the registration
statement to 10% of the total shares covered by the registration statement.
Form S-3 Registration Statements. The holders of the shares having
registration rights can request that we register their shares if we are
eligible to file a registration statement on Form S-3 and if the total price of
the shares of common stock offered to the public is at least $500,000. These
holders may only require us to
64
<PAGE>
file two Form S-3 Registration Statements in any 12-month period. We are not
required to file any registration statement pursuant to these rights within the
six months following this offering. We may postpone the filing of any
registration statement for up to 90 days if we determine that the filing would
be seriously detrimental to us and our stockholders, although we may only
exercise this right once in any 12-month period.
We will pay all expenses incurred in connection with the filings described
above, except for underwriters' and brokers' discounts and commissions, which
will be paid by each of the selling stockholders. The registration rights
described above will expire with respect to any particular stockholder if it
can sell all of its shares in a three-month period under Rule 144 of the
Securities Act. In any event, the registration rights described above will
expire five years after the completion of this offering.
Anti-takeover Effects of Delaware Law and our Certificate of Incorporation and
Bylaws
There are certain provisions of Delaware law and our certificate of
incorporation and bylaws that may be deemed to have an anti-takeover effect and
may discourage, delay or prevent a tender offer or takeover attempt that you
might consider to be in your best interest, including any attempt that might
result in a premium over the market price for your shares. These provisions are
summarized in the following paragraphs.
Classified Board of Directors. In accordance with Section 2115 of the
California Corporations Code, commencing at the first annual meeting of
stockholders following the date on which we first shall have had at least 800
holders of our common stock, our board of directors will be divided into three
classes of directors, as nearly equal in size as possible, serving staggered
three-year terms. Upon expiration of the term of a class of directors, the
directors in that class will be elected for three-year terms at the annual
meeting of stockholders in the year in which the term for that class of
directors expires. Our certificate of incorporation and bylaws provide that
directors may be removed only by the affirmative vote of the holders of two-
thirds of the shares of capital stock entitled to vote in the election of
directors. In addition, any vacancy on the board of directors, however
occurring, including a vacancy resulting from an enlargement of the board of
directors, may only be filled by vote of a majority of the directors then in
office. The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from acquiring, control of Lexar Media.
Stockholder Action; Special Meeting of Stockholders. Our certificate of
incorporation eliminates the ability of stockholders to act by written consent.
Our bylaws further provide that our stockholders may not call special meetings
without advance notice and approval of stockholders owning at least a majority
of our outstanding voting stock. These provisions could have the effect of
delaying actions that are favored by some stockholders. These provisions may
also discourage another person from making a tender offer for our common stock,
because that person, even if it acquired a majority of our outstanding voting
securities, would be able to take action as a stockholder, such as electing new
directors or approving a merger, only at a duly called meeting of stockholders
and not by written consent.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be
received at our principal executive offices not less than 60 days nor more than
90 days before the one-year anniversary of the prior annual meeting of
stockholders. If the annual meeting is called for a date that is not within 30
days before or 60 days after the anniversary date, in order to be timely,
notice from the stockholder must be received within ten days after the date on
which notice of the annual meeting was mailed to stockholders or made public,
whichever occurred first. Our bylaws also specify certain requirements as to
the form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate
65
<PAGE>
acquisitions and employee benefit plans. The existence of authorized but
unissued shares of common stock and preferred stock could render more difficult
or discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Amendments; Supermajority Vote Requirements. Delaware law provides generally
that the affirmative vote of stockholders owning a majority of the outstanding
shares of stock entitled to vote on a matter is required to amend a
corporation's certificate of incorporation or bylaws, unless a corporation's
certificate of incorporation or bylaws, as the case may be, requires a greater
percentage. Our certificate of incorporation requires the approval of holders
of at least two-thirds of the outstanding shares of stock entitled to vote in
order to adopt, amend or repeal the provisions of our certificate of
incorporation relating to the election and removal of directors and the ability
of our stockholders to take action by written consent.
Section 203 Business Combinations. After this offering, we will be subject
to the provisions of Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. This section prevents some Delaware
corporations from engaging, under some circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets with any interested stockholder, meaning a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the
date that the stockholder became an interested stockholder unless:
. the transaction is approved by the board of directors before the date
the interested stockholder attained the status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
. on or subsequent to that date the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.
A Delaware corporation may opt out of this section with an express provision
in its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from a stockholders' amendment
approved by at least a majority of the outstanding voting shares. However, we
have not opted out of this provision. The statute could prohibit or delay
mergers or other takeover or change-in-control attempts and, accordingly, may
discourage attempts to acquire us.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
Listing
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "LEXR."
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there was no public market for our common stock. A
significant public market for our common stock may not develop or be sustained
after this offering. The sale of a substantial amount of our common stock,
including shares issued upon exercise of outstanding options and warrants, in
the public market after this offering, or the possibility of these sales
occurring, could cause the prevailing market price of our common stock to
decline or impair our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
56,629,501 shares of our common stock, based on shares of common stock
outstanding as of March 17, 2000, assuming the conversion of all of our
outstanding preferred stock into 34,148,853 shares of our common stock and the
exercise of outstanding warrants to purchase 348,300 shares of our common stock
prior to the completion of this offering. Of these shares, all of the 7,500,000
shares of our common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
the shares are purchased by affiliates as that term is defined in Rule 144
under the Securities Act. Any shares purchased by an affiliate may not be
resold except pursuant to an effective registration statement or an applicable
exemption from registration, including an exemption under Rule 144 of the
Securities Act. The remaining 49,129,501 shares of our common stock held by
existing stockholders are restricted securities as that term is defined in
Rule 144 under the Securities Act. These restricted securities may be sold in
the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act. These rules are summarized below. Subject to the lock-up agreements
described below and the provisions of Rule 144 and Rule 701, additional shares
will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number
of Shares Date
--------- ----
<C> <S>
7,500,000 On the date of this prospectus, these shares sold in the offering
will be immediately available for sale in the public market.
41,852,342 180 days after the date of this prospectus, the 180-day lock-up
terminates and these shares are saleable under Rule 144 (subject in
some cases to volume limitations) or Rule 144(k) or Rule 701.
7,277,159 At various times commencing more than 180 days after the date of
this prospectus, these shares will be eligible for sale under Rule
144 or Rule 145 upon the expiration of various one-year holding
periods or the lapse of various repurchase rights.
</TABLE>
Lock-Up Agreements
All of our officers and directors and substantially all of our stockholders
have signed lock-up agreements that prohibit them from offering, selling or
otherwise disposing of any shares of our common stock, options or warrants to
acquire shares of our common stock or securities exchangeable for or
convertible into shares of our common stock owned by them without the prior
written consent of Chase Securities, Inc. during the 180-day period following
the date of this prospectus. Chase Securities Inc. may choose to release some
of these shares from these restrictions prior to the expiration of this 180-day
period, although it has no current intention to do so.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year from the later of the date those shares of
common stock were acquired from us or from an affiliate of ours would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
(1) 1% of the number of shares of common stock then outstanding, which
will equal approximately 566,295 shares immediately after this offering; or
67
<PAGE>
(2) the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale of any shares of common stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us. Affiliates may sell shares not
constituting restricted securities in accordance with the foregoing volume
limitations and other restrictions, but without regard to the one-year holding
period.
Rule 144(k)
In addition, under Rule 144(k), a person who is not one of our affiliates at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years from the later of
the date those shares of common stock were acquired from us or from an
affiliate of ours, including the holding period of any prior owner other than
an affiliate, is entitled to sell those shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Therefore, unless otherwise restricted pursuant to the lock-up
agreements or otherwise, those shares may be sold immediately upon the
completion of this offering.
Rule 701
Any employee, officer or director of, or consultant to, us who purchased his
or her shares under a written compensatory plan or contract may be entitled to
sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell those shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this prospectus before selling those shares. However, all
shares issued under Rule 701 are subject to lock-up agreements and will only
become eligible for sale when the 180-day lock-up agreements expire.
Stock Options
At March 17, 2000, there were options to purchase 2,579,484 shares of our
common stock outstanding under our stock option plans and otherwise.
Immediately after the effective date of this offering, we expect to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance under our stock option plans. Upon the filing of
this registration statement and upon expiration of 180-day lock-up agreements,
approximately 6,002,986 shares of common stock issuable upon exercise of stock
options will be immediately eligible for sale in the public market, subject to
Rule 144 volume limitations applicable to our affiliates.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Chase Securities Inc.,
J.P. Morgan Securities Inc., Prudential Securities Incorporated and SG Cowen
Securities Corporation, have severally agreed to purchase from us the following
respective numbers of shares of our common stock:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Chase Securities Inc...............................................
J.P. Morgan Securities Inc.........................................
Prudential Securities Incorporated.................................
SG Cowen Securities Corporation....................................
---------
Total............................................................ 7,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in our business and the receipt of certificates, opinions and letters from us
and our counsel. The nature of the underwriters' obligations requires that they
purchase all shares of our common stock offered in this offering if they
purchase any of the shares in this offering.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to dealers at that price less a concession not in excess of
$ per share. The underwriters may allow and the dealers may reallow a
concession not in excess of $ per share to other dealers. After the public
offering of the shares, the underwriters may change the offering price and
other selling terms. The representatives have advised us that the underwriters
do not intend to confirm discretionary sales in excess of 5% of the shares of
common stock offered by this prospectus.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of the effective date of this offering, to purchase up to
1,125,000 additional shares of our common stock at the initial public offering
price, less the underwriting discounts and commissions, set forth on the cover
page of this prospectus. To the extent that the underwriters exercise this
option, each underwriter will have a firm commitment to purchase approximately
the same percentage that the number of shares of our common stock to be
purchased by it shown in the above table bears to the total number of shares of
our common stock offered in this offering. We will be obligated to sell shares
to the underwriters to the extent the option is exercised. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of our common stock offered in this offering.
The following table shows the per share and total public offering price, the
underwriting discounts and commissions and the proceeds before expenses to us.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,900,000.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price...
Underwriting discounts
and commissions........
Proceeds, before
expenses, to us........
</TABLE>
At our request, the underwriters have reserved up to shares of our
common stock to be sold in the offering and offered for sale, at the initial
public offering price, to friends and relatives of employees,
69
<PAGE>
employees, consultants, directors and other persons with business relationships
to us. The number of shares of our common stock available for sale to the
general public will be reduced to the extent these individuals purchase the
reserved shares. Any reserved shares that are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities connected
to this offering, including liabilities under the Securities Act of 1933, and
to contribute to payments the underwriters may be required to make in respect
of those liabilities.
Substantially all of our stockholders, including all of our executive
officers and directors, who will own in the aggregate 48,946,671 shares of our
common stock after the offering, have agreed that they will not, without the
prior written consent of Chase Securities Inc., offer, sell or otherwise
dispose of any shares of our common stock, options or warrants to acquire
shares of our common stock or securities exchangeable for or convertible into
shares of common stock owned by them during the 180-day period following the
date of this prospectus. We have agreed that we will not, without the prior
written consent of Chase Securities Inc., offer, sell or otherwise dispose of
any shares of our common stock, options or warrants to acquire shares of our
common stock or securities exchangeable for or convertible into shares of our
common stock during the 180-day period following the date of this prospectus,
except that we may issue shares upon the exercise of options granted before the
date of this prospectus and may grant additional options under our stock option
plans, provided, however, that, without the prior written consent of Chase
Securities Inc., the additional options will not be exercisable during such
period.
Prior to this offering, there has been no public market for our shares. The
initial public offering price will be negotiated among the underwriters and us.
Among the factors to be considered in determining the initial public offering
price of the shares, in addition to prevailing market conditions, will be our
historical performance, estimates of our business potential and earnings
prospects, an assessment of management and the consideration of the above
factors in relation to market valuations of companies in related businesses.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
In connection with the offering, the underwriters may purchase and sell
shares of our common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discounts and commissions received by it because the representatives have
repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of our common stock. As a result, the price of our
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM, a full service brokerage firm program, may view offering terms and a
prospectus online and place orders through their financial advisors.
70
<PAGE>
On September 28, 1999, in consideration for services that SG Cowen
Securities Corporation provided to us in connection with the issuance and sale
of our Series E preferred stock, we issued to SG Cowen a warrant to purchase
193,050 shares of our Series E preferred stock at an exercise price of
$2.59 per share convertible into 161,776 shares of common stock. This warrant
expires, if not earlier exercised, on the earlier of September 28, 2003 or the
consummation of this offering.
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus for us.
Gibson, Dunn & Crutcher LLP, San Francisco, California, will pass upon certain
legal matters in connection with this offering for the underwriters. An
investment partnership comprised of partners from Fenwick & West LLP holds
43,750 shares of our common stock and Fenwick & West LLP holds a warrant to
purchase 30,000 shares of our common stock at an exercise price of $1.00 per
share.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement or the
exhibits and schedules that are part of the Registration Statement. Any
statements made in this prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
of these contracts, agreements or other documents filed as an exhibit to the
Registration Statement, we refer you to the exhibit for a more complete
description of the matter involved, and each statement in this prospectus is
qualified in its entirety by this reference. You may read and copy all or any
portion of the Registration Statement or any reports, statements or other
information in the files at the following public reference facilities of the
Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Room 1024, Judiciary Plaza Seven World Trade Center 500 West Madison Street
450 Fifth Street, N.W. Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
You can request copies of these documents upon payment of a duplicating fee
by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for
further information on the operation of its public reference rooms. Our
filings, including the Registration Statement, will also be available to you on
the Internet web site maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors, and make available to
our stockholders quarterly reports for the first three quarters of each year
containing unaudited interim financial statements.
71
<PAGE>
LEXAR MEDIA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)................................. F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lexar Media, Inc.
The reincorporation of Lexar Media, Inc. in the State of Delaware, described in
Note 13 to the financial statements, has not been consummated at February 16,
2000. When it has been consummated, we will be in a position to furnish the
following report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of mandatorily redeemable
convertible preferred stock and stockholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of Lexar
Media, Inc. at December 31, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above."
PricewaterhouseCoopers LLP
San Jose, California
February 3, 2000, except for note 13 as to which the date is March 24, 2000
F-2
<PAGE>
LEXAR MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
------------------ December 31,
1998 1999 1999
-------- -------- -------------
(unaudited)
ASSETS (Note 12)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 9,824 $ 6,495
Short-term investments (includes $2,500 of
restricted securities).................... -- 3,896
Accounts receivable, net of allowances for
sales returns and doubtful accounts of
$239 in 1998 and $730 in 1999............. 2,603 8,822
Inventory, net............................. 2,856 16,287
Prepaid expenses and other current assets.. 345 545
-------- --------
Total current assets..................... 15,628 36,045
Property and equipment, net.................. 807 1,834
Intangible assets, net....................... 299 188
Other assets................................. 80 207
-------- --------
Total assets............................. $ 16,814 $ 38,274
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................... $ 4,133 $ 9,029
Accrued liabilities........................ 950 2,106
Deferred revenue........................... 97 112
Notes payable to stockholders.............. 67 5,224
-------- --------
Total current liabilities................ 5,247 16,471
Notes payable to stockholders, net of current
portion..................................... 5,326 96
-------- --------
Total liabilities........................ 10,573 16,567
Mandatorily redeemable convertible preferred
stock (redemption value $55,258)............ 24,653 53,136
Commitments and contingencies (Notes 9 and
10)
Stockholders' equity (deficit):
Common stock, $0.0001 par value:
Authorized: 75,000,000 shares
Issued and outstanding: 7,971,217 shares
in 1998, 12,664,322 shares in 1999, and
47,634,477 shares pro forma............. -- 1 $ 5
Additional paid-in capital................. 845 24,566 82,310
Unearned stock-based compensation.......... -- (19,158) (19,158)
Notes receivable from stockholders......... (456) (2,756) (2,756)
Accumulated deficit........................ (18,801) (34,082) (34,082)
-------- -------- --------
Total stockholders' equity (deficit)..... (18,412) (31,429) $ 26,319
-------- -------- ========
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (deficit).......... $ 16,814 $ 38,274
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
LEXAR MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues:
Product sales.................................... $ 1,938 $ 7,609 $ 29,219
Development fees................................. 1,005 -- --
------- ------- --------
Total revenues................................. 2,943 7,609 29,219
Cost of revenues (excludes stock-based compensation
of $129 in 1999).................................. 1,133 6,033 24,596
------- ------- --------
Gross margin....................................... 1,810 1,576 4,623
Operating expenses:
Research and development (excludes stock-based
compensation of $274 in 1999)................... 3,931 3,101 4,141
Sales and marketing (excludes stock-based compen-
sation of $285 in 1999)......................... 1,098 4,413 8,599
General and administrative (excludes stock-based
compensation of $1,118 in 1999)................. 1,650 2,733 5,241
Stock-based compensation......................... -- -- 1,806
------- ------- --------
Total operating expenses....................... 6,679 10,247 19,787
------- ------- --------
Loss from operations............................... (4,869) (8,671) (15,164)
Interest expense and other......................... 288 419 117
------- ------- --------
Net loss....................................... $(5,157) $(9,090) $(15,281)
======= ======= ========
Net loss per common share--basic and diluted....... $ (0.52) $ (3.29) $ (2.87)
======= ======= ========
Shares used in net loss per common share calcula-
tion--basic and diluted........................... 9,945 2,766 5,320
======= ======= ========
Pro forma net loss per common share--basic and di-
luted (unaudited) (Note 12)....................... $ (0.48)
========
Shares used in pro forma net loss per common share
calculation--basic and diluted (unaudited) (Note
12)............................................... 32,163
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LEXAR MEDIA, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Mandatorily
Redeemable
Convertible
Preferred Notes
Stock Common Stock Additional Unearned Receivable
--------------- --------------- Paid-in Stock-based from
Shares Amount Shares Amount Capital Compensation Stockholders
------ ------- ------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997.... 16,854 $ 2 $ 107 $ -- $ --
Conversion of note payable
into Series A mandatorily
redeemable convertible
preferred stock............. 3,000 $ 3,000
Issuance of Series A
mandatorily redeemable
convertible preferred stock. 3,000 2,919 15 -- 2 -- --
Issuance of common stock to
employees for services...... -- -- 1,631 -- 257 -- --
Issuance of common stock for
services.................... -- -- 100 -- 16 -- --
Exercise of stock options.... -- -- 9 -- 1 -- --
Repurchase of stock.......... (3,000) (2,997) (16,279) (2) (1) -- --
Net loss..................... -- -- -- -- -- -- --
------ ------- ------- --- ------- -------- -------
Balances, December 31, 1997.. 3,000 2,922 2,330 -- 382 -- --
Conversion of convertible
promissory notes into Series
B mandatorily redeemable
convertible preferred stock. 3,000 1,240
Issuance of Series C
mandatorily redeemable
convertible preferred stock. 10,444 8,267
Conversion of convertible
promissory notes into Series
C mandatorily
redeemable convertible
preferred stock............. 1,000 800
Issuance of Series D
mandatorily redeemable
convertible preferred stock. 6,825 11,424
Issuance of restricted stock
to employees in exchange for
notes receivable............ -- -- 4,553 -- 364 -- (364)
Exercise of stock options and
grant of restricted stock... -- -- 1,201 -- 108 -- (104)
Repurchase of stock.......... -- -- (113) -- (9) -- 9
Reduction of notes receivable
from stockholders........... -- -- -- -- -- -- 3
Net loss..................... -- -- -- -- -- -- --
------ ------- ------- --- ------- -------- -------
Balances, December 31, 1998.. 24,269 24,653 7,971 -- 845 -- (456)
Issuance of Series D
mandatorily redeemable
convertible preferred stock. 119 200
Conversion of convertible
promissory notes into Series
E mandatorily
redeemable convertible
preferred stock............. 882 2,285
Conversion of note payable
into Series E mandatorily
redeemable convertible
preferred stock............. 65 153
Issuance of Series E
mandatorily redeemable
convertible preferred stock. 10,701 25,845
Unearned stock-based
compensation................ -- -- -- -- 20,964 (20,964) --
Amortization of unearned
stock-based compensation.... -- -- -- -- -- 1,806 --
Accretion of mandatorily
redeemable convertible
preferred stock............. -- -- -- -- (166) -- --
Issuance of warrants for
bridge financing............ -- -- -- -- 5 -- --
Issuance of warrants for
services.................... -- -- -- -- 446 -- --
Exercise of stock options.... -- -- 4,849 1 2,484 -- (2,349)
Repurchase of stock.......... -- -- (156) -- (12) -- 12
Reduction of notes receivable
from stockholders........... -- -- -- -- -- -- 37
Net loss..................... -- -- -- -- -- -- --
------ ------- ------- --- ------- -------- -------
Balances, December 31, 1999.. 36,036 $53,136 12,664 $ 1 $24,566 $(19,158) $(2,756)
- --------------------------------------------------
====== ======= ======= === ======= ======== =======
<CAPTION>
Accumulated
Deficit Total
----------- ---------
<S> <C> <C>
Balances, January 1, 1997.... $ (4,554) $ (4,445)
Conversion of note payable
into Series A mandatorily
redeemable convertible
preferred stock.............
Issuance of Series A
mandatorily redeemable
convertible preferred stock. -- 2
Issuance of common stock to
employees for services...... -- 257
Issuance of common stock for
services.................... -- 16
Exercise of stock options.... -- 1
Repurchase of stock.......... -- (3)
Net loss..................... (5,157) (5,157)
----------- ---------
Balances, December 31, 1997.. (9,711) (9,329)
Conversion of convertible
promissory notes into Series
B mandatorily redeemable
convertible preferred stock.
Issuance of Series C
mandatorily redeemable
convertible preferred stock.
Conversion of convertible
promissory notes into Series
C mandatorily
redeemable convertible
preferred stock.............
Issuance of Series D
mandatorily redeemable
convertible preferred stock.
Issuance of restricted stock
to employees in exchange for
notes receivable............ -- --
Exercise of stock options and
grant of restricted stock... -- 4
Repurchase of stock.......... -- --
Reduction of notes receivable
from stockholders........... -- 3
Net loss..................... (9,090) (9,090)
----------- ---------
Balances, December 31, 1998.. (18,801) (18,412)
Issuance of Series D
mandatorily redeemable
convertible preferred stock.
Conversion of convertible
promissory notes into Series
E mandatorily
redeemable convertible
preferred stock.............
Conversion of note payable
into Series E mandatorily
redeemable convertible
preferred stock.............
Issuance of Series E
mandatorily redeemable
convertible preferred stock.
Unearned stock-based
compensation................ -- --
Amortization of unearned
stock-based compensation.... -- 1,806
Accretion of mandatorily
redeemable convertible
preferred stock............. -- (166)
Issuance of warrants for
bridge financing............ -- 5
Issuance of warrants for
services.................... -- 446
Exercise of stock options.... -- 136
Repurchase of stock.......... -- --
Reduction of notes receivable
from stockholders........... -- 37
Net loss..................... (15,281) (15,281)
----------- ---------
Balances, December 31, 1999.. $(34,082) $(31,429)
- --------------------------------------------------
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LEXAR MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(5,157) $ (9,090) $(15,281)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock issued for services rendered.............. 273 -- --
Depreciation and amortization................... 286 433 740
Gain on sale of fixed assets.................... (6) -- --
Allowances for sales returns and doubtful ac-
counts......................................... 39 201 491
Allowance to reduce inventory to net realizable
value.......................................... 102 125 296
Note issued in connection with legal settlement. -- -- 154
Amortization of stock-based compensation........ -- -- 1,806
Issuance of warrants............................ -- -- 192
Change in operating assets and liabilities:
Accounts receivable............................. 48 (2,541) (6,709)
Inventory....................................... (562) (2,520) (13,728)
Prepaid expenses and other assets............... 23 (294) (326)
Accounts payable................................ 96 3,030 3,920
Accrued liabilities............................. 566 247 2,132
Deferred revenue................................ (350) 97 15
------- -------- --------
Net cash used in operating activities.......... (4,642) (10,312) (26,298)
------- -------- --------
Cash flows from investing activities:
Purchase of intangible assets.................... -- (17) --
Purchase of property and equipment............... (753) (534) (1,655)
Proceeds from sale of fixed assets............... 15 -- --
Purchase of short-term investments (including
$2,500 of restricted securities)................ -- -- (3,896)
Stockholders' loans.............................. -- (80) --
------- -------- --------
Net cash used in investing activities.......... (738) (631) (5,551)
------- -------- --------
Cash flows from financing activities:
Issuance of mandatorily redeemable convertible
preferred stock................................. 2,922 19,680 26,137
Reduction of notes receivable from stockholders.. -- 3 35
Exercise of stock options........................ 1 5 136
Proceeds from convertible promissory notes....... 349 800 2,285
Repayment of loan................................ (45) (61) (73)
Repayment of note payable........................ (1,000) -- --
Repurchase of stock.............................. (3,000) -- --
Proceeds from notes payable to stockholders...... 6,400 -- --
------- -------- --------
Net cash provided by financing activities...... 5,627 20,427 28,520
------- -------- --------
Net increase (decrease) in cash................... 247 9,484 (3,329)
Cash at beginning of the year..................... 93 340 9,824
------- -------- --------
Cash at end of year............................... $ 340 $ 9,824 $ 6,495
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........... $ 76 $ 667 $ 575
Taxes paid....................................... $ 1 $ 1 $ 1
Supplemental disclosure of non-cash financing and
investing activities:
Conversion of note payable into mandatorily
redeemable convertible
preferred stock................................ $ 3,000 $ 1,250 $ 153
Conversion of convertible promissory notes into
mandatorily redeemable convertible preferred
stock.......................................... $ -- $ 800 $ 2,285
Exercise of stock options and restricted stock
grants in exchange for full recourse notes..... $ -- $ 468 $ 2,349
Repurchase of shares through cancellation of
notes receivable............................... $ -- $ 9 $ 13
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS:
Lexar Media, Inc. (the "Company") was incorporated under the laws of the
State of California on September 16, 1996 when the company acquired the solid-
state storage business unit of Cirrus Logic, Inc. ("Cirrus Logic"). The Company
designs, develops and markets a complete line of removable digital film and
digital photography connectivity products. Operations and revenues, to date,
have been generated primarily from sales in the United States, the United
Kingdom ("UK") and Japan. The Company changed its name from Lexar Microsystems,
Inc. to Lexar Media, Inc. in February 1998.
In September 1996, immediately following its formation, the Company acquired
all of the intangible assets of the Solid State Business Unit of Cirrus Logic
for $3,500,000 plus legal costs of $73,000. The acquisition was accounted for
as a purchase transaction. The Company financed the acquisition by borrowing
$1,000,000 from Cirrus Logic and the issuance of a note of $2,500,000 for the
remainder of the purchase price to a new third party. The $1,000,000 note was
repaid in May 1997 and the $2,500,000 note was converted into Series A
Preferred Stock in September 1997. The Company also obtained the option to
purchase certain assets of Cirrus Logic related to the business unit. The
option was exercised and certain of the option assets were acquired for
additional consideration of $227,000 in 1997. The entire original purchase
price of $3,500,000 was allocated to intangibles. Of this amount, $3,047,000
was determined to be in-process research and development costs and has been
charged to operations at the date of acquisition. The remaining goodwill is
being amortized to operations on a straight-line basis over five years.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
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 reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original or remaining maturity of three months or less to be cash equivalents.
Concentration of cash and credit risk
The Company's cash and cash equivalents are maintained at major U.S. and
Japanese financial institutions. Deposits in these institutions may exceed the
amount of insurance provided on these deposits.
The Company's accounts receivable are derived from revenues earned from
customers located primarily in the U.S., U.K. and Japan. The Company performs
ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable.
Four customers accounted for 39%, 11%, 11% and 10% of accounts receivable as
of December 31, 1998. Three customers accounted for 16%, 15% and 13% of
accounts receivable as of December 31, 1999.
F-7
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues from three customers represented 48%, 20% and 15% of total revenues
for the year ended December 31, 1997. Revenues from four customers represented
25%, 18%, 13% and 11% of total revenues for the year ended December 31, 1998.
Revenues from three customers represented 13%, 11% and 10% of total revenues
for the year ended December 31, 1999.
Certain components necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers.
Restricted securities
At December 31, 1999, $2,500,000 of the Company's short-term investments
were restricted under letters of credit.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments including
cash equivalents, short term investment, accounts receivable, notes receivable,
accounts payable, notes payable and accrued liabilities approximate fair value
due to their short maturities.
Investments in marketable securities
The Company accounts for investments in marketable securities in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Debt and equity securities are classified as available for sale
securities and are reported at fair market value with any unrealized holding
gains and losses excluded from current earnings and reported as a separate
component of stockholders' equity and as a separate component of comprehensive
income. As of December 31, 1999, the investments in marketable securities were
corporate debt securities, all of which mature within one year. The unrealized
gain on these securities at December 31, 1999 was approximately $58,000.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method. Appropriate allowances are made to reduce the
value of inventories to net realizable value, where this is below cost. This
may occur where the Company determines that inventories may be slow-moving or
obsolete.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line basis over the estimated useful lives of the
assets, generally 3 to 5 years as follows:
<TABLE>
<CAPTION>
Useful Life
-----------
<S> <C>
Computer equipment............................................... 3 years
Software......................................................... 3 years
Engineering and office equipment................................. 5 years
Furniture, fixtures and improvements............................. 5 years
</TABLE>
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful lives of the related assets.
F-8
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets
Goodwill, primarily related to the acquisition of the solid-state storage
business unit acquired from Cirrus Logic, is amortized on a straight-line basis
to operations over five years.
The Company assesses the recoverability of goodwill, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires the Company to review the carrying value of an asset for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. When such an event
occurs, the Company estimates the future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition. If the
undiscounted expected future cash flows are less than the carrying amount of
the asset, an impairment loss is recognized.
Software development costs
Costs incurred in the research, design and development of products are
expensed as incurred until technological feasibility has been established. To
date, the establishment of technological feasibility of the Company's products
and general release substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
Web site development costs
Costs incurred in the design, creation and maintenance of content, graphics
and user interface of the Company's web sites are expensed as incurred in
accordance with SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Costs incurred in the development of
application and infrastructure of the web sites are capitalized and amortized
over the useful life of the web sites. To date, such costs have not been
significant.
Segments
The Company follows Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company operates in one segment, using one measurement of profitability to
manage its business. All long-lived assets are maintained in the United States.
The revenues generated from customers located in countries other than the
United States that represented over 10% of revenues were as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
--------------- --------
<S> <C> <C> <C>
Japan............................................... $ 257 $ 1,550 $ 4,275
United Kingdom...................................... $ -- $ 192 $ 3,398
</TABLE>
Revenue recognition
The Company's customers include distributors, retailers, original equipment
manufacturers and end users. Certain customers have return and price protection
rights. The Company recognizes revenue where there is a contract or purchase
order, upon shipment or delivery depending on the terms of sale and
collectibility of the resulting receivable is probable. The Company provides
for estimated future returns and price protection based on historical
experience at the time revenue is recognized. At the time of sale, the Company
also provides for the estimated costs of meeting product warranty obligations.
For one of the
F-9
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's distributors, revenues and the costs of revenues are deferred until
the distributor has sold the product to its customer.
Research and development
Research and development costs are charged to operations as incurred.
Accounting for stock-based compensation
The Company follows the disclosure provisions of Financial Accounting
Standards Board ("FASB") SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS No. 123 have been presented (see Note
7). Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and the
exercise price of the option. Stock, stock options and warrants for stock
issued to non-employees have been accounted for in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
for the years ended December 31, 1997, 1998 and 1999 were $9,000, $710,000 and
$2,456,000, respectively.
Income taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Comprehensive income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Through December 31, 1999, the Company had not had any
transactions that were required to be reported in other comprehensive income.
Recent accounting pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position 98-1, or SOP 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 does
not have a material impact on the financial statements.
In April 1998, the AcSEC issued Statement of Position 98-5, or SOP 98-5,
"Reporting on the Costs of Start-Up Activities." The standard requires
companies to expense the costs of start-up activities and organization costs as
incurred. In general, SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The adoption of SOP 98-5 does not have a material impact on
the results of operations.
F-10
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
balance sheet, and that the corresponding gains or losses be reported either in
the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 2000. The Company does not
currently hold derivative instruments or engage in hedging activities.
Net loss per common share
Basic net loss per common share is computed by dividing net loss available
to common stockholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is computed giving
effect to all dilutive potential common shares, including options, warrants and
preferred stock. A reconciliation of the numerator and denominator used in the
calculation of historical basic and diluted net loss per share follows (in
thousands, except per common share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Numerator:
Net loss....................................... $(5,157) $(9,090) $(15,281)
Accretion of mandatorily redeemable convertible
preferred stock ............................. -- -- (166)
------- ------- --------
Net loss after accretion of mandatorily
redeemable convertible preferred stock......... $(5,157) $(9,090) $(15,447)
======= ======= ========
Denominator:
Weighted average common shares outstanding..... 10,387 5,812 8,622
Weighted average unvested common shares subject
to repurchase................................. (442) (3,046) (3,302)
------- ------- --------
Denominator for basic and diluted calculations.. 9,945 2,766 5,320
======= ======= ========
Net loss per common share--basic and diluted.... $ (0.52) $ (3.29) $ (2.87)
======= ======= ========
</TABLE>
Antidilutive securities
Securities listed below have not been included in the computations of
diluted net loss per share for the years ended December 31, 1997, 1998 and 1999
indicated (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
--------------------
1997 1998 1999
------ ------ ------
Shares Shares Shares
------ ------ ------
<S> <C> <C> <C>
Shares under warrants for Series C mandatorily
redeemable convertible preferred stock................ 100 100 100
Shares under warrants for Series E mandatorily
redeemable convertible preferred stock................ -- -- 281
Shares under warrants for common stock................. -- 125 166
Shares under options for common stock.................. 2,407 3,371 1,472
Restricted stock ...................................... -- -- 1,200
Mandatorily redeemable convertible preferred stock..... 3,000 24,269 36,036
</TABLE>
F-11
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign currency transactions
Foreign currency denominated monetary assets and liabilities are translated
into U.S. dollars at the end-of-period exchange rates; nonmonetary assets and
liabilities are recorded at their historical exchange rates. Gains and losses
from foreign currency transactions are included in interest expense and other.
NOTE 3 -- BALANCE SHEET DISCLOSURES (in thousands):
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Raw materials.............................................. $ 265 $ 5,332
Controllers................................................ 29 1,877
Flash memory products...................................... 2,403 8,760
Ancillary products......................................... 386 841
------ -------
3,083 16,810
Less: inventory reserve.................................... (227) (523)
------ -------
$2,856 $16,287
====== =======
Property and equipment consisted of the following:
<CAPTION>
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Equipment.................................................. $ 852 $ 1,858
Software................................................... 390 785
Furniture, fixtures and improvements....................... 70 325
------ -------
1,312 2,968
Less: accumulated depreciation and amortization............ (505) (1,134)
------ -------
Property and equipment, net................................ $ 807 $ 1,834
====== =======
Intangible assets consisted of the following:
<CAPTION>
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Goodwill, primarily related to the acquisition of the
solid-state storage business unit from Cirrus Logic....... $ 543 $ 543
Less: accumulated amortization............................. (244) (355)
------ -------
$ 299 $ 188
====== =======
Accrued liabilities consisted of the following:
<CAPTION>
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Payroll and related amounts................................ $ 526 $ 1,390
Interest................................................... 136 87
Other...................................................... 288 629
------ -------
$ 950 $ 2,106
====== =======
</TABLE>
F-12
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--NOTES PAYABLE:
In April 1997, the Company purchased engineering equipment financed through
an equipment financing company. The loan is collateralized by the equipment. At
December 31, 1999, the holder of this note was a stockholder of the Company;
accordingly the loan balance has been classified under notes payable to
stockholders. The note, which bears interest at 9.68% per year, requires
monthly principal and interest payments of $7,000 through March 2002. Principal
payments are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
2000................................................................ $ 74
2001................................................................ 82
2002................................................................ 14
----
$170
====
</TABLE>
In June and July 1997, a stockholder made a cash advance to the Company in
the amount of $400,000 to provide working capital to the Company. The note
bears interest at 5.5% and the maturity date is July 2000.
Under a Note Purchase Agreement signed in August 1997 with two noteholders,
the Company issued two convertible promissory notes and ten other promissory
notes for a total amount of $6,000,000. In February 1998, $1,250,000 of these
convertible promissory notes were converted to shares of Series B mandatorily
redeemable convertible preferred stock. In February 1998, the interest rate on
the remaining $4,750,000 was changed from 8.5% to 10% and the maturity date was
extended from July 31, 1999 to July 31, 2000. All these notes are
collateralized by all assets of the Company.
NOTE 5--INCOME TAXES:
The federal and state tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are presented
below (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets and liabilities:
Net operating loss carryforwards......................... $ 5,236 $ 11,027
Depreciation and amortization............................ 1,275 1,344
Research credit carryforwards............................ 387 1,157
Other.................................................... 868 1,107
------- --------
7,766 14,635
Less: valuation allowance................................. (7,766) (14,635)
------- --------
$ -- $ --
======= ========
</TABLE>
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $25,741,000, and federal and state research
credits of approximately $580,000 and $577,000, respectively, to offset future
taxes. The operating loss carryforwards and credits will expire between 2003
and 2019 if not utilized. The Company has established a 100% valuation
allowance since it is more likely than not that no benefit will be realized for
its deferred tax assets.
The future utilization of the Company's net operating loss carryforwards
will be subject to certain limitations based on an ownership change as defined
by Internal Revenue Code section 382.
F-13
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT):
In January 1998, the Company completed a bridge loan financing with three
venture capital parties for an aggregate amount of $800,000 plus interest of
10% per annum. The bridge loan was converted into 1,000,000 shares of Series C
mandatorily redeemable convertible preferred stock in February 1998 when the
Company entered into a Series C mandatorily redeemable preferred stock purchase
agreement with venture capital firms and other investors. Under this agreement,
the Company issued 11,443,750 shares (including the 1,000,000 shares) of Series
C mandatorily redeemable convertible preferred stock at $0.80 per share for a
total consideration of $9,155,000.
In November 1998, the Company issued 6,824,923 shares of Series D
mandatorily redeemable convertible preferred stock at $1.685 per share for
$11,500,000. In January 1999, the Company issued 118,695 additional shares of
Series D mandatorily redeemable convertible preferred stock at $1.685 per share
for $200,000.
In August 1999, the Company issued convertible promissory notes for an
aggregate amount of $2,285,000 plus interest at 6% per annum. The convertible
promissory notes automatically converted into 882,409 shares of Series E
mandatorily redeemable convertible preferred stock at $2.59 per share.
Additionally, a $153,000 convertible note payable including interest was
converted into 65,482 shares of Series E mandatory redeemable convertible
preferred stock in September 1999. The Company also issued 10,700,602 shares of
Series E mandatorily redeemable convertible preferred stock at $2.59 per share,
for a total of $27,715,000.
Mandatorily redeemable convertible preferred stock
At December 31, 1998 and 1999, the amounts of the mandatorily redeemable
convertible preferred stock by series were as follows (in thousands):
<TABLE>
<CAPTION>
Shares Issued
and Outstanding Net Amount Liquidation Value
December 31, December 31, Including
Shares --------------- --------------- Liquidation Undeclared,
Series Authorized 1998 1999 1998 1999 Value Unpaid Dividends
------ ---------- ------- ------- ------- ------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 3,000 3,000 3,000 $ 2,922 $ 2,955 $ 3,000 $ 3,620
B 3,000 3,000 3,000 1,240 1,243 1,250 1,433
C 11,544 11,444 11,444 9,067 9,096 9,155 10,498
D 6,943 6,825 6,944 11,424 11,640 11,700 12,769
E 12,171 -- 11,648 -- 28,202 30,153 30,757
------ ------- ------- ------- ------- ------- -------
36,658 24,269 36,036 $24,653 $53,136 $55,258 $59,077
====== ======= ======= ======= ======= ======= =======
</TABLE>
Dividends
The holders of each share of Series A, Series B, Series C, Series D and
Series E mandatorily redeemable convertible preferred stock are entitled to
receive cumulative dividends, out of any funds and assets of the Company
legally available, prior and in preference to any declaration or payment of any
dividend on common stock of the Company at the annual dividend rate (which
means respectively $0.08, $0.033, $0.064, $0.1348 and $0.2072 per share per
annum for the Series A, Series B, Series C, Series D and Series E mandatorily
redeemable convertible preferred stock, respectively, adjusted for any stock
split, combination, dividend or other recapitalization) when, as and if
declared by the Board of Directors of the Company. Such cumulative dividends
will accrue on each share of Series A, Series B, Series C, Series D and Series
E mandatorily redeemable convertible preferred stock, when, as and if declared
by the Board of Directors, from the date such share is issued and will accrue
from day to day whether or not earned.
F-14
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Payments of any dividends to the holders of the Series A, Series B, Series C,
Series D and Series E mandatorily redeemable convertible preferred stock shall
be made pro rata, on an equal priority, pari passu basis, according to their
respective dividend preferences. If the Company will have accrued but unpaid
dividends on redeemable convertible preferred stock, upon conversion at an
initial public offering, then all such accrued but unpaid dividends shall be
cancelled.
Liquidation rights
The holders of each share of Series A, Series B, Series C, Series D and
Series E mandatorily redeemable convertible preferred stock will be entitled to
be paid, out of the available funds and assets, and prior and in preference to
any payment or distribution of any available funds and assets on any shares of
common stock, an amount per share equal to the original issue price (which
means respectively $1.00, $0.417, $0.80, $1.685 and $2.59 per share of the
Series A, Series B, Series C, Series D and Series E mandatorily redeemable
convertible preferred stock adjusted for any stock split, combination, dividend
or other recapitalization) plus any accrued but unpaid dividends. Funds and
assets will be distributed among the holders of the outstanding Series A,
Series B, Series C, Series D and Series E mandatorily redeemable convertible
preferred stock pro rata, on an equal priority, pari passu basis, according to
their respective liquidation preferences. A consolidation, merger or sale of
the Company will be deemed to be a liquidation, dissolution or winding up of
the Company for purposes of liquidation rights.
Participation rights
If there are any funds and assets remaining after the payment or
distribution to the holders of the mandatorily redeemable preferred stock of
their full preferential amounts, then all remaining assets and funds will be
distributed among the holders of the outstanding common stock and the Series A,
the Series B, Series C, Series D and Series E mandatorily redeemable
convertible preferred stock pro rata according to the number of shares of
common stock held by such holders assuming conversion of the mandatorily
redeemable preferred stock into common stock.
Redemption
The Company, to the extent it is lawfully and contractually able to do so,
is obligated to offer to redeem, at the respective Original Issue Price plus
accrued but unpaid dividends (if declared) all of the Series A, Series B,
Series C, Series D and Series E mandatorily redeemable convertible preferred
stock in three annual installments, one-third of the mandatorily redeemable
convertible preferred stock issued by the Company within sixty days of each of
the fifth and sixth annual anniversary dates of the Original Issue Date and
100% of the remaining mandatorily redeemable convertible preferred stock issued
by the Company within sixty days of the seventh anniversary of the Original
Issue Date. The holders of each of the Series A, Series B, Series C, Series D
and Series E mandatorily redeemable convertible preferred stock will have the
option, each year, to either accept or reject the redemption offer.
Voting rights
Each holder of shares of common stock is entitled to one vote for each share
held.
Each holder of shares of mandatorily redeemable convertible preferred stock
is entitled to the number of votes equal to the number of whole shares of
common stock into which such shares of mandatorily redeemable convertible
preferred stock are convertible.
F-15
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversion rights
At the option of the holder, each share of mandatorily redeemable
convertible preferred stock is convertible, at any time or from time to time,
into fully paid and nonassessable shares of common stock.
Each share of mandatorily redeemable convertible preferred stock will
automatically be converted into fully paid and nonassessable shares of common
stock, immediately prior to the closing of an initial public offering with
minimum proceeds and a price per share as set forth in the agreements for each
series or upon the Company's receipt of the written consent of the holders of
not less than two-thirds of the then outstanding shares of mandatorily
redeemable convertible preferred stock to the conversion of all then
outstanding mandatorily redeemable convertible preferred stock. Series A,
Series B, Series C and Series D mandatorily redeemable convertible preferred
stock is convertible into shares of common stock on a one-for-one basis. The
conversion price of Series E mandatorily redeemable convertible preferred stock
is subject to adjustments based on certain performance criteria. The conversion
price will, however, not be lower than $2.09 per share or higher than $3.09 per
share.
Common stock
In February 1998, three employees were issued 2,400,000, 1,076,284 and
1,076,284 shares, respectively, of the Company's common stock at a price of
$0.08 per share. The share issuances were outside of the Company's 1996 Stock
Plan. The purchase price was paid through full-recourse promissory notes
payable in full to the Company in four years. The purchased shares are subject
to repurchase by the Company at the original purchase price paid per share,
upon the purchaser's cessation of service other than by involuntary termination
prior to vesting of such shares. The repurchase right lapses with respect to
the purchased shares upon vesting. At December 31, 1999, the unvested shares
for the three employees were 712,500, 600,000 and 600,000, respectively.
712,500 shares granted to the first employee will continue to vest monthly
until the unvested shares total 600,000. The last 600,000 shares for each
employee will vest fully at the end of the four year vesting period or earlier
if certain performance criteria are met.
Warrants
During the years ended December 31, 1998 and 1999, the Company issued the
following warrants:
Shares subject to warrants to purchase mandatorily redeemable convertible
preferred stock (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Exercise Number of Black-Scholes
Series Date Issued Price Shares Value Reason
------ -------------- -------- --------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
C February 1998 $0.80 100 0.414 Services
E August 1999 $2.59 88 1.339 Bridge financing
E September 1999 $2.59 193 1.339 Services
Shares subject to warrants to purchase common stock (in thousands):
<CAPTION>
Exercise Number of Black-Scholes
Date Issued Price Shares Value Reason
-------------- -------- --------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
February 1998 $0.80 125 0.414 Equity financing cost
September 1999 $0.30 11 2.361 Legal settlement
December 1999 $1.00 30 6.247 Services
</TABLE>
Warrants issued during the years ended December 31, 1998 and 1999 were
valued using the Black-Scholes valuation model using the following assumptions;
dividend yield of 0%, volatility of 60%, risk-free interest rate of 6% and a
contractual term of four years.
F-16
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--STOCK OPTION PLAN:
The Company has a 1996 Stock Option/Stock Issuance Plan. The Plan is divided
into three separate equity programs: the option grant program, the stock
issuance program and the stock bonus program. Under the Plan, the exercise
price per share of the stock options granted to employees, members of the Board
of Directors or consultants shall not be less than 85% (110% for a 10%
shareholder) of the fair market value on the option grant date. Incentive
options may only be granted to employees and exercise price per share shall not
be less than 100% of the fair market value per share of common stock on the
option grant date.
Each option is exercisable as determined by the Board of Directors for all
of the option shares and has a maximum term of ten years from the date of the
grant. The Company has the right to repurchase, at the time of cessation of
employment, at the exercise price paid per share any unvested shares, as
established by the Board of Directors. As of December 31, 1998 and 1999, the
Company had reserved 7,938,082 and 13,038,082 shares, respectively, under the
Plan.
Stock option activity under the Plan for the period from January 1, 1997 to
December 31, 1999 is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------
Shares Weighted
Available Number of Exercise Average
for Grant Shares Price Exercise Price
--------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Balances, January 1, 1997..... 3,751 2,762 $ 0.16 $0.160
Additional shares reserved... 1,208 -- --
Options granted.............. (766) 766 0.08-0.16 0.147
Options exercised............ -- (9) 0.16 0.160
Options canceled............. 1,113 (1,113) 0.16 0.160
------ ------
Balances, December 31, 1997... 5,306 2,406 0.08-0.16 0.158
Additional shares reserved... 217 -- --
Options granted.............. (1,207) 1,207 0.08-0.20 0.105
Options exercised............ -- (151) 0.16 0.160
Options canceled............. 92 (92) 0.08-0.16 0.099
------ ------
Balances, December 31, 1998... 4,408 3,370 0.08-0.20 0.140
Additional shares reserved... 5,100 --
Options granted.............. (3,291) 3,291 0.20-2.00 0.770
Options exercised............ -- (4,849) 0.08-1.00 0.512
Options canceled............. 340 (340) 0.08-0.30 0.126
Repurchases.................. 156 -- 0.08 0.080
------ ------
Balances, December 31, 1999... 6,713/1/ 1,472 $0.08-2.00 $0.468
====== ======
</TABLE>
- ---------------------
(1) The Company granted 2,699,331 and 1,050,000 shares of restricted stock to
employees during the years ended December 31, 1996 and 1998, respectively.
These grants were made under the Company's 1996 Stock Option/Issuance Plan,
therefore the shares available for grant at December 31, 1999 were
2,964,046.
In December 1999, three employees were granted 1,200,000 shares of
restricted stock with a purchase price of $2.00 per share. These equity grants
were made outside of the Company's 1996 Stock Plan and vest over a four-year
period.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation," which was effective for the
F-17
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's fiscal year 1997. SFAS 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS 123 or under the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," but requires pro forma disclosure
in the footnotes to the financial statements as if the measurement provisions
of SFAS 123 had been adopted.
The Company has continued to account for its stock-based compensation under
the Plan in accordance with APB 25. Accordingly, no compensation expense has
been recognized for the Plan.
Had compensation expense for the Company's stock options and the restricted
stock issuances been determined based on the fair value of the grant date for
awards in fiscal years 1997, 1998 and 1999 consistent with the provision of
SFAS 123, the Company's net loss for 1997, 1998 and 1999 would have been
increased to the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported.................................... $(5,157) $(9,090) $(15,281)
======= ======= ========
Pro forma...................................... $(5,181) $(9,097) $(15,366)
======= ======= ========
Net loss per common share--basic and diluted as
reported....................................... $ (0.52) $ (2.79) $ (2.87)
======= ======= ========
Net loss per common share--basic and diluted pro
forma.......................................... $ (0.52) $ (2.79) $ (2.89)
======= ======= ========
</TABLE>
In accordance with the provisions of SFAS 123, the fair value of each option
is estimated using the following assumptions for grants during the years ended
December 31, 1997, 1998 and 1999; dividend yield of 0%, volatility of 60%,
risk-free interest rates of between 4.25% to 8.66% at the date of grant and an
expected term of five years.
During the year ended December 31, 1999, the Company recorded unearned
stock-based compensation totaling $20,964,000, which is being amortized to
expense over the period during which the options vest, generally four years,
using the method set out in Example 2 both FASB Interpretation No. 28 ("FIN
28"). Under the FIN 28 method, each vested tranche of options is accounted for
as a separate option grant awarded for past services. Accordingly, the
compensation expense is recognized over the period during which the services
have been provided. This method results in a front-loading of the compensation
expense. For the year ended December 31, 1999, the Company recorded stock-based
compensation of $1,806,000 in respect of options granted to employees and non-
employees during the year.
The total unamortized unearned stock-based compensation recorded for all
option grants through December 31, 1999 will be amortized as follows: $11.4
million for the year ending December 31, 2000; $4.8 million for the year ending
December 31, 2001; $2.3 million for the year ending December 31, 2002; and $0.7
million for the year ending December 31, 2003.
The weighted average per share fair value of common stock options granted
during 1997, 1998 and 1999 was $0.147, $0.105 and $5.890, respectively.
F-18
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Weighted Weighted Number Weighted
Average Average Exercisable Average
Exercise Number Contractual Exercise Not Subject Exercise
Price Outstanding Life Price to Repurchase Price
-------- ----------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.16 90 6.84 $0.16 37 $0.16
0.08 311 7.94 0.08 71 0.08
0.08 30 8.62 0.08 10 0.08
0.20 400 9.04 0.20 58 0.20
0.30 56 9.59 0.30 -- 0.30
0.50 94 9.76 0.50 -- 0.50
1.00 286 9.94 1.00 5 1.00
2.00 205 9.97 2.00 23 2.00
----- ---
1,472 204
===== ===
</TABLE>
At December 31, 1999, there were 2,997,680 shares issued under the plan
which were unvested and subject to repurchase.
NOTE 8--401(k) PLAN:
The Company has a 401(k) plan. The Company does not make matching
contributions or discretionary contributions under the plan.
NOTE 9--COMMITMENTS:
The Company leases its U.S. facilities under an operating lease agreement
expiring on January 1, 2005. Rent expense was $260,000, $338,000 and $383,000
for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company leases its Japanese facilities under an agreement which provides
for the lease of executive office space and administrative services in Japan
and expires on September 30, 2001. The lease payment is approximately $5,000
per month.
Minimum lease payments under all non-cancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
2000.............................................................. $ 612
2001.............................................................. 631
2002.............................................................. 655
2003.............................................................. 656
2004.............................................................. 670
------
$3,224
======
</TABLE>
NOTE 10--CONTINGENCIES:
On March 20, 1998, a competitor, SanDisk, sued the company for patent
infringement. Motions by both parties were heard on March 17, 2000 and a
decision is currently pending. Trial is set for October 23, 2000. The Company
believes, based in part on discussions with patent counsel and on an opinion of
patent
F-19
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
counsel, that it has meritorious defenses to the plaintiff's claims and intends
to defend the litigation vigorously. The Company believes that the ultimate
resolution of the matter will not have a material adverse effect on its results
of operations for the year ended December 31, 1999 or its financial condition
and cash flow as of that date as reported in these financial statements. This
litigation, whether or not determined in the Company's favor or settled by the
Company, may be costly and may divert the efforts and attention of the
Company's management from normal business operations and could affect the
ability of the Company to raise capital in the future.
NOTE 11--RELATED PARTY TRANSACTIONS:
In 1997, the Company sold $1,397,000 of products to Simple Technology, Inc.
The owners of this Company were stockholders of Lexar Media, Inc. until August
1997. As of December 31, 1997, the Company had receivables due from Simple
Technology, Inc. of $37,000. There were no such transactions in 1998 or 1999.
In 1998, the Company sold $294,000 of products to and made purchases of
$557,000 from Kingston Technology, Inc., an investor in the Company. At
December 31, 1998, the Company had payables to Kingston Technology, Inc. of
$22,000. There were no such transactions in 1997 or 1999.
The Company purchased materials of $5,273,000 and $18,509,000 from Toshiba,
an investor in the Company during the years ended December 31, 1998 and 1999,
respectively. The Company had payables of $1,803,000 and $3,392,000 to Toshiba
at December 31, 1998 and 1999, respectively.
During 1998, the Company advanced $80,000 to two officers (who are also
stockholders of the Company) in relation to taxes owed on bonus payments. The
term of these loans is four years and they bear interest at 5.7% per annum.
The Company had a $170,000 note payable to GE Capital, a stockholder of the
Company, this note is also guaranteed by Toshiba.
NOTE 12--UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND STOCKHOLDERS'
EQUITY:
Upon the closing of the Company's initial public offering, all outstanding
Series A, Series B, Series C, Series D and Series E mandatorily redeemable
convertible preferred stock and expiring warrants will automatically convert
into 34,148,853 and 346,300 shares of common stock, respectively, assuming a
conversion price for the Series E mandatorily redeemable convertible preferred
stock of $3.09 per share. The pro forma effect of this conversion has been
presented as a separate column in the Company's balance sheet, assuming that
this conversion had occurred as of December 31, 1999 (see Note 13).
Pro forma basic and diluted net loss per common share have been computed to
give effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of the Company's initial public offering
(using the as-if-converted method) for the year ended December 31, 1999.
F-20
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerator and denominator used in the calculation of
pro forma basic and diluted net loss per share follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
(unaudited)
<S> <C>
Numerator:
Net loss......................................................... $(15,281)
========
Denominator:
Shares used in computing basic and diluted net loss per share.... 5,320
Adjusted to reflect the effect of the assumed conversion of
convertible preferred stock from the date of issuance:
Series A mandatorily redeemable preferred stock................ 3,000
Series B mandatorily redeemable preferred stock................ 3,000
Series C mandatorily redeemable preferred stock................ 11,444
Series D mandatorily redeemable preferred stock................ 6,939
Series E mandatorily redeemable preferred stock................ 2,460
Issuance of 475,000 shares for PrintRoom.com, Inc. acquisition... --
Exercise of warrants for 346,300 shares of stock which expire
upon closing of the initial public offering..................... --
--------
Weighted average shares used in computing pro forma basic and
diluted net loss per share....................................... 32,163
========
Pro forma basic and diluted net loss per share.................... $ (0.48)
========
</TABLE>
NOTE 13--SUBSEQUENT EVENTS:
Acquisition
On January 21, 2000, the Company acquired all of the outstanding stock of
PrintRoom.com, Inc. for 475,000 shares of the Company's common stock. The
transaction will be accounted for as a purchase.
Reincorporation
On January 21, 2000, the board of directors authorized the reincorporation
of the Company in the State of Delaware.
Following the reincorporation, the Company will be authorized to issue
200,000,000 shares of $0.0001 par value common stock and 10,000,000 shares of
$0.0001 par value preferred stock. The board of directors has the authority to
issue the undesignated preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof.
Initial Public Offering
On January 21, 2000, the board of directors approved the filing of a
registration statement for an underwritten public offering of the Company's
common stock.
The 2000 Equity Incentive Plan
On January 21, 2000, the board of directors approved the adoption of the
2000 Equity Incentive Plan, which will become effective upon the effective date
of an initial public offering. The Company reserved 8,000,000 shares under this
plan for grants to employees.
F-21
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 2000 Employee Stock Purchase
On January 21, 2000, the board of directors approved the adoption of the
2000 Employee Stock Purchase Plan, which will become effective on the first
business day on which price quotations for the Company's common stock are
available on the Nasdaq National Market. The Company has reserved 1,000,000
shares under this plan for grants to employees.
Amendment of Articles of Incorporation
On February 23, 2000, the shareholders approved the Company's amended
articles of incorporation to increase the conversion price for Series E
mandatorily redeemable convertible preferred stock to $3.09. In the event that
the Company does not close an underwritten public offering of the Company's
common stock on or before May 31, 2000, the conversion price of Series E
mandatorily redeemable convertible preferred stock will be $2.35.
Option Grants
The Company granted stock options to employees and non employees during the
period from January 1, 2000 to March 17, 2000 which resulted in an additional
unearned stock-based compensation amount of $6.4 million.
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Lexar Media Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee, NASD filing fee and
Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 29,601
NASD Filing Fee................................................ 11,713
Nasdaq National Market Listing Fee............................. 95,000
Blue Sky Fees and Expenses..................................... 5,000
Transfer Agent and Registrar Fees.............................. 10,000
Legal Fees and Expenses........................................ 450,000
Accounting Fees and Expenses................................... 400,000
Directors and Officers Insurance............................... 600,000
Printing Expenses.............................................. 250,000
Miscellaneous.................................................. 48,686
----------
Total........................................................ $1,900,000
==========
</TABLE>
- ---------------------
* To be filed by amendment.
ITEM 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or the board of directors of a corporation to grant, indemnity to
directors and officers in terms sufficiently broad to permit indemnification
under certain circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933.
As permitted by Delaware law, the Registrant's certificate of incorporation
provides that its directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that the exculpation from liabilities is not permitted
under Delaware law as in effect at the time the liability is determined. As
permitted by Delaware law, the bylaws of the Registrant provide that the
Registrant shall indemnify its directors to the full extent permitted by
Delaware law. The Registrant also has an insurance policy in place covering its
directors and officers from losses arising from the performance of their duties
with or on behalf of the Registrant, including in connection with public
securities matters.
The Registrant also intends to enter into indemnification agreements with
its directors and officers obligating the Registrant to indemnify such
directors and officers against losses incurred in connection with certain
claims in their capacities as agents of the Registrant. The Underwriting
Agreement provides for the indemnification of officers and directors of the
Registrant by the Underwriters against certain liabilities.
ITEM 15. Recent Sales of Unregistered Securities.
In the three fiscal years prior to the effective date of this Registration
Statement, we have issued and sold the following unregistered securities:
1. In March 1997, we issued and sold a secured promissory note to
MetLife Capital Corporation in the aggregate principal amount of
$348,423.21 for an aggregate consideration of $348,423.21 in cash.
2. In May 1997, we issued and sold an aggregate of 6,000,000 shares of
Series A preferred stock to four investors for an aggregate consideration
of $6,000,000 in cash.
II-1
<PAGE>
3. In August 1997, we issued and sold convertible secured promissory
notes in the aggregate principal amount of $1,250,000 and secured
promissory notes in the aggregate principal amount of $4,750,000 to two
investors for an aggregate consideration of $6,000,000 in cash. In February
1998, these noteholders converted the secured convertible promissory notes
into 3,000,048 shares of our Series B preferred stock at a conversion price
of $0.41667 per share.
4. In January 1998, we issued a warrant to APV Technology Partners II,
L.P. to purchase up to 62,500 shares of common stock, a warrant to St. Paul
Venture Capital Affiliates Fund I, LLC to purchase up to 1,719 shares of
common stock and a warrant to St. Paul Venture Capital IV, LLC to purchase
up to 60,781 shares of common stock, each at an exercise price of $0.80 per
share, which warrants expire, if not earlier exercised, on December 31,
2002.
5. In January 1998, we issued and sold convertible promissory notes in
the aggregate principal amount of $800,000 to three investors for $800,000
in cash. On February 23, 1998, these noteholders converted the convertible
promissory notes into 1,000,000 shares of Series C preferred stock at a
conversion price of $0.80 per share.
6. In February 1998, we issued and sold 11,443,750 shares of Series C
preferred stock to seven investors for $8,355,000 in cash and by conversion
of bridge financing promissory notes in the aggregate principal amount of
$800,000 for an aggregate consideration of $9,155,000.
7. In February 1998, we issued a warrant to Micro-Comp Industries, Inc.
to purchase up to 100,000 shares of Series C preferred stock at an exercise
price of $0.80 per share, which warrant expires, if not earlier exercised,
on the earlier of February 23, 2001 or the consummation of this offering.
8. In November 1998 and January 1999, we issued and sold an aggregate of
6,943,618 shares of Series D preferred stock to six investors for an
aggregate consideration of $11,700,001 in cash.
9. In May 1999, we issued and sold a convertible promissory note in the
aggregate principal amount of $153,425 to Smart Modular Technologies, Inc.
in connection with a litigation settlement. On September 28, 1999, the
noteholder converted this promissory note into 65,482 shares of Series E
preferred stock at a conversion price of $2.34 per share.
10. In August 1999, we issued a warrant to St. Paul Venture Capital
Affiliates Fund I, LLC to purchase up to 583 shares of Series E preferred
stock, a warrant to St. Paul Venture Capital V, LLC to purchase up to
20,651 shares of Series E preferred stock, a warrant to John A. Rollwagen
to purchase up to 1,270 shares of Series E preferred stock and a warrant to
Thomvest Holdings, Inc. to purchase up to 25,086 shares of Series E
preferred stock, each at an exercise price of $2.59 per share, which
warrants expire, if not earlier exercised, on August 6, 2003.
11. In August 1999, we issued and sold convertible promissory notes in
the aggregate amount of $2,400,000.02 to seven investors for $2,400,000.02
in cash. On September 28, 1999, these noteholders converted the convertible
promissory notes into 4,412,251 shares of Series E preferred stock at a
conversion price of $2.59 per share.
12. In August 1999, we issued a warrant to APV Technology Partners II,
L.P. to purchase up to 25,404 shares of Series E preferred stock, a warrant
to David Sun to purchase up to 7,622 shares of Series E preferred stock and
a warrant to John Tu to purchase up to 7,622 shares of Series E preferred
stock, each at an exercise price of $2.59 per share which warrants expire,
if not earlier exercised, on August 9, 2003.
13. In September 1999, we issued and sold 11,583,011 shares of Series E
preferred stock to fifteen investors for $27,714,552.96 in cash and by
conversion of bridge financing promissory notes in the aggregate amount of
$2,285,445.54 for an aggregate consideration of $29,999,998.50.
II-2
<PAGE>
14. In September 1999, we issued a warrant to SG Cowen Securities
Corporation to purchase up to 193,050 shares of Series E preferred stock at
an exercise price of $2.59 per share, which warrant expires, if not earlier
exercised, on the earlier of September 28, 2003 or the consummation of this
offering and a warrant to Smart Modular Technologies, Inc. to purchase up
to 10,583 shares of common stock at an exercise price of $0.30 per share,
which warrant expires, if not earlier exercised, on the earlier of
September 28, 2000 or the consummation of this offering.
15. In December 1999, we issued a warrant to Fenwick & West LLP to
purchase up to 30,000 shares of common stock at an exercise price of $1.00
per share, which warrant expires, if not earlier exercised, on January 31,
2005.
16. In January 2000, we issued 475,000 shares of common stock to the
shareholders of Printroom.com, Inc. in connection with our acquisition of
Printroom.com.
17. In March 2000, we issued and sold a convertible promissory note in
the aggregate principal amount of $2,000,000 to Sony Electronics Inc. for
an aggregate consideration of $2,000,000 in cash.
18. In March 2000, we issued a warrant to Sony Electronics Inc. to
purchase up to 400,000 shares of common stock at an exercise price equal to
the lesser of (1) $15.00 per share or (2) 93% of the per share public
offering price of the common stock sold in this offering, which warrant
expires, if not earlier exercised upon the change of control of 50% or more
of our outstanding stock at the consummation of this offering.
19. As of March 17, 2000, 9,529,772 shares of common stock had been
issued to our employees, consultants and other service providers upon
exercise of options or pursuant to restricted stock purchase agreements,
2,579,484 shares of common stock were issuable upon exercise of outstanding
options under our 1996 Stock Option/Stock Issuance Plan.
All of the 3,000,000 outstanding shares of Series A preferred stock will
automatically convert on a one-to-one basis into shares of common stock upon
the consummation of this offering. All of the 3,000,048 outstanding shares of
Series B preferred stock will automatically convert into shares of common stock
upon the consummation of this offering. All of the 11,443,750 shares of Series
C preferred stock will automatically convert on a one-to-one basis into shares
of common stock. All of the 6,943,618 shares of Series D preferred stock will
automatically convert on a one-to-one basis into shares of common stock
upon the consummation of this offering. All of the 11,648,493 shares of Series
E preferred stock will automatically convert into 9,763,623 shares of common
stock upon the consummation of this offering assuming the conversion price of
the Series E preferred stock is $3.09 per share.
The sales and issuances of securities listed above, other the sales and
issuances in Item 17, were deemed to be exempt from registration under Section
4(2) of the Securities Act of 1933 or Regulation D thereunder as transactions
not involving a public offering. The sales and issuances of securities listed
above in Item 17 were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions pursuant to compensatory benefit plans and
contracts relating to compensation. All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
II-3
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation as filed January 11, 2000*
3.2 Form of First Amended and Restated Certificate of Incorporation to be
effective before the closing of the offering
3.3 Form of Second Amended and Restated Certificate of Incorporation to be
effective upon the closing of the offering*
3.4 Bylaws*
3.5 Restated Bylaws to be effective upon the closing of the offering*
4.1 Specimen Common Stock Certificate**
4.2 Investors Rights Agreement dated September 28, 1999, as amended*
4.3 Amendment No. 2 to Investors Rights Agreement dated March 21, 2000
5.1 Opinion of Fenwick & West LLP
10.1 Form of Indemnity Agreement entered into between the Registrant and
all executive officers and directors*
10.2 1996 Stock Option/Stock Issuance Plan*
10.3 2000 Equity Incentive Plan
10.4 2000 Employee Stock Purchase Plan*
10.5 Form of Common Stock Warrant*
10.6 Form of Series E Warrant*
10.7 Lease between Registrant and Renco Investment Company dated January 1,
1997, as amended*
10.8 Offer letter for John H. Reimer dated September 4, 1997
10.9 Offer letter for Petro Estakhri dated September 16, 1996
10.10 Employment Agreement with Petro Estakhri dated September 19, 1996, as
amended
10.11 Offer letter for Eric B. Stang dated October 20, 1999
10.12 Offer letter for Ronald H. Bissinger dated December 15, 1999
10.13 Restricted Stock Purchase Agreement between the Registrant and John H.
Reimer
dated June 5, 1998
10.14 Restricted Stock Purchase Agreement between the Registrant and Petro
Estakhri
dated June 5, 1998
10.15 Restricted Stock Purchase Agreement between the Registrant and John H.
Reimer
dated January 17, 2000
10.16 Restricted Stock Purchase Agreement between the Registrant and Petro
Estakhri
dated January 17, 2000**
10.17 Confidential Separation Agreement and Release between the Registrant
and Robert J. Netter, Jr. dated October 7, 1999
10.18 Lexar Technology License Agreement between the Registrant and SONY
Corporation dated March 21, 2000**
10.19 SONY Technology License Agreement between the Registrant and SONY
Corporation dated March 21, 2000**
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.20 Convertible Note and Warrant Purchase Agreement between the Registrant
and SONY Electronics, Inc. dated March 21, 2000
10.21 Employment Memorandum of Understanding Among the Registrant, Mahmud
(Mike) Assar and Petro Estakhri dated August 20, 1997
10.22 Security Agreement between the Registrant and Petro Estakhri dated
April 3, 1998
10.23 Agreement and Plan of Reorganization Among Lexar Media, Inc. and the
Stockholders of Printroom.com, Inc. dated January 21, 2000
10.24 Valuation and Qualifying Accounts
10.25 Letter Agreement Regarding Employment between the Registrant and
Ronald H. Bissinger dated March 24, 2000**
10.26 Letter Agreement Regarding Employment between the Registrant and Eric
B. Stang dated March 24, 2000**
21.1 Subsidiaries*
23.1 Consent of Fenwick & West LLP (Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney*
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedule
The following financial statement schedule of Lexar Media, Inc. is filed as
part of this Report and should be read in conjunction with the Financial
Statements of Lexar Media, Inc.
<TABLE>
<CAPTION>
Schedule Description
-------- -----------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the consolidated financial statements or notes thereto.
ITEM 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, 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.
II-5
<PAGE>
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
II- 6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Fremont, State of California, on the 24th day of March, 2000.
Lexar Media, Inc.
By: /s/ John H. Reimer*
-----------------------------------
John H. Reimer
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Petro Estakhri* Chairman of the Board, Chief March 24, 2000
___________________________________________ Technology Officer and
Petro Estakhri Executive Vice President,
Engineering
/s/ John H. Reimer* President and Chief March 24, 2000
___________________________________________ Executive Officer and
John H. Reimer Director (Principal
Executive Officer)
/s/ Eric B. Stang* Chief Operating Officer and March 24, 2000
___________________________________________ Director
Eric B. Stang
/s/ Ronald H. Bissinger Chief Financial Officer March 24, 2000
___________________________________________ (Principal Financial
Ronald H. Bissinger Officer and Principal
Accounting Officer)
/s/ William T. Dodds* Director March 24, 2000
___________________________________________
William T. Dodds
/s/ J. Scott Case* Director March 24, 2000
___________________________________________
J. Scott Case
/s/ Brian D. Jacobs* Director March 24, 2000
___________________________________________
Brian D. Jacobs
/s/ John A. Rollwagen* Director March 24, 2000
___________________________________________
John A. Rollwagen
/s/ William J. Stewart* Director March 24, 2000
___________________________________________
William J. Stewart
</TABLE>
*By: /s/ Ronald H. Bissinger
-----------------------------------
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement
3.2 Form of First Amended and Restated Certificate of Incorporation to be
effective
before the closing of the offering
4.3 Amendment No. 2 to Investors Rights Agreement
5.1 Opinion of Fenwick & West LLP
10.3 2000 Equity Incentive Plan
10.8 Offer Letter for John H. Reimer dated September 7, 1997
10.9 Offer Letter for Petro Estakhri dated September 16, 1996
10.10 Employment Agreement with Petro Estakhri dated September 19, 1996, as
amended
10.11 Offer Letter for Eric B. Stang dated October 20, 1999
10.12 Offer Letter for Ronald H. Bissinger dated December 15, 1999
10.13 Restricted Stock Purchase Agreement between the Registrant
and John H. Reimer dated June 5, 1998
10.14 Restricted Stock Purchase Agreement between the Registrant
and Petro Estakhri dated June 5, 1998
10.15 Restricted Stock Purchase Agreement between the Registrant
and John H. Reimer dated January 17, 2000
10.17 Confidential Separation Agreement and Release between the Registrant
and Robert J. Netter, Jr. dated October 7, 1999
10.20 Convertible Note and Warrant Purchase Agreement between the Registrant
and SONY Electronics, Inc. dated March 21, 2000
10.21 Employment Memorandum of Understanding Among the Registrant,
Mahmud (Mike) Assar and Petro Estakhri dated August 20, 1997
10.22 Security Agreement between the Registrant and Petro Estakhri dated
April 3, 1998
10.23 Agreement and Plan of Reorganization Among Lexar Media, Inc.
and the Stockholders of Printroom.com, Inc. dated January 21, 2000
10.24 Valuation and Qualifying Accounts
23.1 Consent of Fenwick & West LLP (Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
</TABLE>
<PAGE>
EXHIBIT 1.1
LEXAR MEDIA, INC.
7,500,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
_______ __, 2000
CHASE SECURITIES INC.
J.P. MORGAN & CO.
SG COWEN SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
c/o Chase Securities Inc.
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Lexar Media, Inc., a Delaware corporation (herein called the Company),
proposes to issue and sell 7,500,000 shares of its authorized but unissued
Common Stock, $0.0001 par value (herein called the Common Stock) (said
7,500,000 shares of Common Stock being herein called the Underwritten Stock).
The Company proposes to grant to the Underwriters (as hereinafter defined) an
option to purchase up to 1,125,000 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for which you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each
of the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.
1. Registration Statement. The Company has filed with the Securities
and Exchange Commission (herein called the Commission) a registration statement
on Form S-1 (No. 333-30556), including the related preliminary prospectus, for
the registration under the
___________________
/1/ Plus an option to purchase from the Company up to 1,125,000 additional
shares to cover over-allotments.
<PAGE>
Securities Act of 1933, as amended (herein called the Securities Act), of the
Stock. Copies of such registration statement and of each amendment thereto, if
any, including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission) heretofore filed by
the Company with the Commission have been delivered to you.
The term Registration Statement as used in this Agreement shall mean
such registration statement, including all exhibits and financial statements
thereto and all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, in the form in which it became
effective, and any registration statement filed pursuant to Rule 462(b) of the
rules and regulations of the Commission with respect to the Stock (herein called
a Rule 462(b) Registration Statement) and, in the event of any amendment thereto
after the effective date of such registration statement (herein called the
Effective Date), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including any Rule 462(b)
Registration Statement). The term Prospectus as used in this Agreement shall
mean the prospectus relating to the Stock first filed with the Commission
pursuant to Rule 424(b) and Rule 430A (or, if no such filing is required, as
included in the Registration Statement) and, in the event of any supplement or
amendment to such prospectus after the Effective Date, shall also mean (from and
after the filing with the Commission of such supplement or the effectiveness of
such amendment) such prospectus as so supplemented or amended. The term
Preliminary Prospectus as used in this Agreement shall mean each preliminary
prospectus included in the Registration Statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
2. Representations and Warranties of the Company.
(a) The Company hereby represents and warrants as follows:
(i) 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, has full corporate power and
corporate authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good standing
in all jurisdictions in which the character of the property owned or leased or
the nature of the business transacted by it makes qualification necessary except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, financial condition, prospects, or results of
operations of the Company and its subsidiaries, taken as a whole (herein called
a Material Adverse Effect).
(ii) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption
"Capitalization." Proper corporate
2
<PAGE>
proceedings have been taken validly to authorize such authorized capital stock.
All of the outstanding shares of such capital stock have been duly and validly
issued and are fully paid and nonassessable. No other shares of capital stock,
or options, warrants or other rights to acquire capital stock of the Company are
outstanding except as described in the Registration Statement and Prospectus.
(iii) Except as set forth in the Registration Statement, all of
the issued and outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and nonassessable, and
is owned by the Company free and clear of all liens, encumbrances and security
interests, and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in any such subsidiary are
outstanding.
(iv) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition,
prospects or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement and the Prospectus.
(v) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material respects,
with the provisions of the Securities Act and the rules and regulations of the
Commission thereunder; on the Effective Date, the Registration Statement did not
contain any untrue statement of a material fact and did not omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, as of its date the Prospectus did not
and, on the Closing Date and any later date on which Option Stock is to be
purchased, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order 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 in this
subparagraph (v) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in conformity
with information herein or otherwise furnished in writing to the Company by or
on behalf of the Underwriters for use in the Registration Statement or the
Prospectus.
(vi) The Stock to be issued and sold by the Company is duly and
validly authorized, and when issued and sold to the Underwriters as provided
herein, will be duly and validly issued, fully paid and nonassessable and
conforms to the description thereof in the Prospectus. No further approval or
authority of the stockholders or the Board of Directors of the Company will be
required for the issuance and sale of the Stock as contemplated herein. No
preemptive rights of, or rights of refusal in favor of, stockholders exist with
respect to the Stock, or the issue and sale thereof, pursuant to the Certificate
of Incorporation or Bylaws of the Company and there are no contractual
preemptive rights, rights of first refusal or rights of co-sale between the
Company and any stockholders that exist and have not been waived with respect to
3
<PAGE>
the issue and sale of the Stock. The form of certificate for the Stock conforms
to the legal requirements of the State of Delaware.
(vii) All holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have included such
securities in the Registration Statement, have 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. Except as described in the
Prospectus, there are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Securities Act.
Except as described in the Prospectus, there are no outstanding commitments of
sale or liens related to or entitling any person to purchase or otherwise to
acquire any shares of the capital stock of, or other ownership interest in, the
Company.
(viii) Prior to the Closing Date, the Stock to be issued and sold by
the Company will be authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(ix) The Registration Statement has become effective under the
Securities Act and, to the Company's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission.
(x) There are no franchises, contracts, leases, documents or legal
proceedings, pending or threatened, of a character required to be described in
the Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not so described or filed as required.
(xi) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation or Bylaws, or similar governing documents,
as the case may be; to the knowledge of the Company, neither the Company nor any
of its subsidiaries is in violation or breach of, or in default under (nor has
any event occurred that with notice or lapse of time, or both, would be a
violation or breach of, or a default under) any obligation, agreement or
condition contained in any agreement or instrument to which the Company or any
of its subsidiaries is a party or by which it or any of its properties or assets
are bound or affected (except for such violations, breaches or defaults as would
not have a Material Adverse Effect). Neither the Company nor any of its
subsidiaries is in violation of any law, statute, regulation or ordinance, or
any order, writ, injunction or decree, of any jurisdiction, court or
governmental instrumentality applicable to its businesses and operations (except
for such violations as would not have a Material Adverse Effect).
4
<PAGE>
(xii) This Agreement has been duly authorized, executed and
delivered by the Company and is the legal, valid and binding obligation of the
Company enforceable against it in accordance with its terms, except as
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and by
general equity principles, and as rights to indemnity or contribution hereunder
may be limited by federal or state securities laws or the public policy
underlying such laws.
(xiii) The issue and sale by the Company of the shares of Stock to be
sold by the Company as contemplated by this Agreement will not conflict with, or
result in a breach of, the Certificate of Incorporation or Bylaws or similar
governing documents of the Company or any of its subsidiaries or any agreement
or instrument to which the Company or any of its subsidiaries is a party or any
applicable law or regulation, or any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality.
(xiv) The Company and each of its subsidiaries have such permits,
licenses, registrations, franchises and authorizations of governmental or
regulatory authorities or third parties (herein called Permits), including,
without limitation, under any applicable federal export and import laws, as are
necessary to own, lease and operate its properties and assets and to conduct its
businesses or operations and as contemplated by the Prospectus; to the knowledge
of the Company, the Company and each of its subsidiaries is in compliance with
such Permits, and no event has occurred that allows, or after notice or lapse of
time or both would allow, revocation or termination thereof or result in any
other material impairment of the rights of the holder of any such Permits.
(xv) Neither the Company nor any of its subsidiaries is conducting,
or intends to conduct, its business in a manner in which it would become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(xvi) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as is reasonable and prudent for the respective businesses
in which they are engaged.
(xvii) PricewaterhouseCoopers LLP (herein called PWC), the accounting
firm that has audited the required annual financial statements and any
supporting schedule filed or to be filed with the Commission as part of the
Registration Statement and the Prospectus, is an independent public accounting
firm with respect to the Company as required by the Securities Act and the rules
and regulations of the Commission thereunder.
(xviii) The consolidated financial statements of the Company,
together with related notes and any schedule of the Company included in the
Registration Statement and the Prospectus, are accurate and present fairly the
financial position, results of operations and cash flows of the Company as
consolidated with its subsidiaries at the indicated dates and for the indicated
periods. Such financial statements have been prepared in accordance with
generally accepted accounting principles (herein called GAAP) consistently
applied throughout the periods involved, and all adjustments necessary for a
fair presentation of results for such periods have
5
<PAGE>
been made and any unaudited financial statements have been prepared on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and the Prospectus. The summary and selected
financial and operating data included in the Registration Statement and the
Prospectus presents fairly the information shown therein and have been prepared
on a basis consistent with the audited and any unaudited financial statements,
as the case may be, included therein.
(xix) No labor dispute with the employees of the Company or any of
its subsidiaries exists, or to the knowledge of the Company, is imminent. No
collective bargaining agreement exists with any of the Company's employees and,
to the Company's knowledge, no such agreement is imminent.
(xx) The Company has good and marketable title to all of the
properties and assets reflected in the financial statements (or as described in
the Registration Statement) filed with the Commission as part of the
Registration Statement, free and clear of any lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such financial statements (or
as described in the Registration Statement). All leases to which the Company or
any of its subsidiaries is party are valid and binding obligations of the
Company or such subsidiary and no default by the Company or any of its
subsidiaries has occurred or is continuing thereunder which could reasonably be
expected to result in a Material Adverse Effect, and the Company and each of its
subsidiaries enjoys peaceful and undisturbed possession under all such leases to
which it is a party as lessee.
(xxi) The Company and each of its subsidiaries own or have valid
licenses to use, the patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names (collectively, Patents and Proprietary Rights)
currently employed by them in connection with the business they now operate.
Except as disclosed in the Registration Statement and Prospectus, neither the
Company nor any of its subsidiaries has received any written notice of, and the
Company has no knowledge of, any infringement of or conflict with asserted
rights of others with respect to any Patent or Proprietary Rights (except for
such infringements or conflicts as would not have a Material Adverse Effect).
(xxii) The Company and each of its subsidiaries have timely filed all
federal, state, local and foreign income tax returns which have been required to
be filed and have paid all taxes indicted by said returns and all assessments
received by them or any of them to the extent that such taxes have become due
and are not being contested in good faith except where the failure to file such
returns and pay such taxes would not have a Material Adverse Effect. All tax
liabilities (including those being contested in good faith) for the periods
covered by the financial statements of the Company that are included in the
Registration Statement have been adequately provided for in such financial
statements.
(xxiii) Other than as provided to the Underwriters under this
Agreement, neither the Company nor any of its subsidiaries has incurred any
liability for finders' or brokers' fees or agents' commissions in connection
with the execution and delivery of this Agreement or the transactions hereby
contemplated.
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(xxiv) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance 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 GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management's general or specific authorization, and (iv) the recorded
accountability for inventory is compared with the existing inventory at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxv) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the National
Association of Securities Dealers, Inc. (herein called the NASD) or such
additional steps as may be necessary to qualify the Stock for public offering by
the Underwriters under state securities or blue sky laws) has been obtained or
made and is in full force and effect.
(xxvi) The Company has not taken, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Stock.
(xxvii) The statements in the Prospectus under the heading "Related
Party Transactions" set forth all existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions between or among the Company, on the one hand,
and any officer, director or stockholder of the Company, or with any partner,
affiliate or associate of any of the foregoing persons or entities, on the other
hand, required to be set forth or described thereunder.
(xxviii) There are no matters related to the Company's Year 2000
issues that are of a character required to be described or referred to in the
Registration Statement or Prospectus by the Securities Act or the rules and
regulations of the Commission thereunder which have not been accurately
described in the Registration Statement.
(xxix) The Company has not at any time since its inception (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 U.S. 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.
(xxx) Neither the Company nor any of its subsidiaries has
distributed and neither will distribute prior to the later of (i) the Closing
Date, or any date on which Option Stock is to be purchased, as the case may be,
and (ii) completion of the distribution of the Stock, any offering material
other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Securities Act.
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3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell 7,500,000 shares of the Underwritten Stock to the several
Underwriters and each of the Underwriters agrees to purchase from the Company
the respective aggregate number of shares of Underwritten Stock set forth
opposite its name in Schedule I. The price at which such shares of
Underwritten Stock shall be sold by the Company and purchased by the several
Underwriters shall be $ per share. In making this Agreement, each Underwriter
is contracting severally and not jointly; except as provided in paragraphs (b)
and (c) of this Section 3, the agreement of each Underwriter is to purchase
only the respective number of shares of the Underwritten Stock specified in
Schedule I.
(b) If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares,
the number of shares of the Stock which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis to absorb the remaining shares which the
defaulting Underwriter or Underwriters agreed to purchase; provided, however,
that the non-defaulting Underwriters shall not be obligated to purchase the
shares which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Stock exceeds 10% of the total number
of shares of the Stock which all Underwriters agreed to purchase hereunder. If
the total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in accordance
with the two preceding sentences, the Company shall have the right, within 24
hours next succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers satisfactory to you for purchase of such
shares on the terms herein set forth. In any such case, either you or the
Company shall have the right to postpone the Closing Date determined as provided
in Section 5 hereof for not more than seven business days after the date
originally fixed as the Closing Date pursuant to said Section 5 in order that
any necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made. If neither the non-defaulting
Underwriters nor the Company shall make arrangements within the 24-hour periods
stated above for the purchase of all the shares of the Stock which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter and
without any liability on the part of any non-defaulting Underwriter to the
Company. Nothing in this paragraph (b), and no action taken hereunder, shall
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
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(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 1,125,000 shares in the aggregate of the Option Stock from
the Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of
the Option Stock as to which the several Underwriters are exercising the
option. Delivery of certificates for the shares of Option Stock, and payment
therefor, shall be made as provided in Section 5 hereof. The number of shares
of the Option Stock to be purchased by each Underwriter shall be the same
percentage of the total number of shares of the Option Stock to be purchased
by the several Underwriters as such Underwriter is purchasing of the
Underwritten Stock, as adjusted by you in such manner as you deem advisable to
avoid fractional shares.
4. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth under the caption entitled
"Underwriting" in the Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Stock filed by the Company (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of
the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., California time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Fenwick & West LLP, Two Palo Alto Square, Palo Alto,
California, at 7:00 a.m., California time, on the fourth business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., California time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Fenwick & West LLP, Two Palo
Alto Square, Palo Alto, California, at 7:00 a.m., California time, on the third
business day after the exercise of such option.
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<PAGE>
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order by one or more certified or official bank check or
checks or by one or more wire transfers in same day funds. Such payment shall
be made upon delivery of certificates for the Stock to you for the respective
accounts of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check or wire transfer shall
not have been received by you on the Closing Date or any later date on which
Option Stock is purchased for the account of such Underwriter. Any such payment
by you shall not relieve such Underwriter from any of its obligations hereunder.
6. Further Agreements of the Company. The Company covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional information,
(ii) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, (iii) the institution or notice of
intended institution of any action or proceeding for that purpose, (iv) the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Stock for sale in any jurisdiction, or (v) the receipt by
it of notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the issuance
of such a stop order and, if such an order shall at any time be issued, to
obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver
to you a signed copy of the Registration Statement as originally filed and of
each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also
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deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible, deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company and of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company and of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to which any of the Stock may be sold by the
several Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may reasonably designate and, during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, in keeping such qualifications in good standing under
said securities or blue sky laws; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to qualify as
a foreign corporation in any jurisdiction in which it is not so qualified. The
Company will, from time to time, prepare and file such statements, reports, and
other documents as are or may be required to continue such qualifications in
effect for so long a period as you may reasonably request for distribution of
the Stock.
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(f) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(g) Not later than the 45th day following the end of the fiscal
quarter (90th day in the case of the fourth fiscal quarter in a fiscal year)
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(h) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the NASD of the Registration Statement, any Preliminary
Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies
of any Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 6 to be so furnished, (iii) the preparation, printing and
filing of all supplements and amendments to the Prospectus referred to in
paragraph (d) of this Section 6, (iv) the furnishing to you and the Underwriters
of the reports and information referred to in paragraph (g) of this Section 6
and (v) the printing and issuance of stock certificates, including the transfer
agent's fees.
(i) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and the cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel in
qualifying the Stock under state securities or blue sky laws and in the review
of the offering by the NASD.
(j) The Company hereby agrees that, without the prior written consent
of Chase Securities Inc. on behalf of the Underwriters, the Company will not,
for a period of 180 days following the commencement of the public offering of
the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract
to sell, make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock or (ii) enter into any swap or other agreement
or similar arrangement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company upon the exercise of
warrants and stock options that are presently outstanding and described as such
in the Prospectus or which may be issued hereafter under the Company's stock
option plans described in the Prospectus (the "Option Plans"), (C) the Company's
grants of options pursuant to the Option Plans described in the Prospectus, (D)
shares of Common Stock under the employee stock purchase plan described in the
Prospectus and (E) the Company's issuance of up to 30,000 shares of Common Stock
in connection with its acquisition of Impact Peripherals.
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(k) If at any time during the 25-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 for the 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) The Company is not, and immediately upon receipt and pending
application of the net proceeds from the sale of the Stock to be sold by the
Company in the manner described in the Prospectus, will not be an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(m) The Company will comply with the Securities Act and the rules and
regulations of the Commission thereunder, and the Exchange Act and the rules and
regulations of the Commission thereunder, so as to permit the completion of the
distribution of the Stock as contemplated in this Agreement and the Prospectus.
(n) The Company will apply the net proceeds of its sale of the Stock
as set forth in the Prospectus under the heading "Use of Proceeds."
(o) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that constitutes or might reasonably be
expected to constitute, the stabilization or manipulation of the price of its
Common Stock.
(p) 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.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, the common law or otherwise, and the Company
agrees to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement related thereto) or any post-
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effective amendment thereto (including any Rule 462(b) registration statement
related 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 (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, including any
Rule 462(b) registration statement related thereto, and (2) the indemnity
agreement contained in this paragraph (a) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages, liabilities or expenses
purchased the Stock which is the subject thereof (or to the benefit of any
person controlling such Underwriter) if at or prior to the written confirmation
of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended
or supplemented) was not sent or delivered to such person and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented) unless the failure is the result of noncompliance by the Company
with paragraph (c) of Section 6 hereof. The indemnity agreements of the Company
contained in this paragraph (a) and the representations and warranties of the
Company contained in Section 2 hereof shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, the common
law or otherwise and to reimburse each of them for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) 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 (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the
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Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment thereof or supplement thereto. The
indemnity agreement of each Underwriter contained in this paragraph (b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from which indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its
own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (herein called the Notice of Defense) to
the indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that
15
<PAGE>
(A) the indemnifying party or parties shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in clause
(i) of the proviso to the preceding sentence and (B) the indemnifying party or
parties shall bear such other expenses as it or they have authorized to be
incurred by the indemnified party or parties. If, within a reasonable time after
receipt of the Notice, no Notice of Defense has been given, the indemnifying
party or parties shall be responsible for any legal or other expenses incurred
by the indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Stock received by
the Company and the total underwriting discount received by the Underwriters, as
set forth in the table on the cover page of the Prospectus, bear to the
aggregate public offering price of the Stock. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation; preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which
16
<PAGE>
contribution may be sought, it will promptly give written notice of such service
to the party or parties from whom contribution may be sought, but the omission
so to notify such party or parties of any such service shall not relieve the
party from whom contribution may be sought from any obligation it may have
hereunder or otherwise (except as specifically provided in paragraph (c) of this
Section 7).
(e) No indemnifying party will, without the prior written consent of
each indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
indemnified party or any person who controls such indemnified party within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such indemnified
party and each such controlling person from all liability arising out of such
claim, action, suit or proceeding.
8. Termination. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.
9. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any
17
<PAGE>
later date on which Option Stock is to be purchased, as the case may be, and to
the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by counsel for the Underwriters, which approval shall not be
unreasonably withheld.
(c) You shall have received from Fenwick & West LLP, counsel for the
Company, opinions, addressed to the Underwriters and dated the Closing Date,
covering the matters set forth in Annex A hereto, and if Option Stock is
purchased at any date after the Closing Date, additional opinions from such
counsel, addressed to the Underwriters and dated such later date, confirming
that the statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall be reasonably satisfied that (i) as of the Effective
Date, the statements made in the Registration Statement and the Prospectus were
true and correct and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein, respectively, not misleading, (ii) since
the Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any occurrence or change giving rise to a termination
under Section 8.
18
<PAGE>
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the Chief Executive Officer and
the Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in the
form in which it originally became effective and the Prospectus contained
therein and any supplements or amendments thereto, and that the statements
included in clauses (i) through (vii) of paragraph (d) of this Section 9 are
true and correct.
(f) You shall have received from PWC a letter or letters, addressed to
the Underwriters and dated the Closing Date and any later date on which Option
Stock is purchased, confirming that they are independent public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable published rules and regulations thereunder and based upon the
procedures described in their 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 three business days prior to the Closing Date or such
later date on which Option Stock is purchased (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, 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 the Original Letter or
to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus. The
Original Letter from PWC shall be addressed to or for the use of the
Underwriters in form and substance reasonably 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
Securities Act and the applicable published rules and regulations of the
Commission, and (ii) set forth their opinion with respect to their examination
of the consolidated balance sheet of the Company as of December 31, 1999 and
related consolidated statements of operations, stockholders' equity, and cash
flows for the 12 months ended December 31, 1999, and (iii) address other matters
agreed upon by PWC and you.
(g) You shall have received from PWC a letter addressed to the Company
and made available to you 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 financial
statements as at December 31, 1999 did not disclose any weakness in internal
controls that they considered to be material weaknesses.
(h) Where applicable, you shall have been furnished evidence in usual
written or telegraphic form as is available from the appropriate authorities of
the several jurisdictions, or other evidence satisfactory to you, of the
qualification referred to in paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
19
<PAGE>
(j) On or prior to the Closing Date, you shall have received from the
Company's directors and officers and substantially all of its stockholders
agreements, in form reasonably satisfactory to Chase Securities Inc., stating
that without the prior written consent of Chase Securities Inc. on behalf of the
Underwriters, such person or entity will not, for a period of 180 days following
the commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any short sale,
pledge, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Gibson, Dunn & Crutcher LLP, counsel for the
Underwriters, shall be reasonably satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all out-
of-pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the transactions
contemplated hereby.
10. Conditions of the Obligation of the Company. The obligation of
the Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by the Company by giving
notice to you. Any such termination shall be without liability of the Company
to the Underwriters and without liability of the Underwriters to the Company;
provided, however, that in the event of any such termination the Company agrees
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 6 hereof.
20
<PAGE>
11. Reimbursement of Certain Expenses. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 7 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions of
said Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
13. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Chase H&Q, One Bush Street, San
Francisco, California 94104 with a copy to Gibson, Dunn & Crutcher LLP, One
Montgomery Street, Telesis Tower, San Francisco, California 94104, Attention:
Kenneth R. Lamb, Esq. and if to the Company, shall be mailed, telegraphed or
delivered to it at its office, 47421 Bayside Parkway, Fremont, California 94538,
Attention: John H. Reimer, President and Chief Executive Officer with a copy to:
Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306,
Attention: Dennis R. DeBroeck, Esq. All notices given by telegraph shall be
promptly confirmed by letter.
14. Miscellaneous. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or their respective directors or officers, and (c)
delivery and payment for the Stock under this Agreement; provided, however, that
-------- -------
if this Agreement is terminated prior to the Closing Date, the provisions of
paragraph (k) of Section 6 hereof shall be of no further force or effect.
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.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
21
<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
LEXAR MEDIA, INC.
By___________________________________
John H. Reimer
President and Chief Executive Officer
The foregoing Agreement is hereby confirmed and
accepted as of the date first above written.
CHASE SECURITIES INC.
J.P. MORGAN & CO.
SG COWEN SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
By Chase Securities Inc.
By ___________________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
22
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of Shares
Underwriters to be Purchased
------------ ---------------
Chase Securities Inc.......................
J.P. Morgan & Co...........................
SG Cowen Securities Corporation............
Prudential Securities Incorporated.........
TOTAL................................. 7,500,000
---------------
<PAGE>
EXHIBIT 3.2
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LEXAR MEDIA, INC. (DELAWARE)
Lexar Media, Inc. (Delaware), a Delaware corporation (the "Corporation"),
-----------
which was originally incorporated on January 11, 2000, hereby certifies that the
First Amended and Restated Certificate of Incorporation of the Corporation
attached hereto as Exhibit A, which is incorporated herein by this reference,
---------
has been duly adopted by the Board of Directors and stockholders of the
Corporation in accordance with Sections 242 and 245 of the Delaware General
Corporation Law, with the approval of the stockholders having been given by
written consent without a meeting in accordance with Section 228 of the Delaware
General Corporation Law.
IN WITNESS WHEREOF, said Corporation has caused this First Amended and
Restated Certificate of Incorporation to be signed by its by duly authorized
officer.
Dated: March ___, 2000
LEXAR MEDIA, INC. (DELAWARE)
_________________________________
John Reimer, President
<PAGE>
Exhibit A
---------
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LEXAR MEDIA, INC.
ARTICLE I
The name of the corporation is Lexar Media, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 15 East North Street, City of Dover, County of Kent. The name of its
registered agent at that address is Incorporating Services, Ltd.
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 total number of shares of all classes of capital stock which the
corporation has authority to issue is 113,705,827 shares, consisting of two
classes: (i) 75,000,000 shares of Common Stock, par value $0.0001 per share, and
(ii) 36,658,348 shares of Preferred Stock, par value $0.0001 per share. Of the
36,658,348 shares of Preferred Stock authorized to be issued by the corporation,
(i) 3,000,000 shares are hereby designated "Series A Preferred Stock," (ii)
3,000,048 shares are hereby designated "Series B Preferred Stock," (iii)
11,543,750 shares are hereby designated "Series C Preferred Stock," (iv)
6,943,618 shares are hereby designated "Series D Preferred Stock," and (v)
12,170,932 shares are hereby designated "Series E Preferred Stock." The rights,
preferences, privileges and restrictions granted to and imposed upon the Series
A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock,
the Series D Preferred Stock, the Series E Preferred Stock and the Common Stock
are set forth below:
1. Definitions. For purposes of this Article IV, the following
-----------
definitions shall apply:
1.1 "Affiliates" shall mean any Person that directly or indirectly
----------
controls, is controlled by, or is under common control with, the indicated
Person.
1.2 "Available Funds and Assets" shall mean the funds and assets of
--------------------------
the Company (whether such funds and assets are capital, surplus or earnings)
that may be legally available for distribution to the stockholders of the
Company from time to time.
1
<PAGE>
1.3 "Board" shall mean the Board of Directors of the Company.
-----
1.4 "Company" shall mean this corporation.
-------
1.5 "Common Stock" shall mean the Common Stock, par value $0.0001 per
------------
share, of the Company.
1.6 "Common Stock Director" shall mean the director of the Company
---------------------
elected by the holders of the Common Stock, voting separately as a separate
class, pursuant to Section 5.5.
1.7 "Common Stock Dividend" shall mean a stock dividend declared and
---------------------
paid on the Common Stock that is payable in shares of Common Stock.
1.8 "Dividend Rate" shall mean (i) $0.08 per share per annum for the
-------------
Series A Preferred Stock, (ii) $0.0333336 per share per annum for the Series B
Preferred Stock, (iii) $0.064 per share per annum for the Series C Preferred
Stock, (iv) $0.1348 per share per annum for the Series D Preferred Stock and (v)
$0.2072 per share per annum for the Series E Preferred Stock, each appropriately
adjusted for any stock split, combination or other recapitalization affecting
the particular series of Preferred Stock and for any dividends on such stock
payable in shares of Preferred Stock or Common Stock which occur after the
Original Issue Date.
1.9 "Original Issue Date" shall mean the date on which the first
-------------------
share of Series E Preferred Stock is issued by the Company.
1.10 "Original Issue Price" shall mean (i) $1.00 per share for the
--------------------
Series A Preferred Stock, (ii) $0.41667 per share for the Series B Preferred
Stock, (iii) $0.80 per share for the Series C Preferred Stock, (iv) $1.685 per
share for the Series D Preferred Stock and (v) $2.59 per share for the Series E
Preferred Stock, each appropriately adjusted for any stock split, combination or
other recapitalization affecting the particular series of Preferred Stock and
for any dividends on such stock payable in shares of Preferred Stock or Common
Stock which occur after the Original Issue Date.
1.11 "Permitted Repurchases" shall mean the repurchase by the Company
---------------------
of shares of Common Stock held by employees, officers, directors, consultants,
independent contractors, advisors, or other persons performing services for the
Company or a subsidiary that are subject to restricted stock purchase agreements
or stock option exercise agreements as approved by the Board under which the
Company has the option to repurchase such shares (i) at cost, upon the
occurrence of certain events, such as the termination of employment or services
or (ii) at any price pursuant to the exercise by the Company of a right of
first refusal to repurchase such shares.
1.12 "Person" shall include all natural persons, corporations,
------
business trusts, associations, limited liability companies, partnerships, joint
ventures and other entities, governments, agencies and political subdivisions.
1.13 "Preferred Stock" shall mean the Series A, Series B, Series C,
---------------
Series D and Series E Preferred Stock, collectively.
2
<PAGE>
1.14 "Qualified Public Offering" shall mean the first underwritten
-------------------------
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offering and sale of Common
Stock for the account of the Company on a firm commitment basis in which the
aggregate gross proceeds received by the Company at the public offering price
equals or exceeds $20,000,000 and the public offering price equals or exceeds
$6.18 per share of Common Stock, appropriately adjusted for any stock split,
combination or other recapitalization affecting the Common Stock and dividends
on Common Stock payable in shares of Common Stock which occur after the Original
Issue Date.
1.15 "Series A Preferred Stock" shall mean the Series A Preferred
------------------------
Stock, $0.0001 par value per share, of the Company.
1.16 "Series B Preferred Stock" shall mean the Series B Preferred
------------------------
Stock, $0.0001 par value per share, of the Company.
1.17 "Series C Preferred Stock" shall mean the Series C Preferred
------------------------
Stock, $0.0001 par value per share, of the Company.
1.18 "Series C Director" shall mean a director of the Company elected
-----------------
by the holders of the Series C Preferred Stock, voting separately as a separate
series, pursuant to Section 5.5.
1.19 "Series C Purchase Agreement" shall mean the Series C Purchase
---------------------------
Agreement entered into between the Company and the holders of Series C Preferred
Stock, as amended.
1.20 "Series D Preferred Stock" shall mean the Series D Preferred
------------------------
Stock, $0.0001 par value per share, of the Company.
1.21 "Series D Purchase Agreement" shall mean the Series D Purchase
---------------------------
Agreement entered into between the Company and the holders of Series D Preferred
Stock, as amended.
1.22 "Series E Preferred Stock" shall mean the Series E Preferred
------------------------
Stock, $0.0001 par value per share, of the Company.
1.23 "Series E Director" shall mean a director of the Company elected
-----------------
by the holders of the Series E Preferred Stock, voting separately as a separate
series, pursuant to Section 5.5.
1.24 "Series E Purchase Agreement" shall mean the Series E Purchase
---------------------------
Agreement entered into between the Company and the holders of the Series E
Preferred Stock, as amended.
2. Dividend Rights.
---------------
2.1 Dividend Preference. The holders of each share of Series A,
-------------------
Series B, Series C, Series D and Series E Preferred Stock then outstanding shall
be entitled to receive, when, as and if declared by the Board of Directors,
cumulative dividends, out of any funds and
3
<PAGE>
assets of the Company legally available therefor, prior and in preference to any
declaration or payment of any dividend (payable other than a Common Stock
Dividend) on Common Stock of the Company at the annual Dividend Rate for each
such series of Preferred Stock, unless otherwise approved by all of the
directors of the Company. Such cumulative dividends shall accrue on each share
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock from the date on which
such share is issued by the Company, and shall accrue from day to day whether or
not earned or declared. No accumulation of dividends on the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock shall bear any interest. Unless the full
amount of any accrued and unpaid cumulative dividends accrued on the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall have been paid or declared in
full and a sum sufficient for the payment thereof reserved and set apart, no
dividend, other than a Common Stock Dividend, shall be paid, or declared, on any
Common Stock. The payments of any dividends to the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall be made pro rata, on an equal
priority, pari passu basis, according to their respective dividend preferences
as set forth herein.
2.2 Other Dividends. Except as set forth in Section 2.1 above, no
---------------
dividend or other distribution shall accrue or be paid with respect to any
shares of capital stock of the Company for any period, whether before or after
the effective date of this First Amended and Restated Certificate of
Incorporation, unless and until approved by all of the directors of the Company.
In the event any dividend or distribution is declared or made with respect to
outstanding shares of Common Stock (including, without limitation, any Common
Stock Dividend), a comparable dividend or distribution shall be simultaneously
declared or made with respect to the outstanding shares of Preferred Stock, as
if fully converted into Common Stock, including fractions of shares. The
dividends on shares of capital stock of the Company shall be payable only out of
funds legally available therefor.
2.3 Non-Cash Dividends. Whenever a dividend provided for in this
------------------
Section 2 shall be payable in securities of the Company or in property other
than cash, the value of such dividend shall be deemed to be the price of such
security or the fair market value of such property as determined in good faith
by the Board.
2.4 No Payment on Conversion. If the Company shall have accrued but
------------------------
unpaid dividends with respect to any Preferred Stock upon its conversion as
provided in Section 6, then all such accrued but unpaid dividends on such
converted shares shall be canceled.
3. Liquidation Rights. In the event of any liquidation, dissolution or
------------------
winding up of the Company, whether voluntary or involuntary, the Available Funds
and Assets shall be distributed to stockholders in the following manner.
3.1 Liquidation Preferences. The holders of each share of Series A
-----------------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock then outstanding shall be entitled
to be paid, out of the Available Funds and Assets, and prior and in preference
to any payment or distribution, or any setting apart of any payment or
distribution, of any Available Funds and Assets on any shares of Common Stock,
an
4
<PAGE>
amount per share equal to the Original Issue Price for each such series of
Preferred Stock, respectively, plus all accrued but unpaid dividends thereon
(the "Liquidation Preference"). If upon any liquidation, dissolution or winding
----------------------
up of the Company, whether voluntary or involuntary, the Available Funds and
Assets shall be insufficient to permit the payment to holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock of their full preferential amounts
described in this Section 3.1, then all the remaining Available Funds and Assets
shall be distributed among the holders of the then outstanding Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock pro rata, on an equal priority,
pari passu basis, according to their respective liquidation preferences as set
forth herein.
3.2 Participation Rights. If there are any Available Funds and
--------------------
Assets remaining after the payment or distribution, or the setting aside for
payment or distribution, to the holders of the Preferred Stock of their full
preferential amounts described above in this Section 3, then all such remaining
Available Funds and Assets shall be distributed among the holders of the then
outstanding Common Stock, the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series
E Preferred Stock pro rata according to the number of shares of Common Stock
held by such holders, where, for this purpose, holders of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock will be deemed to hold, in lieu of
their Preferred Stock, the greatest whole number of shares of Common Stock then
issuable upon conversion in full of such shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock pursuant to Section 6.
3.3 Notice. In connection with any liquidation, dissolution or
------
winding up of the Company, whether voluntary or involuntary, the Company shall
provide notice not less than fifteen (15) business days prior to the
consummation of such event to each holder of Preferred Stock.
3.4 Merger or Sale of Assets. A (i) consolidation or merger of the
------------------------
Company with or into any other entity in which the holders of the outstanding
shares of the Company immediately before such consolidation or merger do not,
immediately after such consolidation or merger, retain stock representing a
majority of the voting power of the surviving entity of such consolidation or
merger (or its parent entity if the surviving entity is wholly owned by the
parent entity) or (ii) a sale, lease (excluding any sale-leaseback transaction
or equipment lease financing), exclusive license or transfer of all or
substantially all of the assets of the Company, whether in a single transaction
or a series of related transactions, shall each be deemed to be a liquidation,
dissolution or winding up of the Company as those terms are used in this Section
3.
3.5 Non-Cash Consideration. If any assets of the Company distributed
----------------------
to stockholders in connection with any liquidation, dissolution, or winding up
of the Company are other than cash, then the value of such assets shall be their
fair market value as determined by the Board of Directors in good faith, except
------
that any securities to be distributed to stockholders in a liquidation,
- ----
dissolution, or winding up of the Company shall be valued as follows:
5
<PAGE>
(a) The method of valuation of securities not subject to
investment letter or other similar restrictions on free marketability shall be
as follows:
(i) if the securities are then traded on a national
securities exchange or the Nasdaq National Market or a similar national
quotation system, then the value shall be deemed to be the average of the
closing prices of the securities on such exchange or system over the 30-day
period ending three (3) days prior to the distribution; and
(ii) if actively traded over-the-counter, then the value
shall be deemed to be the average of the closing bid prices over the 30-day
period ending three (3) days prior to the distribution; and
(iii) if there is no active public market, then the value
shall be the fair market value thereof, as determined in good faith by the Board
of Directors of the Company.
(b) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make an
appropriate discount from the market value determined as above in subparagraphs
(a)(i), (ii) or (iii) of this subsection to reflect the approximate fair market
value thereof, as determined in good faith by the Board of Directors.
(c) To the extent commercially practicable, distribution of each
non-cash asset shall be made pro rata to each stockholder in proportion to the
aggregate amount to which such stockholder is entitled in the event of a
liquidation, dissolution or winding up of the Company. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
which will involve the distribution of assets other than cash, if the assets to
be distributed are not divisible in a commercially practicable manner so as to
effect the pro rata distribution contemplated by this subparagraph, then the
Company shall use commercially reasonable efforts to liquidate such assets for
cash.
4. Redemption.
----------
4.1 Redemption Offer. The Company shall, to the extent it is
----------------
lawfully able to do so, be obligated to offer to redeem, at the respective
Original Issue Price plus accrued but unpaid dividends, all of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock in three (3) annual installments as
follows: (i) within sixty (60) days after November 4, 2003, one-third of each
series of Preferred Stock outstanding on November 4, 2003; (ii) within sixty
(60) days after November 4, 2004, one-half of each series of Preferred Stock
outstanding on November 4, 2004; and, (iii) within sixty (60) days after
November 4, 2005, all of the Preferred Stock outstanding on November 4, 2005.
Each holder of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock shall have
the option, each year, to either accept or reject the redemption offer. No
other share of capital stock of the Company, preferred or common, may be
redeemed without the consent of all of the directors of the Company, except for
Permitted Repurchases that have been approved in advance by a majority of the
Board of Directors. If upon any redemption date scheduled under this subsection
for the redemption of Preferred Stock, the funds and assets of the Company
legally available to redeem such stock shall be insufficient to redeem all
shares of Preferred Stock then scheduled to
6
<PAGE>
be redeemed, then any such unredeemed shares shall be carried forward and shall
be redeemed, together with any other shares of Preferred Stock then scheduled to
be redeemed, at the next redemption date scheduled under this Section 4.1 for
the redemption of Preferred Stock to the full extent of legally available funds
of the Company at such time, and any such unredeemed shares shall continue to be
so carried forward until redeemed. Those shares of Preferred Stock which are
subject to redemption hereunder but which have not been redeemed due to
insufficient legally available funds and assets of the Company shall continue to
be outstanding and entitled to all dividends, liquidation, conversion and other
rights, preferences, privileges and restrictions of the Preferred Stock
respectively until such shares have been converted or redeemed.
4.2 Redemption Notice. At least thirty (30) but no more than sixty
-----------------
(60) days prior to the date fixed for any redemption of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock (the "Redemption Date"), written notice shall
---------------
be mailed by the Company, postage prepaid, to each holder of record of the
shares of Preferred Stock to be redeemed, at the address last shown on the
records of the Company for such holder or given by the holder to the Company for
the purpose of notice or, if no such address appears or is given, at the place
where the principal executive office of the Company is located, notifying such
holder of the redemption to be effected, specifying the subsection hereof under
which such redemption is being effected, the Redemption Date, the applicable
redemption price, the number of shares of Preferred Stock of such holder to be
redeemed, the place at which payment may be obtained and the date on which the
conversion rights, as set forth in Section 6, as to such shares terminate, if
the redemption offer is accepted, which date shall in no event be earlier than
three (3) days prior to the Redemption Date, and calling upon such holder to
surrender to the Company, in the manner and at the place designated, the
certificate or certificates representing the shares which the holder elects to
have redeemed (the "Redemption Notice"). The record date for determining which
-----------------
holders shall receive the Redemption Notice shall be the close of business on
the business day next preceding the day on which such Redemption Notice is
given. Each holder of the Preferred Stock, upon receipt of the Redemption
Notice, shall, within twenty (20) days after the date of such notice, notify the
Company whether or not such holder wishes to participate in the redemption and
the number of shares such holder wishes to have redeemed up to the maximum
number of shares of Preferred Stock of such holder set forth in the Redemption
Notice on any Redemption Date (the "Redemption Confirmation"); provided,
----------------------- --------
however, on November 4, 2005 such holders of Preferred Stock may redeem all of
- -------
their remaining Preferred Stock. Only those holders of the Preferred Stock
responding to the Redemption Notice within such twenty (20) day period will be
entitled and obligated to have their shares redeemed.
4.3 Priority and Allocation. If at any time the Company is obligated
-----------------------
to redeem Preferred Stock under this Section 4 and the funds lawfully and
contractually available for such redemption of Preferred Stock are insufficient
to permit payment in full to such holders of Preferred Stock, no redemption
shall be made under this Section 4 of only a part of the then outstanding Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock, unless the Company shall effect
such redemption pro rata among all holders of shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock requested to be redeemed pursuant to the
Redemption Confirmation according to the dollar amount due to each such holder
thereof on the applicable Redemption Date.
7
<PAGE>
4.4 Surrender of Certificates. On or before each designated
-------------------------
Redemption Date, each holder of Preferred Stock which has elected to redeem
shares of Preferred Stock shall, unless such holder has previously exercised his
right to convert such shares of Preferred Stock into Common Stock as provided in
Section 4.5 below, surrender the certificate(s) representing such shares of
Preferred Stock which the holder has elected to be redeemed to the Company, in
the manner and at the place designated in the Redemption Notice, and thereupon
the redemption price for such shares shall be payable to the order of the person
whose name appears on such certificate(s) as the owner thereof, and each
surrendered certificate shall be canceled and retired. If less than all of the
shares represented by such certificate are to be redeemed, then the Company
shall promptly issue a new certificate representing the unredeemed shares.
4.5 Effect of Redemption. If the Redemption Notice shall have been
--------------------
duly given, and if on the Redemption Date the redemption price is either paid or
made available for payment through the deposit arrangements specified in Section
4.6 below, then notwithstanding that the certificates evidencing any of the
shares of Preferred Stock included in the Redemption Confirmation shall not have
been surrendered, all dividends with respect to such shares shall cease to
accrue after the Redemption Date, such shares shall not thereafter be
transferred on the books of the Company and all of the rights of the holders of
such shares with respect to such shares shall terminate after the Redemption
Date, except only the right of the holders to receive the redemption price
without interest upon surrender of their certificate(s) therefor.
4.6 Deposit of Redemption Price. On or prior to the Redemption Date,
---------------------------
the Company may, at its option, deposit with a bank or trust company in San
Jose, California having a capital and surplus of at least $100,000,000, as a
trust fund, a sum equal to the maximum aggregate redemption price for all shares
of Preferred Stock to be redeemed pursuant to the Redemption Confirmation, with
irrevocable instructions and authority to the bank or trust company to pay, on
or after the Redemption Date, the redemption price to the respective holders
upon the surrender of their share certificates. If such deposit is made, then
from and after the Redemption Date, the shares so called for redemption shall be
redeemed. The deposit shall constitute full payment of the shares to their
tendering holders, and from and after the Redemption Date, the shares shall be
deemed to be no longer outstanding, all dividends with respect to such shares
shall cease to accrue and the holders thereof shall cease to be stockholders
with respect to such shares and shall have no rights with respect thereto except
the right to receive from the bank or trust company payment of the redemption
price of the shares, without interest, upon surrender of their certificates
therefor, and the right to convert such shares as provided in Section 6 below.
Any funds so deposited and unclaimed at the end of one (1) year from the
Redemption Date shall be released or repaid to the Company, after which time the
holders of shares submitted for redemption who have not claimed such funds shall
be entitled to receive payment of the redemption price only from the Company.
5. Voting Rights.
-------------
5.1 Common Stock. Each holder of shares of Common Stock shall be
------------
entitled to one (1) vote for each share thereof held.
5.2 Preferred Stock. Each holder of shares of Preferred Stock shall
---------------
be entitled to the number of votes equal to the number of whole shares of Common
Stock into which such
8
<PAGE>
shares of Preferred Stock could be converted pursuant to the provisions of
Section 6 below at the record date for the determination of the stockholders
entitled to vote on such matters or, if no such record date is established, the
date such vote is taken or any written consent of stockholders is solicited.
5.3 General. Subject to the foregoing provisions of this Section 5,
-------
each holder of Preferred Stock shall have full voting rights and powers equal to
the voting rights and powers of the holders of Common Stock, including any
special voting rights provided for by law or set forth elsewhere in this First
Amended and Restated Certificate of Corporation, and shall be entitled to notice
of any stockholders' meeting in accordance with the Bylaws of the Company, as in
effect at the time in question, and applicable law, and shall be entitled to
vote, together with the holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote, except as may be
otherwise provided by applicable law. Except as otherwise expressly provided
herein or as required by law, the holders of Preferred Stock and the holders of
Common Stock shall vote together and not as separate classes.
5.4 Board Size. The authorized number of directors of the Board of
----------
Directors of the Company shall be eight (8). The Company shall not alter the
authorized number of directors in its Certificate of Incorporation, Bylaws or
otherwise, without first obtaining the written consent, or affirmative vote at a
meeting, of the holders of at least two-thirds of the then outstanding shares of
the Preferred Stock, consenting or voting, as the case may be, separately as a
single class.
5.5 Board of Directors Election and Removal.
---------------------------------------
(a) Election. (i) so long as 3,000,000 shares of the Series C
--------
Preferred Stock remain outstanding, the holders of the Series C Preferred Stock,
voting as a separate series with cumulative voting rights as among themselves in
accordance with Section 708 of the California Corporations Code, shall be
entitled to elect two (2) directors of the Company, (ii) so long as 2,000,000
shares of the Series E Preferred Stock remain outstanding, the holders of the
Series E Preferred Stock, voting as a separate series with cumulative voting
rights as among themselves in accordance with Section 708 of the California
Corporations Code, shall be entitled to elect one (1) director of the Company,
(iii) the holders of the Common Stock, voting as a separate class with
cumulative voting rights as among themselves in accordance with Section 708 of
the California Corporations Code, shall be entitled to elect one (1) director of
the Company and (iv) the holders of the Preferred Stock and the Common Stock,
voting together as a single class with cumulative voting rights as among
themselves in accordance with Section 708 of the California Corporations Code,
shall be entitled to elect four (4) directors of the Company. In the event the
Series C Preferred Stock no longer have the right to elect the Series C
Directors pursuant to Section 5.5(a)(i) above or the Series E Preferred Stock no
longer have the right to elect the Series E Director pursuant to Section
5.5(a)(ii) above, then such director(s) shall be elected pursuant to Section
5.5(a)(iv) above.
(b) Quorum; Required Vote.
---------------------
(i) Quorum. At any meeting held for the purpose of electing
------
directors, (i) the presence in person or by proxy of the holders of a majority
of the shares of the Series C Preferred Stock, Series E Preferred Stock or
Common Stock then outstanding,
9
<PAGE>
respectively, shall constitute a quorum of the Series C Preferred Stock, Series
E Preferred Stock or Common Stock, as the case may be, for the election of
directors to be elected solely by the holders of the Series C Preferred Stock,
Series E Preferred Stock or Common Stock, respectively and (ii) the presence in
person or by proxy of the holders of a majority of the aggregate number of
shares of the Preferred Stock and Common Stock then outstanding shall constitute
a quorum for the election of the directors to be elected jointly by the holders
of the Preferred Stock and the Common Stock.
(ii) Required Vote. With respect to the election of any
-------------
director or class of capital stock given the right to elect such director or
directors pursuant to Section 5.5(a) above ("Specified Stock"), that candidate
---------------
or those candidates, as applicable, shall be elected who either: (i) in the case
of any such vote conducted at a meeting of the holders of such Specified Stock,
receive the highest number of affirmative votes of the outstanding shares of
such Specified Stock, up to the number of directors to be elected by such
Specified Stock; or (ii) in the case of any such vote taken by written consent
without a meeting, are elected by the unanimous written consent of the holders
of shares of such Specified Stock, except that if such vote is to fill a vacancy
on the Board of Directors, other than a vacancy created by removal of a
director, such vacancy may be filled by election by the majority written consent
of the holders of shares of such Specified Stock.
(c) Vacancy. If there shall be any vacancy in the office of a
-------
director elected by the holders of any Specified Stock pursuant to Section
5.5(a), then a successor to hold office for the unexpired term of such director
may be elected by either: (i) the remaining director or directors, if any, in
office that were so elected by the holders of such Specified Stock, by the
affirmative vote of a majority of such directors, or by the sole remaining
director elected by the holders of such Specified Stock if there be but one, or
(ii) the requisite vote or consent of the holders of the shares of such
Specified Stock that are entitled to elect such director under Section
5.5(b)(ii).
(d) Removal. Any director who shall have been elected to the
-------
Board by the holders of any Specified Stock pursuant to Section 5.5(a) or by any
director or directors elected by holders of any Specified Stock as provided in
Section 5.5(c), may be removed during his or her term of office, either with or
without cause, by, and only by, the affirmative vote of shares representing a
majority of the voting power of all the outstanding shares of such Specified
Stock entitled to vote, given either at a meeting of such stockholders duly
called for that purpose or pursuant to a written consent of stockholders without
a meeting, and any vacancy created by such removal may be filled only in the
manner provided in Section 5.5(c).
(e) Procedures. Any meeting of the holders of any Specified
----------
Stock, and any action taken by the holders of any Specified Stock by written
consent without a meeting, in order to elect or remove a director under this
Section 5.5, shall be held in accordance with the procedures and provisions of
the Bylaws of the Company, the California Corporations Code and applicable law
regarding stockholder meetings and stockholder actions by written consent, as
such are then in effect, including but not limited to procedures and provisions
for determining the record date for shares entitled to vote.
10
<PAGE>
(f) Termination. Notwithstanding anything in this Section 5.5 to
-----------
the contrary, the provisions of this Section 5.5 shall cease to be of any
further force or effect upon the earlier to occur of : (i) with respect to
provisions requiring the directors to be elected by the holders of Series C
Preferred Stock, the first date on which the total number of outstanding shares
of Series C Preferred Stock is less than 3,000,000 shares of the Series C
Preferred Stock and with respect to provisions requiring the directors to be
elected by the holders of Series E Preferred Stock, the first date on which the
total number of outstanding shares of Series E Preferred Stock is less than
2,000,000 shares of the Series E Preferred Stock, such number of shares in each
case being subject to proportional adjustment to reflect combination or
subdivisions of such Series C Preferred Stock or Series E Preferred Stock or
dividends declared in shares of such stock; or (ii) the merger or consolidation
of the Company with or into any other corporation or corporations where the
Company is not the surviving corporation if such consolidation or merger is
approved by the stockholders of the Company in compliance with applicable law
and the Certificate of Incorporation and Bylaws of the Company; or (iii) a sale
of all or substantially all of the assets of the Company in a single transaction
or a series of related transactions.
6. Conversion Rights. The outstanding shares of Preferred Stock shall be
-----------------
convertible into Common Stock as follows:
6.1 Optional Conversion.
-------------------
(a) At the option of the holder thereof, each share of Preferred
Stock shall be convertible, at any time or from time to time, into fully paid
and nonassessable shares of Common Stock as provided herein.
(b) Each holder of Preferred Stock who elects to convert the
same into shares of Common Stock shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Company or any transfer agent for
the Preferred Stock or Common Stock, and shall give written notice to the
Company at such office that such holder elects to convert the same and shall
state therein the number of shares of Preferred Stock being converted. Thereupon
the Company shall promptly issue and deliver at such office to such holder, or
to the nominee or nominees of such holder a certificate or certificates for the
number of shares of Common Stock to which such holder is entitled upon such
conversion. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the certificate or
certificates representing the shares of Preferred Stock to be converted, and the
person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date.
6.2 Automatic Conversion.
--------------------
(a) Each share of Preferred Stock shall automatically be
converted into fully paid and nonassessable shares of Common Stock, as provided
herein (i) immediately prior to the closing of a Qualified Public Offering or
(ii) upon the receipt by the Company of the written consent of the holders of
not less than two-thirds of the then outstanding shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, voting together as a single class, as well
as the consent of holders
11
<PAGE>
of at least two-thirds of the then outstanding shares of Series E Preferred
Stock, voting as a separate class, to the conversion of all then outstanding
Preferred Stock under this Section 6.
(b) All holders of record of shares of Preferred Stock will be
given at least twenty (20) days' prior written notice of the anticipated date of
any automatic conversion referenced in Section 6.2(a) and the Company shall also
exercise reasonable efforts to provide three (3) days' notice of such actual
conversion date to said holders, which notice may be by telephone. Each such
notice shall designate a place for automatic conversion of all of the shares of
such Preferred Stock pursuant Section 6.2(a). Such notices will be sent by mail,
first class, postage prepaid to each record holder of Preferred Stock at the
address of such holder appearing on the stock register of the Company, by
overnight courier service or by telephone as provided herein. The failure to
properly provide notice under this Section 6.2(b) will not invalidate the
conversion of all outstanding Preferred Stock under this Section 6.
(c) Upon the occurrence of any event specified in Section 6.2(a)
(i) or (ii) above, the outstanding shares of Preferred Stock shall be converted
into Common Stock automatically without the need for any further action by the
holders of such shares and whether or not the certificates representing such
shares are surrendered to the Company or its transfer agent; provided, however,
-------- -------
that the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless the certificates
evidencing such shares of Preferred Stock are either delivered to the Company or
its transfer agent as provided below, or the holder notifies the Company or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with such certificates. Upon the
occurrence of such automatic conversion of the Preferred Stock, the holders of
Preferred Stock shall surrender the certificates representing such shares at the
office of the Company or any transfer agent for the Preferred Stock or Common
Stock. Thereupon, there shall be issued and delivered to such holder, or to the
nominee or nominees of such holder promptly at such office and in its name as
shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares of
Preferred Stock surrendered were convertible on the date on which such automatic
conversion occurred.
6.3 Conversion Price. Each share of Preferred Stock shall be
----------------
convertible in accordance with Section 6.1 or Section 6.2 above into the number
of shares of Common Stock which results from dividing the Original Issue Price
for such series of Preferred Stock by the conversion price for such series of
Preferred Stock that is in effect at the time of conversion (the "Conversion
----------
Price"). The initial Conversion Price for the Series A Preferred Stock shall be
- -----
the Original Issue Price of the Series A Preferred Stock. The initial Conversion
Price for the Series B Preferred Stock shall be the Original Issue Price of the
Series B Preferred Stock. The initial Conversion Price for the Series C
Preferred Stock shall be the Original Issue Price of the Series C Preferred
Stock. The initial Conversion Price for the Series D Preferred Stock shall be
the Original Issue Price of the Series D Preferred Stock. The initial Conversion
Price for the Series E Preferred Stock shall be the Original Issue Price of the
Series E Preferred Stock. In each case the Conversion Price for the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall be subject to readjustment as
12
<PAGE>
provided by Section 6.14 herein. The Conversion Price of each series of
Preferred Stock shall be subject to adjustment from time to time as provided
below.
6.4 Adjustment Upon Common Stock Event. If at any time or from to
----------------------------------
time after the Original Issue Date there occurs a Common Stock Event (as
hereinafter defined), the Conversion Price of each series of Preferred Stock
shall, simultaneously with the happening of such Common Stock Event, be adjusted
by multiplying the Conversion Price of such series of Preferred Stock in effect
immediately prior to such Common Stock Event by a fraction, (i) the numerator of
which shall be the number of shares of Common Stock issued and outstanding
immediately prior to such Common Stock Event and (ii) the denominator of which
shall be the number of shares of Common Stock issued and outstanding immediately
after such Common Stock Event, and the product so obtained shall thereafter be
the Conversion Price for such series of Preferred Stock. The Conversion Price
for a series of Preferred Stock shall be readjusted in the same manner upon the
happening of each subsequent Common Stock Event. As used herein, the term
"Common Stock Event" shall mean: (i) the issue by the Company of additional
------------------
shares of Common Stock as a dividend or other distribution on outstanding Common
Stock; (ii) a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock; or (iii) combination of the
outstanding shares of Common Stock into a smaller number of shares of Common
Stock.
6.5 Adjustments for Other Dividends and Distributions. If at any
-------------------------------------------------
time or from time to time after the Original Issue Date the Company pays a
dividend or makes another distribution to the holders of the Common Stock
payable in securities of the Company other than shares of Common Stock, then in
each such event provision shall be made so that the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable upon
conversion thereof, the amount of securities of the Company which they would
have received had their Preferred Stock been converted into Common Stock on the
date of such event, or such record date, as applicable, and had they thereafter,
during the period from the date of such event, or such record date, as
applicable, to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 6 with respect to
the rights of the holders of the Preferred Stock or with respect to such other
securities by their terms.
6.6 Adjustment for Reclassification, Exchange and Substitution. If
----------------------------------------------------------
at any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock is changed into the same or a different number of shares of any class or
classes of stock, whether by recapitalization, reclassification or otherwise
(other than by a Common Stock Event or a stock dividend, reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 6), then
in any such event each holder of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock shall have the right thereafter to convert such stock into the kind and
amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change by holders of the number of
shares of Common Stock into which such shares of Series A Preferred Stock,
Series B Preferred Stock,
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<PAGE>
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
could have been converted immediately prior to such recapitalization,
reclassification or change, all subject to further adjustment as provided herein
or with respect to such other securities or property by the terms thereof.
6.7 Reorganizations, Mergers and Consolidations. If at any time or
-------------------------------------------
from time to time after the Original Issue Date there is a capital
reorganization of the Company (other than a recapitalization, subdivision,
combination, reclassification or exchange of shares provided for elsewhere in
this Section 6) or a merger or consolidation of the Company with or into another
corporation, except an event which is governed under Section 3.4, then, as a
part of such reorganization, merger or consolidation, provision shall be made so
that the holders of the Preferred Stock thereafter shall be entitled to receive,
upon conversion of the Preferred Stock, the number of shares of stock or other
securities or property of the Company, or of such successor corporation
resulting from such reorganization, merger or consolidation, to which a holder
of Common Stock deliverable upon conversion would have been entitled on such
reorganization, merger or consolidation. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 6
with respect to the rights of the holders of the Preferred Stock after the
reorganization, merger or consolidation to the end that the provisions of this
Section 6, including adjustment of the Conversion Price then in effect and
number of shares issuable upon conversion of the Preferred Stock, shall be
applicable after that event and be as nearly equivalent to the provisions hereof
as may be practicable. This Section 6.7 shall similarly apply to successive
reorganizations, mergers and consolidations.
6.8 Sale of Shares Below Conversion Price.
-------------------------------------
(a) Adjustment Formula. If at any time or from time to time after
------------------
the Original Issue Date the Company issues or sells, or is deemed by the
provisions of this Section 6.8 to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), otherwise than in connection with a
Common Stock Event as provided in Section 6.4, a dividend or distribution as
provided in Section 6.5, a recapitalization, reclassification or other change as
provided in Section 6.6 or a reorganization, merger or consolidation as provided
in Section 6.7, for an Effective Price (as hereinafter defined) that is less
than the Conversion Price for a series of Preferred Stock in effect immediately
prior to such issue or sale, then, and in each such case, the Conversion Price
for such series of Preferred Stock shall be reduced, as of the close of business
on the date of such issue or sale, to the price obtained by multiplying such
Conversion Price by a fraction:
(i) the numerator of which shall be the sum of (A) the
number of Common Stock Equivalents Outstanding (as hereinafter defined)
immediately prior to such issue or sale of Additional Shares of Common Stock
plus (B) the quotient obtained by dividing the Aggregate Consideration Received
(as hereinafter defined) by the Company for the total number of Additional
Shares of Common Stock so issued or sold, or deemed so issued and sold, by the
Conversion Price for such series of Preferred Stock in effect immediately prior
to such issue or sale; and
(ii) the denominator of which shall be the sum of (A) the
number of Common Stock Equivalents Outstanding immediately prior to such issue
or sale plus
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<PAGE>
(B) the number of Additional Shares of Common Stock so issued or sold or deemed
so issued and sold.
(b) Certain Definitions. For the purpose of making any
-------------------
adjustment required under this Subsection 6.8:
(i) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued by the Company, or deemed to have been issued by
the Company pursuant to Section 6.8(c) below, whether or not subsequently
reacquired or retired by the Company, other than: (A) shares of Series E
Preferred Stock sold pursuant to the Series E Purchase Agreement; (B) shares of
Common Stock issued or issuable upon conversion of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock; (C) shares of Common Stock, or options, warrants or
rights therefor, issued or issuable to employees, officers, or directors of, or
contractors, consultants or legal, financial or other advisers to, the Company
or any of its subsidiaries outstanding as of or issued following the Original
Issue Date pursuant to stock purchase or stock option plans, stock bonuses or
awards, warrants, contracts or other arrangements that are approved by the Board
of Directors in compliance with Section 7.2(5) hereof; (D) the convertible
promissory notes issued on or about August 6, 1999 in an aggregate principal
amount of $2,285,449.38 convertible into shares of Series E Preferred Stock and
the shares of Series E Preferred Stock issued or issuable upon conversion
thereof; (E) the convertible promissory note issued on or about May 13, 1999 in
a principal amount of $150,000 convertible into shares of Series E Preferred
Stock and the shares of Series E Preferred Stock issued or issuable upon
conversion thereof; (F) warrants for 88,241 shares of Series E Preferred Stock
issued on or about August 6, 1999 and the shares of Series E Preferred Stock
issued or issuable upon exercise thereof; (G) warrants for up to 135,359 shares
of Common Stock outstanding on the Original Issue Date and the shares of Common
Stock issued or issuable upon exercise thereof; (H) warrants for 100,000 shares
of Series C Preferred Stock outstanding on the Original Issue Date and shares of
Series C Preferred Stock issued or issuable upon exercise thereof; (I) warrants
for 231,660 shares of Series E Preferred Stock outstanding on the Original Issue
Date and shares of Series E Preferred Stock issued or issuable upon exercise
thereof; (J) up to 200,000 shares of Common Stock or Preferred Stock and/or
options or warrants therefor approved by the Board of Directors and issued or
issuable to parties providing the Company with equipment leases, real property
leases, loans, credit lines, guaranties of indebtedness, cash price reductions
or similar financing, such number of shares being subject to proportional
adjustment to reflect subdivisions, combinations and stock dividends affecting
the number of outstanding shares of such stock; and (K) securities issued
pursuant to the acquisition of another corporation or entity by the Company, as
approved by two-thirds of the disinterested members of the Board of Directors of
the Company, by consolidation, merger, purchase of all or substantially all of
the assets, or other reorganization in which the Company acquires, in a single
transaction or series of related transactions, all or substantially all of the
assets of such other corporation or entity or fifty percent (50%) or more of the
voting power of such other corporation or entity or fifty percent (50%) or more
of the equity ownership of such other entity.
(ii) The "Aggregate Consideration Received" by the Company
--------------------------------
for any issue or sale, or deemed issue or sale, of securities shall (A) to the
extent it consists of cash, be computed at the gross amount of cash received by
the Company before deduction of any underwriting or similar commissions,
compensation or concessions paid or allowed by the
15
<PAGE>
Company in connection with such issue or sale and without deduction of any
expenses payable by the Company; (B) 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 Board of Directors; and (C) if Additional Shares of Common Stock,
Convertible Securities or Rights or Options to purchase either Additional Shares
of Common Stock or Convertible Securities are issued or sold together with other
stock or securities or other assets of the Company for a consideration which
covers both, be computed as the portion of the consideration so received that
may be reasonably determined in good faith by the Board of Directors to be
allocable to such Additional Shares of Common Stock, Convertible Securities or
Rights or Options.
(iii) "Common Stock Equivalents Outstanding" shall mean the
------------------------------------
number of shares of Common Stock that is equal to the sum of (A) all shares of
Common Stock of the Company that are outstanding at the time in question, plus
(B) all shares of Common Stock of the Company issuable upon conversion of all
shares of Preferred Stock or other Convertible Securities that are outstanding
at the time in question, plus (C) all shares of Common Stock of the Company that
are issuable upon the exercise of Rights or Options that are outstanding at the
time in question assuming the full conversion or exchange into Common Stock of
all such Rights or Options that are Rights or Options to purchase or acquire
Convertible Securities into or for Common Stock.
(iv) "Convertible Securities" shall mean evidence of
----------------------
indebtedness, shares of stock or other securities that are at any time, directly
or indirectly, convertible into or exchangeable for shares of Common Stock.
(v) The "Effective Price" of Additional Shares of Common
---------------
Stock shall mean the Aggregate Consideration Received, or deemed to have been
received, by the Company under this Section 6.8, for the issue of such
Additional Shares of Common Stock, divided by the total number of Additional
Shares of Common Stock issued or sold, or deemed to have been issued or sold, by
the Company under this Section 6.8; and
(vi) "Rights or Options" shall mean warrants, options or
-----------------
other rights to purchase or acquire shares of Common Stock or Convertible
Securities.
(c) Deemed Issuances. For the purpose of making any adjustment
----------------
to the Conversion Price required under this Section 6.8, if the Company issues
or sells any Rights or Options or Convertible Securities and if the Effective
Price of the shares of Common Stock issuable upon exercise of such Rights or
Options and/or the conversion or exchange of Convertible Securities (computed
without reference to any additional or similar protective or antidilution
clauses) is less than the Conversion Price then in effect for a series of
Preferred Stock, then the Company shall be deemed to have issued, at the time of
the issuance of such Rights, Options or Convertible Securities, that number of
Additional Shares of Common Stock that is equal to the maximum number of shares
of Common Stock issuable upon exercise or conversion of such Rights, Options or
Convertible Securities upon their issuance and to have received, as the
Aggregate Consideration Received for the issuance of such shares, an amount
equal to the total amount of the consideration, if any, received by the Company
for the issuance of such Rights or Options or Convertible Securities, plus, in
the case of such Rights or Options, the minimum amounts of consideration, if
any, payable to the Company upon the exercise in full
16
<PAGE>
of such Rights or Options, plus, in the case of Convertible Securities, the
minimum amounts of consideration, if any, payable to the Company, other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities, upon the conversion or exchange thereof; provided, however, that:
-------- -------
(i) if the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective clauses,
then the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses;
(ii) if the minimum amount of consideration payable to the
Company upon the exercise of Rights or Options or the conversion or exchange of
Convertible Securities is reduced over time or upon the occurrence or non-
occurrence of specified events other than by reason of antidilution or similar
protective adjustments, then the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced; and
(iii) if the minimum amount of consideration payable to the
Company upon the exercise of such Rights or Options or the conversion or
exchange of Convertible Securities is subsequently increased, then the Effective
Price shall again be recalculated using the increased minimum amount of
consideration payable to the Company upon the exercise of such Rights or Options
or the conversion or exchange of such Convertible Securities.
No further adjustment of the Conversion Price, adjusted upon the issuance of
such Rights or Options or Convertible Securities, shall be made as a result of
the actual issuance of shares of Common Stock on the exercise of any such Rights
or Options or the conversion or exchange of any such Convertible Securities. If
any such Rights or Options or the conversion rights represented by any such
Convertible Securities shall expire without having been fully exercised, then
the Conversion Price as adjusted upon the issuance of such Rights or Options or
Convertible Securities shall be readjusted to the Conversion Price which would
have been in effect had an adjustment been made on the basis that the only
shares of Common Stock so issued were the shares of Common Stock, if any, that
were actually issued or sold on the exercise of such Rights or Options or rights
of conversion or exchange of such Convertible Securities, and such shares of
Common Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise, plus the consideration, if any,
actually received by the Company for the granting of all such Rights or Options,
whether or not exercised, plus the consideration received for issuing or selling
all such Convertible Securities actually converted or exchanged, plus the
consideration, if any, actually received by the Company, other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities, on the conversion or exchange of such Convertible Securities,
provided that such readjustment shall not apply to prior conversions of
Preferred Stock.
6.9 Certificate of Adjustment. In each case of an adjustment or
-------------------------
readjustment of the Conversion Price for a series of Preferred Stock, the
Company, at its expense, shall cause its Chief Financial Officer to compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment and showing
17
<PAGE>
in reasonable detail the facts upon which such adjustments or readjustments are
based, and shall mail such certificate, by first class mail, postage prepaid, to
each registered holder of the Preferred Stock at the holder's address as shown
in the books of the Company.
6.10 Fractional Shares. No fractional shares of Common Stock shall
-----------------
be issued upon any conversion of Preferred Stock. In lieu of any fractional
share to which the holder would otherwise be entitled, the Company shall pay the
holder cash equal to the product of such fraction multiplied by the then
effective Conversion Price.
6.11 Reservation of Stock Issuable Upon Conversion. The Company
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Preferred Stock and issuance of Common Stock pursuant
to any outstanding options, warrants or other rights to acquire Common Stock. If
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, the Company will take such corporate action as may, in the
reasonable opinion of the Company, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
6.12 Notices. Any notice required by the provisions of this Section
-------
6 to be given to the holders of shares of the Preferred Stock shall be deemed
given upon the earlier of actual receipt or five (5) business days after deposit
in the United States mail, by certified or registered mail, return receipt
requested, postage prepaid, addressed to each holder of record at the address of
such holder appearing on the books of the Company.
6.13 No Impairment. The Company shall not avoid or seek to avoid the
-------------
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Preferred Stock
against impairment.
6.14 Adjustment of Series E Conversion Price. As of the effective
---------------------------------------
date of the filing of these Restated Articles of Incorporation, the Conversion
Price of the Series E Preferred Stock (the "Series E Conversion Price") shall be
-------------------------
$3.09; provided however that if, prior to May 31, 2000, the Company does not
close a bona fide underwritten public offering of shares of the Company with
gross proceeds to the Company (before underwriter commissions and expenses) of
at least $20 million and a minimum per share price of at least $6.18 per share
of Common Stock (such price to be proportionally adjusted to reflect stock
splits, stock dividends and the like) (a "Series E Ratchet Qualified IPO"), the
--------------------------------
Series E Conversion Price shall become $2.35. For the purpose of determining
whether the underwritten public offering described is a Series E Ratchet
Qualified IPO under this Section 6.14, the minimum per share price of the shares
of the Company shall be the greater of (a) the low end of the price range at
which the shares are expected to be sold to the public as indicated on the cover
of the printed "red herring" prospectus distributed to potential investors
18
<PAGE>
to market the shares or (b) the initial price per share at which the shares are
purchased by the public in the offering.
7. Restrictions and Limitations.
----------------------------
7.1 Series Protective Provisions.
----------------------------
(a) So long as at least 1,000,000 shares of Series A Preferred
Stock remain outstanding, such number appropriately adjusted for any stock
split, combination or other recapitalization effecting the Series A Preferred
Stock and dividends on such stock payable in shares of Preferred Stock or Common
Stock which occur after the Original Issue Date, the Company shall not, without
the approval, by vote or written consent, of the holders of at least a majority
of the Series A Preferred Stock then outstanding, voting as a separate series,
take any action which:
(i) authorizes or issues any new class of additional shares
of capital stock of the Company, except for Preferred Stock authorized as of the
filing of this First Amended and Restated Certificate of Incorporation, having
priority over the Series A Preferred or ranking in parity with the Series A
Preferred Stock (including any increase in the authorized number of shares of
Series A Preferred Stock) as to the payment or distribution of assets upon the
liquidation or dissolution, voluntary or involuntary, of the Company; or
(ii) amends this First Amended and Restated Certificate of
Incorporation of the Company so as to alter or change any existing rights,
preferences, privileges or provisions relating to the Series A Preferred Stock
or the holders thereof, or waive any of the rights granted to the holders of the
Series A Preferred Stock by this First Amended and Restated Certificate of
Incorporation of the Company;
(b) So long as at least 1,000,000 shares of Series B Preferred
Stock remain outstanding, such number appropriately adjusted for any stock
split, combination or other recapitalization affecting the Series B Preferred
Stock and dividends on such stock payable in shares of Preferred Stock or Common
Stock which occur after the Original Issue Date, the Company shall not, without
the approval, by vote or written consent, of the holders of at least a majority
of the Series B Preferred Stock then outstanding, voting as a separate series,
take any action which:
(i) authorizes or issues any new class of additional shares
of capital stock of the Company, except for Preferred Stock authorized as of the
filing of this First Amended and Restated Certificate of Incorporation, having
priority over the Series B Preferred Stock or ranking in parity with the Series
B Preferred Stock (including any increase in the authorized number of shares
Series B Preferred Stock) as to the payment or distribution of assets upon the
liquidation or dissolution, voluntary or involuntary, of the Company; or
(ii) amends this First Amended and Restated Certificate of
Incorporation of the Company so as to alter or change any existing rights,
preferences, privileges or provisions relating to the Series B Preferred Stock
or the holders thereof, or waive any of the rights granted to the holders of the
Series B Preferred Stock by this First Amended and Restated Certificate of
Incorporation of the Company;
19
<PAGE>
(c) So long as at least 3,000,000 shares of the Series C
Preferred Stock remain outstanding, such number appropriately adjusted for any
stock split, combination or other recapitalization effecting the Series C
Preferred Stock and dividends on such stock payable in shares of Preferred Stock
or Common Stock which occur after the Original Issue Date, the Company shall
not, without the approval, by vote or written consent, of the holders of at
least two-thirds of the Series C Preferred Stock then outstanding, voting as a
separate series, take any action which:
(i) authorizes or issues any new class of additional shares
of capital stock of the Company, except for Preferred Stock authorized as of the
filing of this First Amended and Restated Certificate of Incorporation, having
priority over the Series C Preferred Stock or ranking in parity with the Series
C Preferred Stock (including any increase in the authorized number of shares
Series C Preferred Stock) as to the payment or distribution of assets upon the
liquidation or dissolution, voluntary or involuntary, of the Company; or
(ii) amends this First Amended and Restated Certificate of
Incorporation of the Company so as to materially and adversely alter or change
any existing rights, preferences, privileges or provisions relating to the
Series C Preferred Stock or the holders thereof, or waive any of the rights
granted to the holders of the Series C Preferred Stock by this First Amended and
Restated Certificate of Incorporation of the Company.
(d) So long as at least 2,500,000 shares of the Series D
Preferred Stock remain outstanding, such number appropriately adjusted for any
stock split, combination or other recapitalization effecting the Series D
Preferred Stock and dividends on such stock payable in shares of Preferred Stock
or Common Stock which occur after the Original Issue Date, the Company shall
not, without the approval, by vote or written consent, of the holders of at
least two-thirds of the Series D Preferred Stock then outstanding, voting as a
separate series, take any action which:
(i) authorizes or issues any new class of additional shares
of capital stock of the Company, except for Preferred Stock authorized as of the
filing of these this First Amended and Restated Certificate of Incorporation,
having priority over the Series D Preferred Stock or ranking in parity with the
Series D Preferred Stock (including any increase in the authorized number of
shares Series D Preferred Stock) as to the payment or distribution of assets
upon the liquidation or dissolution, voluntary or involuntary, of the Company;
or
(ii) amends this First Amended and Restated Certificate of
Incorporation or the Bylaws of the Company so as to materially and adversely
alter or change any existing rights, preferences, privileges or provisions
relating to the Series D Preferred Stock or the holders thereof, or waive any of
the rights granted to the holders of the Series D Preferred Stock by this First
Amended and Restated Certificate of Incorporation of the Company.
(e) So long as at least 2,000,000 shares of the Series E
Preferred Stock remain outstanding, such number appropriately adjusted for any
stock split, combination or other recapitalization affecting the Series E
Preferred Stock and dividends on such stock payable in shares of Preferred Stock
or Common Stock which occur after the Original Issue Date, except as otherwise
provided in Section 7.1(e)(iv), the Company shall not, without the approval, by
vote or
20
<PAGE>
written consent, of the holders of at least four-fifths of the Series E
Preferred Stock then outstanding, voting as a separate series:
(i) authorize or issue any new class of additional shares
of capital stock of the Company having priority over the Series E Preferred or
ranking in parity with the Series E Preferred Stock or securities convertible
into such securities (including any increase in the authorized number of shares
of Series E Preferred Stock) as to redemption, the payment of dividends or the
payment or distribution of assets upon the liquidation or dissolution, voluntary
or involuntary, of the Company;
(ii) amend this First Amended and Restated Certificate of
Incorporation of the Company so as to alter or change any existing rights,
preferences, privileges or provisions relating to the Series E Preferred Stock
or the holders thereof, or waive any of the rights granted to the holders of the
Series E Preferred Stock by this First Amended and Restated Certificate of
Incorporation of the Company;
(iii) sell, lease (excluding any sale-leaseback transaction
or equipment lease financing), exclusively license or transfer all or
substantially all of the assets of the Company or of any subsidiary of the
Company, whether in a single transaction or a series of related transactions,
consolidate with or merge the Company or any subsidiary of the Company into any
other company or entity, or permit any other company or entity to consolidate or
merge into the Company or any subsidiary of the Company, or enter into a plan of
exchange with any other company or entity, or otherwise acquire any other
company or entity,
(iv) take any action constituting or resulting in a
liquidation, dissolution or winding up of the Company without the vote of two-
thirds of the Series E Preferred Stock then outstanding, voting as a separate
series; or
(v) acquire or permit any of its subsidiaries to acquire,
directly or indirectly in any transaction or related series of transactions, all
or any material portion of the assets, business, stock or other equity interests
of any person other than acquisitions of assets in the ordinary course of
business of the Company.
7.2 Class Protective Provisions. So long as 1,000,000 shares of
---------------------------
Preferred Stock remain outstanding, the Company shall not, without the approval,
by vote or written consent, of the holders of at least a majority of the shares
of Preferred Stock then outstanding, voting together as a single class:
(i) redeem any share(s) of Common Stock, other than Permitted
Repurchases;
(ii) sell, lease (excluding any sale-leaseback transaction or
equipment lease financing), exclusively license or transfer of all or
substantially all of the assets of the Company or of any subsidiary of the
Company, whether in a single transaction or a series of related transactions,
consolidate with or merge the Company or any subsidiary of the Company into any
other company or entity, or permit any other company or entity to consolidate or
merge into the Company or any subsidiary of the Company, or enter into a plan of
exchange with any
21
<PAGE>
other company or entity, or otherwise acquire any other company or entity, or
otherwise take any action constituting or resulting in a liquidation,
dissolution or winding up of the Company;
(iii) except as contemplated herein, declare or pay any
dividends, other than dividends payable solely in shares of its own Common
Stock, on or declare or make any other distribution, directly or indirectly, on
account of any shares of Preferred Stock or Common Stock now or hereafter
outstanding;
(iv) authorize, permit or in any way enable any subsidiary of
the Company to sell or issue capital stock to any party other than the Company;
or
(v) increase the pool of Common Stock, or options, warrants or
rights therefore, issued or issuable to employees, officers, or directors of, or
contractors, consultants or advisers to, the Company or any subsidiary pursuant
to stock purchase or stock option plans, stock bonuses or awards, warrants,
contracts or other arrangements that are approved by the Board of Directors in
excess of 17,195,759 shares, including all such shares outstanding on the date
hereof and such number of shares to be calculated net of any repurchases of such
shares by the Company and net of any such expired or terminated options,
warrants or rights and to be proportionally adjusted to reflect any subsequent
Common Stock Event.
8. Miscellaneous.
-------------
8.1 No Reissuance of Preferred Stock. No share or shares of
--------------------------------
Preferred Stock acquired by the Company by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Company shall be
authorized to issue.
8.2 Consent to Certain Transactions. Each holder of shares of
-------------------------------
Preferred Stock shall, by virtue of its acceptance of a stock certificate
evidencing Preferred Stock, be deemed to have consented, for purposes of
Sections 502, 503 and 506 of the California Corporations Code, to all Permitted
Repurchases.
ARTICLE V
In furtherance of and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to adopt, amend or repeal the
Bylaws of this corporation, subject to the right of the stockholders entitled to
vote with respect thereto, in accordance with the provisions of such Bylaws, to
alter and repeal the Bylaws adopted or amended by the Board of Directors.
Notwithstanding any other provisions of law, this First Amended and Restated
Certificate of Incorporation or the Bylaws, each as amended, and notwithstanding
the fact that a lesser percentage may be specified by law, this First Amended
and Restated Certificate of Incorporation or the Bylaws, the affirmative vote of
the holders of at least sixty six and two-thirds percent (66 2/3%) of the
outstanding voting stock then entitled to vote at an election of directors,
voting together as a single class, shall be required to alter, change, amend,
repeal or adopt any provision inconsistent with this Article V.
22
<PAGE>
ARTICLE VI
To the fullest extent permitted by law, no director of the corporation
shall be personally liable to the corporation or its stockholders for monetary
damages for any breach of fiduciary duty as a director, notwithstanding any
provision of law imposing such liability. Without limiting the effect of the
preceding sentence, if the Delaware General Corporation Law is hereafter amended
to authorize the further elimination or limitation of the liability of a
director, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. No amendment to or repeal of this provision, nor
the adoption of any provision of this First Amended and Restated Certificate of
Incorporation inconsistent with this Article VI, shall apply to or have any
effect on the liability or alleged liability of any director of the corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
23
<PAGE>
EXHIBIT 4.3
AMENDMENT NO. 2 TO
INVESTORS RIGHTS AGREEMENT
This AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT dated March 21, 2000
(this "Amendment") amends that certain Investors Right Agreement, which is
---------
attached hereto as Exhibit A, dated as of September 28, 1999, by and among Lexar
---------
Media, Inc., a California corporation (the "Company"), certain existing
-------
shareholders of the Company listed on Schedule 1 thereto and certain investors
listed on Schedule 2 thereto, as amended by that certain Amendment No. 1 to
Investors Rights Agreement, which is attached hereto as Exhibit B, dated as of
---------
December 18, 1999, (the "Investors Rights Agreement"). The capitalized terms
--------------------------
not otherwise defined herein have the respective meanings given to them in the
Investors Rights Agreement.
RECITALS
A. Section 7.1 of the Investor Rights Agreement states in part that any
term or provision of the Investors Rights Agreement may be amended by
a writing signed by the Company and holders of at least two-thirds
(2/3rds) of the Registrable Common.
B. The undersigned parties include the Company and the holders of at
least two-thirds (2/3rds) of the Registrable Common.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree to amend the Investors Rights
Agreement as follows:
1. Section 1.11 of the Investors Rights Agreement is amended by adding a
reference to the Convertible Promissory Note (the "Sony Note") issued pursuant
to that certain Convertible Note and Warrant Purchase Agreement, dated as of
even date herewith (the "Purchase Agreement"), by and between the Company and
Sony Electronics, Inc. ("Sony"). Section 1.11 shall read in its entirety as
follows:
1.11. "Registrable Common" means (a) any shares of Common Stock which
------------------
have been issued or are issuable upon the conversion of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or
Series E Preferred, (b) any shares of Common Stock which have been issued
or are issuable upon exercise of the Warrants, the Series C Warrant, the
Series E Warrant or the Bridge Loan Warrant, (c) any shares of Common Stock
which have been issued or are issuable upon conversion of the convertible
promissory note issued to Sony Electronics, Inc. ("Sony") on or about March
21, 2000 and (d) any share of Common Stock issued as a dividend, stock
split, reclassification,
<PAGE>
recapitalization or other distribution with respect to or in exchange for
replacement of any Registrable Common, and, and, provided, however, that
shares of Common Stock shall no longer be Registrable Common when they
shall have been effectively registered under the Securities Act and sold by
the Holder thereof in accordance with such registration or sold by the
Holder pursuant to Rule 144.
2. Section 1.22 of the Investors Rights Agreement is amended by adding a
reference to the warrant issued to Sony pursuant to the Purchase Agreement (the
"Sony Warrant"). Section 1.22 shall read in its entirety as follows:
1.22. "Warrants" means (a) the warrants to purchase 125,000 shares of
--------
the Company's Common Stock granted to certain of the Investors as of
January 16, 1998, (b) the warrant granted to SMART Modular Technologies,
Inc. as of September 28, 1999 to purchase up to a certain number of shares
of the Company's Common Stock as set forth in the warrant, (c) the warrant
to purchase up to 30,000 shares of the Company's Common Stock granted to
Fenwick & West LLP as of December 8, 1999 and (d) the warrant to purchase
shares of the Company's Common Stock granted to Sony on or about March 21,
2000.
3. Sections 4.2 (iv) and 4.2 (vii) of the Investors Rights Agreement are
amended by adding a reference to the Sony Note and the Sony Warrant to exclude
the Sony Note, the Sony Warrant and the Common Stock issuable upon conversion of
the Sony Note and the Sony Warrant from the definition of "New Securities" that
are subject to each Holders' right of first refusal. Sections 4.2 (iv) and 4.2
(vii) shall read in their entirety as follows:
(iv) the Warrants, the Series C Warrants, the Series E Warrants, the
Bridge Loan Warrants or any securities issuable upon exercise of the
Warrants, the Series C Warrants, the Series E Warrants and the Bridge Loan
Warrants (the "Warrant Securities") or any securities issuable upon the
conversion of any Warrant Securities;
(vii) the convertible promissory note issued by the Company to Sony
Electronics, Inc. on or about March 21, 2000 in the principal amount of
$2,000,000, the convertible promissory note issued by the Company on or
about May 13, 1999 in the principal amount of $150,000, the convertible
promissory notes issued by the Company on or about August 6, 1999 in the
aggregate principal amount of $2,285,449.38 or any securities issuable upon
the conversion of any of such notes (the "Note Securities") or any
securities issuable upon the conversion of any Note Securities;
4. Sections 5.1.1, 5.1.2, 5.1.4 and 5.2.3 of the Investors Rights
Agreement are amended by adding a reference to the Registrable Common issued or
issuable upon conversion of the Series E Preferred to include the Holders of
such Registrable Common as Holders who can initiate a Registration Request
pursuant to Section 5.1. Sections 5.1.1, 5.1.2, 5.1.4 and 5.2.3 shall read in
their entirety as follows:
<PAGE>
5.1.1. If, at any time after the earlier of: (i) six (6) months after
the Company's initial public offering of its Common Stock or (ii) June 1,
2001, the Company shall receive a written request for registration under
the Securities Act from (a) the record Holder or Holders of an aggregate of
at least a majority of the then Registrable Common not previously
registered under the Securities Act and sold or (b) the record Holder or
Holders of an aggregate of at least one-fifth (1/5th) of the then
Registrable Common issued upon conversion of the Series E Preferred;
provided that at least 500,000 shares of the Registrable Common issued upon
conversion of the Series E Preferred remain outstanding (a "Registration
Request"):
(a) the Company shall promptly give written notice to all other
record Holders of Registrable Common not previously registered under
the Securities Act and sold that such registration is to be effected
("Registration Notice"); and
(b) subject to the limitations and requirements set forth in
this Section 5.1, the Company shall use its best efforts to prepare
and file a registration statement under the Securities Act, covering
the Registrable Common which is the subject of the Registration
Request and such additional Registrable Common for which it has
received written requests to register by such other record Holders:
(i) within twenty (20) days after the delivery of the Registration
Notice if the Company is subject to the reporting requirements of the
Exchange Act or (ii) within forty-five (45) days after the delivery of
the Registration Notice if the Company is not subject to such
reporting requirements; and the Company shall use its best efforts to
cause such registration statement to become effective as soon as is
practicable after receipt of the Registration Request, but not later
than sixty (60) days after receipt of such request.
5.1.2. The Company shall be obligated (a) to proceed with filing the
Registration Statement only if the anticipated gross offering proceeds
based upon the public offering price per share proposed by the underwriters
is at least $5,000,000, (b) to prepare, file and cause to become effective
no more than two (2) registration statements pursuant to Registration
Requests made by Holders of at least a majority of the Registrable Common
under this Section 5.1 and no more than one (1) additional registration
statement pursuant to a Registration Request made by the Holders of at
least one-fifth (1/5th) of the Registrable Common issued or issuable upon
conversion of the Series E Preferred under this Section 5.1 and (c)
notwithstanding the provisions of Subsection 5.1.2(b) above, to prepare,
file and cause to become effective no more than one (1) registration
statement pursuant to a Registration Request made under this Section 5.1
during any six-month period.
5.1.4. If the Holders submitting the Registration Request (the
"Initiating Holders") intend to distribute the Registrable Common covered
by such request
<PAGE>
by means of an underwriting, the Registration Request shall so indicate and
the Company shall include such information in the Registration Notice. A
majority in interest of the Initiating Holders shall select the
underwriter, with the approval of the Company, which approval shall not be
unreasonably withheld. Notwithstanding any other provision of this Section
5.1, if the managing underwriter advises the Initiating Holders in writing
that marketing factors require reducing the number of shares to be
underwritten, then the number of shares of Registrable Common included in
the underwriting shall be reduced pro rata among all participating Holders
in proportion (as nearly as practicable) to the amount of Registrable
Common owned by each participating Holder; provided, that, if in connection
with a Registration Request made by the Holders of the Registrable Common
issued or issuable upon conversion of the Series E Preferred, Registrable
Common is being included in the underwriting pursuant to a Holder's
incidental registration rights under Section 5.2, such reduction shall be
made: (i) first, from the number of Registrable Common requested to be
included in the underwriting pursuant to Section 5.2, on a pro rata basis,
based on the number of Registrable Common requested to be included in the
registration by Holders pursuant to Section 5.2, and (ii) second, from the
number of Registrable Common requested to be included in such underwriting
by the applicable Initiating Holders, on a pro rata basis, based on the
number of Registrable Common requested to be included in the registration
by such Initiating Holders; provided, however that such reduction shall be
-------- -------
made only if all other securities (other than Registrable Common) to be
included already have been entirely excluded from the underwriting.
5.2.3. If in the good faith judgment of the managing underwriter of
such public offering, marketing factors require the number of securities
otherwise to be included in the underwritten public offering to be reduced
or excluded such number may be reduced pro rata (by number of shares) or
excluded among the Holders thereof requesting such registration; provided,
however, that, (i) in connection with an offering initiated by the Company,
such reduction shall be made: (a) first, from the number of securities
requested to be included in such offering by Holders exercising incidental
registration rights pursuant to this Section 5.2, on a pro rata basis,
based on the number of Registrable Common requested to be included in the
offering by such Holders and (b) second, from the number of securities to
be offered for the account of the Company and (ii) in connection with a
Registration Request made by the Holders of the Registrable Common issued
or issuable upon conversion of the Series E Preferred, such reduction shall
be made: (a) first, from the number of securities requested to be included
in such offering by Holders exercising incidental registration rights
pursuant to this Section 5.2, on a pro rata basis, based on the number of
Registrable Common requested to be included in the offering by such Holders
and (b) second, from the number of securities to be offered by the
Initiating Holders, on a pro rata basis, based on the number of Registrable
Common requested to be included in the offering by such Initiating Holders
under Section 5.1 or 5.3; and, provided, further, that the number of
-------- -------
Registrable Common included in any such registration is not reduced below
10 percent (10%) of the shares included in the
<PAGE>
registration, except for a registration relating to the Company's initial
public offering, from which all Registrable Common may be excluded.
5. Section 7.1 of the Investors Rights Agreement is amended by adding a
reference to the Registrable Common issued or issuable upon conversion of the
Series E Preferred to include the Holders of such Registrable Common as Holders
who can initiate a Registration Request pursuant to Section 5.1.1. The second
sentence of Section 7.1 shall read in its entirety as follows:
Notwithstanding the previous sentence and in lieu of the vote required
therein, no such amendment or waiver shall (i) adversely affect the rights
of a Holder, to (A) attend Board meetings pursuant to Section 2.5 or (B)
receive expense reimbursement pursuant to Section 3.3 without the written
consent of the affected Holder, or (ii) adversely affect the rights of the
Holders of Registrable Common issued or issuable upon conversion of the
Series E Preferred to make a Registration Request pursuant to Sections
5.1.1 and 5.1.2 without the written consent of four-fifths (4/5ths) of the
Series E Preferred.
6. Except as expressly modified by this Amendment, all terms of the
Investors Rights Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
COMPANY: LEXAR MEDIA, INC.
By:_______________________________________
Name: Mr. John Reimer
Title: President and Chief Executive
Officer
SHAREHOLDERS: __________________________________________
John Reimer
__________________________________________
Petro Estakhri
__________________________________________
Mahmud ("Mike") Assar
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
INVESTORS: GE CAPITAL EQUITY INVESTMENTS, INC.
a Delaware corporation
By:_____________________________________
Name:________________________________
Title:_______________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
ST. PAUL VENTURE CAPITAL IV, LLC
By:_____________________________________
Name:________________________________
Title:_______________________________
ST. PAUL VENTURE CAPITAL V, LLC
By:_____________________________________
Name:________________________________
Title:_______________________________
ST. PAUL VENTURE CAPITAL AFFILIATES
FUND I, LLC
By St. Paul Venture Capital, Inc.,
Its Manager
By:_____________________________________
Name:________________________________
Title:_______________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
APV TECHNOLOGY PARTNERS II, L.P.
By APV Management Co. II, LLC,
Its Managing General Partner
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
THE JOHN TU AND MARY TU TRUST,
DATED JUNE 16, 1995
By:________________________________
Name: John Tu
Title: Trustee
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
DECLARATION OF TRUST OF DAVID SUN AND
DIANA SUN, DATED FEBRUARY 26, 1986
By:_____________________________________
Name: David Sun
Title: Co-Trustee
By:_____________________________________
Name: Diana Sun
Title: Co-Trustee
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
THOMVEST HOLDINGS, INC.
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
TOSHIBA AMERICA ELECTRONIC
COMPONENTS, INC.
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
JOHN A. ROLLWAGEN REVOCABLE TRUST
U/A DATED SEPTEMBER 13, 1991
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
F&W INVESTMENTS 1997
By:________________________________
Name:___________________________
Title:__________________________
FENWICK & WEST LLP
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
1267104 ONTARIO, LTD.
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
SIP GLOBAL I, L.P.
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
NORWEST BANK MINNESOTA, N.A.
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
SUNAMERICA, INC.,
as beneficial owner
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
VAN WAGONER CAPITAL MANAGEMENT
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
OLYMPUS OPTICAL CO., LTD.
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
MELLON VENTURES, L.P.
By:________________________________
Name:___________________________
Title:__________________________
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
LAGUNITAS PARTNER, L.P.
By:________________________________
Name:___________________________
Title:__________________________
GRUBER & McBAINE INTERNATIONAL
By:________________________________
Name:___________________________
Title:__________________________
___________________________________
JON D. GRUBER
SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS RIGHTS AGREEMENT
<PAGE>
EXHIBIT 5.1
-----------
March 24, 2000
Lexar Media, Inc.
47421 Bayside Parkway
Fremont, California 94538
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
(File Number 333-30556) (the "Registration Statement") filed by you with the
Securities and Exchange Commission (the "Commission") on or about February 16,
2000, as subsequently amended, in connection with the registration under the
Securities Act of 1933, as amended, of an aggregate of 8,625,000 shares of your
Common Stock (the "Stock).
In rendering this opinion, we have examined the following:
(1) the Registration Statement, together with the Exhibits filed, or
incorporated therein, as a part thereof;
(2) the Prospectus prepared in connection with the Registration Statement;
(3) the minutes of meetings and actions by written consent of the
shareholders and Board of Directors that are contained in your minute
books that are in our possession;
(4) the stock records that you have provided to us (consisting of a list
of shareholders and a list of option and warrant holders respecting
your capital and of any rights to purchase capital stock that was
prepared by you and dated as of March 17, 2000 verifying the number
of such issued and outstanding securities); and
(5) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing certain factual and other
representations.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity and completeness of all documents submitted
to us as originals, the conformity to originals and completeness of all
documents submitted to us as copies, the legal capacity of all natural persons
executing the same and the lack of any undisclosed termination, modification,
waiver or amendment to any documents reviewed by us and the due authorization,
execution and delivery
<PAGE>
of all documents where due authorization, execution and delivery are
prerequisites to the effectiveness thereof. We have also assumed that the
certificates representing the Stock have been, or will be when issued, properly
signed by authorized officers of the Company or their agents.
As to matters of fact relevant to this opinion, we have relied solely upon
our examination of the documents referred to above. We have made no independent
investigation or other attempt to verify the accuracy of any of such information
or to determine the existence or non-existence of any other factual matters;
however, we are not aware of any facts that would cause us to believe that the
- -------
opinion expressed herein is not accurate.
We are admitted to practice law in the State of California, and we express
no opinion herein with respect to the application or effect of the laws of any
jurisdiction other than the existing laws of the United States of America and
the State of California.
In connection with our opinion expressed below, we have assumed that, at or
prior to the time of the delivery of any shares of Stock, the Registration
Statement will have been declared effective under the Securities Act of 1933, as
amended, that the registration will apply to such shares of Stock and will not
have been modified or rescinded and that there will not have occurred any change
in law affecting the validity or enforceability of such shares of Stock.
Based upon the foregoing, it is our opinion that the up to 8,625,000 shares
of Stock to be issued and sold by you, when issued and sold in accordance with
the manner referred to in the Prospectus associated with the Registration
Statement, will be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, the Prospectus constituting a part thereof and any
amendments thereto.
This opinion speaks only as of its date and we assume no obligation to
update this opinion should circumstances change after the date hereof. This
opinion is intended solely for use in connection with issuance and sale of
shares subject to the Registration Statement and is not to be relied upon for
any other purpose.
Very truly yours,
/s/ FENWICK & WEST LLP
FENWICK & WEST LLP
<PAGE>
EXHIBIT 10.3
LEXAR MEDIA, INC.
2000 EQUITY INCENTIVE PLAN
As Adopted January 21, 2000
1. PURPOSE. The purpose of this Plan is to provide incentives to
-------
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the
--------------------------
total number of Shares reserved and available for grant and issuance pursuant to
this Plan will be 8,000,000 Shares plus Shares that are subject to: (a) issuance
upon exercise of an Option but cease to be subject to such Option for any reason
other than exercise of such Option; (b) an Award granted hereunder but are
forfeited or are repurchased by the Company at the original issue price; and (c)
an Award that otherwise terminates without Shares being issued. In addition,
any authorized shares not issued or subject to outstanding grants under the
Company's 1996 Stock Option/Stock Issuance Plan (the "Prior Plan") on the
Effective Date (as defined below) and any shares issued under the Prior Plan
that are forfeited or repurchased by the Company or that are issuable upon
exercise of options granted pursuant to the Prior Plan that expire or become
unexercisable for any reason without having been exercised in full, will no
longer be available for grant and issuance under the Prior Plan, but will be
available for grant and issuance under this Plan. In addition, on each January
1, the aggregate number of Shares reserved and available for grant and issuance
pursuant to this Plan will be increased automatically by a number of Shares
equal to 5% of the total outstanding shares of the Company as of the immediately
preceding December 31, provided that no more than 50,000,000 shares shall
be issued as ISOs (as defined in Section 5 below). At all times the Company
shall reserve and keep available a sufficient number of Shares as shall be
required to satisfy the requirements of all outstanding Options granted under
this Plan and all other outstanding but unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
number of Shares that may be granted pursuant to Sections 3 and 9 below, (c) the
Exercise Prices of and number of Shares subject to outstanding Options, and (d)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the stockholders of the
Company and compliance with applicable securities laws; provided, however, that
-------- -------
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only
-----------
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisors of the Company or any Parent or Subsidiary of the Company; provided
--------
such consultants, contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. No person will be eligible to receive more than 2,000,000 Shares
in any calendar year under this Plan pursuant to the grant of Awards hereunder,
other than new employees of the Company or of a Parent or Subsidiary of the
Company (including new employees who are also officers and directors of the
Company or any Parent or Subsidiary of the Company), who are eligible to receive
up to a maximum of 3,000,000 Shares in the calendar year in which they commence
their employment. A person may be granted more than one Award under this Plan.
4. ADMINISTRATION.
--------------
<PAGE>
Lexar Media, Inc.
2000 Equity Incentive Plan
4.1 Committee Authority. This Plan will be administered by the
-------------------
Committee or by the Board acting as the Committee. Except for automatic grants
to Outside Directors pursuant to Section 9 hereof, and subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan. Except
for automatic grants to Outside Directors pursuant to Section 9 hereof, the
Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Except for automatic grants to Outside
--------------------
Directors pursuant to Section 9 hereof, any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Award under this Plan.
The Committee may delegate to one or more officers of the Company the authority
to grant an Award under this Plan to Participants who are not Insiders of the
Company.
5. OPTIONS. The Committee may grant Options to eligible persons and will
-------
determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan will
--------------------
be evidenced by an Award Agreement which will expressly identify the Option as
an ISO or an NQSO ("Stock Option Agreement"), and, except as otherwise required
by the terms of Section 9 hereof, will be in such form and contain such
provisions (which need not be the same for each Participant) as the Committee
may from time to time approve, and which will comply with and be subject to the
terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the date
-------------
on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option
2
<PAGE>
Lexar Media, Inc.
2000 Equity Incentive Plan
Agreement and a copy of this Plan will be delivered to the Participant within a
reasonable time after the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the times or
---------------
upon the events determined by the Committee as set forth in the Stock Option
Agreement governing such Option; provided, however, that no Option will be
-------- -------
exercisable after the expiration of ten (10) years from the date the Option is
granted; and provided further that no ISO granted to a person who directly or by
----------------
attribution owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Parent or Subsidiary of the
Company ("Ten Percent Stockholder") will be exercisable after the expiration of
five (5) years from the date the ISO is granted. The Committee also may provide
for Options to become exercisable at one time or from time to time, periodically
or otherwise, in such number of Shares or percentage of Shares as the Committee
determines.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by delivery to
------------------
the Company of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set forth in
-----------
the Stock Option Agreement, exercise of an Option will always be subject to the
following:
(a) If the Participant is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter or longer time
period not exceeding five (5) years as may be determined by the
Committee, with any exercise beyond three (3) months after the
Termination Date deemed to be an NQSO), but in any event, no
later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death
or Disability (or the Participant dies within three (3) months
after a Termination other than for Cause or because of
Participant's Disability), then Participant's Options may be
exercised only to the extent that such Options would have been
exercisable by Participant on the Termination Date and must be
exercised by Participant (or Participant's legal representative
or authorized assignee) no later than twelve (12) months after
the Termination Date (or such shorter or longer time period not
exceeding five (5) years as may be determined by the Committee,
with any such exercise beyond (a) three (3) months after the
Termination Date when the Termination is for any reason other
than the Participant's death or Disability, or (b) twelve (12)
months after the Termination Date when the Termination is for
Participant's death or Disability, deemed to be an NQSO), but in
any event no later than the expiration date of the Options.
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(c) Notwithstanding the provisions in paragraph 5.6(a) above, if a
Participant is terminated for Cause, neither the Participant, the
Participant's estate nor such other person who may then hold the
Option shall be entitled to exercise any Option with respect to
any Shares whatsoever, after termination of service, whether or
not after termination of service the Participant may receive
payment from the Company or Subsidiary for vacation pay, for
services rendered prior to termination, for services rendered for
the day on which termination occurs, for salary in lieu of
notice, or for any other benefits. In making such determination,
the Board shall give the Participant an opportunity to present to
the Board evidence on his behalf. For the purpose of this
paragraph, termination of service shall be deemed to occur on the
date when the Company dispatches notice or advice to the
Participant that his service is terminated.
5.7 Limitations on Exercise. The Committee may specify a reasonable
-----------------------
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value (determined
------------------
as of the date of grant) of Shares with respect to which ISO are exercisable for
the first time by a Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company, Parent or Subsidiary
of the Company) will not exceed $100,000. If the Fair Market Value of Shares on
the date of grant with respect to which ISO are exercisable for the first time
by a Participant during any calendar year exceeds $100,000, then the Options for
the first $100,000 worth of Shares to become exercisable in such calendar year
will be ISO and the Options for the amount in excess of $100,000 that become
exercisable in that calendar year will be NQSOs. In the event that the Code or
the regulations promulgated thereunder are amended after the Effective Date of
this Plan to provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISO, such different limit will be automatically
incorporated herein and will apply to any Options granted after the effective
date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may modify,
----------------------------------
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
- -------- -------
Exercise Price that would be permitted under Section 5.4 of this Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in this
-------------------
Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
----------------
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares the
person may purchase, the price to be paid (the "Purchase Price"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a Restricted
------------------------------
Stock Award made pursuant to this Plan will be evidenced by an Award Agreement
("Restricted Stock Purchase Agreement") that will be in such form (which need
not be the same for each Participant) as the Committee will from time to time
approve, and will comply with and be subject to the terms and conditions of this
Plan. The offer of Restricted Stock will be accepted by the Participant's
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date the
Restricted Stock Purchase Agreement is
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delivered to the person. If such person does not execute and deliver the
Restricted Stock Purchase Agreement along with full payment for the Shares to
the Company within thirty (30) days, then the offer will terminate, unless
otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
--------------
Restricted Stock Award will be determined by the Committee on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten Percent
Stockholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8
of this Plan.
6.3 Terms of Restricted Stock Awards. Restricted Stock Awards shall
--------------------------------
be subject to such restrictions as the Committee may impose. These restrictions
may be based upon completion of a specified number of years of service with the
Company or upon completion of the performance goals as set out in advance in the
Participant's individual Restricted Stock Purchase Agreement. Restricted Stock
Awards may vary from Participant to Participant and between groups of
Participants. Prior to the grant of a Restricted Stock Award, the Committee
shall: (a) determine the nature, length and starting date of any Performance
Period for the Restricted Stock Award; (b) select from among the Performance
Factors to be used to measure performance goals, if any; and (c) determine the
number of Shares that may be awarded to the Participant. Prior to the payment
of any Restricted Stock Award, the Committee shall determine the extent to which
such Restricted Stock Award has been earned. Performance Periods may overlap
and Participants may participate simultaneously with respect to Restricted Stock
Awards that are subject to different Performance Periods and having different
performance goals and other criteria.
6.4 Termination During Performance Period. If a Participant is
-------------------------------------
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Restricted Stock Award only to the extent earned as of the date of
Termination in accordance with the Restricted Stock Purchase Agreement, unless
the Committee will determine otherwise.
7. STOCK BONUSES.
-------------
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares
-----------------------
(which may consist of Restricted Stock) for services rendered to the Company or
any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "Performance Stock Bonus
Agreement") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the number
----------------------
of Shares to be awarded to the Participant. If the Stock Bonus is being earned
upon the satisfaction of performance goals pursuant to a Performance Stock Bonus
Agreement, then the Committee will: (a) determine the nature, length and
starting date of any Performance Period for each Stock Bonus; (b) select from
among the Performance Factors to be used to measure the performance, if any; and
(c) determine the number of Shares that may be awarded to the Participant.
Prior to the payment of any Stock Bonus, the Committee shall determine the
extent to which such Stock Bonuses have been earned. Performance Periods may
overlap and Participants may participate simultaneously with respect to Stock
Bonuses that are subject to different Performance Periods and different
performance goals and other criteria. The number of Shares may be fixed or may
vary in accordance with such performance goals and criteria as may be determined
by the Committee. The Committee may adjust the performance goals applicable to
the Stock Bonuses to take into account changes in law and accounting or tax
rules and to make such adjustments as the
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Committee deems necessary or appropriate to reflect the impact of extraordinary
or unusual items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may be paid
---------------
currently or on a deferred basis with such interest or dividend equivalent, if
any, as the Committee may determine. Payment may be made in the form of cash or
whole Shares or a combination thereof, either in a lump sum payment or in
installments, all as the Committee will determine.
8. PAYMENT FOR SHARE PURCHASES.
---------------------------
8.1 Payment. Payment for Shares purchased pursuant to this Plan may
-------
be made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares); or (2) were
obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are
-------- -------
not employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant
and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby
the Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for
the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a
NASD Dealer whereby the Participant irrevocably elects to
exercise the Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security for a loan
from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay for
---------------
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
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9. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS.
--------------------------------------
9.1 Types of Options and Shares. Options granted under this Plan and
----------------------------
subject to this Section 9 shall be NQSOs.
9.2 Eligibility. Options subject to this Section 9 shall be granted
-----------
only to Outside Directors.
9.3 Initial Grant. Each Outside Director who first becomes a member
-------------
of the Board on or after the Effective Date will automatically be granted an
Option for 50,000 Shares (an "Initial Grant") on the date such Outside Director
first becomes a member of the Board. Each Outside Director who became a member
of the Board prior to the Effective Date will automatically be granted an Option
for 25,000 Shares immediately following the Effective Date.
9.4 Succeeding Grant. Immediately following each Annual Meeting of
----------------
stockholders, each Outside Director will automatically be granted an Option for
25,000 Shares (a "Succeeding Grant"), provided the Outside Director is a member
of the Board on such date and has served continuously as a member of the Board
for a period of at least one year since the date of such Outside Director's
Initial Grant. Notwithstanding anything in this Section 9.4 to the contrary,
the Board may make discretionary supplemental grants to an Outside Director who
has served for less than one year from the date of such Outside Director's
Initial Grant, provided that no Outside Director may receive more than 75,000
--------
Shares in any calendar year pursuant to this Section 9.
9.5 Vesting. The date an Outside Director receives an Initial Grant
-------
or a Succeeding Grant is referred to in this Plan as the "Start Date" for such
Option.
(a) Initial Grants. Each Initial Grant will vest as to twenty-five
--------------
percent (25%) of the Shares on the one (1) year anniversary of
the Start Date for such Initial Grant, and as to 2.08333% of the
Shares on each subsequent monthly anniversary thereafter, so long
as the Outside Director continuously remains a director or
consultant of the Company.
(b) Succeeding Grants. Each Succeeding Grant will vest as to twenty-
-----------------
five percent (25%) of the Shares on the one (1) year anniversary
of the Start Date for such Succeeding Grant, and as to 2.08333%
of the Shares on each subsequent monthly anniversary thereafter,
so long as the Outside Director continuously remains a director
or consultant of the Company.
Notwithstanding any provision to the contrary, in the event of a Corporate
Transaction described in Section 18.1, the vesting of all options granted to
Outside Directors pursuant to this Section 9 will accelerate and such options
will become exercisable in full prior to the consummation of such event at such
times and on such conditions as the Committee determines, and must be exercised,
if at all, within three months of the consummation of said event. Any options
not exercised within such three-month period shall expire.
9.6 Exercise Price. The exercise price of an Option pursuant to an
--------------
Initial Grant and Succeeding Grant shall be the Fair Market Value of the Shares,
at the time that the Option is granted.
10. WITHHOLDING TAXES.
-----------------
10.1 Withholding Generally. Whenever Shares are to be issued in
---------------------
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding tax
requirements.
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10.2 Stock Withholding. When, under applicable tax laws, a
-----------------
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee and be in writing in a form acceptable to the
Committee.
11. TRANSFERABILITY.
---------------
11.1 Except as otherwise provided in this Section 11, Awards granted
under this Plan, and any interest therein, will not be transferable or
assignable by Participant, and may not be made subject to execution, attachment
or similar process, otherwise than by will or by the laws of descent and
distribution or as determined by the Committee and set forth in the Award
Agreement with respect to Awards that are not ISOs.
11.2 All Awards other than NQSO's. All Awards other than NQSO's shall
-----------------------------
be exercisable: (i) during the Participant's lifetime, only by (A) the
Participant, or (B) the Participant's guardian or legal representative; and (ii)
after Participant's death, by the legal representative of the Participant's
heirs or legatees.
11.3 NQSOs. Unless otherwise restricted by the Committee, an NQSO
-----
shall be exercisable: (i) during the Participant's lifetime only by (A) the
Participant, (B) the Participant's guardian or legal representative, (C) a
Family Member of the Participant who has acquired the NQSO by "permitted
transfer;" and (ii) after Participant's death, by the legal representative of
the Participant's heirs or legatees. "Permitted transfer" means, as authorized
by this Plan and the Committee in an NQSO, any transfer effected by the
Participant during the Participant's lifetime of an interest in such NQSO but
only such transfers which are by gift or domestic relations order. A permitted
transfer does not include any transfer for value and neither of the following
are transfers for value: (a) a transfer of under a domestic relations order in
settlement of marital property rights or (b) a transfer to an entity in which
more than fifty percent of the voting interests are owned by Family Members or
the Participant in exchange for an interest in that entity.
12. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES..
------------------------------------------------------
12.1 Voting and Dividends. No Participant will have any of the rights
--------------------
of a stockholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will
be a stockholder and have all the rights of a stockholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
--------
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
-------- -------
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's Purchase Price or Exercise Price pursuant
to Section 12.
12.2 Financial Statements. The Company will provide financial
--------------------
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
-------- -------
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
12.3 Restrictions on Shares. At the discretion of the Committee, the
-----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or
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cancellation of purchase money indebtedness, at the Participant's Exercise Price
or Purchase Price, as the case may be.
13. CERTIFICATES. All certificates for Shares or other securities
------------
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
------------------------
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
-------- -------
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
-----------------------------
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be
----------------------------------------------
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
-----------------------
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
----------------------
18.1 Assumption or Replacement of Awards by Successor. Except for
------------------------------------------------
automatic grants to Outside Directors pursuant to Section 9 hereof, in the event
of (a) a dissolution or liquidation of the Company, (b) a
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merger or consolidation in which the Company is not the surviving corporation
(other than a merger or consolidation with a wholly-owned subsidiary, a
reincorporation of the Company in a different jurisdiction, or other transaction
in which there is no substantial change in the stockholders of the Company or
their relative stock holdings and the Awards granted under this Plan are
assumed, converted or replaced by the successor corporation, which assumption
will be binding on all Participants), (c) a merger in which the Company is the
surviving corporation but after which the stockholders of the Company
immediately prior to such merger (other than any stockholder that merges, or
which owns or controls another corporation that merges, with the Company in such
merger) cease to own their shares or other equity interest in the Company, (d)
the sale of substantially all of the assets of the Company, or (e) the
acquisition, sale, or transfer of more than 50% of the outstanding shares of the
Company by tender offer or similar transaction (each, a "Corporate
Transaction"), (i) the vesting of all outstanding Awards will accelerate as to
an additional 25% of the Shares that are unvested on the date of the Corporate
Transaction and, (ii) thereafter, unless otherwise set forth below, all unvested
shares subject to outstanding Awards will continue to vest in equal monthly
installments over the remaining original vesting term as set forth in the Award
Agreement. Upon a Corporate Transaction, all outstanding Awards shall be assumed
by the successor or acquiring corporation (if any), which assumption will be
binding on all Participants. In the alternative, the successor or acquiring
corporation may substitute equivalent Awards or provide substantially similar
consideration to Participants as was provided to shareholders (after taking into
account the existing provisions of the Awards). The successor corporation may
also issue, in place of outstanding unvested Shares of the Company held by the
Participants, substantially similar shares or other property subject to
repurchase restrictions no less favorable to the Participant. In the event such
successor corporation (if any) refuses to assume or substitute Awards, as
provided above, pursuant to a Corporate Transaction described in this Subsection
18.1, such Awards will expire on such Corporate Transaction at such time and on
such conditions as the Committee will determine. Notwithstanding anything in
this Plan to the contrary, the Committee may, in its sole discretion, provide
that the vesting of any or all Awards granted pursuant to this Plan will
accelerate upon a Corporate Transaction described in this Section 18. If the
Committee exercises such discretion with respect to Options, such Options will
become exercisable in full prior to the consummation of such event at such time
and on such conditions as the Committee determines, and if such Options are not
exercised prior to the consummation of the Corporate Transaction, they shall
terminate at such time as determined by the Committee.
18.2 Other Treatment of Awards. Subject to any greater rights granted
-------------------------
to Participants under the foregoing provisions of this Section 18, in the event
of the occurrence of any Corporate Transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, or sale of assets.
18.3 Assumption of Awards by the Company. The Company, from time to
-----------------------------------
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of Shares issuable
------
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on
---------------------------------
the date on which the registration statement filed by the Company with the SEC
under the Securities Act registering the initial public offering of the
Company's Common Stock is declared effective by the SEC (the "Effective Date").
This Plan shall be approved by the stockholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon
the Effective Date, the Committee may grant Awards pursuant to this Plan;
provided, however, that: (a) no Option may be exercised prior to initial
- -------- -------
stockholder approval of this Plan; (b) no Option granted pursuant to an
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increase in the number of Shares subject to this Plan approved by the Board will
be exercised prior to the time such increase has been approved by the
stockholders of the Company; (c) in the event that initial stockholder approval
is not obtained within the time period provided herein, all Awards granted
hereunder shall be cancelled, any Shares issued pursuant to any Awards shall be
cancelled and any purchase of Shares issued hereunder shall be rescinded; and
(d) in the event that stockholder approval of such increase is not obtained
within the time period provided herein, all Awards granted pursuant to such
increase will be cancelled, any Shares issued pursuant to any Award granted
pursuant to such increase will be cancelled, and any purchase of Shares pursuant
to such increase will be rescinded.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of stockholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate
--------------------------------
or amend this Plan in any respect, including without limitation amendment of any
form of Award Agreement or instrument to be executed pursuant to this Plan;
provided, however, that the Board will not, without the approval of the
- -------- -------
stockholders of the Company, amend this Plan in any manner that requires such
stockholder approval.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
--------------------------
Board, the submission of this Plan to the stockholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have the
-----------
following meanings:
"Award" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Cause" means the commission of an act of theft, embezzlement, fraud,
dishonesty or a breach of fiduciary duty to the Company or a Parent or
Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board.
"Company" means Lexar Media, Inc. or any successor corporation.
"Disability" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
11
<PAGE>
Lexar Media, Inc.
2000 Equity Incentive Plan
"Fair Market Value" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the
date of determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and
asked prices on the date of determination as reported in The Wall
--------
Street Journal;
--------------
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock
pursuant to a registration statement filed with the SEC under the
Securities Act; or
(e) if none of the foregoing is applicable, by the Committee in good
faith.
"Family Member" includes any of the following:
(a) child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law of the Participant, including any such person with
such relationship to the Participant by adoption;
(b) any person (other than a tenant or employee) sharing the
Participant's household;
(c) a trust in which the persons in (a) and (b) have more than fifty
percent of the beneficial interest;
(d) a foundation in which the persons in (a) and (b) or the
Participant control the management of assets; or
(e) any other entity in which the persons in (a) and (b) or the
Participant own more than fifty percent of the voting interest.
"Insider" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"Option" means an award of an option to purchase Shares pursuant to
Section 5.
"Outside Director" means a member of the Board who is not an employee
of the Company or any Parent, Subsidiary or Affiliate of the Company.
"Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations other
than the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
12
<PAGE>
Lexar Media, Inc.
2000 Equity Incentive Plan
"Participant" means a person who receives an Award under this Plan.
"Performance Factors" means the factors selected by the Committee from
among the following measures to determine whether the performance goals
established by the Committee and applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or earnings
before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total stockholder return and/or total stockholder return growth;
(g) Return on equity;
(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual confidential business objectives.
"Performance Period" means the period of service determined by the
Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards or Stock Bonuses.
"Plan" means this Lexar Media, Inc. 2000 Equity Incentive Plan, as
amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to Section
6.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"Stock Bonus" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant,
13
<PAGE>
Lexar Media, Inc.
2000 Equity Incentive Plan
independent contractor, or advisor to the Company or a Parent or Subsidiary of
the Company. An employee will not be deemed to have ceased to provide services
in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of
absence approved by the Committee, provided, that such leave is for a period of
not more than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "Termination Date").
"Unvested Shares" means "Unvested Shares" as defined in the Award
Agreement.
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
14
<PAGE>
EXHIBIT 10.8
[COMPANY LOGO]
September 4. 1997
Mr. John Reimer
2363 Preston Lane
West Dundee, IL 60118
Dear John:
We are pleased to present the following offer of employment for you to join
Lexar Microsystems, Inc. ("Lexar"), as CEO and President, reporting to the Lexar
Board of Directors. In this capacity, you will assume and discharge such
responsibilities as are commensurate with the office and position. In
consideration of your service, your compensation for your first year will be
$240,000.00, payable on a biweekly basis retroactively effective as of July 15,
1997. You will serve on the Lexar Board of Directors throughout your tenure as
CEO and President.
You will be eligible to participate to all current employee benefit and
incentive programs of Lexar.
I. Compensation
As set forth above, your base salary will be $240,000.00 per year, and the
parties will agree to a bonus plan that provides for a targeted bonus of
$120,000.00 per year based on performance with the goals and other terms
(including the payment schedule) of such bonus to be mutually measured by the
parties at a Board meeting to be held by the end of 1997.
II. Vacation
Commencing as of your date of hire, you will accrue vacation each month at a
rate of 17 days per year.
III. Stock Option Grant
Stock option grant will be proposed and agreed by the Board of Directors to be
held by October 1997. It is understood that at least twenty five percent (25%)
of the options will be vested upon re-capitalization.
IV. Relocation and Purchase Assistance
Lexar will assist you in your relocation from Illinois to Northern California by
paying all reasonable and documented relocation costs of buying a new home in
Northern California and selling your home in Illinois, including without
limitation loan fees, closing costs, real estate commissions (on both homes) and
points (up to one and one-half points). In addition, all travel costs incurred
by you and your immediate family coincident with such move will be paid by
Lexar. All temporary living expenses will also be paid by Lexar until such time
as you locate a permanent residence.
Lexar will guarantee the selling price of your residence in Illinois which
listed for $549,995.00. In the event the house sells for less than $549,995.00,
Lexar will pay you eighty percent (80%) of the difference between the
$549,995.00 and the actual selling pace up to $20,000.00
<PAGE>
In the event you purchase a new home prior to selling your residence in
Illinois, Lexar agrees to pay the lesser of your two mortgage payments until
your Illinois residence is sold.
All amounts payable to you in connection with this relocation and purchase
assistance will be "grossed up" for federal and state taxes that would be
payable by you on such amounts.
V. Termination Severance
In the event of your involuntary termination from employment with Lexar, for any
reason other than breaching of your fiduciary duty and/or engaging in a criminal
activity, Lexar will continue to pay you, as severance pay, your base salary
until such time as when you become employed elsewhere or twelve (12) months from
the date of your termination, whichever occurs first. In the event the Board of
Directors changes your compensation or responsibilities without your
concurrence, you may choose to terminate your employment, in which event you
would be entitled to the aforementioned severance pay. In case of either such
aforementioned event (termination or a change in compensation or
responsibilities without concurrence), your unvested stock options in the
company will vest in full immediately.
VI. Death
Upon your death, all unvested stock options in the company will vest in full
immediately.
* * * *
In consideration of this offer of employment, you agree to complete and return
the necessary documentation in order to complete your personnel file with Lexar.
This offer constitutes the entire and exclusive agreement between Lexar and you
concerning your terms and conditions of employment and your employee
relationship with Lexar. By signing below, you acknowledge and agree that you
are not relying on any representation or statement other than that which is
expressly set forth in this offer letter, the employment agreement, and the
confidentiality agreement.
Sincerely,
/s/ Hideo Ito /s/ Petro Estakhri
- ---------------------------- -----------------------------
Hideo Ito Petro Estakhri
I accept the terms of this offer and will report to work in accordance with the
terms of this agreement.
/s/ John H. Reimer 9-4-97
- ---------------------------- -----------------------------
John H. Reimer Date
2
<PAGE>
EXHIBIT 10.9
September 16, 1996
It gives me great pleasure to confirm our offer of employment for you to join
Lexar Microsystems, Inc. ("Lexar"), in the same position in which you are
presently employed with Cirrus Logic, Inc., reporting to your same supervisor.
Your bi-weekly salary will be the same as in your current position. Paydays are
on Fridays for the previous two calendar weeks of work. As a Lexar employee,
you will be eligible to participate in all current employee benefit and
incentive programs as described below. In consideration for this offer of
employment, you agree to complete and return the necessary documentation in
order to complete your personnel file with Lexar.
I. Vacation
Your vacation benefits, including your rate of vacation accrual, will be
identical to those you enjoyed with Cirrus Logic, with your date of seniority,
for purposes of vacation entitlement, dating from your commencement of
employment with the Solid-State Storage Business Unit.
II. Medical and Miscellaneous
Medical and dental benefits will initially be covered under COBRA as an
extension of your Cirrus Logic benefit plans. Thereafter, Lexar will attempt to
implement comparable medical and dental benefit plans, in addition to long-term
disability, life, and ad&d insurance plans for all employees.
III. Savings Plans and Profit Sharing
Lexar intends to immediately establish a 401(k) plan in which you will be
permitted to participate. Further, if you wish, Lexar will seek to arrange for
a roll-over of your current 401(k) plan into the Lexar plan. In addition, you
will be eligible for profit sharing upon completion of one full year of service.
This offer letter, the "Employment Agreement" and "Employee Nondisclosure and
Invention Assignment Agreement" constitute the entire and exclusive agreement
between Lexar and you concerning your terms and conditions of employment and
employee relationship with Lexar.
<PAGE>
September 16, 1996
Page 2
This offer will remain open until 5:00 p.m., September 19, 1996. We look
forward to your acceptance of our offer and having you join the Lexar
Microsystems Team. If you have any questions, please feel free to call me.
Sincerely,
/s/ Michael A. Liccardo
- -----------------------------
I accept the terms of this offer and will report to work on ___________________
/s/ Petro Estakhri 9/19/96
- ----------------------------- ------------------------
Name Date
<PAGE>
EXHIBIT 10.10
LEXAR MICROSYSTEMS. INC.
------------------------
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is dated the 19th day of September 1996, between Lexar
Microsystems, Inc. ("Employer"), a California corporation, and Petro Estakhri
("Employee").
In consideration of the mutual promises and covenants contained in this
Agreement, the parties agree as follows:
1. Employment Duties. Commencing on or about September 17, 1996, Employer
-----------------
agrees to employ Employee in the same position as Employee was employed with
Cirrus Logic, Inc., on September 13, 1996 ("Current Position"), and Employee
agrees to serve at that position or in such other positions as Employee may be
assigned from time to time by Employer. In such initial position, Employee
shall report to the same supervisor as in the Current Position or, to such other
person as management designates. Employee shall have such duties as are
assigned from time to time by Employer and as are consistent with such position.
In connection with Employee's employment by Employer, Employee shall initially
be based at Employer's place of business at 47421 Bayside Parkway, Fremont, CA
94538.
2. Time and Effort, Exclusivity of Employment. Employee shall faithfully,
------------------------------------------
honestly and diligently serve Employer, devote all of Employee's working time,
attention, knowledge and skill to Employee's employment hereunder and use
Employee's best efforts to promote the business and interests of Employer and to
perform the duties and responsibilities that are assigned to Employee. Employer
shall be entitled to all of the benefits and profits arising from or incident to
the duties of Employee pursuant to this Agreement. During Employee's employment,
Employee shall not, directly or indirectly, engage or participate in any
business that is in competition in any manner whatsoever with the business of
Employer.
3. Compensation. As compensation for the services to be rendered by Employee,
------------
Employer shall pay Employee in equal bi-weekly installments the same salary as
in the Current Position (less normal withholding for state and federal income
taxes and employee portions of FICA, SDI, and any other required or Employee-
authorized deductions), together with such additional term: of compensation, if
any, as set forth in Employee's employment offer letter and/or in this Agreement
Employee shall also be entitled to participate in such employee benefit programs
as may be offered by Employer, subject to the terms and eligibility requirements
established by Employer for such programs. The parties contemplate that
compensation adjustments may be made from time to time at the discretion of
Employer. Such adjustments shall be incorporated into and form a part of this
Agreement.
4. Term and Termination. Employee's employment under this Agreement is for no
--------------------
specified period of time and shall continue until terminated by either party.
Employee's employment with Employer is "at will" meaning that either Employee or
Employer may terminate the employment relationship at any time on notice to the
other, with or without cause, for any reason or no reason, and with no liability
of Employer to Employee other than for wages accrued to the date of termination.
Employer may also discipline, demote or alter the terms of employment of
Employee at any time, with or without cause or advance notice.
1
<PAGE>
5. Observance of Rules and Regulations. Employee agrees to abide by all
-----------------------------------
Employer's policies, rules and regulations as adopted or amended from time to
time by Employer in its discretion.
6. Employee Nondisclosure and Invention Assignment Agreement. Employee's
---------------------------------------------------------
employment is subject to the requirement that Employee sign, observe, and agree
to be bound both during and after Employee's employment, by the provisions of
the Employer's Employee Nondisclosure and Invention Assignment Agreement, a copy
of which is being furnished to Employee at the same time as this Agreement.
Employee's execution of the Employee Nondisclosure and Invention Assignment
Agreement is an express condition precedent to Employee's commencement of
employment with Employer.
7. Non-Solicitation. Employee shall not, either during Employee's employment
----------------
by Employer or for a period of one (1) year thereafter, directly or indirectly,
solicit, induce or attempt to induce any of the employees of Employer or any of
its affiliates, to leave their employment.
8. Remedies. Employee acknowledges that a breach or threatened breach by
--------
Employee of the provisions of Section 6 of the Agreement or Sections 2 or 4 of
the Employee Nondisclosure and Invention Assignment Agreement will result in
Employer and its affiliates suffering irreparable harm which cannot be
calculated or fully or adequately compensated by recovery of damages alone.
Accordingly, Employee agrees that Employer shall be entitled to temporary and
permanent injunctive relief, specific performance and other equitable remedies,
in addition to any other relief to which Employer may become entitled.
9. Notices. Any notice or other communication required or permitted to be
-------
given under the Agreement shall be in writing and shall be given by prepaid
first class mail, or by hand-delivery. Any such notice or other communication,
if mailed by prepaid first class mail shall be deemed to have been received on
the fourth business day after the postmarked date, or if delivered by hand,
shall be deemed to have been received by Employer at the time it is delivered to
the applicable address noted below or by Employee at the time it is received by
Employee or at the time it is delivered to the applicable address noted below.
Notices and other communications shall be addressed as follows:
(a) If to Employer:
Lexar Microsystems, Inc.
47421 Bayside Parkway
Fremont, CA 94538
Attn: Human Resources Dept.
(b) If to Employee:
_____________________________
_____________________________
_____________________________
2
<PAGE>
Either party may change its address for the purposes of this Agreement by giving
written notice of such change to the other party.
10. Invalidity of Provisions. If any provision of this Agreement should be
------------------------
declared to be void or unenforceable by a court of competent jurisdiction from
which no further appeal lies or is taken, that provision shall be deemed to be
severed from this Agreement and the remaining provisions shall not be affected
and shall remain valid and enforceable.
11. Entire Agreement. Amendment. Waiver. This Agreement, together with the
-----------------------------------
Employer's Employee Nondisclosure and Invention Assignment Agreement and the
Employer's employment offer letter, if any, to Employee (each of which is
incorporated herein), constitute the entire agreement between the parties with
respect to the subject matter contained in such documents, and supersede all
prior agreements relating to the same subject matter. There are no other
representations, warranties, conditions, agreements or acknowledgments, which
form a part of or affect this Agreement. Except as provided in this Agreement,
no waiver or termination shall be binding unless accepted in writing by both
parties. No waiver of any provision of this Agreement shill constitute a waiver
of any other provision and no waiver of arty provision of this Agreement shall
constitute a continuing waiver unless otherwise expressly provided.
12. Governing Law and Forum Selection. This Agreement shall be governed by,
---------------------------------
and interpreted and enforced in accordance with, the laws of the State of
California (excluding any conflict of law rule or principle which might refer
such construction to the laws of another jurisdiction). Employer and Employee
irrevocably submit to jurisdiction of the courts of Santa Clara County,
California, for the purpose of obtaining an order to compel submission to
binding arbitration pursuant to Section 13 below.
13. Binding Arbitration. Employer and Employee agree to submit to final and
-------------------
binding arbitration before J.A.M.S/ENDISPUTE in Santa Clara County, California,
all past, present, and future claims or disputes in any way arising out of or
relating to Employee's employment with Employer, including, without limitation
(except as expressly excluded below in this Section), any claims or disputes
concerning the separation of that employment; any other adverse personnel action
by Employer any claims by Employee against Employer, or by Employer against
Employee, arising out of or related to any federal, state or local law, statute
or regulation prohibiting employment discrimination or harassment; any public
policy, and any other claim for personal, emotional, physical or economic injury
(individually or collectively, "Covered Claims"). The only claims or disputes
excluded from binding arbitration under this Agreement are the following: any
claim by Employee for workers' compensation benefits or for benefits under an
Employer plan that provides its own arbitration procedure; and any claim by
Employer for equitable relief, including but not limited to, a temporary
restraining order, preliminary injunction or permanent injunction against
Employee.
(a) The party asserting a Covered Claim must give written notice to the
other party within 180 days of the date of the accrual of such claim for statute
of limitations purposes. If such notice is not given within this time period,
the claim shall be deemed waived.
(b) Prior to initiating arbitration, an Employee shall attempt in good
faith to resolve a Covered Claim through means of conciliation with Employer. An
Employee asserting a Covered
3
<PAGE>
Claim ordinarily must attempt to conciliate the matter first in accordance with
Employer's Conflict Resolution Policy.
(c) If Employer's conciliation process does not produce a satisfactory
resolution, within 30 days thereafter the aggrieved party may demand arbitration
of a Covered Claim. The arbitration shall be conducted in accordance with the
then-existing Rules and Procedures of J.A.M.S/ENDISPUTE for Arbitration of
Employment Disputes, except that the mediation and optional appeal procedures of
J.A.M.S/ENDISPUTE shall not be required. The Arbitrator shall not have the
power to commit errors of law or legal reasoning, or to grant relief which would
not be legally available in a California court.
(d) This Agreement to submit all Covered Claims to binding arbitration in
no way alters Employee's at-will employment with Employer and does not require
Employer to provide Employee with any type of progressive discipline.
14. Attorney's Fees and Costs. Should any legal action (other than binding
-------------------------
arbitration under Section 13 above, in which each party shall bear its, his or
her own fees and costs) be required to resolve any dispute over the meaning or
enforceability of this Agreement or to enforce the terms of this Agreement, the
prevailing party shall be entitled to recover its, his or her reasonable
attorneys' fees and costs incurred in such action, in addition to any other
relief to which that party may be entitled.
15. Acknowledgements and Representations. Employee acknowledges, represents
------------------------------------
and agrees that:
(a) Employee has read and understands the terms of this Agreement and
Employee's obligations hereunder. and Employee agrees to abide by the terms of
this Agreement;
(b) Employer has made no promises or representations concerning future
promotions, compensation, or other terms and conditions of employment other than
as expressly stated in this Agreement; and,
(c) By accepting employment under this Agreement, Employee has not relied
upon or been induced to accept employment with Employer on the basis of any such
promises or representations.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement.
EMPLOYEE
/s/ Petro Estakhri
- --------------------------------
LEXAR MICROSYSTEMS, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
5
<PAGE>
EXHIBIT 10.11
October 20, 1999 [Company Logo]
Eric B. Stang
2090 Barbara Drive
Palo Alto, CA 94303
Dear Eric:
It gives me great pleasure to confirm our offer of employment for you to join
Lexar Media, Inc., (Lexar) in the position of Chief Operating Officer (COO).
You will be reporting directly to me and your base compensation will be
$200,000.00 annually which will be paid on a bi-weekly basis, in accordance, and
subject to, the Company's normal payroll procedures.
In this capacity you will be responsible for and oversee the day-to-day
operation of the following functions: Product Marketing, Worldwide Sales,
Manufacturing, Engineering and Quality. The Chief Financial Officer, the Chief
Technology Officer, the General Counsel & Director of Business Development, and
Corporate Communications will continue to report directly to me.
As a Lexar employee, you will be eligible to participate in all current employee
benefit and incentive programs including those described below.
1. STOCK: We will recommend to the Board of Directors that you will be granted
a stock option entitling you to purchase, with a promissory note, 800,000 shares
of stock. The granted shares will be vested through four years, with 25%
vesting on your first anniversary (from your date of hire), and 1/36th of the
remaining shares vesting each subsequent month of your employment thereafter.
This option, as a formality, is subject to board approval, and a detailed
description of the vesting schedule will be furnished to you upon approval and
issuance. All of your granted shares shall vest upon a merger or acquisition of
Lexar, a "Corporate Transaction" as such term is defined under Lexar's Stock
Option Plan.
2. BONUS PLAN: You will be eligible to participate in Lexar's MBO based
incentive plan. This plan will give you the potential of earning additional
income based on mutually agreed MBOs. Specific details of the plan will be
defined by the Compensation Committee shortly after you become on board with
Lexar Media.
3. VACATION: Your vacation benefits will begin at 3.70 hours every two weeks.
This equals to 12 days of vacation in the first three years.
4. MEDICAL, SAVINGS PLAN AND MISCELLANEOUS: Medical, dental, long-term
disability, life and vision insurance, are included in the benefit package that
Lexar offers. In addition to your basis health care benefits, Lexar also offers
a Flexible Plan and makes a contribution of 2% of your base compensation to the
Flex Plan for your benefit. The 2% contribution is used to offset the costs of
your benefit choices, including group health plans. Please refer to the
Benefits Summary for eligibility information. Furthermore, Lexar has
established a 401K plan in which you will be eligible to participate on your
date of hire.
5. As Lexar's relationship with employees are at-will, either you or Lexar may
terminate the employment relationship at any time for any reason, with or
without notice. However, in the event if Lexar terminates your employment other
than for cause, you will be entitled to receive up to six (6) months of your
annual compensation, in the form of continuing bi-weekly payments, or until you
commence new full-time employment, whichever comes first.
For this purpose, "cause" shall include your death and any of the following, as
determined in good faith by Lexar's Board of Directors: disability rendering
you unable effectively and substantially to perform
<PAGE>
Eric B. Stang
10/20/99
Page 2
your duties hereunder for any consecutive period of 90 calendar days, or your
commission upon Lexar of a material theft, embezzlement or fraudulent misuse of
funds.
In the event of a dispute arising under or related to this agreement, including
any termination of your employment under this agreement, you or Lexar may
initiate for arbitration under the arbitration administration of the American
Arbitration Association ("AAA"). Any Arbitration hearing will be held in the
vicinity of the Lexar location where you last performed services and will be
held in accordance with the Employee Dispute Resolution rules of the AAA, within
60 calendar days of such filing or as may be extended upon the consent of the
parties or their counsel. The arbitration shall be binding on both parties and
may be entered as a judgment in any court of competent jurisdiction. Each party
shall bear its own costs of arbitration including attorneys fees, unless you
prevail in whole or in part, in which case Lexar will pay your costs of
arbitration including reasonable attorney fees, pro-rated to extent you prevail,
and such shall be part of the award in the arbitration.
This offer letter, and the "Employment Agreement, & Employment Nondisclosure
Invention Assignment Agreement" constitute the entire and exclusive agreement,
between Lexar and you, concerning your employment with Lexar, and it may not be
modified, altered or amended, either expressly or implied, unless in writing
signed by you, and approved by President of Board of Directors at Lexar.
For purposes of federal immigration law, you will be required to provide Lexar
with documentary evidence of your identity and eligibility for employment in the
United States. Such documentation must be provided to us within three (3)
business days of your hire date, or our employment relationship with you may be
terminated.
6. BOARD SEAT: In your position as COO, you will be granted a seat on Lexar's
Board of Directors provided that the required approvals are obtained from
Lexar's Directors and shareholders.
Please indicate your acceptance of this offer, by returning one copy of this
letter with your signature, and a start date, at your earliest convenience.
This offer will remain open until Tuesday, October 26, 1999. We look forward to
your acceptance of our offer and having you join the Lexar Media Team.
Sincerely,
/s/ John Reimer
John Reimer
President and CEO
I accept the terms of this offer and will report to work on: 11/8/99
-----------
/s/ Eric B. Stang 10/25/99
- ------------------------------------- ----------------
Eric B. Stang Date:
<PAGE>
EXHIBIT 10.12
[Lexar Media Logo]
December 15, 1999
Ronald H. Bissinger
1142 Mataro Court
Pleasanton, CA 94566
Dear Ronald:
It gives me great pleasure to confirm our offer of employment for you to join
Lexar Media, Inc., (Lexar) in the position of Chief Financial Officer (CFO).
You will be reporting directly to me and your base compensation will be
$165,000.00 annually which will be paid on a bi-weekly basis, in accordance, and
subject to, the Company's normal payroll procedures.
As a Lexar employee, you will be eligible to participate in all current employee
benefit and incentive programs including those described below.
1. Stock: We will recommend to the Board of Directors that you will be
granted a stock option entitling you to purchase, with a promissory note,
400,000 shares of stock. The granted shares will be vested through four years,
with 25% vesting on your first anniversary (from your date of hire), and 1/36th
of the remaining shares vesting each subsequent month of your employment
thereafter. This option, as a formality, is subject to board approval, and a
detailed description of the vesting schedule will be furnished to you upon
approval and issuance. All of your granted shares shall vest upon a merger or
acquisition of Lexar, a "Corporate Transaction" as such term is defined under
Lexar's Stock Option Plan.
2. Bonus Plan: You will be eligible to participate in Lexar's MBO based
incentive plan. This plan will give you the potential of earning additional
income based on mutually agreed MBOs. Specific details of the plan will be
defined by the Compensation Committee shortly after you become on board with
Lexar Media.
3. Vacation: Your vacation benefits will begin at 3.70 hours every two weeks.
This equals to 12 days of vacation in the first three years.
4. Medical, Savings Plan and Miscellaneous: Medical, dental, long-term
disability, life and vision insurance, are included in the benefit package that
Lexar offers. In addition to your basis health care benefits, Lexar also offers
a Flexible Plan and makes a contribution of 2% of your base compensation to the
Flex Plan for your benefit. The 2% contribution is used to offset the costs of
your benefit choices, including group health plans. Please refer to the
Benefits
<PAGE>
Ronald H. Bissinger
Page 2
Summary for eligibility information. Furthermore, Lexar has established a 401K
plan in which you will be eligible to participate on your date of hire.
5. As Lexar's relationship with employees are at-will, either you or Lexar may
terminate the employment relationship at any time for any reason, with or
without notice. However, in the event if Lexar terminates your employment other
than for cause, you will be entitled to receive up to six (6) months of your
annual compensation, in the form of continuing bi-weekly payments, or until you
commence new full-time employment, whichever comes first.
For this purpose, "cause" shall include your death and any of the following, as
determined in good faith by Lexar's Board of Directors: disability rendering you
unable effectively and substantially to perform your duties hereunder for any
consecutive period of 90 calendar days, or your commission upon Lexar of a
material theft, embezzlement or fraudulent misuse of funds.
In the event of a dispute arising under or related to this agreement, including
any termination of your employment under this agreement, you or Lexar may
initiate for arbitration under the arbitration under the administration of the
American Arbitration Association ("AAA"). Any Arbitration hearing will be held
in the vicinity of the Lexar location where you last performed services and will
be held in accordance with the Employee Dispute Resolution rules of the AAA,
within 60 calendar days of such filing or as may be extended upon the consent of
the parties or their counsel. The arbitration shall be binding on both parties
and may be entered as a judgment in any court of competent jurisdiction. Each
party shall bear its own costs of arbitration including attorneys fees, unless
you prevail in whole or in part, in which case Lexar will pay your costs of
arbitration including reasonable attorney fees, pro-rated to the extent you
prevail, and such shall be part of the award in the arbitration.
This offer letter, and the "Employment Agreement & Employee Nondisclosure
Invention Assignment Agreement" constitute and entire and exclusive agreement,
between Lexar and you, concerning your employment with Lexar, and it may not be
modified, altered or amended, either expressly or implied, unless in writing
signed by you, and approved by President of Board of Directors at Lexar.
For purposes of federal immigration law, you will be required to provide Lexar
with documentary evidence of your identity and eligibility for employment in the
United States. Such documentation must be provided to us within three (3)
business days of your hire date, or our employment relationship with your may be
terminated.
Please indicate your acceptance of this offer, by returning one copy of this
letter with your signature, and a start date, at your earliest convenience.
<PAGE>
Ronald H. Bissinger
Page 3
This offer will remain open until Friday, December 17, 1999. We look forward to
your acceptance of our offer and having you join the Lexar Media Team.
Sincerely,
/s/ John Reimer
John Reimer
President & CEO
I accept the term of this offer and will report to work on: 12/20/99
/s/ Ronald Bissinger 12/17/99
- ----------------------------- -------------------
Ronald H. Bissinger Date
<PAGE>
EXHIBIT 10.13
RESTRICTED STOCK PURCHASE AGREEMENT
This Restricted Stock Purchase Agreement (this "Agreement") is made and
---------
entered into as of June 5, 1998 (the "Effective Date") between Lexar Media, Inc.
--------------
(the "Company"), a California corporation, and John Reimer ("Purchaser").
------- ---------
1. PURCHASE OF SHARES. On the Effective Date and subject to the terms and
------------------
conditions of this Agreement, Purchaser hereby purchases from the Company, and
Company hereby sells to Purchaser, an aggregate of 2,400,000 shares of the
Company's common stock (the "Shares") at an aggregate purchase price of
------
$192,000.00 (the "Purchase Price") or $0.08 per Share (the "Purchase Price Per
-------------- ------------------
Share"). As used in this Agreement, the term "Shares" refers to the Shares
- -----
purchased under this Agreement and includes all securities received (a) in
replacement of the Shares, (b) as a result of stock dividends or stock splits in
respect of the Shares, and (c) in replacement of the Shares in a
recapitalization, merger, reorganization or the like.
2. PAYMENT OF PURCHASE PRICE; CLOSING.
----------------------------------
(a) Deliveries by Purchaser. Purchaser hereby delivers to the Company
-----------------------
the full Purchase Price by delivery to the Company of a Secured Full Recourse
Promissory Note of Purchaser in the principal amount of the full Purchase Price
in the form of Exhibit 1, duly executed by Purchaser (the "Note"). Purchaser
--------- ----
also hereby delivers to the Company: (i) two (2) copies of a blank Stock Power
and Assignment Separate from Stock Certificate in the form of Exhibit 2 attached
---------
hereto (the "Stock Powers"), both duly executed by Purchaser (and Purchaser's
------------
spouse, if any), (ii) if Purchaser is married, a Consent of Spouse in the form
of Exhibit 3 attached hereto (the "Spouse Consent") duly executed by Purchaser's
--------- --------------
spouse, and (iii) a Stock Pledge Agreement in the form of Exhibit 4, duly
---------
executed by Purchaser (the "Pledge Agreement").
----------------
(b) Deliveries by the Company. Upon its receipt of the entire Purchase
-------------------------
Price and all the documents to be executed and delivered by Purchaser to the
Company under Section 2(a), the Company will issue a duly executed stock
certificate evidencing the Shares in the name of Purchaser registered in
Purchaser's name in accordance with Section 19, with such certificate to be
placed in escrow as provided in Section 8 until expiration or termination of
both the Company's Repurchase Option and Right of First Refusal described in
Sections 5 and 6 and payment in full to the Company of all sums due under the
Note.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents
-------------------------------------------
and warrants to the Company that:
(a) Purchase for Own Account for Investment. Purchaser is purchasing
---------------------------------------
the Shares for Purchaser's own account for investment purposes only and not with
a view to, or for sale in connection with, a distribution of the Shares within
the meaning of the Securities Act of 1933, as amended (the "1933 Act").
--------
Purchaser has no present intention of selling or otherwise disposing of all or
any portion of the Shares and no one other than Purchaser has any beneficial
ownership of any of the Shares.
<PAGE>
(b) Access to Information. Purchaser has had access to all
---------------------
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.
(c) Understanding of Risks. Purchaser is an officer of the Company
----------------------
and is fully aware of: (i) the highly speculative nature of the investment in
the Shares; (ii) the financial hazards involved; (iii) the lack of liquidity of
the Shares and the restrictions on transferability of the Shares (e.g., that
----
Purchaser may not be able to sell or dispose of the Shares or use them as
collateral for loans); (iv) the qualifications and backgrounds of the management
of the Company; and (v) the tax consequences of investment in the Shares.
(d) Purchaser's Qualifications. Purchaser has a preexisting personal
--------------------------
or business relationship with the Company and/or certain of its officers and/or
directors of a nature and duration sufficient to make Purchaser aware of the
character, business acumen and general business and financial circumstances of
the Company and/or such officers and directors. By reason of Purchaser's
business or financial experience, Purchaser is capable of evaluating the merits
and risks of this investment, has the ability to protect Purchaser's own
interests in this transaction and is financially capable of bearing a total loss
of this investment.
(e) No General Solicitation. At no time was Purchaser presented with
-----------------------
or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.
(f) Compliance with Securities Laws. Purchaser understands and
-------------------------------
acknowledges that, in reliance upon the representations and warranties made by
Purchaser herein, the Shares are not being registered with the Securities and
Exchange Commission ("SEC") under the 1933 Act or being qualified under the
---
California Corporate Securities Law of 1968, as amended (the "Law"), but instead
---
are being issued under an exemption or exemptions from the registration and
qualification requirements of the 1933 Act and the Law or other applicable state
securities laws which impose certain restrictions on Purchaser's ability to
transfer the Shares.
(g) Restrictions on Transfer. Purchaser understands that Purchaser
------------------------
may not transfer any Shares unless such Shares are registered under the 1933 Act
or qualified under the Law or unless, in the opinion of counsel to the Company,
exemptions from such registration and qualification requirements are available.
Purchaser understands that only the Company may file a registration statement
with the SEC or the California Commissioner of Corporations and that the Company
is under no obligation to do so with respect to the Shares. Purchaser has also
been advised that exemptions from registration and qualification may not be
available or may not permit Purchaser to transfer all or any of the Shares in
the amounts or at the times proposed by Purchaser.
(h) Rule 144. In addition, Purchaser has been advised that SEC Rule
--------
144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the Shares
and, in any event, requires that the Shares be
2
<PAGE>
held for a minimum of one year, and in certain cases two years, after they have
been purchased and paid for (within the meaning of Rule 144), before they may be
------------
resold under Rule 144. Purchaser understands that Shares paid for with a Note
may not be deemed to be fully "paid for" within the meaning of Rule 144 unless
certain conditions are met and that, accordingly, the Rule 144 holding period of
such Shares may not begin to run until such Shares are fully paid for within the
meaning of Rule 144. Purchaser understands that Rule 144 may indefinitely
restrict transfer of the Shares so long as Purchaser remains an "affiliate" of
the Company and "current public information" about the Company (as defined in
Rule 144) is not publicly available.
4. COMPLIANCE WITH CALIFORNIA SECURITIES LAWS. THE SALE OF THE SECURITIES
------------------------------------------
THAT ARE THE SUBJECT OF THIS AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA
COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT
TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF
ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL
UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
BEING AVAILABLE.
5. COMPANY'S REPURCHASE OPTION. The Company has the option to repurchase
---------------------------
all or a portion of the Unvested Shares (as defined below) on the terms and
conditions set forth in this Section (the "Repurchase Option") if Purchaser
-----------------
ceases to be employed by the Company (as defined herein) for any reason, or no
reason, including without limitation Purchaser's death, disability, voluntary
resignation or termination by the Company with or without cause.
(a) Definition of "Employed by the Company"; "Termination Date". For
----------------------------------------------------------
purposes of this Agreement, Purchaser will be considered to be "employed by the
---------------
Company" if the Board of Directors of the Company determines that Purchaser is
- -------
rendering substantial services as an officer, employee, consultant or
independent contractor to the Company or to any parent, subsidiary or affiliate
of the Company. In case of any dispute as to whether Purchaser is employed by
the Company, the Board of Directors of the Company will have discretion to
determine whether Purchaser has ceased to be employed by the Company or any
parent, subsidiary or affiliate of the Company and the effective date on which
Purchaser's employment terminated (the "Termination Date").
----------------
(b) Unvested and Vested Shares. Shares that are not Vested Shares (as
--------------------------
defined in this Section) are "Unvested Shares". On the Effective Date 1,800,000
---------------
of the Shares will be Unvested Shares. If Purchaser has been continuously
employed by the Company at all times from the Effective Date until July 15, 1998
(the "First Vesting Date"), then on the First Vesting Date 600,000 of the Shares
------------------
will become Vested Shares; and thereafter, for so long (and only for so long) as
Purchaser remains continuously employed by the Company at all times after the
First Vesting Date, an additional 2.083% of the Shares will become Vested Shares
upon the expiration of each full month elapsed after the First Vesting Date;
provided, however, (i) Mr. Reimer will immediately receive 18 months of vesting
upon death or an Involuntary Termination (as defined in Appendix A hereto), (ii)
all unvested Shares shall vest upon an Involuntary Termination within 12 months
of a Corporate Transaction (as defined in Appendix A hereto) or
3
<PAGE>
(iii) the last 600,000 shares (the "Performance Shares") which would vest over
------------------
the last 16 months of the 48 month period (the "Performance Period") shall not
------------------
become fully vested and shall remain subject to the Company's right of
repurchase notwithstanding continued service during the Performance Period
unless and until one of the following conditions occurs (the "Performance
-----------
Conditions"): (A) the Company pays its outstanding debts to John Tu and David
- ----------
Sun in the principal amount of $4,750,000 and all accrued interest thereon and
to Toshiba in the principal amount of $400,000 and all accrued interest thereon
and achieves at least two consecutive quarters of profitability (which may occur
before or after such payoff), (B) an initial public offering of the Company, (C)
a Corporate Transaction or (D) completion of four years of service from July 15,
1997. If after the Performance Conditions occur, the Performance Shares will
remain subject to the Company's right of repurchase unless there has been
continued service for the four year period ending July 15, 2001 or they are
otherwise vested under provisions (i) or (ii) above.
(c) Adjustments. The number of Shares that are Vested Shares or
-----------
Unvested Shares will be proportionally adjusted to reflect any stock dividend,
stock split, reverse stock split or recapitalization of the common stock of the
Company occurring after the Effective Date.
(d) Exercise of Repurchase Option at Original Price. At any time
-----------------------------------------------
within thirty (30) days after the Termination Date, the Company may elect to
repurchase any or all of the Unvested Shares by giving Purchaser written notice
of exercise of the Repurchase Option. The Company and/or its assignee(s) will
then have the option to repurchase from Purchaser (or from Purchaser's personal
representative as the case may be) any or all of the Unvested Shares at the
Purchaser's original Purchase Price Per Share (as adjusted to reflect any stock
dividend, stock split, reverse stock split or recapitalization of the common
stock of the Company occurring after the Effective Date).
(e) Payment of Repurchase Price. The repurchase price payable to
---------------------------
purchase Unvested Shares upon exercise of the Repurchase Option will be payable,
at the option of the Company or its assignee(s), by check or by cancellation of
all or a portion of any outstanding indebtedness of Purchaser to the Company (or
to such assignee) or by any combination thereof. The repurchase price will be
paid without interest within sixty (60) days after the Termination Date.
(f) Right of Termination Unaffected. Nothing in this Agreement will
-------------------------------
be construed to limit or otherwise affect in any manner whatsoever the right or
power of the Company (or any parent, subsidiary or affiliate of the Company) to
terminate Purchaser's employment at any time for any reason or no reason, with
or without cause.
6. RIGHT OF FIRST REFUSAL. Unvested Shares may not be sold or otherwise
----------------------
transferred by Purchaser without the Company's prior written consent. Before
any Vested Shares held by Purchaser or any transferee of such Shares (either
being sometimes referred to herein as the "Holder") may be sold or otherwise
------
transferred (including without limitation a transfer by gift or operation of
law), the Company and/or its assignee(s) will have a right of first refusal to
purchase the Shares to be sold or transferred (the "Offered Shares") on the
--------------
terms and conditions set forth in this Section (the "Right of First Refusal").
----------------------
4
<PAGE>
(a) Notice of Proposed Transfer. The Holder of the Shares will
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
------
Holder's bona fide intention to sell or otherwise transfer the Offered Shares;
(ii) the name of each proposed purchaser or other transferee ("Proposed
--------
Transferee"); (iii) the number of Offered Shares to be transferred to each
- ----------
Proposed Transferee; (iv) the bona fide cash price or other consideration for
which the Holder proposes to transfer the Offered Shares (the "Offered Price");
-------------
and (v) that the Holder will offer to sell the Offered Shares to the Company
and/or its assignee(s) at the Offered Price as provided in this Section.
(b) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after the date of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all (but not less than
all) of the Offered Shares proposed to be transferred to any one or more of the
Proposed Transferees named in the Notice, at the purchase price determined in
accordance with subsection (c) below.
(c) Purchase Price. The purchase price for the Offered Shares
--------------
purchased under this Section will be the Offered Price. If the Offered Price
includes consideration other than cash, then the value of the non-cash
consideration as determined in good faith by the Company's Board of Directors
will conclusively be deemed to be the cash equivalent value of such non-cash
consideration.
(d) Payment. Payment of the purchase price for Offered Shares will be
-------
payable, at the option of the Company and/or its assignee(s) (as applicable), by
check or by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Company (or to such assignee, in the case of a purchase of
Offered Shares by such assignee) or by any combination thereof. The purchase
price will be paid without interest within sixty (60) days after the Company's
receipt of the Notice, or, at the option of the Company and/or its assignee(s),
in the manner and at the time(s) set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Offered Shares proposed
--------------------------
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section, then the
Holder may sell or otherwise transfer such Offered Shares to that Proposed
Transferee at the Offered Price or at a higher price, provided that such sale or
--------
other transfer is consummated within 120 days after the date of the Notice, and
provided further, that: (i) any such sale or other transfer is effected in
- -------- -------
compliance with all applicable securities laws; and (ii) the Proposed Transferee
agrees in writing that the provisions of this Section will continue to apply to
the Offered Shares in the hands of such Proposed Transferee. If the Offered
Shares described in the Notice are not transferred to the Proposed Transferee
within such 120 day period, then a new Notice must be given to the Company, and
the Company will again be offered the Right of First Refusal before any Shares
held by the Holder may be sold or otherwise transferred.
(f) Exempt Transfers. Notwithstanding anything to the contrary in
----------------
this Section, the following transfers of Shares will be exempt from the Right of
First Refusal: (i) the transfer of any or all of the Shares during Purchaser's
lifetime by gift or on Purchaser's death by will or intestacy to Purchaser's
"immediate family" (as defined below) or to a trust for the benefit of Purchaser
or Purchaser's immediate family, provided that each transferee or other
recipient
5
<PAGE>
agrees in a writing satisfactory to the Company that the provisions of this
Section will continue to apply to the transferred Shares in the hands of such
transferee or other recipient; (ii) any transfer of Shares made pursuant to a
statutory merger or statutory consolidation of the Company with or into another
corporation or corporations (except, unless provided otherwise in Section 6(g),
that the Right of First Refusal will continue to apply thereafter to such
Shares, in which case the surviving corporation of such merger or consolidation
shall succeed to the rights or the Company under this Section unless the
agreement of merger or consolidation expressly otherwise provides); or (iii) any
transfer of Shares pursuant to the winding up and dissolution of the Company. As
used herein, the term "immediate family" will mean Purchaser's spouse, lineal
----------------
descendant or antecedent, father, mother, brother or sister, adopted child or
grandchild, or the spouse of any child, adopted child, grandchild or adopted
grandchild of Purchaser.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
will terminate as to all Shares upon the effective date of the first sale of
common stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the SEC under the 1933 Act (other
than a registration statement relating solely to the issuance of common stock
pursuant to a business combination or an employee incentive or benefit plan).
(h) Encumbrances on Vested Shares. Purchaser may grant a lien or
-----------------------------
security interest in, or pledge, hypothecate or encumber Vested Shares only if
each party to whom such lien or security interest is granted, or to whom such
pledge, hypothecation or other encumbrance is made, agrees in a writing
satisfactory to the Company that: (i) such lien, security interest, pledge,
hypothecation or encumbrance will not apply to such Vested Shares after they are
acquired by the Company and/or its assignees) under this Section; and (ii) the
provisions of this Section will continue to apply to such Vested Shares in the
hands of such party and any transferee of such party. Purchaser may not grant a
lien or security interest in, or pledge, hypothecate or encumber, any Unvested
Shares.
7. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this
---------------------
Agreement, Purchaser will have all of the rights of a shareholder of the Company
with respect to the Shares from and after the date that Purchaser delivers
payment of the Purchase Price until such time as Purchaser disposes of the
Shares or the Company and/or its assignee(s) exercise(s) the Repurchase Option
or Right of First Refusal. Upon an exercise of the Repurchase Option or the
Right of First Refusal, Purchaser will have no further rights as a holder of the
Shares so purchased upon such exercise, except the right to receive payment for
the Shares so purchased in accordance with the provisions of this Agreement, and
Purchaser will promptly surrender the stock certificate(s) evidencing the Shares
so purchased to the Company for transfer or cancellation.
8. ESCROW. As security for Purchaser's faithful performance of this
------
Agreement, Purchaser agrees, immediately upon receipt of the stock
certificate(s) evidencing the Shares, to deliver such certificate(s), together
with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any
(with the date and number of Shares left blank), to the Secretary of the Company
or other designee of the Company ("Escrow Holder"), who is hereby appointed to
-------------
hold such certificate(s) and Stock Powers in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this
6
<PAGE>
Agreement. Escrow Holder will act solely for the Company as its agent and not as
a fiduciary. Purchaser and the Company agree that Escrow Holder will not be
liable to any party to this Agreement (or to any other party) for any actions or
omissions unless Escrow Holder is grossly negligent or intentionally fraudulent
in carrying out the duties of Escrow Holder under this Section. Escrow Holder
may rely upon any letter, notice or other document executed by any signature
purported to be genuine and may rely on the advice of counsel and obey any order
of any court with respect to the transactions contemplated by this Agreement.
The Shares will be released from escrow upon termination of both the Repurchase
Option and the Right of First Refusal provided, however, that the Shares will be
-------- -------
retained in escrow so long as they are subject to the Pledge Agreement.
9. TAX CONSEQUENCES. Purchaser hereby acknowledges that Purchaser has
----------------
been informed that, unless an election is filed by the Purchaser with the
Internal Revenue Service (and, if necessary, the proper state taxing
authorities), within 30 days of the purchase of the Shares, electing pursuant to
--------------
Section 83(b) of the Internal Revenue Code (and similar state tax provisions, if
applicable) to be taxed currently on any difference between the Purchase Price
of the Shares and their fair market value on the date of purchase, there will be
a recognition of taxable income to the Purchaser, measured by the excess, if
any, of the fair market value of the Vested Shares, at the time they cease to be
Unvested Shares, over the purchase price for such Shares. Purchaser represents
that Purchaser has consulted any tax consultant(s) Purchaser deems advisable in
connection with Purchaser's purchase of the Shares and the filing of the
election under Section 83(b) and similar tax provisions. A form of Election
under Section 83(b) is attached hereto as Exhibit 5 for reference. PURCHASER
---------
HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES
RESULTING FROM SUCH ELECTION OR FOR FAILING TO FILE THE ELECTION AND PAYING
TAXES RESULTING FROM THE LAPSE OF THE REPURCHASE RESTRICTIONS ON THE UNVESTED
SHARES.
10. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------------------
(a) Legends. Purchaser understands and agrees that the Company will
-------
place the legends set forth below or similar legends on any stock certificate(s)
evidencing the Shares, together with any other legends that may be required by
state or federal securities laws, the Company's Articles of Incorporation or
Bylaws, any other agreement between Purchaser and the Company or any agreement
between Purchaser and any third party:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE
7
<PAGE>
ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER
TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN
COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON PUBLIC RESALE, TRANSFER, RIGHT OF
REPURCHASE AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE
ISSUER AND/OR ITS ASSIGNEE(S) AS SET FORTH IN A RESTRICTED
STOCK PURCHASE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL
HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT
THE PRINCIPAL OFFICE OF THE ISSUER. SUCH PUBLIC SALE AND
TRANSFER RESTRICTIONS AND THE RIGHT OF REPURCHASE AND RIGHT
OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Instructions. Purchaser agrees that, in order to
--------------------------
ensure compliance with the restrictions imposed by this Agreement, the Company
may issue appropriate "stop-transfer" instructions to its transfer agent, if
any, and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company will not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares, or to accord the right to vote or pay dividends, to any
purchaser or other transferee to whom such Shares have been so transferred.
11. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any
-------------------------
registration of the Company's securities under the 1933 Act that, upon the
request of the Company or the underwriters managing any registered public
offering of the Company's securities, Purchaser will not sell or otherwise
dispose of any Shares without the prior written consent of the Company or such
managing underwriters, as the case may be, for a period of time after the
effective date of such registration requested by such managing underwriters and
subject to all restrictions as the Company or the managing underwriters may
specify for employee-shareholders generally.
12. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of
------------------------------------
the Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state and federal laws and regulations and with
all applicable requirements of any stock exchange or automated quotation system
on which the Company's common stock may be listed or quoted at the time of such
issuance or transfer.
13. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
----------------------
under this Agreement, including its rights to repurchase Shares under the
Repurchase Option and
8
<PAGE>
the Right of First Refusal. This Agreement will be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement will be binding upon
Purchaser and Purchaser's heirs, executors, administrators, successors and
assigns.
14. GOVERNING LAW; SEVERABILITY. This Agreement will be governed by and
---------------------------
construed in accordance with the internal laws of the State of California,
excluding that body of laws pertaining to conflict of laws. If any provision of
this Agreement is determined by a court of law to be illegal or unenforceable,
then such provision will be enforced to the maximum extent possible and the
other provisions will remain fully effective and enforceable.
15. NOTICES. Any notice required or permitted hereunder will be given in
-------
writing and will be deemed effectively given upon personal delivery, three (3)
days after deposit in the United States mail by certified or registered mail
(return receipt requested), one (1) business day after its deposit with any
return receipt express courier (prepaid), or one (1) business day after
transmission by telecopier, addressed to the other party at its address (or
facsimile number, in the case of transmission by telecopier) as shown below its
signature to this Agreement, or to such other address as such party may
designate in writing from time to time to the other party.
16. FURTHER INSTRUMENTS. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
17. HEADINGS. The captions and headings of this Agreement are included
--------
for ease of reference only and will be disregarded in interpreting or construing
this Agreement. All references herein to Sections will refer to Sections of
this Agreement.
18. ENTIRE AGREEMENT. This Agreement, together with all its Exhibits,
----------------
constitutes the entire agreement and understanding of the parties with respect
to the subject matter of this Agreement, including any sale, grant or transfer
to the Purchaser of capital stock of the Company (including any options
therefor), any payments or preferences to be paid to Purchaser upon the sale of
the Company and all management incentive plans in which Purchaser could
participate, and supersedes all prior understandings and agreements, whether
oral or written, between the parties hereto with respect to the specific subject
matter hereof.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
9
<PAGE>
19. TITLE TO SHARES. The exact spelling of the name(s) under which
---------------
Purchaser will take title to the Shares is:
___________________________________________________
___________________________________________________
Purchaser desires to take title to the Shares as follows:
[ ] Individual, as separate property
[ ] Husband and wife, as community property
[ ] Joint Tenants
[ ] Alone or with spouse as trustee(s) of the
following trust (including date): ____________________________________
______________________________________________________________________
______________________________________________________________________
[ ] Other; please specify: _______________________________________________
______________________________________________________________________
Purchaser's social security number is: _________________________________________
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Purchaser has executed this
Agreement in duplicate, as of the Effective Date.
COMPANY PURCHASER
By:______________________________ ___________________________________
Name:____________________________
Title:___________________________ Name: John Reimer
Address: 47421 Bayside Parkway Address:___________________________
Fremont, CA 94538 ___________________________________
Fax: (510) 413-1255 Fax: (____)________________________
10
<PAGE>
APPENDIX A
----------
A. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of the
Company.
B. Involuntary Termination shall mean the termination of Purchaser's
-----------------------
Service by reason of:
(i) Purchaser's involuntary dismissal or discharge by the Company for
reasons other than Misconduct, or
(ii) Purchaser's voluntary resignation following (A) a change in
Purchaser's position with the Company (or Parent or Subsidiary employing
Purchaser) which materially reduces Purchaser's level of responsibility,
(B) a reduction in Purchaser's level of compensation (including base
salary, fringe benefits and target bonus under any corporate-performance
based bonus or incentive programs) by more than fifteen percent (15%) or
(C) a relocation of Purchaser's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is
effected by the Company without Purchaser's consent.
C. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Purchaser, any unauthorized use or disclosure by the
Purchaser of confidential information or trade secrets of the Company (or any
Parent or Subsidiary), or any other intentional misconduct by the Purchaser
adversely affecting the business or affairs of the Company (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Company (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of the
Purchaser or any other person in the Service of the Company (or any Parent or
Subsidiary).
D. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization, combination of shares, exchange of shares or other change
affecting the Company's outstanding Common Stock as a class without the
Company's receipt of consideration.
E. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the Company is not the
surviving entity,
(ii) a sale, transfer or other disposition of all or substantially all
of the Company's assets,
11
<PAGE>
(iii) a reverse merger in which the Company is the surviving entity
but in which the Company's outstanding voting securities are transferred in
whole or in part to a person or persons different from the persons holding
those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which
the Company is incorporated or to create a holding company structure.
F. Service shall mean the Purchaser's performance of services for the
-------
Company (or any Parent or Subsidiary) in the capacity of an employee, subject to
the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance, a non-employee member of the
board of directors or an independent consultant.
12
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit 1: Secured Full Recourse Promissory Note
Exhibit 2: Stock Power and Assignment Separate from Stock Certificate
Exhibit 3: Spousal Consent
Exhibit 4: Stock Pledge Agreement
Exhibit 5: Election Under Section 83(b) of the Internal Revenue Code
13
<PAGE>
EXHIBIT 1
---------
SECURED FULL RECOURSE PROMISSORY NOTE
-------------------------------------
Fremont, California
$192,000.00 June 5, 1998
1. Obligation. In exchange for the issuance to the undersigned
----------
("Purchaser") of 2,400,000 shares (the "Shares") of the Common Stock of Lexar
--------- ------
Media, Inc., a California corporation (the "Company"), receipt of which is
-------
hereby acknowledged, Purchaser hereby promises to pay to the order of the
Company on or before July 15, 2002 (the "Maturity Date"), at the Company's
-------------
principal place of business at 47421 Bayside Parkway, Fremont, California, 94538
or at such other place as the Company may direct, the principal sum of One
Hundred Ninety-Two Thousand Dollars ($192,000.00) together with interest
compounded annually on the unpaid principal at the rate of six and 23/100
percent (6.23%). The principal sum and accrued interest will be due and payable
on the Maturity Date.
2. Security. Payment of this Note is secured by a security interest in
--------
the Shares granted to the Company by Purchaser under a Stock Pledge Agreement
dated of even date herewith between the Company and Purchaser (the "Pledge
------
Agreement"). This Note is being tendered by Purchaser to the Company as the
- ---------
purchase price of the Shares pursuant to that certain Restricted Stock Purchase
Agreement between Purchaser and the Company dated of even date with this Note
(the "Purchase Agreement").
------------------
3. Default; Acceleration of Obligation. Purchaser will be deemed to be in
-----------------------------------
default under this Note and the principal sum of this Note, together with all
interest accrued thereon, will immediately become due and payable in full: (a)
upon Purchaser's failure to make any payment when due under this Note; (b) in
the event Purchaser ceases to be employed by the Company (as defined in the
Purchase Agreement) for any reason; (c) upon any transfer of any of the Shares;
(d) upon the filing by or against Purchaser of any voluntary or involuntary
petition in bankruptcy or any petition for relief under the federal bankruptcy
code or any other state or federal law for the relief of debtors; or (e) upon
the execution by Purchaser of an assignment for the benefit of creditors or the
appointment of a receiver, custodian, trustee or similar party to take
possession of Purchaser's assets or property.
4. Remedies On Default. Upon any default of Purchaser under this Note,
-------------------
the Company will have, in addition to its rights and remedies under this Note
and the Pledge Agreement, full recourse against any real, personal, tangible or
intangible assets of Purchaser, and may pursue any legal or equitable remedies
that are available to it.
<PAGE>
5. Rule 144 Holding Period. PURCHASER UNDERSTANDS THAT THE HOLDING PERIOD
-----------------------
SPECIFIED UNDER RULE 144(d) OF THE SECURITIES AND EXCHANGE COMMISSION WILL NOT
BEGIN TO RUN WITH RESPECT TO SHARES PURCHASED WITH THIS NOTE UNTIL EITHER (A)
THE PURCHASE PRICE OF SUCH SHARES IS PAID IN FULL IN CASH OR BY OTHER PROPERTY
ACCEPTED BY THE COMPANY, OR (B) THIS NOTE IS SECURED BY COLLATERAL, OTHER THAN
THE SHARES, HAVING A FAIR MARKET VALUE AT LEAST EQUAL TO THE AMOUNT OF
PURCHASER'S THEN OUTSTANDING OBLIGATION UNDER THIS NOTE (INCLUDING ACCRUED
INTEREST).
6. Prepayment. Prepayment of principal and/or interest due under this
----------
Note may be made at any time without penalty. Unless otherwise agreed in
writing by the Company, all payments will be made in lawful tender of the United
States and will be applied first to the payment of accrued interest, and the
remaining balance of such payment, if any, will then be applied to the payment
of principal. If Purchaser prepays all or a portion of the principal amount of
this Note, Purchaser intends that the Shares paid for by the portion of
principal so paid will continue to be held in pledge under the Pledge Agreement
to serve as independent collateral for the outstanding portion of this Note for
the purpose of commencing the holding period under Rule 144(d) of the Securities
and Exchange Commission with respect to other Shares purchased with this Note.
7. Governing Law; Waiver. The validity, construction and performance of
---------------------
this Note will be governed by the internal laws of the State of California,
excluding that body of law pertaining to conflicts of law. Purchaser hereby
waives presentment, notice of non-payment, notice of dishonor, protest, demand
and diligence.
8. Attorneys' Fees. If suit is brought for collection of this Note,
---------------
Purchaser agrees to pay all reasonable expenses, including attorneys' fees,
incurred by the holder in connection therewith whether or not such suit is
prosecuted to judgment.
IN WITNESS WHEREOF, Purchaser has executed this Note as of the date and
year first above written.
John Reimer
- -------------------------------- _____________________________________
Purchaser's Name Purchaser's Signature
2
<PAGE>
EXHIBIT 2
---------
STOCK POWER AND ASSIGNMENT
SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase
Agreement dated as of June 5, 1998, (the "Agreement"), the undersigned hereby
---------
sells, assigns and transfers unto _____________________, __________ shares of
the common stock of Lexar Media, Inc., a California corporation (the "Company"),
-------
standing in the undersigned's name on the books of the Company represented by
Certificate No(s). ____ delivered herewith, and does hereby irrevocably
constitute and appoint the Secretary of the Company as the undersigned's
attorney-in-fact, with full power of substitution, to transfer said stock on the
books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE
AGREEMENT AND THE EXHIBITS THERETO.
Dated: ____________________
PURCHASER
___________________________________
(Signature)
John Reimer
-----------------------------------
(Please Print Name)
___________________________________
(Spouse's Signature, if any)
___________________________________
(Please Print Spouse's Name)
Instruction: Please do not fill in any blanks other than the signature line.
- ----------- ---
The purpose of this Stock Power and Assignment is to enable the Company and/or
its assignee(s) to acquire the shares upon a default under Purchaser's Note or
exercise of its "Repurchase Option" and/or "Right of First Refusal" set forth in
the Agreement without requiring additional signatures on the part of the
Purchaser or Purchaser's Spouse.
<PAGE>
EXHIBIT 3
---------
CONSENT OF SPOUSE
-----------------
I, the undersigned, am the spouse of John Reimer ("Purchaser"). I have
---------
read and hereby consent to and approve all the terms and conditions of: the
Restricted Stock Purchase Agreement (the "Agreement") dated as of June 5, 1998
---------
between Purchaser and Lexar Media, Inc., a California corporation (the
"Company"), pursuant to which Purchaser has purchased 2,400,000 shares of the
-------
Company's common stock (the "Shares") and that certain Secured Full Recourse
------
Promissory Note (the "Note") and Stock Pledge Agreement ("Pledge Agreement")
---- ----------------
executed by Purchaser in connection with the Agreement.
In consideration of the Company granting my spouse the right to purchase
the Shares under the Agreement, I hereby agree to be irrevocably bound by all
the terms and conditions of the Agreement (including but not limited to the
Company's Repurchase Option, the Right of First Refusal and the market standoff
agreements contained therein) and of the Note and the Pledge Agreement and
further agree that any community property interest I may have in the Shares will
be similarly bound by the Agreement, the Note and the Pledge Agreement.
I hereby appoint Purchaser as my attorney-in-fact, to act in my name, place
and stead with respect to any amendment of the Agreement, the Note and the
Pledge Agreement, and with respect to the making and filing of an election under
Internal Revenue Code Section 83(b) in connection with the purchase of the
Shares.
Dated as of: June 5, 1998
___________________________________
Signature of Spouse [Sign Here]
___________________________________
Name of Spouse [Please Print]
<PAGE>
EXHIBIT 4
---------
STOCK PLEDGE AGREEMENT
----------------------
This Agreement is made and entered into as of June 5, 1998 between Lexar
Media, Inc., a California corporation (the "Company"), and John Reimer
-------
("Pledgor").
-------
R E C I T A L S
- - - - - - - -
A. In exchange for Pledgor's Secured Full Recourse Promissory Note to the
Company of even date herewith (the "Note"), the Company has issued and sold to
----
Pledgor 2,400,000 shares of its common stock (the "Shares") pursuant to the
------
terms and conditions of that certain Restricted Stock Purchase Agreement between
the Company and Pledgor of even date herewith (the "Purchase Agreement").
------------------
B. Pursuant to Section 5 of the Purchase Agreement, all the Shares on the
date hereof constitute "Unvested Shares" (as defined in the Purchase Agreement
and which herein shall have the meaning as so defined in the Purchase
Agreement); provided, that certain of the Shares will cease to be Unvested
Shares pursuant to the terms of Section 5 of the Purchase Agreement.
C. Pledgor has agreed that repayment of the Note will be secured by the
pledge of the Unvested Shares pursuant to this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Creation of Security Interest. Pursuant to the provisions of the
-----------------------------
California Commercial Code, Pledgor hereby grants to the Company, and the
Company hereby accepts, a first and present security interest in the Unvested
Shares as collateral to secure the payment of Pledgor's obligation to the
Company under the Note. Pledgor herewith delivers to the Company common stock
certificate(s) No(s). ________, representing all the Shares, together with one
stock power for each certificate in the form attached as an Exhibit to the
Purchase Agreement, duly executed (with the date and number of shares left
blank) by Pledgor and Pledgor's spouse, if any. For purposes of this Agreement,
the Unvested Shares pledged to the Company hereby, together with any additional
collateral pledged pursuant to Section 5 hereof, will hereinafter be
collectively referred to as the "Collateral." Pledgor agrees that the
----------
Collateral pledged to the Company will be deposited with and held by the Escrow
Holder (as defined in the Purchase Agreement) and that, notwithstanding anything
to the contrary in the Purchase Agreement, for purposes of carrying out the
provisions of this Agreement, Escrow Holder will act solely for the Company as
its agent and not as a fiduciary.
2. Representations and Warranties. Pledgor hereby represents and
------------------------------
warrants to the Company that Pledgor has good title (both record and beneficial)
to the Collateral, free and clear of all claims, pledges, security interests,
liens or encumbrances of every nature whatsoever, and that Pledgor has the right
to pledge and grant the Company the security interest in the Collateral granted
under this Agreement. Pledgor further agrees that, until the
<PAGE>
entire principal sum and all accrued interest due under the Note has been paid
in full, Purchaser will not, without the Company's prior written consent, (i)
sell, assign or transfer, or attempt to sell, assign or transfer, any of the
Collateral, or (ii) grant or create, or attempt to grant or create, any security
interest, lien, pledge, claim or other encumbrance with respect to any of the
Collateral.
3. Rights on Default. In the event of default (as defined in the
-----------------
Note) by Pledgor under the Note, the Company will have full power to sell,
assign and deliver the whole or any part of the Collateral at any broker's
exchange or elsewhere, at public or private sale, at the option of the Company,
in order to satisfy any part of the obligations of Pledgor now existing or
hereinafter arising under the Note. On any such sale, the Company or its
assigns may purchase all or any part of the Collateral. In addition, at its
sole option, the Company may elect to retain all the Collateral in full
satisfaction of Pledgor's obligation under the Note, in accordance with the
provisions and procedures set forth in the California Commercial Code.
4. Additional Remedies. The rights and remedies granted to the
-------------------
Company herein upon default under the Note will be in addition to all the
rights, powers and remedies of the Company under the California Commercial Code
and applicable law and such rights, powers and remedies will be exercisable by
the Company with respect to all of the Collateral. Pledgor agrees that the
Company's reasonable expenses of holding the Collateral, preparing it for resale
or other disposition, and selling or otherwise disposing of the Collateral,
including attorneys' fees and other legal expenses, will be deducted from the
proceeds of any sale or other disposition and will be included in the amounts
Pledgor must tender to redeem the Collateral. All rights, powers and remedies
of the Company will be cumulative and not alternative. Any forbearance or
failure or delay by the Company in exercising any right, power or remedy
hereunder will not be deemed to be a waiver of any such right, power or remedy
and any single or partial exercise of any such right, power or remedy hereunder
will not preclude the further exercise thereof.
5. Dividends; Voting. All dividends hereinafter declared on or
-----------------
payable with respect to the Collateral during the term of this pledge (excluding
only ordinary cash dividends, which will be payable to Pledgor so long as
Pledgor is not in default under the Note) will be immediately delivered to the
Company to be held in pledge under this Agreement. Notwithstanding this
Agreement, so long as Pledgor owns the Shares and is not in default under the
Note, Pledgor will be entitled to vote any shares comprising the Collateral,
subject to any proxies granted by Pledgor.
6. Adjustments. In the event that during the term of this pledge,
-----------
any stock dividend, reclassification, readjustment, stock split or other change
is declared or made with respect to the Collateral, or if warrants or any other
rights, options or securities are issued in respect of the Collateral, then all
new, substituted and/or additional shares or other securities issued by reason
of such change or by reason of the exercise of such warrants, rights, options or
securities, will be immediately pledged to the Company to be held under the
terms of this Agreement in the same manner as the Collateral is held hereunder.
7. Rights Under Purchase Agreement. Pledgor understands and agrees
-------------------------------
that the Company's rights to repurchase the Collateral under the Purchase
Agreement will continue for the periods and on the terms and conditions
specified in the Purchase Agreement, whether or
2
<PAGE>
not the Note has been paid during such period of time, and that to the extent
that the Note is not paid during such period of time, the repurchase by the
Company of the Collateral may be made by way of cancellation of all or any part
of Pledgor's indebtedness under the Note.
8. Redelivery of Collateral. Upon payment in full of the entire
------------------------
principal sum and all accrued interest due under the Note, and subject to the
terms and conditions of the Purchase Agreement, the Company will immediately
redeliver the Collateral to Pledgor and this Agreement will terminate; provided,
--------
however, that all rights of the Company to retain possession of the Shares
- -------
pursuant to the Purchase Agreement will survive termination of this Agreement.
9. Successors and Assigns. This Agreement will inure to the benefit
----------------------
of the respective heirs, personal representatives, successors and assigns of the
parties hereto.
10. Governing Law; Severability. This Agreement will be governed by
---------------------------
and construed in accordance with the internal laws of the State of California,
excluding that body of law relating to conflicts of law. Should one or more of
the provisions of this Agreement be determined by a court of law to be illegal
or unenforceable, the other provisions nevertheless will remain effective and
will be enforceable.
11. Modification; Entire Agreement. This Agreement will not be
------------------------------
amended without the written consent of both parties hereto. This Agreement and
Section 8 of the Purchase Agreement constitute the entire agreement of the
parties hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings related to such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
COMPANY PLEDGOR
By: _____________________________ __________________________________
[Signature]
Name:____________________________ John Reimer
----------------------------------
Its:_____________________________
3
<PAGE>
EXHIBIT 5
---------
ELECTION UNDER SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned Taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code, to include in gross income for the Taxpayer's current
taxable year the excess, if any, of the fair market value of the property
described below at the time of transfer over the amount paid for such property,
as compensation for services.
1. TAXPAYER'S NAME: John Reimer
--------------------------------------------
TAXPAYER'S ADDRESS: ____________________________________________
____________________________________________
SOCIAL SECURITY NUMBER: ____________________________________________
2. The property with respect to which the election is made is described as
follows: 1,800,000 shares of Common Stock of Lexar Media, Inc., a
California corporation (the "Company"), which is Taxpayer's employer or the
-------
corporation for whom the Taxpayer performs services.
3. The date on which the shares were transferred was June 5, 1998 and this
election is made for calendar year 1998.
4. The shares are subject to the following restrictions: The Company may
repurchase all or a portion of the shares at the Taxpayer's original
purchase price under certain conditions at the time of Taxpayer's
termination of employment or services.
5. The fair market value of the shares (without regard to restrictions other
than restrictions which by their terms will never lapse) was $0.08 per
share at the time of transfer.
6. The amount paid for such shares was $0.08 per share.
7. The Taxpayer has submitted a copy of this statement to the Company.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS"), AT THE
---
OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS, WITHIN 30 DAYS AFTER
--------------
THE DATE OF TRANSFER OF THE PROPERTY, AND MUST ALSO BE FILED WITH THE TAXPAYER'S
INCOME TAX RETURNS FOR THE CALENDAR YEAR. THE ELECTION CANNOT BE REVOKED
WITHOUT THE CONSENT OF THE IRS.
Dated: _______________, 1998 ___________________________________
Taxpayer's Signature
<PAGE>
EXHIBIT 10.14
RESTRICTED STOCK PURCHASE AGREEMENT
This Restricted Stock Purchase Agreement (this "Agreement") is made and
---------
entered into as of June 5, 1998 (the "Effective Date") between Lexar Media, Inc.
--------------
(the "Company"), a California corporation, and Petro Estakhri ("Purchaser").
------- ---------
1. PURCHASE OF SHARES. On the Effective Date and subject to the terms and
------------------
conditions of this Agreement, Purchaser hereby purchases from the Company, and
Company hereby sells to Purchaser, an aggregate of 1,076,284 shares of the
Company's common stock (the "Shares") at an aggregate purchase price of
------
$86,102.72 (the "Purchase Price") or $0.08 per Share (the "Purchase Price Per
-------------- ------------------
Share"). As used in this Agreement, the term "Shares" refers to the Shares
- -----
purchased under this Agreement and includes all securities received (a) in
replacement of the Shares, (b) as a result of stock dividends or stock splits in
respect of the Shares, and (c) in replacement of the Shares in a
recapitalization, merger, reorganization or the like.
2. PAYMENT OF PURCHASE PRICE; CLOSING.
----------------------------------
(a) Deliveries by Purchaser. Purchaser hereby delivers to the Company
-----------------------
the full Purchase Price by delivery to the Company of a Secured Full Recourse
Promissory Note of Purchaser in the principal amount of the full Purchase Price
in the form of Exhibit 1, duly executed by Purchaser (the "Note"). Purchaser
--------- ----
also hereby delivers to the Company: (i) two (2) copies of a blank Stock Power
and Assignment Separate from Stock Certificate in the form of Exhibit 2 attached
---------
hereto (the "Stock Powers"), both duly executed by Purchaser (and Purchaser's
------------
spouse, if any), (ii) if Purchaser is married, a Consent of Spouse in the form
of Exhibit 3 attached hereto (the "Spouse Consent") duly executed by Purchaser's
--------- --------------
spouse, and (iii) a Stock Pledge Agreement in the form of Exhibit 4, duly
---------
executed by Purchaser (the "Pledge Agreement").
----------------
(b) Deliveries by the Company. Upon its receipt of the entire Purchase
-------------------------
Price and all the documents to be executed and delivered by Purchaser to the
Company under Section 2(a), the Company will issue a duly executed stock
certificate evidencing the Shares in the name of Purchaser registered in
Purchaser's name in accordance with Section 19, with such certificate to be
placed in escrow as provided in Section 8 until expiration or termination of
both the Company's Repurchase Option and Right of First Refusal described in
Sections 5 and 6 and payment in full to the Company of all sums due under the
Note.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
-------------------------------------------
warrants to the Company that:
(a) Purchase for Own Account for Investment. Purchaser is purchasing
---------------------------------------
the Shares for Purchaser's own account for investment purposes only and not with
a view to, or for sale in connection with, a distribution of the Shares within
the meaning of the Securities Act of 1933, as amended (the "1933 Act").
--------
Purchaser has no present intention of selling or otherwise disposing of all or
any portion of the Shares and no one other than Purchaser has any beneficial
ownership of any of the Shares.
<PAGE>
(b) Access to Information. Purchaser has had access to all
---------------------
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.
(c) Understanding of Risks. Purchaser is an officer of the Company
----------------------
and is fully aware of: (i) the highly speculative nature of the investment in
the Shares; (ii) the financial hazards involved; (iii) the lack of liquidity of
the Shares and the restrictions on transferability of the Shares (e.g., that
----
Purchaser may not be able to sell or dispose of the Shares or use them as
collateral for loans); (iv) the qualifications and backgrounds of the management
of the Company; and (v) the tax consequences of investment in the Shares.
(d) Purchaser's Qualifications. Purchaser has a preexisting personal
--------------------------
or business relationship with the Company and/or certain of its officers and/or
directors of a nature and duration sufficient to make Purchaser aware of the
character, business acumen and general business and financial circumstances of
the Company and/or such officers and directors. By reason of Purchaser's
business or financial experience, Purchaser is capable of evaluating the merits
and risks of this investment, has the ability to protect Purchaser's own
interests in this transaction and is financially capable of bearing a total loss
of this investment.
(e) No General Solicitation. At no time was Purchaser presented with
-----------------------
or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.
(f) Compliance with Securities Laws. Purchaser understands and
-------------------------------
acknowledges that, in reliance upon the representations and warranties made by
Purchaser herein, the Shares are not being registered with the Securities and
Exchange Commission ("SEC") under the 1933 Act or being qualified under the
---
California Corporate Securities Law of 1968, as amended (the "Law"), but instead
---
are being issued under an exemption or exemptions from the registration and
qualification requirements of the 1933 Act and the Law or other applicable state
securities laws which impose certain restrictions on Purchaser's ability to
transfer the Shares.
(g) Restrictions on Transfer. Purchaser understands that Purchaser
------------------------
may not transfer any Shares unless such Shares are registered under the 1933 Act
or qualified under the Law or unless, in the opinion of counsel to the Company,
exemptions from such registration and qualification requirements are available.
Purchaser understands that only the Company may file a registration statement
with the SEC or the California Commissioner of Corporations and that the Company
is under no obligation to do so with respect to the Shares. Purchaser has also
been advised that exemptions from registration and qualification may not be
available or may not permit Purchaser to transfer all or any of the Shares in
the amounts or at the times proposed by Purchaser.
(h) Rule 144. In addition, Purchaser has been advised that SEC Rule
--------
144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the Shares
and, in any event, requires that the Shares be
2
<PAGE>
held for a minimum of one year, and in certain cases two years, after they have
been purchased and paid for (within the meaning of Rule 144), before they may be
------------
resold under Rule 144. Purchaser understands that Shares paid for with a Note
may not be deemed to be fully "paid for" within the meaning of Rule 144 unless
certain conditions are met and that, accordingly, the Rule 144 holding period of
such Shares may not begin to run until such Shares are fully paid for within the
meaning of Rule 144. Purchaser understands that Rule 144 may indefinitely
restrict transfer of the Shares so long as Purchaser remains an "affiliate" of
the Company and "current public information" about the Company (as defined in
Rule 144) is not publicly available.
4. COMPLIANCE WITH CALIFORNIA SECURITIES LAWS. THE SALE OF THE SECURITIES
------------------------------------------
THAT ARE THE SUBJECT OF THIS AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA
COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT
TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF
ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL
UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
BEING AVAILABLE.
5. COMPANY'S REPURCHASE OPTION. The Company has the option to repurchase
---------------------------
all or a portion of the Unvested Shares (as defined below) on the terms and
conditions set forth in this Section (the "Repurchase Option") if Purchaser
-----------------
ceases to be employed by the Company (as defined herein) for any reason, or no
reason, including without limitation Purchaser's death, disability, voluntary
resignation or termination by the Company with or without cause.
(a) Definition of "Employed by the Company"; "Termination Date". For
----------------------------------------------------------
purposes of this Agreement, Purchaser will be considered to be "employed by the
---------------
Company" if the Board of Directors of the Company determines that Purchaser is
- -------
rendering substantial services as an officer, employee, consultant or
independent contractor to the Company or to any parent, subsidiary or affiliate
of the Company. In case of any dispute as to whether Purchaser is employed by
the Company, the Board of Directors of the Company will have discretion to
determine whether Purchaser has ceased to be employed by the Company or any
parent, subsidiary or affiliate of the Company and the effective date on which
Purchaser's employment terminated (the "Termination Date").
----------------
(b) Unvested and Vested Shares. Shares that are not Vested Shares (as
--------------------------
defined in this Section) are "Unvested Shares". On the Effective Date all of
---------------
the Shares will be Unvested Shares. If Purchaser has been continuously employed
by the Company at all times from the Effective Date until July 15, 1998 (the
"First Vesting Date"), then on the First Vesting Date 25% of the Shares will
------------------
become Vested Shares; and thereafter, for so long (and only for so long) as
Purchaser remains continuously employed by the Company at all times after the
First Vesting Date, an additional 2.083% of the Shares will become Vested Shares
upon the expiration of each full month elapsed after the First Vesting Date;
provided, however, (i) Mr. Estakhri will immediately receive 18 months of
vesting upon death or an Involuntary Termination (as defined in Appendix A
hereto), (ii) all unvested Shares shall vest upon an Involuntary Termination
within 12 months of a Corporate Transaction (as defined in Appendix A hereto) or
(iii) the last
3
<PAGE>
600,000 Shares (the "Performance Shares") which would vest over the last 27
------------------
months of the 48 month period (the "Performance Period") shall not become fully
------------------
vested and shall remain subject to the Company's right of repurchase
notwithstanding continued service during the Performance Period unless and until
one of the following conditions occurs (the "Performance Conditions"): (A) the
----------------------
Company pays its outstanding debts to John Tu and David Sun in the principal
amount of $4,750,000 and all accrued interest thereon and to Toshiba in the
principal amount of $400,000 and all accrued interest thereon and achieves at
least two consecutive quarters of profitability (which may occur before or after
such payoff), (B) an initial public offering of the Company, (C) a Corporate
Transaction or (D) completion of four years of service from July 15, 1997. If
after the Performance Conditions occur, the Performance Shares will remain
subject to the Company's right of repurchase unless there has been continued
service for the four year period ending July 15, 2001 or they are otherwise
vested under any of the provisions (i) or (ii) above.
(c) Adjustments. The number of Shares that are Vested Shares or
-----------
Unvested Shares will be proportionally adjusted to reflect any stock dividend,
stock split, reverse stock split or recapitalization of the common stock of the
Company occurring after the Effective Date.
(d) Exercise of Repurchase Option at Original Price. At any time
-----------------------------------------------
within thirty (30) days after the Termination Date, the Company may elect to
repurchase any or all of the Unvested Shares by giving Purchaser written notice
of exercise of the Repurchase Option. The Company and/or its assignee(s) will
then have the option to repurchase from Purchaser (or from Purchaser's personal
representative as the case may be) any or all of the Unvested Shares at the
Purchaser's original Purchase Price Per Share (as adjusted to reflect any stock
dividend, stock split, reverse stock split or recapitalization of the common
stock of the Company occurring after the Effective Date).
(e) Payment of Repurchase Price. The repurchase price payable to
---------------------------
purchase Unvested Shares upon exercise of the Repurchase Option will be payable,
at the option of the Company or its assignee(s), by check or by cancellation of
all or a portion of any outstanding indebtedness of Purchaser to the Company (or
to such assignee) or by any combination thereof. The repurchase price will be
paid without interest within sixty (60) days after the Termination Date.
(f) Right of Termination Unaffected. Nothing in this Agreement will
-------------------------------
be construed to limit or otherwise affect in any manner whatsoever the right or
power of the Company (or any parent, subsidiary or affiliate of the Company) to
terminate Purchaser's employment at any time for any reason or no reason, with
or without cause.
6. RIGHT OF FIRST REFUSAL. Unvested Shares may not be sold or otherwise
----------------------
transferred by Purchaser without the Company's prior written consent. Before
any Vested Shares held by Purchaser or any transferee of such Shares (either
being sometimes referred to herein as the "Holder") may be sold or otherwise
------
transferred (including without limitation a transfer by gift or operation of
law), the Company and/or its assignee(s) will have a right of first refusal to
purchase the Shares to be sold or transferred (the "Offered Shares") on the
--------------
terms and conditions set forth in this Section (the "Right of First Refusal").
----------------------
4
<PAGE>
(a) Notice of Proposed Transfer. The Holder of the Shares will
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
------
Holder's bona fide intention to sell or otherwise transfer the Offered Shares;
(ii) the name of each proposed purchaser or other transferee ("Proposed
--------
Transferee"); (iii) the number of Offered Shares to be transferred to each
- ----------
Proposed Transferee; (iv) the bona fide cash price or other consideration for
which the Holder proposes to transfer the Offered Shares (the "Offered Price");
-------------
and (v) that the Holder will offer to sell the Offered Shares to the Company
and/or its assignee(s) at the Offered Price as provided in this Section.
(b) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after the date of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all (but not less than
all) of the Offered Shares proposed to be transferred to any one or more of the
Proposed Transferees named in the Notice, at the purchase price determined in
accordance with subsection (c) below.
(c) Purchase Price. The purchase price for the Offered Shares
--------------
purchased under this Section will be the Offered Price. If the Offered Price
includes consideration other than cash, then the value of the non-cash
consideration as determined in good faith by the Company's Board of Directors
will conclusively be deemed to be the cash equivalent value of such non-cash
consideration.
(d) Payment. Payment of the purchase price for Offered Shares will be
-------
payable, at the option of the Company and/or its assignee(s) (as applicable), by
check or by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Company (or to such assignee, in the case of a purchase of
Offered Shares by such assignee) or by any combination thereof. The purchase
price will be paid without interest within sixty (60) days after the Company's
receipt of the Notice, or, at the option of the Company and/or its assignee(s),
in the manner and at the time(s) set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Offered Shares proposed
--------------------------
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section, then the
Holder may sell or otherwise transfer such Offered Shares to that Proposed
Transferee at the Offered Price or at a higher price, provided that such sale or
--------
other transfer is consummated within 120 days after the date of the Notice, and
provided further, that: (i) any such sale or other transfer is effected in
- -------- -------
compliance with all applicable securities laws; and (ii) the Proposed Transferee
agrees in writing that the provisions of this Section will continue to apply to
the Offered Shares in the hands of such Proposed Transferee. If the Offered
Shares described in the Notice are not transferred to the Proposed Transferee
within such 120 day period, then a new Notice must be given to the Company, and
the Company will again be offered the Right of First Refusal before any Shares
held by the Holder may be sold or otherwise transferred.
(f) Exempt Transfers. Notwithstanding anything to the contrary in
----------------
this Section, the following transfers of Shares will be exempt from the Right of
First Refusal: (i) the transfer of any or all of the Shares during Purchaser's
lifetime by gift or on Purchaser's death by will or intestacy to Purchaser's
"immediate family" (as defined below) or to a trust for the benefit of Purchaser
or Purchaser's immediate family, provided that each transferee or other
recipient
5
<PAGE>
agrees in a writing satisfactory to the Company that the provisions of this
Section will continue to apply to the transferred Shares in the hands of such
transferee or other recipient; (ii) any transfer of Shares made pursuant to a
statutory merger or statutory consolidation of the Company with or into another
corporation or corporations (except, unless provided otherwise in Section 6(g),
that the Right of First Refusal will continue to apply thereafter to such
Shares, in which case the surviving corporation of such merger or consolidation
shall succeed to the rights or the Company under this Section unless the
agreement of merger or consolidation expressly otherwise provides); or (iii) any
transfer of Shares pursuant to the winding up and dissolution of the Company. As
used herein, the term "immediate family" will mean Purchaser's spouse, lineal
----------------
descendant or antecedent, father, mother, brother or sister, adopted child or
grandchild, or the spouse of any child, adopted child, grandchild or adopted
grandchild of Purchaser.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
will terminate as to all Shares upon the effective date of the first sale of
common stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the SEC under the 1933 Act (other
than a registration statement relating solely to the issuance of common stock
pursuant to a business combination or an employee incentive or benefit plan).
(h) Encumbrances on Vested Shares. Purchaser may grant a lien or
-----------------------------
security interest in, or pledge, hypothecate or encumber Vested Shares only if
each party to whom such lien or security interest is granted, or to whom such
pledge, hypothecation or other encumbrance is made, agrees in a writing
satisfactory to the Company that: (i) such lien, security interest, pledge,
hypothecation or encumbrance will not apply to such Vested Shares after they are
acquired by the Company and/or its assignees) under this Section; and (ii) the
provisions of this Section will continue to apply to such Vested Shares in the
hands of such party and any transferee of such party. Purchaser may not grant a
lien or security interest in, or pledge, hypothecate or encumber, any Unvested
Shares.
7. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this
---------------------
Agreement, Purchaser will have all of the rights of a shareholder of the Company
with respect to the Shares from and after the date that Purchaser delivers
payment of the Purchase Price until such time as Purchaser disposes of the
Shares or the Company and/or its assignee(s) exercise(s) the Repurchase Option
or Right of First Refusal. Upon an exercise of the Repurchase Option or the
Right of First Refusal, Purchaser will have no further rights as a holder of the
Shares so purchased upon such exercise, except the right to receive payment for
the Shares so purchased in accordance with the provisions of this Agreement, and
Purchaser will promptly surrender the stock certificate(s) evidencing the Shares
so purchased to the Company for transfer or cancellation.
8. ESCROW. As security for Purchaser's faithful performance of this
------
Agreement, Purchaser agrees, immediately upon receipt of the stock
certificate(s) evidencing the Shares, to deliver such certificate(s), together
with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any
(with the date and number of Shares left blank), to the Secretary of the Company
or other designee of the Company ("Escrow Holder"), who is hereby appointed to
-------------
hold such certificate(s) and Stock Powers in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this
6
<PAGE>
Agreement. Escrow Holder will act solely for the Company as its agent and not as
a fiduciary. Purchaser and the Company agree that Escrow Holder will not be
liable to any party to this Agreement (or to any other party) for any actions or
omissions unless Escrow Holder is grossly negligent or intentionally fraudulent
in carrying out the duties of Escrow Holder under this Section. Escrow Holder
may rely upon any letter, notice or other document executed by any signature
purported to be genuine and may rely on the advice of counsel and obey any order
of any court with respect to the transactions contemplated by this Agreement.
The Shares will be released from escrow upon termination of both the Repurchase
Option and the Right of First Refusal provided, however, that the Shares will be
-------- -------
retained in escrow so long as they are subject to the Pledge Agreement.
9. TAX CONSEQUENCES. Purchaser hereby acknowledges that Purchaser has
----------------
been informed that, unless an election is filed by the Purchaser with the
Internal Revenue Service (and, if necessary, the proper state taxing
authorities), within 30 days of the purchase of the Shares, electing pursuant to
--------------
Section 83(b) of the Internal Revenue Code (and similar state tax provisions, if
applicable) to be taxed currently on any difference between the Purchase Price
of the Shares and their fair market value on the date of purchase, there will be
a recognition of taxable income to the Purchaser, measured by the excess, if
any, of the fair market value of the Vested Shares, at the time they cease to be
Unvested Shares, over the purchase price for such Shares. Purchaser represents
that Purchaser has consulted any tax consultant(s) Purchaser deems advisable in
connection with Purchaser's purchase of the Shares and the filing of the
election under Section 83(b) and similar tax provisions. A form of Election
under Section 83(b) is attached hereto as Exhibit 5 for reference. PURCHASER
---------
HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES
RESULTING FROM SUCH ELECTION OR FOR FAILING TO FILE THE ELECTION AND PAYING
TAXES RESULTING FROM THE LAPSE OF THE REPURCHASE RESTRICTIONS ON THE UNVESTED
SHARES.
10. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------------------
(a) Legends. Purchaser understands and agrees that the Company will
-------
place the legends set forth below or similar legends on any stock certificate(s)
evidencing the Shares, together with any other legends that may be required by
state or federal securities laws, the Company's Articles of Incorporation or
Bylaws, any other agreement between Purchaser and the Company or any agreement
between Purchaser and any third party:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS
SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME. THE
7
<PAGE>
ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT
THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE
ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON PUBLIC RESALE, TRANSFER, RIGHT OF
REPURCHASE AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE
ISSUER AND/OR ITS ASSIGNEE(S) AS SET FORTH IN A RESTRICTED
STOCK PURCHASE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL
HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE
PRINCIPAL OFFICE OF THE ISSUER. SUCH PUBLIC SALE AND TRANSFER
RESTRICTIONS AND THE RIGHT OF REPURCHASE AND RIGHT OF FIRST
REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Instructions. Purchaser agrees that, in order to
--------------------------
ensure compliance with the restrictions imposed by this Agreement, the Company
may issue appropriate "stop-transfer" instructions to its transfer agent, if
any, and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company will not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares, or to accord the right to vote or pay dividends, to any
purchaser or other transferee to whom such Shares have been so transferred.
11. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any
-------------------------
registration of the Company's securities under the 1933 Act that, upon the
request of the Company or the underwriters managing any registered public
offering of the Company's securities, Purchaser will not sell or otherwise
dispose of any Shares without the prior written consent of the Company or such
managing underwriters, as the case may be, for a period of time after the
effective date of such registration requested by such managing underwriters and
subject to all restrictions as the Company or the managing underwriters may
specify for employee-shareholders generally.
12. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of
------------------------------------
the Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state and federal laws and regulations and with
all applicable requirements of any stock exchange or automated quotation system
on which the Company's common stock may be listed or quoted at the time of such
issuance or transfer.
13. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
----------------------
under this Agreement, including its rights to repurchase Shares under the
Repurchase Option and
8
<PAGE>
the Right of First Refusal. This Agreement will be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement will be binding upon
Purchaser and Purchaser's heirs, executors, administrators, successors and
assigns.
14. GOVERNING LAW; SEVERABILITY. This Agreement will be governed by and
---------------------------
construed in accordance with the internal laws of the State of California,
excluding that body of laws pertaining to conflict of laws. If any provision of
this Agreement is determined by a court of law to be illegal or unenforceable,
then such provision will be enforced to the maximum extent possible and the
other provisions will remain fully effective and enforceable.
15. NOTICES. Any notice required or permitted hereunder will be given in
-------
writing and will be deemed effectively given upon personal delivery, three (3)
days after deposit in the United States mail by certified or registered mail
(return receipt requested), one (1) business day after its deposit with any
return receipt express courier (prepaid), or one (1) business day after
transmission by telecopier, addressed to the other party at its address (or
facsimile number, in the case of transmission by telecopier) as shown below its
signature to this Agreement, or to such other address as such party may
designate in writing from time to time to the other party.
16. FURTHER INSTRUMENTS. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
17. HEADINGS. The captions and headings of this Agreement are included
--------
for ease of reference only and will be disregarded in interpreting or construing
this Agreement. All references herein to Sections will refer to Sections of
this Agreement.
18. ENTIRE AGREEMENT. This Agreement, together with all its Exhibits,
----------------
constitutes the entire agreement and understanding of the parties with respect
to the subject matter of this Agreement, including any sale, grant or transfer
to the Purchaser of capital stock of the Company (including any options
therefor), any payments or preferences to be paid to Purchaser upon the sale of
the Company and all management incentive plans in which Purchaser could
participate, and supersedes all prior understandings and agreements, whether
oral or written, between the parties hereto with respect to the specific subject
matter hereof.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
9
<PAGE>
19. TITLE TO SHARES. The exact spelling of the name(s) under which
---------------
Purchaser will take title to the Shares is:
___________________________________________________
___________________________________________________
Purchaser desires to take title to the Shares as follows:
[ ] Individual, as separate property
[ ] Husband and wife, as community property
[ ] Joint Tenants
[ ] Alone or with spouse as trustee(s) of the
following trust (including date): ____________________________________
______________________________________________________________________
______________________________________________________________________
[ ] Other; please specify: _______________________________________________
______________________________________________________________________
Purchaser's social security number is: _________________________________________
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Purchaser has executed this
Agreement in duplicate, as of the Effective Date.
COMPANY PURCHASER
By:_______________________________ ___________________________________
Name:_____________________________
Title:____________________________ Name: Petro Estakhri
Address: 47421 Bayside Parkway Address:___________________________
Fremont, CA 94538 ___________________________________
Fax: (510) 413-1255 Fax: (____) _______________________
10
<PAGE>
APPENDIX A
----------
A. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of the
Company.
B. Involuntary Termination shall mean the termination of Purchaser's
-----------------------
Service by reason of:
(i) Purchaser's involuntary dismissal or discharge by the Company for
reasons other than Misconduct, or
(ii) Purchaser's voluntary resignation following (A) a change in
Purchaser's position with the Company (or Parent or Subsidiary employing
Purchaser) which materially reduces Purchaser's level of responsibility,
(B) a reduction in Purchaser's level of compensation (including base
salary, fringe benefits and target bonus under any corporate-performance
based bonus or incentive programs) by more than fifteen percent (15%) or
(C) a relocation of Purchaser's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is
effected by the Company without Purchaser's consent.
C. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Purchaser, any unauthorized use or disclosure by the
Purchaser of confidential information or trade secrets of the Company (or any
Parent or Subsidiary), or any other intentional misconduct by the Purchaser
adversely affecting the business or affairs of the Company (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Company (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of the
Purchaser or any other person in the Service of the Company (or any Parent or
Subsidiary).
D. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization, combination of shares, exchange of shares or other change
affecting the Company's outstanding Common Stock as a class without the
Company's receipt of consideration.
E. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the Company is not the
surviving entity,
(ii) a sale, transfer or other disposition of all or substantially all
of the Company's assets,
11
<PAGE>
(iii) a reverse merger in which the Company is the surviving entity
but in which the Company's outstanding voting securities are transferred in
whole or in part to a person or persons different from the persons holding
those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which
the Company is incorporated or to create a holding company structure.
F. Service shall mean the Purchaser's performance of services for the
-------
Company (or any Parent or Subsidiary) in the capacity of an employee, subject to
the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance, a non-employee member of the
board of directors or an independent consultant.
12
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit 1: Secured Full Recourse Promissory Note
Exhibit 2: Stock Power and Assignment Separate from Stock Certificate
Exhibit 3: Spousal Consent
Exhibit 4: Stock Pledge Agreement
Exhibit 5: Election Under Section 83(b) of the Internal Revenue Code
13
<PAGE>
EXHIBIT 1
---------
SECURED FULL RECOURSE PROMISSORY NOTE
-------------------------------------
Fremont, California
$86,102.72 June 5, 1998
1. Obligation. In exchange for the issuance to the undersigned
----------
("Purchaser") of 1,076,284 shares (the "Shares") of the Common Stock of Lexar
--------- ------
Media, Inc., a California corporation (the "Company"), receipt of which is
-------
hereby acknowledged, Purchaser hereby promises to pay to the order of the
Company on or before July 15, 2002 (the "Maturity Date"), at the Company's
-------------
principal place of business at 47421 Bayside Parkway, Fremont, California, 94538
or at such other place as the Company may direct, the principal sum of Eight-Six
Thousand One Hundred Two Dollars and Seventy-Two Cents ($86,102.72) together
with interest compounded annually on the unpaid principal at the rate of six and
23/100 percent (6.23%). The principal sum and accrued interest will be due and
payable on the Maturity Date.
2. Security. Payment of this Note is secured by a security interest in
--------
the Shares granted to the Company by Purchaser under a Stock Pledge Agreement
dated of even date herewith between the Company and Purchaser (the "Pledge
------
Agreement"). This Note is being tendered by Purchaser to the Company as the
- ---------
purchase price of the Shares pursuant to that certain Restricted Stock Purchase
Agreement between Purchaser and the Company dated of even date with this Note
(the "Purchase Agreement").
------------------
3. Default; Acceleration of Obligation. Purchaser will be deemed to be in
-----------------------------------
default under this Note and the principal sum of this Note, together with all
interest accrued thereon, will immediately become due and payable in full: (a)
upon Purchaser's failure to make any payment when due under this Note; (b) in
the event Purchaser ceases to be employed by the Company (as defined in the
Purchase Agreement) for any reason; (c) upon any transfer of any of the Shares;
(d) upon the filing by or against Purchaser of any voluntary or involuntary
petition in bankruptcy or any petition for relief under the federal bankruptcy
code or any other state or federal law for the relief of debtors; or (e) upon
the execution by Purchaser of an assignment for the benefit of creditors or the
appointment of a receiver, custodian, trustee or similar party to take
possession of Purchaser's assets or property.
4. Remedies On Default. Upon any default of Purchaser under this Note,
-------------------
the Company will have, in addition to its rights and remedies under this Note
and the Pledge Agreement, full recourse against any real, personal, tangible or
intangible assets of Purchaser, and may pursue any legal or equitable remedies
that are available to it.
<PAGE>
5. Rule 144 Holding Period. PURCHASER UNDERSTANDS THAT THE HOLDING PERIOD
-----------------------
SPECIFIED UNDER RULE 144(d) OF THE SECURITIES AND EXCHANGE COMMISSION WILL NOT
BEGIN TO RUN WITH RESPECT TO SHARES PURCHASED WITH THIS NOTE UNTIL EITHER (A)
THE PURCHASE PRICE OF SUCH SHARES IS PAID IN FULL IN CASH OR BY OTHER PROPERTY
ACCEPTED BY THE COMPANY, OR (B) THIS NOTE IS SECURED BY COLLATERAL, OTHER THAN
THE SHARES, HAVING A FAIR MARKET VALUE AT LEAST EQUAL TO THE AMOUNT OF
PURCHASER'S THEN OUTSTANDING OBLIGATION UNDER THIS NOTE (INCLUDING ACCRUED
INTEREST).
6. Prepayment. Prepayment of principal and/or interest due under this
----------
Note may be made at any time without penalty. Unless otherwise agreed in
writing by the Company, all payments will be made in lawful tender of the United
States and will be applied first to the payment of accrued interest, and the
remaining balance of such payment, if any, will then be applied to the payment
of principal. If Purchaser prepays all or a portion of the principal amount of
this Note, Purchaser intends that the Shares paid for by the portion of
principal so paid will continue to be held in pledge under the Pledge Agreement
to serve as independent collateral for the outstanding portion of this Note for
the purpose of commencing the holding period under Rule 144(d) of the Securities
and Exchange Commission with respect to other Shares purchased with this Note.
7. Governing Law; Waiver. The validity, construction and performance of
---------------------
this Note will be governed by the internal laws of the State of California,
excluding that body of law pertaining to conflicts of law. Purchaser hereby
waives presentment, notice of non-payment, notice of dishonor, protest, demand
and diligence.
8. Attorneys' Fees. If suit is brought for collection of this Note,
---------------
Purchaser agrees to pay all reasonable expenses, including attorneys' fees,
incurred by the holder in connection therewith whether or not such suit is
prosecuted to judgment.
IN WITNESS WHEREOF, Purchaser has executed this Note as of the date and
year first above written.
Petro Estakhri
- ------------------------------------ ___________________________________
Purchaser's Name Purchaser's Signature
2
<PAGE>
EXHIBIT 2
---------
STOCK POWER AND ASSIGNMENT
SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase
Agreement dated as of June 5, 1998, (the "Agreement"), the undersigned hereby
---------
sells, assigns and transfers unto _____________________, __________ shares of
the common stock of Lexar Media, Inc., a California corporation (the "Company"),
-------
standing in the undersigned's name on the books of the Company represented by
Certificate No(s). ____ delivered herewith, and does hereby irrevocably
constitute and appoint the Secretary of the Company as the undersigned's
attorney-in-fact, with full power of substitution, to transfer said stock on the
books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE
AGREEMENT AND THE EXHIBITS THERETO.
Dated: ____________________
PURCHASER
___________________________________
(Signature)
Petro Estakhri
-----------------------------------
(Please Print Name)
___________________________________
(Spouse's Signature, if any)
___________________________________
(Please Print Spouse's Name)
Instruction: Please do not fill in any blanks other than the signature line.
- ----------- ---
The purpose of this Stock Power and Assignment is to enable the Company and/or
its assignee(s) to acquire the shares upon a default under Purchaser's Note or
exercise of its "Repurchase Option" and/or "Right of First Refusal" set forth in
the Agreement without requiring additional signatures on the part of the
Purchaser or Purchaser's Spouse.
<PAGE>
EXHIBIT 3
---------
CONSENT OF SPOUSE
-----------------
I, the undersigned, am the spouse of Petro Estakhri ("Purchaser"). I have
---------
read and hereby consent to and approve all the terms and conditions of: the
Restricted Stock Purchase Agreement (the "Agreement") dated as of June 5, 1998
---------
between Purchaser and Lexar Media, Inc., a California corporation (the
"Company"), pursuant to which Purchaser has purchased 1,076,284 shares of the
-------
Company's common stock (the "Shares") and that certain Secured Full Recourse
------
Promissory Note (the "Note") and Stock Pledge Agreement ("Pledge Agreement")
---- ----------------
executed by Purchaser in connection with the Agreement.
In consideration of the Company granting my spouse the right to purchase
the Shares under the Agreement, I hereby agree to be irrevocably bound by all
the terms and conditions of the Agreement (including but not limited to the
Company's Repurchase Option, the Right of First Refusal and the market standoff
agreements contained therein) and of the Note and the Pledge Agreement and
further agree that any community property interest I may have in the Shares will
be similarly bound by the Agreement, the Note and the Pledge Agreement.
I hereby appoint Purchaser as my attorney-in-fact, to act in my name, place
and stead with respect to any amendment of the Agreement, the Note and the
Pledge Agreement, and with respect to the making and filing of an election under
Internal Revenue Code Section 83(b) in connection with the purchase of the
Shares.
Dated as of: June 5, 1998
___________________________________
Signature of Spouse [Sign Here]
___________________________________
Name of Spouse [Please Print]
<PAGE>
EXHIBIT 4
---------
STOCK PLEDGE AGREEMENT
----------------------
This Agreement is made and entered into as of June 5, 1998 between Lexar
Media, Inc., a California corporation (the "Company"), and Petro Estakhri
-------
("Pledgor").
-------
R E C I T A L S
- - - - - - - -
A. In exchange for Pledgor's Secured Full Recourse Promissory Note to the
Company of even date herewith (the "Note"), the Company has issued and sold to
----
Pledgor 1,076,284 shares of its common stock (the "Shares") pursuant to the
------
terms and conditions of that certain Restricted Stock Purchase Agreement between
the Company and Pledgor of even date herewith (the "Purchase Agreement").
------------------
B. Pursuant to Section 5 of the Purchase Agreement, all the Shares on the
date hereof constitute "Unvested Shares" (as defined in the Purchase Agreement
and which herein shall have the meaning as so defined in the Purchase
Agreement); provided, that certain of the Shares will cease to be Unvested
Shares pursuant to the terms of Section 5 of the Purchase Agreement.
C. Pledgor has agreed that repayment of the Note will be secured by the
pledge of the Unvested Shares pursuant to this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Creation of Security Interest. Pursuant to the provisions of the
-----------------------------
California Commercial Code, Pledgor hereby grants to the Company, and the
Company hereby accepts, a first and present security interest in the Unvested
Shares as collateral to secure the payment of Pledgor's obligation to the
Company under the Note. Pledgor herewith delivers to the Company common stock
certificate(s) No(s). ________, representing all the Shares, together with one
stock power for each certificate in the form attached as an Exhibit to the
Purchase Agreement, duly executed (with the date and number of shares left
blank) by Pledgor and Pledgor's spouse, if any. For purposes of this Agreement,
the Unvested Shares pledged to the Company hereby, together with any additional
collateral pledged pursuant to Section 5 hereof, will hereinafter be
collectively referred to as the "Collateral." Pledgor agrees that the
----------
Collateral pledged to the Company will be deposited with and held by the Escrow
Holder (as defined in the Purchase Agreement) and that, notwithstanding anything
to the contrary in the Purchase Agreement, for purposes of carrying out the
provisions of this Agreement, Escrow Holder will act solely for the Company as
its agent and not as a fiduciary.
2. Representations and Warranties. Pledgor hereby represents and
------------------------------
warrants to the Company that Pledgor has good title (both record and beneficial)
to the Collateral, free and clear of all claims, pledges, security interests,
liens or encumbrances of every nature whatsoever, and that Pledgor has the right
to pledge and grant the Company the security interest in the Collateral granted
under this Agreement. Pledgor further agrees that, until the
<PAGE>
entire principal sum and all accrued interest due under the Note has been paid
in full, Purchaser will not, without the Company's prior written consent, (i)
sell, assign or transfer, or attempt to sell, assign or transfer, any of the
Collateral, or (ii) grant or create, or attempt to grant or create, any security
interest, lien, pledge, claim or other encumbrance with respect to any of the
Collateral.
3. Rights on Default. In the event of default (as defined in the
-----------------
Note) by Pledgor under the Note, the Company will have full power to sell,
assign and deliver the whole or any part of the Collateral at any broker's
exchange or elsewhere, at public or private sale, at the option of the Company,
in order to satisfy any part of the obligations of Pledgor now existing or
hereinafter arising under the Note. On any such sale, the Company or its
assigns may purchase all or any part of the Collateral. In addition, at its
sole option, the Company may elect to retain all the Collateral in full
satisfaction of Pledgor's obligation under the Note, in accordance with the
provisions and procedures set forth in the California Commercial Code.
4. Additional Remedies. The rights and remedies granted to the
-------------------
Company herein upon default under the Note will be in addition to all the
rights, powers and remedies of the Company under the California Commercial Code
and applicable law and such rights, powers and remedies will be exercisable by
the Company with respect to all of the Collateral. Pledgor agrees that the
Company's reasonable expenses of holding the Collateral, preparing it for resale
or other disposition, and selling or otherwise disposing of the Collateral,
including attorneys' fees and other legal expenses, will be deducted from the
proceeds of any sale or other disposition and will be included in the amounts
Pledgor must tender to redeem the Collateral. All rights, powers and remedies
of the Company will be cumulative and not alternative. Any forbearance or
failure or delay by the Company in exercising any right, power or remedy
hereunder will not be deemed to be a waiver of any such right, power or remedy
and any single or partial exercise of any such right, power or remedy hereunder
will not preclude the further exercise thereof.
5. Dividends; Voting. All dividends hereinafter declared on or
-----------------
payable with respect to the Collateral during the term of this pledge (excluding
only ordinary cash dividends, which will be payable to Pledgor so long as
Pledgor is not in default under the Note) will be immediately delivered to the
Company to be held in pledge under this Agreement. Notwithstanding this
Agreement, so long as Pledgor owns the Shares and is not in default under the
Note, Pledgor will be entitled to vote any shares comprising the Collateral,
subject to any proxies granted by Pledgor.
6. Adjustments. In the event that during the term of this pledge,
-----------
any stock dividend, reclassification, readjustment, stock split or other change
is declared or made with respect to the Collateral, or if warrants or any other
rights, options or securities are issued in respect of the Collateral, then all
new, substituted and/or additional shares or other securities issued by reason
of such change or by reason of the exercise of such warrants, rights, options or
securities, will be immediately pledged to the Company to be held under the
terms of this Agreement in the same manner as the Collateral is held hereunder.
7. Rights Under Purchase Agreement. Pledgor understands and agrees
-------------------------------
that the Company's rights to repurchase the Collateral under the Purchase
Agreement will continue for the periods and on the terms and conditions
specified in the Purchase Agreement, whether or
2
<PAGE>
not the Note has been paid during such period of time, and that to the extent
that the Note is not paid during such period of time, the repurchase by the
Company of the Collateral may be made by way of cancellation of all or any part
of Pledgor's indebtedness under the Note.
8. Redelivery of Collateral. Upon payment in full of the entire
------------------------
principal sum and all accrued interest due under the Note, and subject to the
terms and conditions of the Purchase Agreement, the Company will immediately
redeliver the Collateral to Pledgor and this Agreement will terminate; provided,
--------
however, that all rights of the Company to retain possession of the Shares
- -------
pursuant to the Purchase Agreement will survive termination of this Agreement.
9. Successors and Assigns. This Agreement will inure to the benefit
----------------------
of the respective heirs, personal representatives, successors and assigns of the
parties hereto.
10. Governing Law; Severability. This Agreement will be governed by
---------------------------
and construed in accordance with the internal laws of the State of California,
excluding that body of law relating to conflicts of law. Should one or more of
the provisions of this Agreement be determined by a court of law to be illegal
or unenforceable, the other provisions nevertheless will remain effective and
will be enforceable.
11. Modification; Entire Agreement. This Agreement will not be
------------------------------
amended without the written consent of both parties hereto. This Agreement and
Section 8 of the Purchase Agreement constitute the entire agreement of the
parties hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings related to such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
COMPANY PLEDGOR
By:_______________________________ ___________________________________
[Signature]
Name:_____________________________ Petro Estakhri
-----------------------------------
Its:______________________________
3
<PAGE>
EXHIBIT 5
---------
ELECTION UNDER SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned Taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code, to include in gross income for the Taxpayer's current
taxable year the excess, if any, of the fair market value of the property
described below at the time of transfer over the amount paid for such property,
as compensation for services.
1. TAXPAYER'S NAME: Petro Estakhri
---------------------------------------
TAXPAYER'S ADDRESS: _______________________________________
_______________________________________
SOCIAL SECURITY NUMBER: _______________________________________
2. The property with respect to which the election is made is described as
follows: 1,076,284 shares of Common Stock of Lexar Media, Inc., a
California corporation (the "Company"), which is Taxpayer's employer or the
-------
corporation for whom the Taxpayer performs services.
3. The date on which the shares were transferred was June 5, 1998 and this
election is made for calendar year 1998.
4. The shares are subject to the following restrictions: The Company may
repurchase all or a portion of the shares at the Taxpayer's original
purchase price under certain conditions at the time of Taxpayer's
termination of employment or services.
5. The fair market value of the shares (without regard to restrictions other
than restrictions which by their terms will never lapse) was $0.08 per
share at the time of transfer.
6. The amount paid for such shares was $0.08 per share.
7. The Taxpayer has submitted a copy of this statement to the Company.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS"), AT THE
---
OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS, WITHIN 30 DAYS AFTER
--------------
THE DATE OF TRANSFER OF THE PROPERTY, AND MUST ALSO BE FILED WITH THE TAXPAYER'S
INCOME TAX RETURNS FOR THE CALENDAR YEAR. THE ELECTION CANNOT BE REVOKED
WITHOUT THE CONSENT OF THE IRS.
Dated: _______________, 1998 ___________________________________
Taxpayer's Signature
<PAGE>
EXHIBIT 10.15
RESTRICTED STOCK PURCHASE AGREEMENT
This Restricted Stock Purchase Agreement (this "Agreement") is made and
entered into as of January 17, 2000 (the "Effective Date") between Lexar Media,
Inc. (the "Company"), a California corporation, and John Reimer ("Purchaser").
1. PURCHASE OF SHARES. On the Effective Date and subject to the terms
------------------
and conditions of this Agreement, Purchaser hereby purchases from the Company,
and Company hereby sells to Purchaser, an aggregate of four hundred thousand
(400,000) shares of the Company's common stock (the "Shares") at an aggregate
purchase price of eight hundred thousand Dollars ($800,000.00) (the "Purchase
Price") or $2.00 per Share (the "Purchase Price Per Share"). As used in this
Agreement, the term "Shares" refers to the Shares purchased under this Agreement
and includes all securities received (a) in replacement of the Shares, (b) as a
result of stock dividends or stock splits in respect of the Shares, and (c) in
replacement of the Shares in a recapitalization, merger, reorganization or the
like .
2. PAYMENT OF PURCHASE PRICE; CLOSING.
----------------------------------
(a) Deliveries by Purchaser. Purchaser hereby delivers to the Company
-----------------------
the full Purchase Price by delivery to the Company of a Note Secured by Stock
Pledge Agreement of Purchaser in the principal amount of the full Purchase Price
in the form of Exhibit 1, duly executed by Purchaser (the "Note"). Purchaser
---------
also hereby delivers to the Company: (i) two (2) copies of a blank Stock Power
and Assignment Separate from Stock Certificate in the form of Exhibit 2 attached
---------
hereto (the "Stock Powers"), both duly executed by Purchaser (and Purchaser's
spouse, if any), (ii) if Purchaser is married, a Consent of Spouse in the form
of Exhibit 3 attached hereto (the "Spouse Consent") duly executed by Purchaser's
---------
spouse, and (iii) a Stock Pledge Agreement in the form of Exhibit 4, duly
---------
executed by Purchaser (the "Pledge Agreement").
(b) Deliveries by the Company. Upon its receipt of the entire
-------------------------
Purchase Price and all the documents to be executed and delivered by Purchaser
to the Company under Section 2(a), the Company will issue a duly executed stock
certificate evidencing the Shares in the name of Purchaser registered in
Purchaser's name in accordance with Section 19, with such certificate to be
placed in escrow as provided in Section 8 until expiration or termination of
both the Company's Repurchase Option and Right of First Refusal described in
Sections 5 and 6 and payment in full to the Company of all sums due under the
Note.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
-------------------------------------------
warrants to the Company that:
(a) Purchase for Own Account for Investment. Purchaser is purchasing
---------------------------------------
the Shares for Purchaser's own account for investment purposes only and not with
a view to, or for sale in connection with, a distribution of the Shares within
the meaning of the Securities Act of 1933, as amended (the "1933 Act").
Purchaser has no present intention of selling or otherwise disposing of all or
any portion of the Shares and no one other than Purchaser has any beneficial
ownership of any of the Shares.
<PAGE>
(b) Access to Information. Purchaser has had access to all
---------------------
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.
(c) Understanding of Risks. Purchaser is an officer of the Company
----------------------
and is fully aware of: (i) the highly speculative nature of the investment in
the Shares; (ii) the financial hazards involved; (iii) the lack of liquidity of
the Shares and the restrictions on transferability of the Shares (e.g., that
----
Purchaser may not be able to sell or dispose of the Shares or use them as
collateral for loans); (iv) the qualifications and backgrounds of the management
of the Company; and (v) the tax consequences of investment in the Shares.
(d) Purchaser's Qualifications. Purchaser has a preexisting personal
--------------------------
or business relationship with the Company and/or certain of its officers and/or
directors of a nature and duration sufficient to make Purchaser aware of the
character, business acumen and general business and financial circumstances of
the Company and/or such officers and directors. By reason of Purchaser's
business or financial experience, Purchaser is capable of evaluating the merits
and risks of this investment, has the ability to protect Purchaser's own
interests in this transaction and is financially capable of bearing a total loss
of this investment.
(e) No General Solicitation. At no time was Purchaser presented with
-----------------------
or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.
(f) Compliance with Securities Laws. Purchaser understands and
-------------------------------
acknowledges that, in reliance upon the representations and warranties made by
Purchaser herein, the Shares are not being registered with the Securities and
Exchange Commission ("SEC") under the 1933 Act or being qualified under the
California Corporate Securities Law of 1968, as amended (the "Law"), but instead
are being issued under an exemption or exemptions from the registration and
qualification requirements of the 1933 Act and the Law or other applicable state
securities laws which impose certain restrictions on Purchaser's ability to
transfer the Shares.
(g) Restrictions on Transfer. Purchaser understands that Purchaser
------------------------
may not transfer any Shares unless such Shares are registered under the 1933 Act
or qualified under the Law or unless, in the opinion of counsel to the Company,
exemptions from such registration and qualification requirements are available.
Purchaser understands that only the Company may file a registration statement
with the SEC or the California Commissioner of Corporations and that the Company
is under no obligation to do so with respect to the Shares. Purchaser has also
been advised that exemptions from registration and qualification may not be
available or may not permit Purchaser to transfer all or any of the Shares in
the amounts or at the times proposed by Purchaser.
(h) Rule 144. In addition, Purchaser has been advised that SEC Rule
--------
144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the Shares
and, in any event, requires that the Shares be
2
<PAGE>
held for a minimum of one year, and in certain cases two years, after they have
been purchased and paid for (within the meaning of Rule 144), before they may be
------------
resold under Rule 144. Purchaser understands that Shares paid for with a Note
may not be deemed to be fully "paid for" within the meaning of Rule 144 unless
certain conditions are met and that, accordingly, the Rule 144 holding period of
such Shares may not begin to run until such Shares are fully paid for within the
meaning of Rule 144. Purchaser understands that Rule 144 may indefinitely
restrict transfer of the Shares so long as Purchaser remains an "affiliate" of
the Company and "current public information" about the Company (as defined in
Rule 144) is not publicly available.
4. COMPLIANCE WITH CALIFORNIA SECURITIES LAWS. THE SALE OF THE SECURITIES
------------------------------------------
THAT ARE THE SUBJECT OF THIS AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA
COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT
TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF
ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL
UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
BEING AVAILABLE.
5. COMPANY'S REPURCHASE OPTION. The Company or its assignees shall have
---------------------------
the option to repurchase all or a portion of the Unvested Shares (as defined
below) on the terms and conditions set forth in this Section (the "Repurchase
Option") if Purchaser ceases to be employed by the Company (as defined herein)
for any reason, or no reason, including without limitation Purchaser's death,
disability, voluntary resignation or termination by the Company with or without
cause.
(a) Definition of "Employed by the Company"; "Termination Date". For
----------------------------------------------------------
purposes of this Agreement, Purchaser will be considered to be "employed by the
Company" if the Board of Directors of the Company determines that Purchaser is
rendering substantial services as an officer, employee, consultant or
independent contractor to the Company or to any parent, subsidiary or affiliate
of the Company. In case of any dispute as to whether Purchaser is employed by
the Company, the Board of Directors of the Company will have discretion to
determine whether Purchaser has ceased to be employed by the Company or any
parent, subsidiary or affiliate of the Company and the effective date on which
Purchaser's employment terminated (the "Termination Date").
(b) Unvested and Vested Shares. Shares that are vested pursuant to
--------------------------
the schedule set forth herein are "Vested Shares". Shares that are not vested
pursuant to the schedule herein are "Unvested Shares". Unvested Shares may not
be sold or otherwise transferred by Purchaser without the Company's prior
written consent. On the Effective Date all of the Shares will be Unvested
Shares. For so long (and only for so long) as Purchaser remains continuously
employed by the Company at all times after December 21, 1999 (the "Grant Date"),
an additional 2.083% of the Shares will become Vested Shares upon each one month
anniversary
3
<PAGE>
of the Grant Date; provided, however, (i) Purchaser will immediately receive 18
months of vesting upon death or an Involuntary Termination (as defined in
Appendix A hereto) and (ii) all unvested Shares shall vest upon an Involuntary
- ----------
Termination within 12 months of a Corporate Transaction (as defined in Appendix
--------
A hereto). If the application of the vesting percentage results in a fractional
- --------
share, such share shall be rounded up to the nearest whole share for each month
except for the last month in such vesting period, at the end of which last month
the balance of the Unvested Shares shall become fully Vested Shares.
(c) Adjustments. The number of Shares that are Vested Shares or
-----------
Unvested Shares will be proportionally adjusted to reflect any stock dividend,
stock split, reverse stock split or recapitalization of the common stock of the
Company occurring after the Effective Date.
(d) Exercise of Repurchase Option at Original Price. At any time
-----------------------------------------------
within ninety (90) days after the Termination Date, the Company may elect to
repurchase any or all of the Unvested Shares by giving Purchaser written notice
of exercise of the Repurchase Option. The Company and/or its assignee(s) will
then have the option to repurchase from Purchaser (or from Purchaser's personal
representative as the case may be) any or all of the Unvested Shares at the
Purchaser's original Purchase Price Per Share, as adjusted to reflect any stock
dividend, stock split, reverse stock split or recapitalization of the common
stock of the Company occurring after the Effective Date (the "Repurchase Option
Price").
(e) Payment of Repurchase Price. The Repurchase Option Price will be
---------------------------
payable, at the option of the Company or its assignee(s), by check or by
cancellation of all or a portion of any outstanding indebtedness of Purchaser to
the Company (or to such assignee) or by any combination thereof. The Repurchase
Option Price will be paid without interest within ninety (90) days after the
Termination Date.
(f) Right of Termination Unaffected. Nothing in this Agreement will
-------------------------------
be construed to limit or otherwise affect in any manner whatsoever the right or
power of the Company (or any parent, subsidiary or affiliate of the Company) to
terminate Purchaser's employment with the Company (or any parent, subsidiary or
affiliate of the Company) at any time for any reason or no reason, with or
without cause.
6. RIGHT OF FIRST REFUSAL. Unvested Shares may not be sold or otherwise
----------------------
transferred by Purchaser without the Company's prior written consent. Before
any Vested Shares held by Purchaser or any transferee of such Shares (either
being sometimes referred to herein as the "Holder") may be sold or otherwise
transferred (including without limitation a transfer by gift or operation of
law), the Company and/or its assignee(s) will have a right of first refusal to
purchase the Shares to be sold or transferred (the "Offered Shares") on the
terms and conditions set forth in this Section (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares will
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer the Offered Shares;
(ii) the name and address of each proposed purchaser or other transferee
("Proposed Transferee"); (iii) the number of Offered Shares to be transferred to
each Proposed Transferee; (iv) the bona fide cash price or other consideration
for which the Holder proposes to transfer the Offered Shares (the "Offered
Price"); and (v) that the Holder will
4
<PAGE>
offer to sell the Offered Shares to the Company and/or its assignee(s) at the
Offered Price as provided in this Section.
(b) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after the date of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all (but not less than
all) of the Offered Shares proposed to be transferred to any one or more of the
Proposed Transferees named in the Notice, at the purchase price determined in
accordance with subsection (c) below.
(c) Purchase Price. The purchase price for the Offered Shares
--------------
purchased under this Section will be the Offered Price. If the Offered Price
includes consideration other than cash, then the value of the non-cash
consideration as determined in good faith by the Company's Board of Directors
will conclusively be deemed to be the cash equivalent value of such non-cash
consideration.
(d) Payment. Payment of the purchase price for Offered Shares will be
-------
payable, at the option of the Company and/or its assignee(s) (as applicable), by
check or by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Company (or to such assignee, in the case of a purchase of
Offered Shares by such assignee) or by any combination thereof. The purchase
price will be paid without interest within sixty (60) days after the Company's
receipt of the Notice, or, at the option of the Company and/or its assignee(s),
in the manner and at the time(s) set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Offered Shares proposed
--------------------------
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section, then the
Holder may sell or otherwise transfer such Offered Shares to that Proposed
Transferee at the Offered Price or at a higher price, provided that such sale or
--------
other transfer is consummated within 120 days after the date of the Notice, and
provided further, that: (i) any such sale or other transfer is effected in
- -------- -------
compliance with all applicable securities laws; and (ii) the Proposed Transferee
agrees in writing that the provisions of this Section will continue to apply to
the Offered Shares in the hands of such Proposed Transferee. If the Offered
Shares described in the Notice are not transferred to the Proposed Transferee
within such 120 day period, then a new Notice must be given to the Company, and
the Company will again be offered the Right of First Refusal before any Shares
held by the Holder may be sold or otherwise transferred.
(f) Exempt Transfers. Notwithstanding anything to the contrary in
----------------
this Section, the following transfers of Shares will be exempt from the Right of
First Refusal: (i) the transfer of any or all of the Shares during Purchaser's
lifetime by gift or on Purchaser's death by will or intestacy to Purchaser's
"immediate family" (as defined below) or to a trust for the benefit of Purchaser
or Purchaser's immediate family, provided that each transferee or other
recipient agrees in a writing satisfactory to the Company that the provisions of
this Section will continue to apply to the transferred Shares in the hands of
such transferee or other recipient; (ii) any transfer of Shares made pursuant to
a statutory merger or statutory consolidation of the Company with or into
another corporation or corporations (except, unless provided otherwise in
Section 6(g), that the Right of First Refusal will continue to apply thereafter
to such Shares, in which case the surviving corporation of such merger or
consolidation shall succeed to the rights
5
<PAGE>
or the Company under this Section unless the agreement of merger or
consolidation expressly otherwise provides); or (iii) any transfer of Shares
pursuant to the winding up and dissolution of the Company. As used herein, the
term "immediate family" will mean Purchaser's spouse, lineal descendant or
antecedent, father, mother, brother or sister, adopted child or grandchild, or
the spouse of any child, adopted child, grandchild or adopted grandchild of
Purchaser.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
will terminate as to all Shares upon the effective date of the first sale of
common stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the SEC under the 1933 Act (other
than a registration statement relating solely to the issuance of common stock
pursuant to a business combination or an employee incentive or benefit plan).
(h) Encumbrances on Vested Shares. Purchaser may grant a lien or
-----------------------------
security interest in, or pledge, hypothecate or encumber Vested Shares only if
each party to whom such lien or security interest is granted, or to whom such
pledge, hypothecation or other encumbrance is made, agrees in a writing
satisfactory to the Company that: (i) such lien, security interest, pledge,
hypothecation or encumbrance will not apply to such Vested Shares after they are
acquired by the Company and/or its assignees) under this Section; and (ii) the
provisions of this Section will continue to apply to such Vested Shares in the
hands of such party and any transferee of such party. Purchaser may not grant a
lien or security interest in, or pledge, hypothecate or encumber, any Unvested
Shares.
7. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this
---------------------
Agreement, Purchaser will have all of the rights of a shareholder of the Company
with respect to the Shares from and after the date that Purchaser delivers
payment of the Purchase Price until such time as Purchaser disposes of the
Shares or the Company and/or its assignee(s) exercise(s) the Repurchase Option
or Right of First Refusal. Upon an exercise of the Repurchase Option or the
Right of First Refusal, Purchaser will have no further rights as a holder of the
Shares so purchased upon such exercise, except the right to receive payment for
the Shares so purchased in accordance with the provisions of this Agreement, and
Purchaser will promptly surrender the stock certificate(s) evidencing the Shares
so purchased to the Company for transfer or cancellation.
8. ESCROW. As security for Purchaser's faithful performance of this
------
Agreement, Purchaser agrees, immediately upon receipt of the stock
certificate(s) evidencing the Shares, to deliver such certificate(s), together
with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any
(with the date and number of Shares left blank), to the Secretary of the Company
or other designee of the Company ("Escrow Holder"), who is hereby appointed to
hold such certificate(s) and Stock Powers in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this Agreement. Escrow Holder will act solely for
the Company as its agent and not as a fiduciary. Purchaser and the Company
agree that Escrow Holder will not be liable to any party to this Agreement (or
to any other party) for any actions or omissions unless Escrow Holder is grossly
negligent or intentionally fraudulent in carrying out the duties of Escrow
Holder under this Section. Escrow Holder may rely upon any letter, notice or
other document executed by any signature purported to be genuine and may rely on
the advice of counsel and obey any order of
6
<PAGE>
any court with respect to the transactions contemplated by this Agreement. The
Shares will be released from escrow upon termination of both the Repurchase
Option and the Right of First Refusal provided, however, that the Shares will be
-------- -------
retained in escrow so long as they are subject to the Pledge Agreement.
9. TAX CONSEQUENCES. PURCHASER UNDERSTANDS THAT PURCHASER MAY SUFFER
----------------
ADVERSE TAX CONSEQUENCES AS A RESULT OF PURCHASER'S PURCHASE OR DISPOSITION OF
THE SHARES. PURCHASER REPRESENTS (i) THAT PURCHASER HAS CONSULTED WITH A TAX
ADVISER THAT PURCHASER DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND (ii) THAT PURCHASER IS NOT RELYING ON THE COMPANY
FOR ANY TAX ADVICE. Purchaser hereby acknowledges that Purchaser has been
informed that, unless an election is filed by the Purchaser with the Internal
Revenue Service (and, if necessary, the proper state taxing authorities), within
------
30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the
- -------
Internal Revenue Code (and similar state tax provisions, if applicable) to be
taxed currently on any difference between the Purchase Price of the Shares and
their fair market value on the date of purchase, there will be a recognition of
taxable income to the Purchaser, measured by the excess, if any, of the fair
market value of the Vested Shares, at the time they cease to be Unvested Shares,
over the purchase price for such Shares. Purchaser represents that Purchaser
has consulted any tax consultant(s) Purchaser deems advisable in connection with
Purchaser's purchase of the Shares and the filing of the election under Section
83(b) and similar tax provisions. A form of Election under Section 83(b) is
attached hereto as Exhibit 5 for reference. PURCHASER HEREBY ASSUMES ALL
---------
RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES RESULTING FROM SUCH
ELECTION OR FROM FAILURE TO FILE THE ELECTION AND PAYING TAXES RESULTING FROM
THE LAPSE OF THE REPURCHASE RESTRICTIONS ON THE UNVESTED SHARES.
10. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------------------
(a) Legends. Purchaser understands and agrees that the Company will
-------
place the legends set forth below or similar legends on any stock certificate(s)
evidencing the Shares, together with any other legends that may be required by
state or federal securities laws, the Company's Articles of Incorporation or
Bylaws, any other agreement between Purchaser and the Company or any agreement
between Purchaser and any third party:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES
ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER
THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE
AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS
OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE
7
<PAGE>
ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE
WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON PUBLIC RESALE, TRANSFER, RIGHT OF
REPURCHASE AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE
ISSUER AND/OR ITS ASSIGNEE(S) AS SET FORTH IN A RESTRICTED
STOCK PURCHASE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL
HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT
THE PRINCIPAL OFFICE OF THE ISSUER. SUCH PUBLIC SALE AND
TRANSFER RESTRICTIONS AND THE RIGHT OF REPURCHASE AND RIGHT
OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
180 DAY MARKET STANDOFF RESTRICTION AS SET FORTH IN A
CERTAIN AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER
OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE
PRINCIPAL OFFICE OF THE ISSUER. AS A RESULT OF SUCH
AGREEMENT, THESE SHARES MAY NOT BE TRADED PRIOR TO 180 DAYS
AFTER THE EFFECTIVE DATE OF THE INITIAL PUBLIC OFFERING OF
THE COMMON STOCK OF THE ISSUER HEREOF. SUCH RESTRICTION IS
BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Instructions. Purchaser agrees that, in order to
--------------------------
ensure compliance with the restrictions imposed by this Agreement, the Company
may issue appropriate "stop-transfer" instructions to its transfer agent, if
any, and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company will not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares, or to accord the right to vote or pay dividends, to any
purchaser or other transferee to whom such Shares have been so transferred.
11. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any
-------------------------
registration of the Company's securities under the 1933 Act that, upon the
request of the Company or the underwriters managing any registered public
offering of the Company's securities, Purchaser will not sell or otherwise
dispose of any Shares without the prior written consent of the Company or such
managing underwriters, as the case may be, for a period of time (not to exceed
one hundred eighty (180) days) after the effective date of such registration
requested by such managing underwriters and subject to all restrictions as the
Company or the
8
<PAGE>
managing underwriters may specify for employee-shareholders generally. Purchaser
further agrees to enter into any agreement reasonably required by the
underwriters to implement the foregoing.
12. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of
------------------------------------
the Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state and federal laws and regulations and with
all applicable requirements of any stock exchange or automated quotation system
on which the Company's common stock may be listed or quoted at the time of such
issuance or transfer.
13. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
----------------------
under this Agreement, including its rights to repurchase Shares under the
Repurchase Option and the Right of First Refusal. This Agreement will be
binding upon and inure to the benefit of the successors and assigns of the
Company. Subject to the restrictions on transfer herein set forth, this
Agreement will be binding upon Purchaser and Purchaser's heirs, executors,
administrators, successors and assigns.
14. GOVERNING LAW; SEVERABILITY. This Agreement will be governed by and
---------------------------
construed in accordance with the internal laws of the State of California,
excluding that body of laws pertaining to conflict of laws. If any provision of
this Agreement is determined by a court of law to be illegal or unenforceable,
then such provision will be enforced to the maximum extent possible and the
other provisions will remain fully effective and enforceable.
15. NOTICES. Any notice required or permitted hereunder will be given in
-------
writing and will be deemed effectively given upon personal delivery, three (3)
days after deposit in the United States mail by certified or registered mail
(return receipt requested), one (1) business day after its deposit with any
return receipt express courier (prepaid), or one (1) business day after
transmission by telecopier, addressed to the other party at its address (or
facsimile number, in the case of transmission by telecopier) as shown below its
signature to this Agreement, or to such other address as such party may
designate in writing from time to time to the other party.
16. FURTHER INSTRUMENTS. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
17. HEADINGS. The captions and headings of this Agreement are included
--------
for ease of reference only and will be disregarded in interpreting or construing
this Agreement. All references herein to Sections will refer to Sections of
this Agreement.
18. ENTIRE AGREEMENT. This Agreement, together with all its Exhibits,
----------------
constitutes the entire agreement and understanding of the parties with respect
to the subject matter of this Agreement, including any sale, grant or transfer
to the Purchaser of capital stock of the Company (including any options
therefor), any payments or preferences to be paid to Purchaser upon the sale of
the Company and all management incentive plans in which Purchaser could
participate, and supersedes all prior understandings and agreements, whether
oral or written, between the parties hereto with respect to the specific subject
matter hereof.
9
<PAGE>
19. TITLE TO SHARES. The exact spelling of the name(s) under which
---------------
Purchaser will take title to the Shares is:
John Reimer
-----------------------------------------------------
Terry Reimer
-----------------------------------------------------
Purchaser desires to take title to the Shares as follows:
[_] Individual, as separate property
[X] Husband and wife, as community property
[_] Joint Tenants
[_] Alone or with spouse as trustee(s) of the
following trust (including date):_______________________________________
________________________________________________________________________
________________________________________________________________________
[_] Other; please specify:__________________________________________________
________________________________________________________________________
Purchaser's social security number is: ###-##-####
----------------------------------------
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Purchaser has executed this
Agreement in duplicate, as of the Effective Date.
COMPANY PURCHASER
By:________________________________ _______________________________
Name: Carlton Osborne
-----------------------------
Title: General Counsel & Secretary Name: John Reimer
-----------------------------
Address: 47421 Bayside Parkway Address:5854 Country Club Drive
-----------------------
Fremont, CA 94538 San Jose, CA, 95138
-------------------------------
Fax: (510) 413-1255
10
<PAGE>
APPENDIX A
----------
A. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of the
Company.
B. Involuntary Termination shall mean the termination
-----------------------
of Purchaser's Service by reason of:
(i) Purchaser's involuntary dismissal or discharge by the Company for
reasons other than Misconduct, or
(ii) Purchaser's voluntary resignation following (A) a change in
Purchaser's position with the Company (or Parent or Subsidiary employing
Purchaser) which materially reduces Purchaser's level of responsibility,
(B) a reduction in Purchaser's level of compensation (including base
salary, fringe benefits and target bonus under any corporate-performance
based bonus or incentive programs) by more than fifteen percent (15%) or
(C) a relocation of Purchaser's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is
effected by the Company without Purchaser's consent.
C. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Purchaser, any unauthorized use or disclosure by the
Purchaser of confidential information or trade secrets of the Company (or any
Parent or Subsidiary), or any other intentional misconduct by the Purchaser
adversely affecting the business or affairs of the Company (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Company (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of the
Purchaser or any other person in the Service of the Company (or any Parent or
Subsidiary).
D. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization, combination of shares, exchange of shares or other change
affecting the Company's outstanding Common Stock as a class without the
Company's receipt of consideration.
E. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the Company is not the
surviving entity,
(ii) a sale, transfer or other disposition of all or substantially all
of the Company's assets,
11
<PAGE>
(iii) a reverse merger in which the Company is the surviving entity
but in which the Company's outstanding voting securities are transferred in
whole or in part to a person or persons different from the persons holding
those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which
the Company is incorporated or to create a holding company structure.
F. Service shall mean the Purchaser's performance of services for the
-------
Company (or any Parent or Subsidiary) in the capacity of an employee, subject to
the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance, a non-employee member of the
board of directors or an independent consultant.
12
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit 1: Note Secured by Stock Pledge Agreement
Exhibit 2: Stock Power and Assignment Separate from Stock Certificate
Exhibit 3: Spousal Consent
Exhibit 4: Stock Pledge Agreement
Exhibit 5: Election Under Section 83(b) of the Internal Revenue Code
13
<PAGE>
EXHIBIT 2
---------
STOCK POWER AND ASSIGNMENT
SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase
Agreement dated as of January 17, 2000, (the "Agreement"), the undersigned
hereby sells, assigns and transfers unto _____________________, __________
shares of the common stock of Lexar Media, Inc., a California corporation (the
"Company"), standing in the undersigned's name on the books of the Company
represented by Certificate No(s). ____ delivered herewith, and does hereby
irrevocably constitute and appoint the Secretary of the Company as the
undersigned's attorney-in-fact, with full power of substitution, to transfer
said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS
AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO.
Dated: ____________________
PURCHASER
_________________________________
(Signature)
John Reimer
_________________________________
(Please Print Name)
_________________________________
(Spouse's Signature, if any)
Terry Reimer
_________________________________
(Please Print Spouse's Name)
Instruction: Please do not fill in any blanks other than the signature line.
- ----------- ---
The purpose of this Stock Power and Assignment is to enable the Company and/or
its assignee(s) to acquire the shares upon a default under Purchaser's Note or
exercise of its "Repurchase Option" and/or "Right of First Refusal" set forth in
the Agreement without requiring additional signatures on the part of the
Purchaser or Purchaser's Spouse.
<PAGE>
EXHIBIT 2
---------
STOCK POWER AND ASSIGNMENT
SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase
Agreement dated as of January 17, 2000, (the "Agreement"), the undersigned
hereby sells, assigns and transfers unto _____________________, __________
shares of the common stock of Lexar Media, Inc., a California corporation (the
"Company"), standing in the undersigned's name on the books of the Company
represented by Certificate No(s). ____ delivered herewith, and does hereby
irrevocably constitute and appoint the Secretary of the Company as the
undersigned's attorney-in-fact, with full power of substitution, to transfer
said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS
AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO.
Dated: ____________________
PURCHASER
_____________________________
(Signature)
John Reimer
_____________________________
(Please Print Name)
_____________________________
(Spouse's Signature, if any)
Terry Reimer
_____________________________
(Please Print Spouse's Name)
Instruction: Please do not fill in any blanks other than the signature line.
- ----------- ---
The purpose of this Stock Power and Assignment is to enable the Company and/or
its assignee(s) to acquire the shares upon a default under Purchaser's Note or
exercise of its "Repurchase Option" and/or "Right of First Refusal" set forth in
the Agreement without requiring additional signatures on the part of the
Purchaser or Purchaser's Spouse.
<PAGE>
EXHIBIT 3
---------
CONSENT OF SPOUSE
-----------------
I, the undersigned, am the spouse of John Reimer ("Purchaser"). I have
read and hereby consent to and approve all the terms and conditions of: the
Restricted Stock Purchase Agreement (the "Agreement") dated as of January 17,
2000 between Purchaser and Lexar Media, Inc., a California corporation (the
"Company"), pursuant to which Purchaser has purchased 400,000 shares of the
Company's common stock (the "Shares") and that certain Note Secured by Stock
Pledge Agreement (the "Note") and Stock Pledge Agreement ("Pledge Agreement")
executed by Purchaser in connection with the Agreement.
In consideration of the Company granting my spouse the right to purchase
the Shares under the Agreement, I hereby agree to be irrevocably bound by all
the terms and conditions of the Agreement (including but not limited to the
Company's Repurchase Option, the Right of First Refusal and the market standoff
agreements contained therein) and of the Note and the Pledge Agreement and
further agree that any community property interest I may have in the Shares will
be similarly bound by the Agreement, the Note and the Pledge Agreement.
I hereby appoint Purchaser as my attorney-in-fact, to act in my name, place
and stead with respect to any amendment of the Agreement, the Note and the
Pledge Agreement, and with respect to the making and filing of an election under
Internal Revenue Code Section 83(b) in connection with the purchase of the
Shares.
Dated as of: January 17, 2000
________________________________
Signature of Spouse [Sign Here]
Terry Reimer
--------------------------------
Name of Spouse [Please Print]
<PAGE>
EXHIBIT 4
---------
STOCK PLEDGE AGREEMENT
----------------------
This Agreement is made and entered into as of January 17, 2000 between
Lexar Media, Inc., a California corporation (the "Company"), and John Reimer
("Pledgor").
R E C I T A L S
- - - - - - - -
A. In exchange for Pledgor's Note Secured by Stock Pledge Agreement to the
Company of even date herewith (the "Note"), the Company has issued and sold to
Pledgor 400,000 shares of its common stock (the "Shares") pursuant to the terms
and conditions of that certain Restricted Stock Purchase Agreement between the
Company and Pledgor of even date herewith (the "Purchase Agreement").
B. Pursuant to Section 5 of the Purchase Agreement, all the Shares on the
date hereof constitute "Unvested Shares" (as defined in the Purchase Agreement
and which herein shall have the meaning as so defined in the Purchase
Agreement); provided, that certain of the Shares will cease to be Unvested
Shares pursuant to the terms of Section 5 of the Purchase Agreement.
C. Pledgor has agreed that repayment of the Note will be secured by the
pledge of the Unvested Shares pursuant to this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Creation of Security Interest. Pursuant to the provisions of the
-----------------------------
California Commercial Code, Pledgor hereby grants to the Company, and the
Company hereby accepts, a first and present security interest in the Unvested
Shares as collateral to secure the payment of Pledgor's obligation to the
Company under the Note. Pledgor herewith delivers to the Company common stock
certificate(s) No(s). ________, representing all the Shares, together with one
stock power for each certificate in the form attached as an Exhibit to the
Purchase Agreement, duly executed (with the date and number of shares left
blank) by Pledgor and Pledgor's spouse, if any. For purposes of this Agreement,
the Unvested Shares pledged to the Company hereby, together with any additional
collateral pledged pursuant to Section 5 hereof, will hereinafter be
collectively referred to as the "Collateral." Pledgor agrees that the
Collateral pledged to the Company will be deposited with and held by the Escrow
Holder (as defined in the Purchase Agreement) and that, notwithstanding anything
to the contrary in the Purchase Agreement, for purposes of carrying out the
provisions of this Agreement, Escrow Holder will act solely for the Company as
its agent and not as a fiduciary.
2. Representations and Warranties. Pledgor hereby represents and
------------------------------
warrants to the Company that Pledgor has good title (both record and beneficial)
to the Collateral, free and clear of all claims, pledges, security interests,
liens or encumbrances of every nature whatsoever, and that Pledgor has the right
to pledge and grant the Company the security interest in the Collateral granted
under this Agreement. Pledgor further agrees that, until the
<PAGE>
entire principal sum and all accrued interest due under the Note has been paid
in full, Purchaser will not, without the Company's prior written consent, (i)
sell, assign or transfer, or attempt to sell, assign or transfer, any of the
Collateral, or (ii) grant or create, or attempt to grant or create, any security
interest, lien, pledge, claim or other encumbrance with respect to any of the
Collateral.
3. Rights on Default. In the event of default (as defined in the
-----------------
Note) by Pledgor under the Note, the Company will have full power to sell,
assign and deliver the whole or any part of the Collateral at any broker's
exchange or elsewhere, at public or private sale, at the option of the Company,
in order to satisfy any part of the obligations of Pledgor now existing or
hereinafter arising under the Note. On any such sale, the Company or its
assigns may purchase all or any part of the Collateral. In addition, at its
sole option, the Company may elect to retain all the Collateral in full
satisfaction of Pledgor's obligation under the Note, in accordance with the
provisions and procedures set forth in the California Commercial Code.
4. Additional Remedies. The rights and remedies granted to the
-------------------
Company herein upon default under the Note will be in addition to all the
rights, powers and remedies of the Company under the California Commercial Code
and applicable law and such rights, powers and remedies will be exercisable by
the Company with respect to all of the Collateral. Pledgor agrees that the
Company's reasonable expenses of holding the Collateral, preparing it for resale
or other disposition, and selling or otherwise disposing of the Collateral,
including attorneys' fees and other legal expenses, will be deducted from the
proceeds of any sale or other disposition and will be included in the amounts
Pledgor must tender to redeem the Collateral. All rights, powers and remedies
of the Company will be cumulative and not alternative. Any forbearance or
failure or delay by the Company in exercising any right, power or remedy
hereunder will not be deemed to be a waiver of any such right, power or remedy
and any single or partial exercise of any such right, power or remedy hereunder
will not preclude the further exercise thereof.
5. Dividends; Voting. All dividends hereinafter declared on or
-----------------
payable with respect to the Collateral during the term of this pledge (excluding
only ordinary cash dividends, which will be payable to Pledgor so long as
Pledgor is not in default under the Note) will be immediately delivered to the
Company to be held in pledge under this Agreement. Notwithstanding this
Agreement, so long as Pledgor owns the Shares and is not in default under the
Note, Pledgor will be entitled to vote any shares comprising the Collateral,
subject to any proxies granted by Pledgor.
6. Adjustments. In the event that during the term of this pledge,
-----------
any stock dividend, reclassification, readjustment, stock split or other change
is declared or made with respect to the Collateral, or if warrants or any other
rights, options or securities are issued in respect of the Collateral, then all
new, substituted and/or additional shares or other securities issued by reason
of such change or by reason of the exercise of such warrants, rights, options or
securities, will be immediately pledged to the Company to be held under the
terms of this Agreement in the same manner as the Collateral is held hereunder.
7. Rights Under Purchase Agreement. Pledgor understands and agrees
-------------------------------
that the Company's rights to repurchase the Collateral under the Purchase
Agreement will continue for the periods and on the terms and conditions
specified in the Purchase Agreement, whether or
<PAGE>
not the Note has been paid during such period of time, and that to the extent
that the Note is not paid during such period of time, the repurchase by the
Company of the Collateral may be made by way of cancellation of all or any part
of Pledgor's indebtedness under the Note.
8. Redelivery of Collateral. Upon payment in full of the entire
------------------------
principal sum and all accrued interest due under the Note, and subject to the
terms and conditions of the Purchase Agreement, the Company will immediately
redeliver the Collateral to Pledgor and this Agreement will terminate; provided,
--------
however, that all rights of the Company to retain possession of the Shares
- -------
pursuant to the Purchase Agreement will survive termination of this Agreement.
9. Successors and Assigns. This Agreement will inure to the benefit
----------------------
of the respective heirs, personal representatives, successors and assigns of the
parties hereto.
10. Governing Law; Severability. This Agreement will be governed by
---------------------------
and construed in accordance with the internal laws of the State of California,
excluding that body of law relating to conflicts of law. Should one or more of
the provisions of this Agreement be determined by a court of law to be illegal
or unenforceable, the other provisions nevertheless will remain effective and
will be enforceable.
11. Modification; Entire Agreement. This Agreement will not be
------------------------------
amended without the written consent of both parties hereto. This Agreement and
Section 8 of the Purchase Agreement constitute the entire agreement of the
parties hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings related to such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
COMPANY PLEDGOR
By:______________________________ ___________________________
[Signature]
Name: Carlton Osborne John Reimer
---------------------------- ---------------------------
Its: General Counsel & Secretary
----------------------------
<PAGE>
EXHIBIT 5
---------
ELECTION UNDER SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned Taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code, to include in gross income for the Taxpayer's current
taxable year the excess, if any, of the fair market value of the property
described below at the time of transfer over the amount paid for such property,
as compensation for services.
1. TAXPAYER'S NAME: John Reimer
--------------------------------------
TAXPAYER'S ADDRESS: 5854 Country Club Drive
--------------------------------------
San Jose, CA 95138
--------------------------------------
SOCIAL SECURITY NUMBER: ###-##-####
--------------------------------------
2. The property with respect to which the election is made is described as
follows: 400,000 shares of Common Stock of Lexar Media, Inc., a California
-------
corporation (the "Company"), which is Taxpayer's employer or the corporation
for whom the Taxpayer performs services.
3. The date on which the shares were transferred was January 17, 2000 and this
election is made for calendar year 2000.
----
4. The shares are subject to the following restrictions: The Company may
repurchase all or a portion of the shares at the Taxpayer's original
purchase price under certain conditions at the time of Taxpayer's
termination of employment or services.
5. The fair market value of the shares (without regard to restrictions other
than restrictions which by their terms will never lapse) was $2.00 per share
-----
at the time of transfer.
6. The amount paid for such shares was $2.00 per share.
-----
7. The Taxpayer has submitted a copy of this statement to the Company.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS"), AT THE
OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS, WITHIN 30 DAYS AFTER
--------------
THE DATE OF TRANSFER OF THE PROPERTY, AND MUST ALSO BE FILED WITH THE TAXPAYER'S
INCOME TAX RETURNS FOR THE CALENDAR YEAR. THE ELECTION CANNOT BE REVOKED
WITHOUT THE CONSENT OF THE IRS.
Dated: January 17, 2000
_______________________________
Taxpayer's Signature
<PAGE>
EXHIBIT 10.17
CONFIDENTIAL
SEPARATION AGREEMENT AND RELEASE
THIS CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE ("Agreement") is made
and entered into on October 7, 1999, by and between Robert J. Netter, Jr. ("Mr.
Netter) and Lexar Media, Inc. (the "Company").
WITNESSETH:
Whereas, Mr. Netter and the Company desire to settle fully and finally any
and all differences between them, including, but in no way limited to, any
differences that might arise out of Mr. Netter's employment with the Company,
and the termination thereof; and
N o w, T h e r e f o r e, in consideration of the premises and mutual
promises herein contained, the parties enter into this Confidential Separation
Agreement and Release.
1. The Company will maintain Mr. Netter as an employee and Chief Financial
Officer of the Company, through October 7, 1999 (or earlier, if Mr. Netter
voluntarily terminates his employment), at which time Mr. Netter will be
terminated (the "Termination Date"). During this period of employment, Mr.
Netter will be entitled to a continuation of present salary and benefits.
During this period of employment, the Company will grant Mr. Netter
reasonable time off from work to seek other employment opportunities. For his
part, Mr. Netter, in his capacity as Chief Financial Officer, will use all
reasonable efforts to obtain and close a private placement financing ("Private
Placement") for the Company in the aggregate amount of twenty. million dollars
($20,000,000). The Company acknowledges that, to date, Mr. Netter has used all
reasonable efforts in performance of his duties regarding the Private Placement.
The Private Placement closing must occur on or before October 16, 1999 to be
considered successful ("Successful Private Placement Closing"); provided,
however, a closing later than October 16, 1999 shall also be considered
successful if such later closing is caused by circumstances beyond the control
of Mr. Netter. In the event the Private Placement closing does not occur on or
before October 16, 1999, the closing with be considered unsuccessful
("Unsuccessful Private Placement Closing"). In addition, if Mr. Netter
voluntarily terminates his employment prior to October 1, 1999, and the Private
Placement closing has not occurred, the closing will be considered an
Unsuccessful Private Placement Closing for purposes of this Agreement.
The determination of the whether the Private Placement is successful or
unsuccessful materially determines the amount of benefits paid to Mr. Netter
upon his Termination Date. In addition, in the event of a Successful Private
Placement Closing, the valuation of the Company may also determine the amount of
benefits paid to Mr. Netter upon his Termination Date. The Schedule of Benefit
Values, based on these determining factors, is attached as Attachment A to this
Agreement, and is incorporated by reference herein.
2. Upon the Termination Date, the Company will provide to Mr. Netter the
following benefits:
<PAGE>
(a) Vacation pay accrued through the Termination Date;
(b) A home computer valued at approximately $500.00; and
(c) Payment directly to the insurer on Mr. Netter's behalf equal to
the cost of the applicable premiums for his present election of
health insurance benefits for Mr. Netter and his dependents during
the Consultancy Period (as defined in Paragraph 3, below) and
contingent severance as specified below.
3. Upon the Termination Date, and in the event of a Successful Private
Placement Closing, Mr. Netter will provide to the Company consulting services
for a period of three (3) months (the "Consultancy Period") during which period
the Company will continue to pay Mr. Netter his base salary, less usual and
customary withholding and will provide Mr. Netter with office space or, if none
is available, an office cubicle. The Company will pay Mr. Netter an additional
hourly rate of $80.00 per hour for work the Company requests and Mr. Netter
accepts during the Consultancy Period, with no minimum or maximum service hours
required. In the event of an Unsuccessful Private Placement, Mr. Netter will not
provide consulting services to the Company and the provisions of this Paragraph
3 will not apply.
4. The Company will provide to Mr. Netter "Contingent Severance Payments"
(less applicable state and federal payroll deductions), payable bi-weekly in
accordance with the Company's normal payroll procedure. The "Contingent
Severance Payments" will begin following the conclusion of the Consultancy
------
Period set forth in Paragraph 3, above, or the Termination Date in the event of
an Unsuccessful Private Placement Closing. The "Contingent Severance Payments"
will cease upon the earlier of the following two dates: (1) the length of time
-----
set forth in the attached Schedule of Benefits; or (2) the date upon which Mr.
Netter obtains Comparable Employment (the "Contingent Severance Period"). For
the purposes of this Agreement, Comparable Employment is any employment or
consulting arrangement that pays Mr. Netter $2,000.00 or more in any month. In
the event Mr. Netter obtains Comparable Employment at a lower salary than his
base salary as of the date of this Agreement, the Company will pay the
difference in salary for the remainder of the "Contingent Severance Period" as
set forth in the attached Schedule of Benefits. The Company will not require Mr.
Netter to submit receipts, invoices, IRS Form W-2 or Form 1099, etc. on a
regular basis. However, the Company reserves the right to inquire of Mr. Netter
regarding Comparable Employment and, in its discretion demand that Mr. Netter
produce invoices, receipts, IRS Form W-2 or Form 1099 for inspection.
5. In the event of a Successful Private Placement Closing, Mr. Netter
will receive a cash bonus (less applicable state and federal payroll deductions)
in an amount set forth in the attached Schedule of Benefits.
6. On March 24, 1998, Mr. Netter executed a "Secured Full Recourse
Promissory Note" as Exhibit 1 to the "Lexar Media, Inc. Restricted Stock
Purchase Agreement," in the amount of $24,000 from the Company. In the event of
a Successful Private Placement Closing, the Company will forgive a portion of
the amount due on the Promissory Note, in an amount set forth in the attached
Schedule of Benefits.
2
<PAGE>
7. On March 24, 1998, Mr. Netter and the Company entered into the "Lexar
Media, Inc. Restricted Stock Purchase Agreement," a copy of which is attached
hereto as Attachment B. As further consideration for this Agreement, the Company
shall grant to Mr. Netter an additional twelve months vesting toward the
Termination of the Company's Repurchase Right set forth in Section D, Paragraph
3, regardless of Private Placement Closing.
In the event of Successful Private Placement Closing, the Company shall
grant to Mr. Netter an additional vesting period in an amount set forth in the
attached Schedule of Benefits.
8. The Company shall grant to Mr. Netter vested shares in an amount set
forth in the attached Schedule of Benefits.
9. The Company, in conjunction with Mr. Netter's input and final approval,
will provide to Mr. Netter an employment letter of reference.
10. This Agreement supersedes, replaces, and revokes the terms contained
in the offer of Employment letter dated September 8, 1997, executed by and
between the Company and Mr. Netter, a copy of which is attached hereto as
Attachment C.
11. Mr. Netter, on the one hand, and the Company, on the other hand,
hereby release and forever discharge each other, and the other's past and
present directors, managers, officers, shareholders, partners, agents,
employees, attorneys, servants, parent corporations, subsidiaries, successors,
assigns, family members, executors, administrators, and each of them, separately
and collectively (hereinafter "Releasees"), from any and all existing claims,
liens, demands, causes of action, obligations, damages and liabilities of any
nature whatsoever, known or unknown, including claims for costs and attorneys'
fees that either party ever had, now has or may claim to have had against
Releasees for any reason, including but not limited to, claims relating to any
oral or written employment or other agreement with the Company, to any services
performed for the Company, to employment or non-employment with the Company, to
any status, term or condition in such employment, or to any physical or mental
harm or distress from such employment or non-employment or claim to any hire,
rehire or future employment of any kind by the Company as a result of this
Agreement or the consideration referred to above.
12. Mr. Netter will indemnify and hold the Company harmless from and
against any and all tax obligations for which Mr. Netter or the Company may
become liable as a result of this Agreement.
13. This Agreement shall not in any way be construed as an admission by
any party that it acted wrongfully with respect to each other or any other
person. The parties specifically disclaim any liability to or wrongful acts
against the other, on the part of itself, its employees or its agents. Rather
the parties have entered into this settlement to resolve any and all disputed
claims which are raised or could be raised by Mr. Netter or the Company. This
Agreement does not constitute an admission or concession by either Mr. Netter or
Company of any liability on account of any of such claims.
3
<PAGE>
14. This Agreement shall not affect the obligations imposed upon Mr.
Netter by virtue of the "Lexar Microsystems, Inc. Employee Nondisclosure and
Invention Assignment Agreement," dated September 8, 1997, and which was
previously executed by Mr. Netter.
15. Mr. Netter and the Company represent and agree to keep the terms of
this Agreement completely confidential, and that he will not disclose any
information concerning this Agreement to anyone other than Mr. Netter's doctor,
tax preparer and attorney, if any, or as otherwise required by law. The Company
reserves the right to disclose the existence of and the terms of this Agreement
internally on a "need-to-know" basis, and to its attorneys, tax advisers, and
other agents as necessary or as required by law.
16. Mr. Netter covenants and agrees never, individually or with any person
or in any way, to commence, aid in any way, prosecute or cause or permit to be
commenced or prosecuted against the Company, any action or other proceeding
based upon any claim, demand, cause of action, obligation, damage or liability
which is the subject of this Release, except as required by law. Mr. Netter
further agrees to aid the Company in the event of litigation against the
Company. The Company represents and agrees to reimburse Mr. Netter at the rate
of two times his base salary and for any necessary expenses incurred by Mr.
Netter in the event of such litigation. The Company agrees to indemnify Mr.
Netter and hold him harmless from any third party claims brought against him
arising out of his employment with the Company.
17. Each party agrees not to engage in conduct or undertake speech
derogatory about or detrimental to the other party.
18. The provisions of this Agreement are severable, and if any part of it
is found to be unenforceable, the other paragraphs shall remain fully valid and
enforceable. This Agreement shall survive the termination of any arrangements
contained herein.
19. The Parties expressly waives any right or benefit available to them in
any capacity under the provisions of section 1542 of the Civil Code of
California, which provides:
"A Release does not extend to claims which the creditor does not know
or suspect to exist in Employee's favor at the time of executing the
release, which if known by him must have materially affected
Employee's settlement with the debtor."
20. The Parties acknowledge and agree that no other consideration other
than as provided for by this Agreement has been or will be paid or furnished;
acknowledge and agree that they will make no claim and hereby waive any right
they may now have or may hereinafter have, based upon any alleged oral
alteration, amendment, modification or any other alleged change in this
Agreement outside of the Agreement; and that they have freely and voluntarily
entered into and executed this Agreement.
21. Mr. Netter understands that various federal, state and local laws
prohibit age, sex, race, disability, benefits, pension, health and other forms
of discrimination and that these laws can be enforced through the U.S. Equal
Employment Opportunity Commission, California state and local human rights
agencies and federal and state courts. Mr. Netter understands that if he
believes his treatment by the Company was discriminatory, he has had the right
to consult with
4
<PAGE>
these agencies and to file a charge with them or file a lawsuit. Mr. Netter
states and confirms that he has filed no Charges or Claims with any state or
federal agency or any other body, institution or tribunal. Mr. Netter has
decided voluntarily to enter into this Agreement, and waive the right to recover
any amounts to which he may have been entitled under such laws, including, but
not limited to: the Age Discrimination in Employment Act, 29 U.S.C. (S) 621 et
--------------------------------------------------------------
sec. (as amended by the Older Workers' Benefit Protection Act, 29 U.S.C.(S)
- ---------------------------------------------------------------------------
626(f)); the California Fair Employment and Housing Act, California Government
Code (S) 12900 et seq.; the Employee Retirement Income Security Act (ERISA), 29
U.S.C. (S) 1001 et seq.; Title VII of the Civil Rights Act of 1964, 42 U.S.C.
(S) 2000e et seq.; and 42 U.S.C. (S) 1981.
22. Mr. Netter acknowledges that he has been advised by the Company to
consult with an attorney prior to executing this Agreement. Mr. Netter
represents and agrees that he fully understands his right to discuss all aspects
of this Agreement with his private attorney, that to the extent, if any, he
desires, he has availed himself of this right, that he has carefully read and
fully understands all of the provisions of this Agreement, and that he is
voluntarily entering into this Agreement. Mr. Netter understands and agrees that
the waiver of rights contained in this Agreement is only in exchange for the
consideration specified herein, and that he would not otherwise be entitled to
such consideration. Mr. Netter acknowledges that he was offered a period of at
least twenty-one (21) days to consider the terms of this Agreement. For a period
of seven (7) days following execution of this Agreement, Mr. Netter may revoke
said Agreement. The Agreement shall not become effective or enforceable until
the seven (7) day period has expired. The "Effective Date" of this Agreement
shall be the eighth day following execution of this Agreement by all Parties.
The Parties understand that no payments or other consideration supporting this
Agreement will be made until the Effective Date of this Agreement.
23. Mr. Netter, and the Company represent and agree that this Agreement is
binding upon themselves and their estates, heirs and assigns.
24. This Agreement incorporates the entire understanding among the
parties, and recites the sole considerations for the promises exchanged herein.
In reaching this Agreement, no party has relied upon any representation or
promise except those expressly set forth herein.
25. This Agreement is governed by, and is to be interpreted according to,
the laws of the State of California. If any term of this Agreement or
application thereof shall be invalid or unenforceable, the remainder of the
Agreement shall remain in full force and effect.
26. The parties hereto agree that venue is proper in the California State
courts in Santa Clara County, California and in the Federal District Court for
the Northern District of California, and each party hereby consents to the
jurisdiction of such courts.
27. This document may be executed in duplicate originals, each of which is
equally admissible in evidence, and each original shall fully bind each party
who executed it.
5
<PAGE>
28. Mr. Netter has read the foregoing Agreement and fully understand and
agree to it.
PLEASE READ CAREFULLY. THIS CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE
INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
Executed at Fremont, CA this 13th day of October, 1999.
By: /s/ Robert J. Netter, Jr.
--------------------------
Robert J. Netter, Jr.
Executed at Fremont, CA this 13th day of October, 1999.
By: /s/ John Reimer
--------------------------
John Reimer
President and CEO Lexar Media, Inc.
6
<PAGE>
ATTACHMENT A
------------
SCHEDULE OF BENEFITS*
--------------------
<TABLE>
<CAPTION>
BENEFIT Unsuccessful Successful Private Successful Private Successful Private Successful Private
Private Placement Placement Closing Placement Closing Placement Closing Placement Closing
Closing (valuation under $80 (valuation $80 up to (valuation $90 up to (valuation $100
million) $89.999 million) $99.999 million) million or more
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consulting Services 0 months 3 months 3 months 3 months 3 months
- ------------------------------------------------------------------------------------------------------------------------------------
Contingent Severance 12 months salary 9 months salary 9 months salary 9 months salary 9 months salary
Payment
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Bonus 0 3 months salary 4 months salary 5 months salary 6 months salary
- ------------------------------------------------------------------------------------------------------------------------------------
Forgiveness of 0 $ 19,500 $ 20,000 $ 20,500 $ 21,000
Promissory Note
- ------------------------------------------------------------------------------------------------------------------------------------
Vesting Bonus (in 0 months 3 months 4 months 5 months 6 months
addition to 12
month grant)
- ------------------------------------------------------------------------------------------------------------------------------------
Grant of Vested 243,750 250,000 256,250 262,500 268,750
Shares
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
__________________
* For example, if the Company achieves a Successful Private Placement with a
closing valued at $95 million, Mr. Nettter would receive 3 months
consulting services, 9 months contingent severance payments, a cash bonus
equal to 5 months base salary, forgiveness of the Promissory Note and a
grant of 262,500 vested shares of Company Common Stock. In addition, the
valuation amount shall be determined by the per share price paid upon
closing.
7
<PAGE>
EXHIBIT 10.20
CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT
This Convertible Note and Warrant Purchase Agreement (the "Agreement")
---------
is made as of March 21, 2000 between Lexar Media Inc., a California corporation
(the "Company"), and Sony Electronics Inc. (the "Investor").
------- --------
1. Issuance of Note and Warrant.
----------------------------
1.1 Convertible Note. Subject to the terms and conditions of this
----------------
Agreement, the Investor agrees to loan the Company an aggregate of Two Million
Dollars ($2,000,000), which loan shall be evidenced by a Convertible Promissory
Note in substantially the form of Exhibit A attached hereto (the "Note"). The
--------- ----
parties agree that the Note shall be convertible into shares of the Company's
Common Stock (the "Conversion Stock") at any time prior to the closing of an
----------------
Initial Public Offering (as defined in the Note) at the conversion rate set
forth in the Note. If on September 1, 2000 the Company has not closed an
Initial Public Offering, then the Note shall no longer be convertible, in whole
or in part, into Conversion Stock or any other security of the Company or any
other successor corporation to the Company.
1.2. Warrant. Subject to the terms and conditions of this Agreement,
-------
the Company further agrees to issue to the Investor a warrant (the "Warrant") in
-------
the form attached hereto as Exhibit B to purchase from the Company shares of
---------
Common Stock (the "Warrant Stock") at the exercise price set forth in the
-------------
Warrant. The parties agree that the Warrant shall not be exercisable until
September 1, 2000. The parties further agree that in the event that the closing
of an Initial Public Offering occurs prior to September 1, 2000, the Warrant
shall expire and shall be of no further force or effect.
2. Closing. The purchase and sale of the Note and the Warrant will take
-------
place at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto,
California, on March 21, 2000, or at such other time and place as the Company
and the Investor mutually agree upon (which time and place are referred to as
the "Closing"). At the Closing, the Investor will deliver to the Company
-------
payment in full for the Note in the amount of Two Million Dollars ($2,000,000),
which the Investor agrees to purchase at the Closing by (i) a check payable to
the Company's order, (ii) wire transfer of funds to the Company or (iii) any
combination of the foregoing. At the Closing, the Company will deliver to the
Investor a duly executed Note and a duly executed Warrant.
3. Representations and Warranties of Company. The Company hereby
-----------------------------------------
represents and warrants to the Investor that the statements in the following
paragraphs of this Section 3 are all true and complete:
3.1 Organization, Good Standing and Qualification. The Company has
---------------------------------------------
been duly incorporated and organized, and is validly existing in good standing,
under the laws of the State of California. The Company has the corporate power
and authority to own and operate its properties and assets and to carry on its
business as currently conducted and as presently proposed to be conducted.
<PAGE>
3.2 Due Authorization. All corporate action on the part of the
-----------------
Company's directors and shareholders necessary for the authorization, execution,
delivery of and the performance of all obligations of the Company under this
Agreement, the Note and the Warrant has been taken or will be taken prior to the
Closing, and this Agreement constitutes, and the Note and the Warrant, when
executed and delivered, will constitute valid and legally binding obligations of
the Company, enforceable in accordance with their respective terms, except as
may be limited by (i) applicable bankruptcy, insolvency, reorganization or other
laws of general application relating to or affecting the enforcement of
creditor's rights generally and (ii) the effect of rules of law governing the
availability of equitable remedies.
3.3 Corporate Power. The Company has the corporate power and
---------------
authority to execute and deliver this Agreement, the Note and the Warrant to be
purchased by the Investor hereunder, to issue the Note and the Warrant and to
carry out and perform all its obligations under this Agreement, the Note and the
Warrant.
3.4 Valid Issuance.
--------------
(a) The Note and the Warrant, when issued, sold and delivered in
accordance with the terms of this Agreement for the consideration provided for
herein, will be duly and validly issued, fully paid, nonassessable and free and
clear of all liens and encumbrances. The Conversion Stock and the Warrant
Stock, when issued in accordance with the terms of the Note and the Warrant,
respectively, will be duly and validly issued, fully paid, nonassessable and
free and clear of all liens and encumbrances.
(b) Based in part on the representations made by the Investors in
Section 4 hereof, the offer and sale of the Note and the Warrant solely to the
Investor in accordance with this Agreement are exempt from the registration and
prospectus delivery requirements of the U.S. Securities Act of 1933, as amended
(the "1933 Act"), and the securities registration and qualification requirements
--------
of the currently effective provisions of the securities laws of California and
the state in which the Investor is resident.
3.5 Preemptive Rights; Rights of First Refusal. The issuance of the
Securities will not trigger any preemptive rights, rights of first refusal or
other rights to purchase stock of the Company (whether in favor of the Company
or any other person), pursuant to any agreement or commitment of the Company,
other than pursuant to that certain Investors Rights Agreement, dated September
28, 1999, by and among the Company and certain investors named therein (the
"Rights Agreement"). As set forth in Section 7, the Company is in the process
----------------
of amending the Rights Agreement such that the issuance of the Securities will
not trigger the preemptive rights and rights of first refusal contained therein.
4. Representations of Investor. The Investor hereby represents and
---------------------------
warrants to, and agrees with, the Company, that:
2
<PAGE>
4.1 Authorization. This Agreement constitutes the Investor's valid
-------------
and legally binding obligation, enforceable in accordance with its terms except
as may be limited by (i) applicable bankruptcy, insolvency, reorganization or
other laws of general application relating to or affecting the enforcement of
creditors' rights generally and (ii) the effect of rules of law governing the
availability of equitable remedies. The Investor represents that it has full
power and authority to enter into this Agreement.
4.2 Purchase for Own Account. The Note, the Warrant, the Conversion
------------------------
Stock and the Warrant Stock (collectively, the "Securities") will be acquired
----------
for investment for the Investor's own account, not as a nominee or agent, and
not with a view to the public resale or distribution thereof within the meaning
of the 1933 Act, and the Investor has no present intention of selling, granting
any participation in or otherwise distributing the same.
4.3 Disclosure of Information. The Investor believes that it has
-------------------------
received or has had full access to all the information it considers necessary or
appropriate to make an informed investment decision with respect to the
Securities. The Investor further has had an opportunity to ask questions and
receive answers from the Company regarding the terms and conditions of the
offering of the Securities and to obtain additional information (to the extent
the Company possessed such information or could acquire it without unreasonable
effort or expense) necessary to verify any information furnished to the Investor
or to which the Investor had access. The foregoing, however, does not in any
way limit or modify the representations and warranties made by the Company in
Section 3.
4.4 Investment Experience. The Investor understands that the
---------------------
purchase of the Securities involves substantial risk. The Investor (i) has
experience as an investor in securities of companies in the development stage
and acknowledges that the Investor is able to fend for itself, can bear the
economic risk of the Investor's investment in the Securities and has such
knowledge and experience in financial or business matters that the Investor is
capable of evaluating the merits and risks of this investment in the Securities
and protecting its own interests in connection with this investment and/or (ii)
has a preexisting personal or business relationship with the Company and certain
of its officers, directors or controlling persons of a nature and duration that
enables the Investor to be aware of the character, business acumen and financial
circumstances of such persons.
4.5 Accredited Investor Status. The Investor is an "accredited
--------------------------
investor" within the meaning of Regulation D promulgated under the 1933 Act.
4.6 Restricted Securities. The Investor understands that the
---------------------
Securities are characterized as "restricted securities" under the 1933 Act and
Rule 144 promulgated thereunder inasmuch as they are being acquired from the
Company in a transaction not involving a public offering, and that under the
1933 Act and applicable regulations thereunder such securities may be resold
without registration under the 1933 Act only in certain limited circumstances.
In this connection, the Investor represents that the Investor is familiar with
Rule 144 of the 1933 Act, as presently in effect, and understands the resale
limitations imposed thereby and by the 1933 Act.
3
<PAGE>
The Investor understands that the Company is under no obligation to register any
of the securities sold hereunder, except pursuant to the Rights Agreement
described in Section 7.
4.7 No Solicitation. At no time was the Investor presented with or
---------------
solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Securities.
5. Further Limitations on Disposition. Without in any way limiting the
----------------------------------
representations set forth above, the Investor further agrees not to make any
disposition of all or any portion of the Securities unless and until:
(a) there is then in effect a registration statement under the 1933
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) the Investor shall have notified the Company of the proposed
disposition, and shall have furnished the Company with a statement of the
circumstances surrounding the proposed disposition, and, at the expense of the
Investor or its transferee, with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
securities under the 1933 Act.
Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be required: (i) for any
transfer of the Securities in compliance with Rule 144 or Rule 144A; or (ii) for
any transfer of the Securities by the Investor to an affiliate (as such term is
defined in the 1933 Act) of the Investor; provided that in each of the foregoing
--------
cases the transferee agrees in writing to be subject to the terms of this
Section 5 to the same extent as if the transferee were the Investor.
6. Legends. The Investor understands and agrees that the certificates
-------
evidencing the Securities will bear legends substantially similar to those set
forth below in addition to any other legend that may be required by applicable
law, by the Company's Articles of Incorporation or Bylaws, or by any agreement
between the Company and the Investor:
(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS
OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS
4
<PAGE>
IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
(b) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations and
Sections 417 and 418 of the California Corporations Code or any other state
securities laws.
The legend set forth in (a) above shall be removed by the Company from any
certificate evidencing the Securities upon delivery to the Company of an opinion
of counsel, reasonably satisfactory to the Company, that a registration
statement under the 1933 Act is at that time in effect with respect to the
legended security or that such security can be freely transferred in a public
sale (other than pursuant to Rule 144 or Rule 145 under the 1933 Act) without
such a registration statement being in effect and that such transfer will not
jeopardize the exemption or exemptions from registration pursuant to which the
Company issued the Securities.
7. Registration Rights. The Company agrees to use its best efforts to
-------------------
promptly cause the Rights Agreement to be amended to permit the Investor to
become a party thereto. It is understood and agreed that the Investor will not
have incidental registration rights as described in Section 5.2 of the Rights
Agreement with respect to the Initial Public Offering. Except as provided in
the previous sentence, the incidental registration rights to be granted to the
Investor under Section 5.2 of the Rights Agreement shall be granted on a pro
rata, pari passu basis with the registration rights of other holders of
registration rights under the Rights Agreement. As a condition to being granted
the registration rights described above, the Investor must execute and deliver
such signature pages to the Rights Agreement, as amended, as the Company may
reasonably request. In the event that the Company is unable to cause the Rights
Agreement to be amended to permit the Investor to become a party thereto within
fifteen (15) business days of the date of this Agreement, then the Company will
enter into a separate registration rights agreement with the Investor in order
to grant the Investor substantially the same rights it would have had if it had
become a party to the Rights Agreement.
8. Market Standoff Agreement. The Investor hereby agrees that, following
-------------------------
the effective date of a registration statement of the Company's initial sale of
securities under the 1933 Act, for the period of time and to the extent
reasonably requested by the underwriter(s) and the Company, the Investor shall
not sell, offer to sell, contract to sell (including, without limitation, any
short sale), grant any option to purchase or otherwise transfer or dispose of
any securities of the Company held by the Investor, directly or indirectly,
except securities covered by the registration statement and transfers to
affiliates who agree to be similarly bound) for the period; provided however,
that (i) the executive officers and directors of the Company, as well as any
holder of at least five percent (5%) of the Company's preferred Stock or common
Stock, shall have agreed to be bound by substantially the same terms and
conditions, (ii) the time period requested for such market standoff shall not
exceed one hundred eighty (180) days and (iii) the restriction shall not apply
to a registration relating solely to employee, consultant or advisor benefit
plans on Form S-1 or Form S-8 (or similar forms promulgated after the date
hereof) or a registration relating solely to a transaction pursuant to Rule 145
promulgated under the 1933 Act on Form S-4 (or similar forms promulgated after
the date hereof). The Company may impose
5
<PAGE>
stop-transfer instructions during such standoff period with respect to the
securities of the Investor subject to this restriction if necessary to enforce
such restrictions.
9. GENERAL PROVISIONS.
------------------
9.1 Survival of Warranties. The representations, warranties and
----------------------
covenants of the Company and the Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investor or the Company, as the case may be.
9.2 Successors and Assigns. The terms and conditions of this
----------------------
Agreement, the Note and the Warrant shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties.
9.3 Governing Law. This Agreement, the Note and the Warrant shall be
-------------
governed by and construed under the internal laws of the State of California as
applied to agreements among California residents entered into and to be
performed entirely within California, without reference to principles of
conflict of laws or choice of laws.
9.4 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.
9.5 Headings. The headings and captions used in this Agreement, the
--------
Note and the Warrant are used for convenience only and are not to be considered
in construing or interpreting this Agreement, the Note and the Warrant. All
references in this Agreement to sections and exhibits shall, unless otherwise
provided, refer to sections hereof and exhibits attached hereto, all of which
exhibits are incorporated herein by this reference.
9.6 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement, the Note and the Warrant shall be given in
writing and shall be deemed effectively given upon personal delivery to the
party to be notified or upon deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the Investor at
the address set forth below or the last address furnished to the Company by the
Investor in writing or, in the case of the Company, at the principal offices of
the Company set forth below, or at such other address as any party or the
Company may designate by giving ten (10) days' advance written notice to all
other parties.
To the Company: To the Investor:
-------------- ---------------
Lexar Media, Inc. Sony Electronics Inc.
47421 Bayside Parkway 3300 Zanker Road
Fremont, California 94538 San Jose, California 95134-1940
Attention: Carlton Osborne Attention: Law Department
Phone: (510) 413-1200 Phone: (408) 955-5850
Fax: (510) 440-3499 Fax: (408) 955-5880
6
<PAGE>
9.8 Amendments and Waivers. Any term of this Agreement, the Note and
----------------------
the Warrant may be amended, and the observance of any term of this Agreement,
the Note and the Warrant 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 Section shall be binding upon the Investor, each future
holder of the Note and/or Warrant and the Company. The waiver of any default
shall not be deemed to constitute a waiver of any other default or a succeeding
breach or default. Time is of the essence in respect to all provisions of this
Agreement, the Note and the Warrant that specify a time for performance.
9.9 Severability. If one or more provisions of this Agreement, the
------------
Note or the Warrant are held to be unenforceable under applicable law, such
provision(s) shall be excluded from this Agreement, the Note or the Warrant, as
applicable, and the balance of the Agreement, the Note or the Warrant shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
9.10 Entire Agreement. This Agreement, the Note and the Warrant
----------------
constitute the entire agreement and understanding of the parties with respect to
the subject matter hereof and supersedes any and all prior negotiations,
correspondence, agreements, understandings duties or obligations between the
parties with respect to the subject matter hereof.
9.11 Further Assurances. From and after the date of this Agreement,
------------------
upon the request of the Investor or the Company, the Company and the Investor
shall execute and deliver such instruments, documents or other writings as may
be reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.
9.12 Attorneys' Fees. In the event any party is required to engage
---------------
the services of any attorneys for the purpose of enforcing this Agreement, the
Note and/or the Warrant, or any provision hereof or thereof, the prevailing
party shall be entitled to recover its reasonable expenses and costs in
enforcing this Agreement, the Note and/or the Warrant, including attorneys'
fees.
9.13 No Impairment. The Company will not, by amendment of its
-------------
Articles of Incorporation or Bylaws, or through reorganization, consolidation,
merger, dissolution, issue or sale of securities, sale of assets or any other
voluntary action, willfully avoid or seek to avoid the observance or performance
of any of the terms of this Agreement, the Note or the Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the Investor under this Agreement, the Note and the Warrant
against wrongful impairment. Without limiting the generality of the foregoing,
the Company will take all such action as may be necessary or appropriate in
order that the Company may duly and validly issue fully paid and nonassessable
shares of Conversion Stock upon the conversion of the Note or Warrant Stock upon
the exercise of the Warrant.
7
<PAGE>
9.14 Transfer. Except as set forth in Section 5, this Agreement, the
--------
Note and the Warrant, and any of the rights hereunder or thereunder, may not be
assigned, conveyed or transferred, in whole or in part, without the Company's
prior written consent, which the Company may withhold in its reasonable
discretion. The rights and obligations of the Company and the Investor under
this Agreement, the Note and the Warrant shall be binding upon and benefit their
respective permitted successors, assigns, heirs, administrators and transferees.
The Investor and any successors thereto shall have all of the rights of a holder
in due course as provided in the Uniform Commercial Code.
8
<PAGE>
In Witness Whereof, the parties hereto have executed this Agreement as of
the date first above written.
LEXAR MEDIA, INC.: SONY ELECTRONICS INC.:
- ----------------- ---------------------
By:________________________ By:__________________________
Name:______________________ Name:________________________
Title:_____________________ Title:_______________________
[SIGNATURE PAGE TO NOTE AND WARRANT PURCHASE AGREEMENT]
Attachments:
Exhibit A Form of Note
Exhibit B Form of Warrant
<PAGE>
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS NOTE HAS NOT BEEN
QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND
THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS NOTE ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS
SO EXEMPT.
THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER
THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT
THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS.
CONVERTIBLE PROMISSORY NOTE
OF
LEXAR MEDIA, INC.
$ 2,000,000 March 21, 2000
Fremont, California
For value received, Lexar Media, Inc., a California corporation (the
"Company"), with principal offices at 47421 Bayside Parkway, Fremont, California
94538, hereby promises to pay to Sony Electronics Inc. the sum of Two Million
Dollars ($2,000,000) plus interest accrued on unpaid principal, compounded
annually based on actual days elapsed, at a rate equal to the lower of (a) the
highest permissible rate under applicable law and (b) 8% per annum from the date
of this Note until the principal amount hereof and all interest accrued thereon
is paid (or converted, as provided in Section 2 hereof). The principal amount
of this Note, and the interest accrued thereon, shall be due and payable in full
on September 1, 2000 at the principal offices of the Company or by mail to the
address of the registered holder of this Note in lawful money of the United
States, unless this Note shall have been previously converted pursuant to
Section 2 hereof. If this Note is not paid in full when due, then the entire
unpaid principal and interest shall bear interest thereafter at a rate of 3% per
annum higher than the rate then applicable, or the maximum legal interest rate,
if lower, due on or before the fifth (5th) day of each applicable month in
arrears.
<PAGE>
1. Definitions. The following definitions shall apply for all purposes
-----------
of this Note:
1.1 "Change of Control" means the consummation of any transaction or
series of related transactions that results in the holders of record of the
Company's capital stock immediately prior to the transaction or transactions
holding less than fifty percent (50%) of the voting power of the Company (or in
the case of a triangular merger, the parent of the Company) immediately after
the transaction or transactions, including the acquisition of the Company by
another entity and any reorganization, merger, consolidation or share exchange,
or which results in the sale of all or substantially all of the assets of the
Company.
1.2 "Company" means the "Company" as defined above and includes any
corporation that shall succeed to or assume the obligations of the Company under
this Note.
1.3 "Conversion Price" means the lower of (i) ninety-three percent
(93%) of the per share public offering price of the common stock sold in the
Initial Public Offering and (ii) Fifteen Dollars ($15.00) per share. The
Conversion Price is subject to adjustment as provided herein.
1.4 "Conversion Stock" means the Company's common stock, par value
$0.0001 per share. The number and character of shares of Conversion Stock are
subject to adjustment as provided herein and the term "Conversion Stock" shall
include stock and other securities and property at any time receivable or
issuable upon conversion of this Note in accordance with its terms.
1.5 "Holder" means any person who shall at the time be the registered
holder of this Note.
1.6 "Initial Public Offering" means a firm commitment underwritten
public offering, the public offering price of which is not less than $6.18 per
share (as adjusted for any stock dividends, recapitalizations, combinations or
splits with respect to such shares) with gross proceeds to the Company of
$20,000,000 in the aggregate before deduction of underwriters commissions and
expenses pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale
of the Company's common stock for the account of the Company.
1.7 "Note" means this Convertible Promissory Note.
2. Conversion.
----------
2.1 At the closing of the Initial Public Offering, all principal and
interest accrued on this Note shall automatically convert into a number of
shares of Conversion Stock determined by dividing the aggregate dollar amount of
the outstanding principal and interest on the Note by the applicable Conversion
Price, without the need for any further action on the part of the Holder;
provided, however, that the Holder shall not be entitled to receive the stock
certificate representing
2
<PAGE>
the shares of Conversion Stock to be issued upon conversion of this Note until
the original of this Note is surrendered to the Company.
2.2 In the event a Change of Control occurs before the closing of the
Initial Public Offering, then the Holder shall have five (5) business days after
it receives a written description of the consideration it would receive in
return for Conversion Stock (a "Change in Control Notice") to provide the
Company with a written election to receive repayment of the principal balance of
this Note and accrued interest thereon in cash. If the Company has not received
such written notice by the Holder electing cash repayment by the close of the
fifth (5th) business day after the Holder's receipt of a Change of Control
Notice, all principal and interest accrued on this Note shall automatically
convert into shares of Conversion Stock at the Conversion Price, without the
need for any further action on the part of the Holder, effective upon the later
of the close of business on the fifth (5th) business day after delivery of a
Change of Control Notice or immediately prior to the consummation of such Change
of Control. Notwithstanding the foregoing, that the Holder shall not be
entitled to receive the stock certificate representing the shares of Conversion
Stock to be issued upon conversion of this Note until the original of this Note
is surrendered to the Company.
2.3 If on September 1, 2000 the Company has not closed an Initial
Public Offering, then the Note shall no longer be convertible, in whole or in
part, into Conversion Stock or any other security of the Company or any other
successor corporation to the Company.
3. Issuance of Conversion Stock. As soon as practicable after conversion
----------------------------
of this Note, the Company, at its expense, will cause to be issued in the name
of and delivered to the Holder, a certificate or certificates for the number of
shares of Conversion Stock to which the Holder shall be entitled upon such
conversion (bearing such legends as may be required by applicable state and
federal securities laws in the opinion of legal counsel of the Company),
together with any other securities and property to which the Holder is entitled
upon such conversion under the terms of this Note. Such conversion shall be
deemed to have been made, (a) if made under Section 2.1 above, on the date of
the closing of the Initial Public Offering and (b) if made under Section 2.2
above, immediately prior to the consummation of the Change of Control. No
fractional shares will be issued upon conversion of this Note. If upon any
conversion of this Note a fraction of a share would otherwise result, then in
lieu of such fractional share, the Company will pay the cash value of that
fractional share, calculated on the basis of the applicable Conversion Price.
4. Adjustment Provisions. The number and character of shares of
---------------------
Conversion Stock issuable upon conversion of this Note (or any shares of stock
or other securities or property at the time receivable or issuable upon
conversion of this Note) and the Conversion Price therefor, are subject to
adjustment upon occurrence of the following events between the date this Note is
issued and the date it is converted:
4.1 Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
----------------------------------------------------------------
etc. The Conversion Price of this Note and the number of shares of Conversion
- ---
Stock issuable upon conversion of this Note (or any shares of stock or other
securities at the time issuable upon conversion of this Note) shall each be
proportionally adjusted to reflect any stock dividend, stock
3
<PAGE>
split, reverse stock split, combination of shares, reclassification,
recapitalization or other similar event affecting the number of outstanding
shares of Conversion Stock (or such other stock or securities).
4.2 Adjustment for Other Dividends and Distributions. In case the
------------------------------------------------
Company shall make or issue, or shall fix a record date for the determination of
eligible holders entitled to receive, a dividend or other distribution payable
with respect to the Conversion Stock that is payable in (a) securities of the
Company (other than issuances with respect to which adjustment is made under
Section 4.1) or (b) assets (other than cash dividends paid or payable solely out
of retained earnings), then, and in each such case, the Holder, upon conversion
of this Note at any time after the consummation, effective date or record date
of such event, shall receive, in addition to the shares of Conversion Stock
issuable upon such exercise prior to such date, the securities or such other
assets of the Company to which the Holder would have been entitled upon such
date if the Holder had converted this Note immediately prior thereto (all
subject to further adjustment as provided in this Note).
4.3 Adjustment for Reorganization, Consolidation, Merger. In case of
----------------------------------------------------
any reorganization of the Company (or of any other corporation the stock or
other securities of which are at the time receivable on the conversion of this
Note) after the date of this Note, or in case, after such date, the Company (or
any such corporation) shall consolidate with or merge into another corporation
or convey all or substantially all of its assets to another corporation, then,
and in each such case, the Holder, upon the conversion of this Note (as provided
in Section 2) at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities and property receivable upon the conversion of
this Note prior to such consummation, the stock or other securities or property
to which the Holder would have been entitled upon the consummation of such
reorganization, consolidation, merger or conveyance if the Holder had converted
this Note immediately prior thereto, all subject to further adjustment as
provided in this Note, and the successor or purchasing corporation in such
reorganization, consolidation, merger or conveyance (if other than the Company)
shall duly execute and deliver to the Holder a supplement hereto acknowledging
such corporation's obligations under this Note; and in each such case, the terms
of the Note shall be applicable to the shares of stock or other securities or
property receivable upon the conversion of this Note after the consummation of
such reorganization, consolidation, merger or conveyance.
4.4 Conversion of Stock. In case all of the authorized Conversion
-------------------
Stock of the Company is converted, pursuant to the Company's Articles of
Incorporation, into or exchanged for other securities or property, or the
Conversion Stock otherwise ceases to exist, then, in such case, the Holder, upon
conversion of this Note at any time after the date on which the Conversion Stock
is so converted or ceases to exist (the "Termination Date"), shall receive, in
lieu of the number of shares of Conversion Stock that would have been issuable
upon such conversion immediately prior to the Termination Date (the "Former
Number of Shares of Conversion Stock"), the stock and other securities and
property to which the Holder would have been entitled to receive upon the
Termination Date if the Holder had converted this Note with respect to the
Former Number of Shares of Conversion Stock immediately prior to the Termination
Date (all subject to further adjustment as provided in this Note).
4
<PAGE>
4.5 Notice of Adjustments. The Company shall promptly give the
---------------------
Holder written notice of each adjustment or readjustment of the Conversion Price
or the number of shares of Conversion Stock or other securities issuable upon
conversion of this Note. The notice shall describe the adjustment or
readjustment and show in reasonable detail the facts on which the adjustment or
readjustment is based.
4.6 No Change Necessary. The form of this Note need not be changed
-------------------
because of any adjustment in the Conversion Price or in the number of shares of
Conversion Stock issuable upon its conversion.
4.7 Reservation of Stock. If at any time the number of shares of
--------------------
Conversion Stock or other securities issuable upon conversion of this Note shall
not be sufficient to effect the conversion of this Note, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Conversion Stock or other
securities issuable upon conversion of this Note as shall be sufficient for such
purpose.
5. No Rights or Liabilities as Shareholder. This Note does not by itself
---------------------------------------
entitle the Holder to any voting rights or other rights as a shareholder of the
Company. In the absence of conversion of this Note, no provisions of this Note,
and no enumeration herein of the rights or privileges of the Holder, shall cause
the Holder to be a shareholder of the Company for any purpose.
6. Subordination. The indebtedness represented by this Note is hereby
-------------
expressly subordinated in right of payment to the prior payment in full of all
of the Company's indebtedness to banks, insurance companies, lease financing
institutions or other lending institutions (other than small business investment
companies or venture capital firms) regularly engaged in the business of lending
money.
7. Prepayment. The Company may not prepay, in whole or in part, the
----------
unpaid principal sum of this Note, plus any unpaid accrued interest under this
Note, prior to September 1, 2000.
8. Default. If the Company defaults in the payment of unpaid principal
-------
or interest hereunder, the holder hereof may declare this Note immediately due,
without notice, presentment, protest, demand and notice of dishonor, all of
which are hereby expressly waived.
9. Transfer. Except as set forth in Section 5 of that certain
--------
Convertible Note and Warrant Agreement, dated as of even date herewith, by and
between the Company and the Holder, this Note, neither this Note nor any of the
rights hereunder, may be assigned, conveyed or transferred, in whole or in part,
without the Company's prior written consent, which the Company may withhold in
its sole discretion. The rights and obligations of the Company and the Holder
under this Note shall be binding upon and benefit their respective permitted
successors, assigns, heirs, administrators and transferees. The Holder and any
successors thereto shall have all of the rights of a holder in due course as
provided in the Uniform Commercial Code.
5
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name as of the date first above written.
LEXAR MEDIA, INC.:
------------------
By:______________________
Name:____________________
Title:___________________
AGREED AND ACKNOWLEDGED:
SONY ELECTRONICS INC.:
- ----------------------
By:______________________
Name:____________________
Title:___________________
[SIGNATURE PAGE TO CONVERTIBLE PROMISSORY NOTE]
6
<PAGE>
EXHIBIT B
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN
QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND
THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS WARRANT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS
SO EXEMPT.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT
THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE COMMON STOCK
OF
LEXAR MEDIA, INC.
This certifies that, for value received, Sony Electronics Inc. or its
permitted registered assigns ("Registered Holder"), is entitled, subject to the
-----------------
terms and conditions of this Warrant, at any time after 10:00 a.m. Pacific Time
on September 1, 2000 (the "Exercise Date"), unless terminated earlier under
-------------
Section 10 hereof, to purchase from Lexar Media, Inc., a California corporation
(the "Company"), Four Hundred Thousand (400,000) shares of the Company's Common
-------
Stock, par value $0.0001 per share (the "Warrant Stock"), at a purchase price
-------------
equal to the lesser of (i) Five Dollars ($5.00) per share or (ii) ninety-three
percent (93%) of the per share public offering price of the common stock sold in
the Company's initial public offering (the "Conversion Price") upon surrender of
----------------
this Warrant at the principal office of the Company, together with a duly
executed subscription in the form attached hereto as Exhibit 1 and simultaneous
---------
payment of the full purchase price therefor in lawful money of the United States
as provided herein. The Conversion Price and the number and character of shares
of Warrant Stock purchasable hereunder are subject to adjustment as provided
herein. Unless the context otherwise
<PAGE>
requires, the term "Warrant Stock" shall mean and include the stock and other
securities and property at any time receivable or issuable upon exercise of this
Warrant. The term "Warrant" as used herein, shall include this Warrant and any
warrants delivered in substitution or exchange therefor as provided herein.
1. Exercise.
--------
1.1 Method of Exercise. Subject to the terms and conditions of this
------------------
Warrant, the Registered Holder may exercise this Warrant in whole or in part, at
any time or from time to time, on any business day after the Exercise Date,
unless terminated earlier under Section 10 hereof, by surrendering this Warrant
at the principal executive office of the Company, together with the subscription
form attached hereto duly executed by the Registered Holder and payment in full
of the purchase price therefor, if applicable (as determined in accordance with
the terms hereof) for the number of shares of Warrant Stock to be purchased upon
such exercise of this Warrant. Upon such exercise, the Company shall promptly
issue or cause to be issued and cause to be delivered to or upon the written
order of the Registered Holder and in such name or names as the Registered
Holder may designate, a certificate for the Warrant Shares issuable upon such
exercise. Any person so designated by the Registered Holder to receive Warrant
Shares shall be deemed to have become holder of record of such Warrant Shares as
of the date of exercise of this Warrant.
1.2 Form of Payment. Payment may be made by (i) a check payable to
---------------
the Company's order, (ii) wire transfer of funds to the Company, (iii)
cancellation of indebtedness of the Company to the Holder or (iv) any
combination of the foregoing.
1.3 Partial Exercise. Upon a partial exercise of this Warrant: (i)
----------------
the Purchase Amount immediately prior to such exercise shall be reduced by the
aggregate amount paid to the Company upon such exercise of this Warrant and (ii)
this Warrant shall be surrendered by the Registered Holder and replaced with a
new Warrant of like tenor for purchase of the number of remaining shares of
Warrant Stock not previously purchased shall be issued by the Company to the
Registered Holder.
1.4 No Fractional Shares. No fractional shares may be issued upon
--------------------
any exercise of this Warrant, and any fractions shall be rounded down to the
nearest whole number of shares. If upon any exercise of this Warrant a fraction
of a share results, the Company will pay the cash value of any such fractional
share, calculated on the basis of the Warrant Price.
1.5 Restrictions on Exercise. This Warrant may not be exercised if
------------------------
the issuance of the Warrant Stock 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 Registered
Holder shall execute the subscription form attached hereto.
1.6 Net Exercise Election. The Registered Holder may elect to convert
---------------------
all or a portion of this Warrant, without the payment by the Registered Holder
of any additional
2
<PAGE>
consideration, by the surrender of this Warrant or such portion to the Company,
with the net exercise election selected in the subscription form attached hereto
duly executed by the Holder, into up to the number of shares of Warrant Stock
that is obtained under the following formula:
X = Y (A-B)
-------
A
where X = the number of shares of Warrant Stock to be issued to the
Registered Holder pursuant to this Section 1.6.
Y = the number of shares of Common Stock purchasable under the
Warrant
A = the fair market value of one share of Warrant Stock.
B = the Conversion Price.
The fair market value of one share of Warrant Stock shall be
determined in good faith by the Company's Board of Directors at the time the net
exercise election is made pursuant to this Section 1.6; provided, however, that
if the Registered Holder elects to convert all or a portion of this Warrant
pursuant to this Section 1.6 in response to an Expiration Notice (as defined in
Section 10) issued as a result of an impending Qualified IPO (as defined in
Section 10), then the fair market value per share shall be the per share public
offering price of the common stock sold in the Qualified IPO. The Company will
promptly respond in writing to an inquiry by the Registered Holder as to the
then current fair market value of one share of Warrant Stock.
2. Taxes. The Company shall not be required to pay any tax or other
-----
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Warrant Stock in any name other than that of the
Registered Holder of this Warrant, and in such case the Company shall not be
required to issue or deliver any stock certificate or security until such tax or
other charge has been paid, or it has been established to the Company's
satisfaction that no tax or other charge is due.
3. Transfer and Exchange. Except as set forth in Section 5 of that
---------------------
certain Convertible Note and Warrant Agreement, dated as of even date herewith,
by and between the Company and the Holder, this Note (the "Purchase Agreement"),
------------------
this Warrant and the rights hereunder may not be transferred in whole or in part
without the Company's prior written consent, which the Company may withhold in
its sole discretion. If a transfer of all or part of this Warrant is permitted
by the preceding sentence, then this Warrant and all rights hereunder may be
transferred, in whole or in part, on the books of the Company maintained for
such purpose at the principal office of the Company referred to above, by the
Registered Holder hereof in person, or by duly authorized attorney, upon
surrender of this Warrant properly endorsed and upon payment of any necessary
transfer tax or other governmental charge imposed upon such transfer. Upon any
permitted partial transfer, the Company will issue and deliver to the Registered
Holder a new
3
<PAGE>
Warrant or Warrants with respect to the shares of Warrant Stock not so
transferred. Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that when this Warrant shall have been so endorsed,
the person in possession of this Warrant may be treated by the Company, and all
other persons dealing with this Warrant, as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding; provided, however that until a
-------- -------
transfer of this Warrant is duly registered on the books of the Company, the
Company may treat the Registered Holder hereof as the owner of this Warrant for
all purposes.
4. Adjustment of Conversion Price and Number of Shares. The number and
---------------------------------------------------
character of shares of Warrant Stock issuable upon exercise of this Warrant (or
any shares of stock or other securities or property at the time receivable or
issuable upon exercise of this Warrant) and the Conversion Price therefor, are
subject to adjustment upon occurrence of the following events:
4.1 Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
----------------------------------------------------------------
etc. The Conversion Price of this Warrant and the number of shares of Warrant
- ----
Stock issuable upon exercise of this Warrant shall each be proportionally
adjusted to reflect any stock dividend, stock split, reverse stock split,
combination of shares, reclassification, recapitalization or other similar event
altering the number of outstanding shares of Warrant Stock.
4.2 Adjustment for Other Dividends and Distributions. In case the
------------------------------------------------
Company shall make or issue, or shall fix a record date for the determination of
eligible holders entitled to receive, a dividend or other distribution with
respect to the Warrant Stock payable in securities of the Company then, and in
each such case, the Registered Holder of this Warrant, on exercise of this
Warrant at any time after the consummation, effective date or record date of
such event, shall receive, in addition to the shares of Warrant Stock (or such
other stock or securities) issuable on such exercise prior to such date, the
securities of the Company to which such Registered Holder would have been
entitled upon such date if such Registered Holder had exercised this Warrant
immediately prior thereto (all subject to further adjustment as provided in this
Warrant).
4.3 Adjustment for Capital Reorganization, Consolidation, Merger. If
------------------------------------------------------------
any capital reorganization of the capital stock of the Company, or any
consolidation or merger of the Company with or into another corporation, or the
sale of all or substantially all of the Company's assets to another corporation
shall be effected in such a way that holders of Warrant Stock will be entitled
to receive stock, securities or assets with respect to or in exchange for their
Warrant Stock, and in each such case, the Registered Holder of this Warrant,
upon the exercise this Warrant (as provided in Section 1), at any time after the
consummation of such capital reorganization, consolidation, merger, or sale,
shall be entitled to receive, in lieu of the stock or other securities and
property receivable upon the exercise of this Warrant prior to such
consummation, the stock or other securities or property to which such Registered
Holder would have been entitled upon such consummation if such Registered Holder
had exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in this Section 4; and in
4
<PAGE>
each such case, the terms of this Warrant shall be applicable to the shares of
stock or other securities or property receivable upon the exercise of this
Warrant after such consummation.
4.4 Conversion of Warrant Stock. In case all of the authorized
---------------------------
Warrant Stock of the Company is converted, pursuant to the Company's Articles of
Incorporation, into or exchanged for other securities or property, or the
Warrant Stock otherwise ceases to exist, then, in such case, the Registered
Holder, upon exercise of this Warrant at any time after the date on which the
Warrant Stock is so converted or ceases to exist (the "Termination Date"), shall
receive, in lieu of the number of shares of Warrant Stock that would have been
issuable upon such exercise immediately prior to the Termination Date (the
"Former Number of Shares of Warrant Stock"), the stock and other securities and
property to which the Registered Holder would have been entitled to receive upon
the Termination Date if the Registered Holder had exercised this Warrant with
respect to the Former Number of Shares of Warrant Stock immediately prior to the
Termination Date (all subject to further adjustment as provided in this
Warrant).
5. Certificate as to Adjustments. In each case of any adjustment in
-----------------------------
either the Conversion Price or in the number of shares of Warrant Stock, or
other stock, securities or property receivable on the exercise of this Warrant,
the Chief Financial Officer of the Company shall compute such adjustment in
accordance with the terms of this Warrant and prepare a certificate setting
forth such adjustment and showing in detail the facts upon which such adjustment
is based, including a statement of the adjusted Conversion Price. The Company
will forthwith mail a copy of each such certificate to the Registered Holder of
this Warrant.
6. Notices of Record Date. In case:
----------------------
(a) the Company shall take a record of the holders of its Warrant
Stock (or other stock or securities at the time receivable upon the exercise of
this Warrant) for the purpose of entitling them to receive any stock dividend;
or
(b) of any consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of the
Company to another corporation in which holders of the Company's stock are to
receive stock, securities or property of another corporation; or
(c) of any voluntary dissolution, liquidation or winding-up of the
Company; or
(d) of any redemption or conversion into Common Stock of all
outstanding Warrant Stock;
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend, and
stating the amount and character of such dividend, or (ii) the date on which
such consolidation, merger, conveyance, dissolution, liquidation, winding-up,
redemption or conversion is to take place, and the time, if any is to be fixed,
as of
5
<PAGE>
which the holders of record of Warrant Stock or Common Stock (or such stock or
securities as at the time are receivable upon the exercise of this Warrant)
shall be entitled to exchange their shares of Warrant Stock or Common Stock (or
such other stock or securities) for securities or other property deliverable
upon such consolidation, merger, conveyance, dissolution, liquidation or
winding-up. Such notice shall be mailed at least ten (10) days prior to the date
therein specified.
7. Loss or Mutilation. Upon receipt by the Company of evidence reasonably
------------------
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant, and of a written indemnity agreement reasonably
satisfactory to the Company, and (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will execute and deliver in lieu
thereof a new Warrant of like tenor.
8. Reservation of Warrant Stock. The Company shall at all times reserve
----------------------------
and keep available for issue upon the exercise of this Warrant such number of
its authorized but unissued shares of Warrant Stock as will be sufficient to
permit the exercise in full of this Warrant.
9. No Rights or Liabilities as Shareholder. This Warrant does not by
---------------------------------------
itself entitle the Registered Holder to any voting rights or other rights as a
shareholder of the Company. In the absence of affirmative action by Registered
Holder to purchase Warrant Stock by exercise of this Warrant, no provisions of
this Warrant, and no enumeration herein of the rights or privileges of the
Registered Holder shall cause such Registered Holder to be a shareholder of the
Company for any purpose.
10. Termination. The right to exercise this Warrant shall terminate (i)
-----------
immediately prior to the closing of a firm commitment public offering
underwritten by a nationally recognized investment bank pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended,
covering the offer and sale of Common Stock for the account of the corporation
in which the aggregate public offering price (before deduction of underwriters'
discounts and commissions) equals or exceeds $20,000,000 and the public offering
price per share of which equals or exceeds $6.18 per share before deduction of
underwriters' discounts and commissions (a "Qualified IPO") or (ii) upon the
-------------
effective date of a merger or consolidation of the Company into or with another
corporation, or the sale of all or substantially all of the Company's assets to
another corporation or person, if, immediately after any such merger,
consolidation or sale of assets, at least fifty percent (50%) of the voting
power of the surviving corporation or such other person, as the case may be, is
owned by persons who are not shareholders of the Company immediately prior to
such merger, consolidation or sale (the "Terminating Transaction"). In case of
-----------------------
either such event, the Company shall, at least fifteen (15) days prior to the
effective date of the Qualified IPO or Terminating Transaction, give written
notice of the imminence of such Qualified IPO or Terminating Transaction (the
"Expiration Notice"). The right to exercise this Warrant shall terminate upon
-----------------
the closing or effective date, as applicable, of a Qualified IPO or Terminating
Transaction, even if such event occurs prior to September 1, 2000.
Dated: March 21, 2000
6
<PAGE>
LEXAR MEDIA, INC. ACKNOWLEDGED AND ACCEPTED
BY SONY ELECTRONICS INC.:
By:_____________________________ By:______________________________
Name:___________________________ Name:____________________________
Title:__________________________ Title:___________________________
7
<PAGE>
Exhibit 1
---------
FORM OF SUBSCRIPTION
--------------------
(To be signed only upon exercise of Warrant)
To: Lexar Media, Inc.
47421 Bayside Parkway
Fremont, CA 94538
(1) The undersigned Holder hereby elects to purchase ________________
shares of Common Stock of _______________ (the "Warrant Stock"), pursuant to the
terms of the attached Warrant, and tenders herewith payment of the purchase
price for such shares in full.
(1) Net Exercise Election. The undersigned Holder elects to convert the
---------------------
Warrant into shares of Warrant Stock by net exercise election pursuant to
Section 1.6 of the Warrant. This conversion is exercised with respect to
__________ shares of Common Stock of _______________ (the "Warrant Stock")
covered by the Warrant.
[STRIKE PARAGRAPH ABOVE THAT DOES NOT APPLY]
(2) In exercising the Warrant, the undersigned Holder hereby confirms and
acknowledges that the representations and warranties set forth in Section 4 of
the Purchase Agreement (as defined in the Warrant) continue to be true and
correct as of this date.
(3) Please issue a certificate or certificates representing such shares of
Warrant Stock in the name or names specified below:
______________________________________ ______________________________________
(Name) (Name)
______________________________________ ______________________________________
(Address) (Address)
______________________________________ ______________________________________
(City, State, Zip Code) (City, State, Zip Code)
______________________________________ ______________________________________
(Federal Tax Identification Number) (Federal Tax Identification Number)
______________________________________ ______________________________________
(Date) (Signature of Holder)
1
<PAGE>
FORM OF ASSIGNMENT
------------------
FOR VALUE RECEIVED the undersigned Registered Holder of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under the within Warrant, with respect to the number of shares
of Common Stock set forth below:
Name of Assignee Address No. of Shares
---------------- ------- -------------
and does hereby irrevocably constitute and appoint ________________ Attorney to
make such transfer on the books of ___________________, maintained for the
purpose, with full power of substitution in the premises.
Dated: _____________________ [Registered Holder]
By:________________________________
Name:______________________________
Title:_____________________________
2
<PAGE>
LEXAR MICROSYSTEMS, INC.
EMPLOYMENT
MEMORANDUM OF UNDERSTANDING
August 20, 1997
This memorandum summarizes the principal terms and conditions of a proposed
agreement among Lexar Microsystems, Inc. (the "Company"), a California
corporation, and Petro Estaktri and Mahmud (Mike) Assar whereby as of August 20,
1997, the Employee and Lexar desire to modify their existing employment
agreements in accordance with the terms and conditions of this Agreement.
Principal Terms of the Transaction
I. Termination Severance.
---------------------
In the event of the Employees' involuntary termination from employment with
Lexar, for any reason other than a breach of fiduciary duty and/or engaging in a
criminal activity, Lexar agrees to continue to pay each of the Employees, as
severance pay, their respective base salaries until such time as when they
become employed elsewhere or twelve months from the date of their termination of
employment, whichever occurs first. In the event the Board of Directors changes
in the compensation or responsibilities without the Employees' concurrence, each
of the Employees may choose to terminate his employment, in which event each of
the Employees would be entitled to the aforementioned severance pay. In case of
either such aforementioned event (termination or a change in compensation or
responsibilities without concurrence), each Employees' unvested stock in the
Company will vest immediately.
II. Event of Death.
--------------
In the event of the death of any of the Employees', all unvested stocks of
the deceased will vest immediately.
III. Compensation.
------------
The existing annual base salary will remain until the Company achieves its
first profitable quarter at which time the new compensation plan substantially
similar for all three executives (John Reimer, Petro Estaktri, and Mike Assar)
will be offered by the board of directors. The bonus plan will be considered
John Reimer, Petro Estaktri and Mike Assar based on mutually agreed performance
goals and payable after Lexar achieves its first profitable quarter. Also Lexar
will acknowledge that the compensation plan for all three employees will remain
the same, even after the IPO.
<PAGE>
IV. Restricted Stock Option Grant.
-----------------------------
Petro Estaktri and Mike Assar are recognized as founders of Lexar
Microsystems. Therefore 50% of the granted shares will be vested upon
recapitalization, and the rest will be vested in four years. Lexar also
recognizes that a portion of these shares that vest upon recapitalization are
already paid for by the employees. Also 25% of the granted shares will be
vested upon recapitalization for John Reimer, and the rest will be vested in
four years.
Petro Estaktri
/s/ Petro Estakhri Date: 9/16/97
- ---------------------------------------
Mahmud Assar
/s/ Mahmud Assar Date: 9/16/97
- ---------------------------------------
John Reimer
/s/ John Reimer Date: 9/16/97
- ---------------------------------------
TEAC TOSHIBA
/s/ Hideo Ito Date: 9/17/97
- ---------------------------------------
Ito Hideo
2
<PAGE>
Exhibit 10.22
SECURITY AGREEMENT
This Security Agreement is made as of April 3, 1998 between Lexar Media,
Inc., a California corporation ("Pledgee"), and Petro Estakhri ("Pledgor").
Recitals
--------
WHEREAS, pursuant to a Secured Full Recourse Promissory Note of even date
herewith, Pledgor has borrowed $40,000 from Pledgee and Pledgor wishes to secure
such loan by granting a security interest in certain shares of the Pledgee's
Common Stock, on and subject to the terms and conditions contained in this
Security Agreement;
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
---------------------------------------------
the Loan, Pledgor, pursuant to the Commercial Code of the State of California,
hereby pledges all of the shares of Common Stock (herein sometimes referred to
as the "Shares" or "Collateral") represented by 50,000 shares duly endorsed in
blank or with executed stock powers, and herewith delivers said shares to the
Secretary of Pledgee ("Pledgeholder"). Who shall hold said certificate as
bailee for Pledgor subject to the terms and conditions of this Security
Agreement.
The pledged stock (together with an executed blank stock assignment), shall
be held by the Pledgeholder as bailee for Pledgor as security for the repayment
of the Note, and any extensions or renewals thereof, to be executed by Pledgor
pursuant to the terms of the Purchase Agreements, and the Pledgeholder shall not
encumber or dispose of such Shares except in the accordance with the provisions
of this Security Agreement.
2. Pledgor's Representations and Covenants. To include Pledgee to make
---------------------------------------
the Loan and enter into this Security Agreement, Pledgor represents and
covenants to Pledgee, its successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum of
-----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
(b) Encumbrances. The Shares are free of all other encumbrances,
------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
(c) Margin Regulations. In the event that Pledgee's Common Stock
------------------
becomes margin-listed by the Federal Reserve Board subsequent to the execution
of this Security Agreement, and Pledgee is classified as a "lender" within the
meaning of the regulations under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G"), Pledgor agrees to operate with Pledgee in making
any amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.
<PAGE>
3. Voting Rights. During the term of this pledge and so long as all
-------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
-----------------
any stock dividend, reclassification, readjustment or other changes declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Warrants and Rights. In the event that, during the term of this
-------------------
pledge, subscription warrants or other rights or options shall be issued in
connection with the pledged Shares, such rights, warrants and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
-------
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or
(b) Pledgor fails to perform any of the covenants set forth in either
of the Purchase Agreements or contained in this Security Agreement for a period
of 10 days after written notice thereof from Pledgee.
In the case of an event of Default, set forth above, Pledgee shall have the
right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue his remedies under the California
Commercial Code.
7. Release of Collateral. Subject to any applicable contrary rules under
---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. Withdrawal of Substitution of Collateral. Pledgor shall not sell,
----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
2
<PAGE>
9. Term. The within pledge of Shares shall continue the payment of all
----
indebtedness secured hereby, at which time the remaining pledged stock shall be
promptly delivered to Pledgor, subject to the provisions for prior release of a
portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall be come immediately due
and payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross
----------------------
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
-----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the
---------------------
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
-------------
governed under the laws of the State of California.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PLEDGOR" /s/
----------------------
----------------------
"PLEDGEE" Lexar Media, Inc.
a California corporation
By:___________________
Title:________________
"PLEDGEHOLDER" ______________________
______________________
Secretary of _________
4
<PAGE>
EXHIBIT 10.23
EXECUTION COPY
--------------
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
LEXAR MEDIA, INC.
AND
THE STOCKHOLDERS
OF
PRINTROOM.COM, INC.
January 21, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Definitions.......................................................................................... 1
2. Purchase and Sale of Target Shares................................................................... 5
(a) Basic Transaction........................................................................... 5
(b) Purchase Price.............................................................................. 5
(c) Closing..................................................................................... 6
(d) Deliveries at the Closing................................................................... 6
3. Representations and Warranties Concerning the Transaction............................................ 6
(a) Representations and Warranties of the Sellers............................................... 6
(b) Representations and Warranties of the Buyer................................................. 7
4. Representations and Warranties Concerning the Target................................................. 8
(a) Organization, Qualification, and Corporate Power............................................ 8
(b) Capitalization.............................................................................. 8
(c) Noncontravention............................................................................ 9
(d) Brokers' Fees............................................................................... 9
(e) Title to Assets............................................................................. 9
(f) Subsidiaries................................................................................ 9
(g) Financial Statements........................................................................ 10
(h) Events Subsequent to Most Recent Fiscal Year End............................................ 10
(i) Undisclosed Liabilities..................................................................... 11
(j) Legal Compliance............................................................................ 11
(k) Tax Matters................................................................................. 11
(l) Real Property............................................................................... 12
(m) Intellectual Property....................................................................... 12
(n) Tangible Assets............................................................................. 16
(o) Inventory................................................................................... 17
(p) Contracts................................................................................... 17
(q) Notes and Accounts Receivable............................................................... 18
(r) Powers of Attorney.......................................................................... 18
(s) Insurance................................................................................... 18
(t) Litigation.................................................................................. 18
(u) Employees................................................................................... 19
(v) Employee Benefits........................................................................... 19
(w) Guaranties.................................................................................. 19
(x) Environmental, Health, and Safety Matters................................................... 19
(y) Certain Business Relationships with the Target.............................................. 20
(z) Consents.................................................................................... 20
(aa) Disclosure.................................................................................. 20
5. Post-Closing Covenants...................................................................... 20
(a) General..................................................................................... 20
(b) Litigation Support.......................................................................... 20
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
(c) Transition.................................................................................. 21
(d) Confidentiality............................................................................. 21
(e) Buyer Stock................................................................................. 21
6. Conditions to Obligation to Close.................................................................... 22
(a) Conditions to Obligation of the Buyer....................................................... 22
(b) Conditions to Obligation of the Sellers..................................................... 23
7. Remedies for Breaches of this Agreement.............................................................. 24
(a) Survival of Representations and Warranties.................................................. 24
(b) Indemnification Provisions for Benefit of the Buyer......................................... 24
(c) Matters Involving Third Parties............................................................. 25
(e) Determination of Adverse Consequences....................................................... 26
(f) Exclusive Remedy............................................................................ 26
8. Piggyback Registration Rights........................................................................ 27
9. Termination of Agreement............................................................................. 27
10. Miscellaneous....................................................................................... 27
(a) Nature of Certain Obligations............................................................... 27
(b) Press Releases and Public Announcements..................................................... 28
(c) No Third-Party Beneficiaries................................................................ 28
(d) Entire Agreement............................................................................ 28
(e) Succession and Assignment................................................................... 28
(f) Counterparts................................................................................ 28
(g) Headings.................................................................................... 28
(h) Notices..................................................................................... 28
(i) Governing Law............................................................................... 29
(j) Amendments and Waivers...................................................................... 29
(k) Severability................................................................................ 29
(l) Expenses.................................................................................... 30
(m) Construction................................................................................ 30
(n) Incorporation of Exhibits, Annexes, and Schedules........................................... 30
(o) Specific Performance........................................................................ 30
(p) Submission to Jurisdiction.................................................................. 30
</TABLE>
-ii-
<PAGE>
Exhibit A--Historical Financial Statements
Exhibit B--Form of Escrow Agreement
Exhibit C--Form of Employment Agreements
Exhibit D--Form of Noncompetition Agreements
Exhibit E--Form of Amended and Restated Stock Purchase Agreements
Annex I--Exceptions to Representations and Warranties of Sellers Concerning the
Transaction
Annex II--Exceptions to Representations and Warranties of Buyer Concerning the
Transaction
Disclosure Schedule--Exceptions to Representations and Warranties Concerning
the Target
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT entered into on January 21, 2000, by and among Lexar Media,
Inc., a California corporation (the "Buyer"), and Mike Kapul, Mike Shapiro,
-----
JoAnne Hu, Andre Shakhnovich, Yuri Agroskin, Robert Cochran, Igor Khurgin, Elina
Khurgin, Dan Agroskin, Moti Klots, Sopha Agroskin, Paul Breytman and Irene
Breytman (collectively the "Sellers"). The Buyer and the Sellers are referred to
-------
collectively herein as the "Parties."
-------
The Sellers in the aggregate own all of the outstanding capital stock
of Printroom.com, Inc., a California corporation (the "Target") .
------
This Agreement contemplates a transaction in which the Buyer will
purchase from the Sellers, and the Sellers will sell to the Buyer, all of the
issued and outstanding capital stock of the Target in return for the
consideration set forth in Section 2 hereof.
The Parties hereto intend to adopt this Agreement as a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended, and the regulations promulgated thereunder.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
1. Definitions.
-----------
"Accredited Investor" has the meaning set forth in Regulation D
-------------------
promulgated under the Securities Act.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
--------------------
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and
fees, including court costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
---------
promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of
----------------
Code Section 1504(a) or any similar group defined under a similar provision of
state, local, or foreign law.
"Basis" means any past or present fact, situation, circumstance,
-----
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"Buyer" has the meaning set forth in the preface above.
-----
-1-
<PAGE>
"Buyer Stock" means the common stock, no par value, of Buyer.
-----------
"Closing" has the meaning set forth in Section 2(c) below.
-------
"Closing Date" has the meaning set forth in Section 2(c) below.
------------
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Confidential Information" means any information concerning the
------------------------
businesses and affairs of the Target other than information that is already
generally available to the public or becomes publicly available through no fault
of the Sellers or Target.
"Copyrights" means all copyrights, copyrights registrations and
----------
applications therefor and all other rights corresponding thereto throughout the
world.
"Disclosure Schedule" has the meaning set forth in Section 4 below.
-------------------
"Employee Benefit Plan" means any (a) non-qualified deferred
----------------------
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan,
including any Multiemployer Plan, or (d) Employee Welfare Benefit Plan or
material fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
-----------------------------
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
-----------------------------
Section 3(1).
"Environmental, Health, and Safety Requirements" shall mean all
----------------------------------------------
federal, state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, all contractual obligations and all common law
concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all those relating
to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control, or cleanup of any hazardous
materials, substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as
now or hereafter in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"Escrow Agent" shall mean Norwest Bank Minnesota, National Association
------------
or, if it is not willing or able to act in such capacity, such other institution
as the parties may agree to.
-2-
<PAGE>
"Escrow Agreement" shall mean the Escrow Agreement, dated as of the
----------------
Closing Date, by and among the Sellers, Buyer and Escrow Agent, in the form
attached hereto as Exhibit B.
"Escrow Shares" has the meaning set forth in Section 2(b).
-------------
"Financial Statements" has the meaning set forth in Section 4(g) below.
--------------------
"GAAP" means generally accepted accounting principles as in effect from
----
time to time in the United States.
"Indemnified Party" has the meaning set forth in Section 7(c) below.
-----------------
"Indemnifying Party" has the meaning set forth in Section 7(c) below.
------------------
"Intellectual Property Rights" shall mean any or all of the following
----------------------------
and all rights in, arising out of, or associated therewith: (A) Patents; (B) all
trade secrets and other rights in know-how and confidential or proprietary
information; (C) Copyrights; (D) Maskworks; (E) all industrial designs and any
registrations and applications therefor throughout the world; (F) all rights in
World Wide Web addresses and domain names and applications and registrations
therefor; (G) Trademarks; and (H) any similar, corresponding or equivalent
rights to any of the foregoing anywhere in the world.
"Knowledge" means actual knowledge after reasonable investigation.
---------
"Liability" means any liability, whether known or unknown, whether
---------
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, whether due or to become due, and
whether or not required to be reflected in financial statements in accordance
with GAAP, including any liability for Taxes.
"Maskworks" means all mask works, mask work registrations and
---------
applications therefor, and any equivalent or similar rights in semiconductor
masks, layouts, architectures or topology.
"Most Recent Balance Sheet" means the balance sheet contained within
-------------------------
the Financial Statements.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
------------------
"Ordinary Course of Business" means the ordinary course of business
---------------------------
consistent with past custom and practice, including with respect to quantity and
frequency.
"Party" has the meaning set forth in the preface above.
-----
"Patents" means all United States and foreign patents and utility
-------
models and applications therefor and all reissues, divisions, re-examinations,
renewals, extensions, provisionals,
-3-
<PAGE>
continuations and continuations-in-part thereof and equivalent or similar rights
anywhere in the world in inventions and discoveries, including, without
limitation, invention disclosures.
"Person" means an individual, a partnership, a corporation, an
------
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity, or any department, agency, or political
subdivision thereof.
"Purchase Price" has the meaning set forth in Section 2(b) below.
--------------
"Requisite Sellers" means Sellers holding a majority in interest of the
-----------------
Target Shares as set forth in Section 4(b) of the Disclosure Schedule.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
-----------------------
amended.
"Security Interest" means any mortgage, pledge, lien, attachment,
-----------------
encumbrance, charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for Taxes not yet due and payable,
(c) purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Seller" has the meaning set forth in the preface above.
------
"Stockholders Representative" means the Representative as defined in
---------------------------
the Escrow Agreement.
"Target" has the meaning set forth in the preface above.
------
"Target Intellectual Property" shall mean any Technology and
----------------------------
Intellectual Property Rights including the Target Registered Intellectual
Property Rights that are owned, in whole or in part, by or exclusively licensed
to Target.
"Target Registered Intellectual Property Rights" shall mean all United
----------------------------------------------
States, international and foreign (A) Patents; (B) registered Trademarks,
applications to register Trademarks, including intent-to-use applications, or
other registrations or applications related to Trademarks; (C) registrations for
Copyrights and applications to register Copyrights; (D) registrations for Mask
Work and applications to register Mask Works; and (E) any other Technology that
is the subject of an application, certificate, filing, registration or other
document issued by, filed with, or recorded by, any state, government or other
public or private legal authority at any time, of Target.
"Target Share" means any share of the common stock, no par value per
------------
share, of the Target.
-4-
<PAGE>
"Tax" means any federal, state, local, or foreign income, gross
---
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, including taxes under Code Section
59A, customs duties, capital stock, franchise, profits, withholding, social
security or similar, unemployment, disability, real property, personal property,
sales, use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
----------
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Technology" shall mean any or all of the following: (A) works of
----------
authorship including, without limitation, computer programs, source code and
executable code, whether embodied in software, firmware or otherwise,
documentation, designs, files, net lists, records, data and mask works; (B)
inventions, whether or not patentable, improvements and technology; (C)
proprietary and confidential information, including technical data and customer
and supplier lists, trade secrets and know how; (D) databases, data compilations
and collections and technical data; (E) logos, trade names, trade dress,
trademarks and service marks; (F) World Wide Web addresses, domain names and
sites; (G) tools, methods and processes; and (H) all instantiations of the
foregoing in any form and embodied in any media.
"Third Party Claim" has the meaning set forth in Section 7(c) below.
-----------------
"Trademarks" means all trade names, logos, common law trademarks and
----------
service marks, trademark and service mark registrations and applications
therefor and all goodwill associated therewith throughout the world.
2. Purchase and Sale of Target Shares.
----------------------------------
(a) Basic Transaction. On and subject to the terms and
-----------------
conditions of this Agreement, the Buyer agrees to purchase from each of the
Sellers, and each of the Sellers agrees to sell to the Buyer, all of his or its
Target Shares for the consideration specified below in this Section 2.
(b) Purchase Price. The Buyer agrees to pay to the Sellers at
--------------
the Closing an aggregate of Four Hundred Seventy Five Thousand (475,000) shares
of Buyer Stock (the "Purchase Price") by delivery (i) to the Sellers of Four
--------------
Hundred Twenty Seven Thousand Five Hundred (427,500) shares of Buyer Stock and
(ii) to the Escrow Agent of Forty Seven Thousand Five Hundred (47,500) shares of
Buyer Stock (the "Escrow Shares"), in accordance with the instructions of the
Escrow Agent provided to the Buyer, to be held in escrow pursuant to the terms
of the Escrow Agreement as collateral for the indemnification obligations of the
Sellers hereunder. The Purchase Price shall be allocated among the Sellers in
proportion to their respective holdings of Target Shares as set forth in Section
4(b) of the Disclosure Schedule. The Sellers hereby acknowledge and agree
-5-
<PAGE>
that the Escrow Shares shall consist solely of shares of Buyer Stock that are
vested shares in accordance with the Restricted Stock Purchase Agreements, each
as amended on the date hereof in accordance with Section 6(a)(vii).
(c) Closing. The closing of the transactions contemplated by
-------
this Agreement (the "Closing") shall take place at the offices of Fenwick & West
-------
LLP in Palo Alto, California, commencing at 10:00 a.m. local time on the date of
this Agreement (the "Closing Date").
------------
(d) Deliveries at the Closing. At the Closing, (i) the Sellers
-------------------------
will deliver to the Buyer the various certificates, instruments, and documents
referred to in Section 6(a) below, (ii) the Buyer will deliver to the Sellers
the various certificates, instruments, and documents referred to in Section 6(b)
below, (iii) each of the Sellers will deliver to the Buyer stock certificates
representing all of his or her Target Shares, endorsed in blank or accompanied
by duly executed assignment documents, (iv) the Buyer and Sellers will execute
the Escrow Agreement and (v) the Buyer will deliver to each of the Sellers and
to the Escrow Agent the consideration specified in Section 2(b) above.
(3) Representations and Warranties Concerning the Transaction.
---------------------------------------------------------
(a) Representations and Warranties of the Sellers. Each of the
---------------------------------------------
Sellers represents and warrants to the Buyer that the statements contained in
this Section 3(a) are correct and complete as of the date of this Agreement,
with respect to himself or herself, except as set forth in Annex I attached
hereto.
(i) Authorization of Transaction. The Seller has full power
----------------------------
and authority to execute and deliver this Agreement and to perform his
or her obligations hereunder. This Agreement constitutes the valid and
legally binding obligation of the Seller, enforceable in accordance
with its terms and conditions. The Seller need not give any notice to,
make any filing with, or obtain any authorization, consent, or approval
of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
(ii) Noncontravention. Neither the execution and the delivery
----------------
of this Agreement and the Escrow Agreement, nor the consummation of the
transactions contemplated hereby and thereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge or other restriction of any government,
governmental agency or court to which the Seller is subject.
(iii) Brokers' Fees. The Seller has no Liability or obligation
-------------
to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which
the Buyer could become liable or obligated.
(iv) Investment. The Seller (A) understands that the Buyer
----------
Stock has not been, and will not be, registered under the Securities
Act, or under any state securities laws, and are being offered and sold
in reliance upon federal and state exemptions for transactions not
-6-
<PAGE>
involving any public offering, (B) is acquiring the Buyer Stock solely
for his or her own account for investment purposes, and not with a view
to the distribution thereof, (C) is a sophisticated investor with
knowledge and experience in business and financial matters, (D) has
received certain information concerning the Buyer and has had the
opportunity to obtain additional information as desired in order to
evaluate the merits and the risks inherent in holding the Buyer Stock,
and (E) is able to bear the economic risk and lack of liquidity
inherent in holding the Buyer Stock.
(v) Target Shares. The Seller holds of record and owns
-------------
beneficially the number of Target Shares set forth next to his or her
name in Section 4(b) of the Disclosure Schedule, free and clear of any
restrictions on transfer (other than any restrictions under the
Securities Act and state securities laws), Taxes, Security Interests,
options, warrants, purchase rights, contracts, commitments, equities,
claims, and demands. The Seller is not a party to any option, warrant,
purchase right, or other contract or commitment that could require the
Seller to sell, transfer, or otherwise dispose of any capital stock of
the Target, other than this Agreement. The Seller is not a party to any
voting trust, proxy, or other agreement or understanding with respect
to the voting of any capital stock of the Target.
(b) Representations and Warranties of the Buyer. The Buyer
-------------------------------------------
represents and warrants to the Sellers that the statements contained in this
Section 3(b) are correct and complete as of the date of this Agreement, except
as set forth in Annex II attached hereto.
(i) Organization and Capitalization of the Buyer. The Buyer is
--------------------------------------------
a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. As of December
31, 1999, the authorized capital stock of Buyer consisted of: (i)
75,000,000 shares of common stock, no par value ("Lexar California
Common Stock"), of which 12,579,322 shares were issued and outstanding
and (ii) 38,705,827 shares of preferred stock, no par value, of which
36,035,909 shares were issued and outstanding, consisting of 3,000,000
shares of Series A Preferred Stock, 3,000,048 shares of Series B
Preferred Stock, 11,543,750 shares of Series C Preferred Stock,
6,943,618 shares of Series D Preferred Stock and 12,170,932 shares of
Series E Preferred Stock.
(ii) Authorization of Transaction. The Buyer has full power
----------------------------
and authority, including full corporate power and authority, to execute
and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of
the Buyer, enforceable in accordance with its terms and conditions. The
Buyer need not give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental
agency in order to consummate the transactions contemplated by this
Agreement, other than filings as may be required by applicable
securities laws, which will be made within the time prescribed by such
law.
(iii) Noncontravention. Neither the execution and the delivery
----------------
of this Agreement and the Escrow Agreement, nor the consummation of the
transactions contemplated hereby and thereby, will (A) violate any
constitution, statute, regulation, rule, injunction, judgment,
-7-
<PAGE>
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Buyer is subject or any
provision of its charter or bylaws or (B) conflict with, result in a
breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or
cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which the Buyer is a party
or by which it is bound or to which any of its assets is subject.
(iv) Brokers' Fees. The Buyer has no Liability or obligation
-------------
to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which
any Seller could become liable or obligated.
(v) Investment. The Buyer is not acquiring the Target Shares
----------
with a view to or for sale in connection with any distribution thereof
within the meaning of the Securities Act.
4. Representations and Warranties Concerning the Target. The
----------------------------------------------------
Sellers represent and warrant to the Buyer that the statements contained in this
Section 4 are correct and complete as of the date of this Agreement, except as
set forth in the disclosure schedule delivered by the Sellers to the Buyer on
the date hereof and initialed by the Parties (the "Disclosure Schedule").
-------------------
Nothing in the Disclosure Schedule shall be deemed adequate to disclose an
exception to a representation or warranty made herein, however, unless the
Disclosure Schedule identifies the exception with reasonable particularity and
describes the relevant facts in reasonable detail. Without limiting the
generality of the foregoing, the mere listing, or inclusion of a copy, of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein, unless the representation or warranty
has to do with the existence of the document or other item itself. The
Disclosure Schedule will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this Section 4.
(a) Organization, Qualification, and Corporate Power. The
------------------------------------------------
Target is a corporation duly organized, validly existing, and in good standing
under the laws of the jurisdiction of its incorporation. The Target is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, assets, financial condition, results of
operations or sales prospects of the Target. The Target has full corporate power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and in which it presently proposes to
engage and to own and use the properties owned and used by it and to perform its
obligations under any contracts by which it is bound. Section 4(a) of the
Disclosure Schedule lists the directors and officers of the Target. The Sellers
have delivered to the Buyer correct and complete copies of the charter and
bylaws of the Target as amended to date. The minute books, containing the
records of meetings of the stockholders, the board of directors, and any
committees of the board of directors, the stock certificate books, and the stock
record books of the Target are correct and complete. The Target is not in
default under or in violation of any provision of its charter or bylaws.
(b) Capitalization. The entire authorized capital stock of the
--------------
Target consists of 10,000,000 Target Shares, of which 4,483,875 Target Shares
are issued and outstanding and none of
-8-
<PAGE>
which Target Shares are held in treasury. All of the issued and outstanding
Target Shares have been duly authorized, are validly issued, fully paid, and
nonassessable, and are held of record by the respective Sellers in the amounts
as set forth in Section 4(b) of the Disclosure Schedule. There are no
outstanding or authorized options, warrants, equity securities, purchase rights,
subscription rights, conversion rights, exchange rights, put or repurchase
rights or other contracts or commitments that could require the Target to issue,
sell, or otherwise cause to become outstanding any of its capital stock or
require Target to repurchase, redeem or otherwise acquire any Target Shares or
similar equity securities of Target. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect to the Target. There are no voting trusts, proxies, or other agreements
or understandings with respect to the voting of the capital stock of the Target.
(c) Noncontravention. Neither the execution and the delivery
----------------
of this Agreement and the Escrow Agreement, nor the consummation of the
transactions contemplated hereby and thereby, will (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court to which
the Target is subject or any provision of the charter or bylaws of the Target or
(ii) conflict with, result in a breach of, constitute a default under, result in
the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument or other arrangement to which the Target is a party or by
which it is bound or to which any of its assets is subject, or result in the
imposition of any Security Interest upon any of its assets. The Target is not
required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement.
(d) Brokers' Fees. The Target does not have any Liability or
--------------
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement.
(e) Title to Assets. The Target has good and marketable title
---------------
to, or a valid leasehold interest in, the properties and assets used by it,
wherever located, or shown on the Most Recent Balance Sheet or acquired after
the date thereof, free and clear of all Security Interests, charges, easements,
covenants or other restrictions, except for installments of special assessments
not yet delinquent and recorded easements, covenants or other restrictions which
do not impair the current use, occupancy, or value, or the marketability of
title, of the property subject thereto, and except for properties and assets
disposed of in the Ordinary Course of Business since the date of the Most Recent
Balance Sheet.
(f) Subsidiaries. The Target does not have any subsidiaries or
------------
affiliated companies and does not otherwise own, directly or indirectly, any
shares of capital stock or any equity, debt or similar interest in, or any
interest convertible, exchangeable or exercisable for any equity, debt or
similar interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity.
-9-
<PAGE>
(g) Financial Statements. Attached hereto as Exhibit A are the
-------------------- ---------
unaudited balance sheet as of December 31, 1999 and the unaudited statements of
income, changes in stockholders' equity and cash flow as of and for the period
beginning on April 1, 1999 to and ending on December 31, 1999 for the Target
(collectively, the "Financial Statements"). The Financial Statements, including
--------------------
the notes thereto, have been prepared in accordance with GAAP applied on a
consistent basis throughout the period covered thereby, present fairly the
financial condition of the Target as of such date and the results of operations
of the Target for such period, are correct and complete, and are consistent with
the books and records of the Target, which books and records are correct and
complete.
(h) Events Subsequent to Most Recent Fiscal Year End. Since
------------------------------------------------
December 31, 1999, there has not been any material adverse change in the
business, financial condition, operations, or results of operations of the
Target. Without limiting the generality of the foregoing, since that date:
(i) the Target has not sold, leased, transferred, or
assigned any of its assets, tangible or intangible, other than for a
fair consideration in the Ordinary Course of Business;
(ii) the Target has not made any capital expenditure or
series of related capital expenditures either involving more than
$5,000 individually or $10,000 in the aggregate, or outside the
Ordinary Course of Business;
(iii) the Target has not made any capital investment in, any
loan to, or any acquisition of the securities or assets of, any other
Person, or series of related capital investments, loans, and
acquisitions, either involving more than $5,000 or outside the Ordinary
Course of Business;
(iv) the Target has not issued any note, bond, or other
debt security or created, incurred, assumed, or guaranteed any
indebtedness for borrowed money or capitalized lease obligation either
involving more than $1,000 singly or $5,000 in the aggregate;
(v) the Target has not canceled, compromised, waived, or
released any right or claim or series of related rights and claims
either involving more than $1,000 or outside the Ordinary Course of
Business;
(vi) the Target has not issued, sold, or otherwise disposed
of any of its capital stock, or granted any options, warrants, or other
rights to purchase or obtain, including upon conversion, exchange, or
exercise, any of its capital stock;
(vii) the Target has not declared, set aside, or paid any
dividend or made any distribution with respect to its capital stocks
whether in cash or in kind, or redeemed, purchased or otherwise
acquired any of its capital stock;
(viii)the Target has not experienced any damage,
destruction, or loss, whether or not covered by insurance, to its
property;
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(ix) the Target has not granted any increase in the base
compensation of any of its directors or officers or any of its
employees outside the Ordinary Course of Business;
(x) the Target has not adopted, amended, modified, or
terminated any bonus, profit-sharing, incentive, severance, or other
plan, contract, or commitment for the benefit of any of its directors,
officers, and employees, or taken any such action with respect to any
other Employee Benefit Plan;
(xi) the Target has not made any other change in employment
terms for any of its directors, officers and employees outside the
Ordinary Course of Business;
(xii) the Target has not made or pledged to make any charitable
or other capital contribution outside the Ordinary Course of Business;
(xiii) there has not been any other material occurrence, event,
incident, action, failure to act, or transaction outside the Ordinary
Course of Business involving the Target; and
(xiv) the Target has not committed to any of the foregoing.
(i) Undisclosed Liabilities. The Target does not have any Liability,
------------------------
and there is no Basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against it giving
rise to any Liability, except for (i) Liabilities set forth on the face of the
Most Recent Balance Sheet and (ii) Liabilities which have arisen after the Most
Recent Balance Sheet in the Ordinary Course of Business, none of which results
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, product liability, infringement,
or violation of law.
(j) Legal Compliance. The Target and its Affiliates have complied
-----------------
with all applicable laws, including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder, of
federal, state, local, and foreign governments and all agencies thereof, and no
action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand, or notice has been filed or commenced against any of them alleging any
failure so to comply.
(k) Tax Matters.
------------
(i) Except as set forth in Section 4(k) of the Disclosure
Schedule, (A) all Tax Returns of, relating to or which include the
Target which are required to have been filed have been filed on a
timely basis with the appropriate authorities and all such Tax Returns
are true, correct and complete in all respects, (B) all Taxes required
to have been paid by the Target have been paid in full on a timely
basis to the appropriate authorities, and (C) all Taxes or other
amounts required to have been collected or withheld by the Target have
been timely and properly collected or withheld.
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(ii) Except as set forth in Section 4(k) of the Disclosure
Schedule, (A) no Taxing authority has asserted in writing any adjustment,
deficiency, or assessment that could result in additional Taxes for which
the Target is or may be liable, (B) there is no pending audit, examination,
investigation, dispute, proceeding or claim for which the Target has
received notice relating to any Taxes for which the Target is or may be
liable, (C) no statute of limitations with respect to any Taxes for which
the Target is or may be liable has been waived or extended, (D) the due
date of any Tax Returns that the Target is required to file has not been
extended, and (E) the Target is not and has never been a party to any Tax
sharing or Tax allocation agreement, arrangement or understanding.
(iii) The Target is not a party to any contract, agreement, plan
or arrangement that, individually or collectively, could give rise to any
payment that would be non-deductible by reason of Section 162, 280G or 404
of the Code. The Target has not made an election under Section 341(f) of
the Code.
(iv) The Target is not and has never been a member of an
Affiliated Group filing a consolidated federal income Tax Return or a
consolidated, combined or unitary state or local income Tax return.
(v) The Target has previously furnished Buyer with copies of all
(A) Tax examinations, (B) extensions of statutory limitations, (C) federal,
state and local income Tax Returns and franchise Tax Returns of the Target
and (D) correspondence between the Target and all Taxing authorities.
(vi) The unpaid Taxes of the Target did not, as of the Most
Recent Balance Sheet, exceed the reserve for Tax Liability, rather than any
reserve for deferred Taxes established to reflect timing differences
between book and tax income.
(l) Real Property. Target does not own any real property. Section
--------------
4(l) of the Disclosure Schedule lists and describes briefly all real property
leased or subleased to the Target, including the term thereof and a description
of any available renewal periods, rental payment terms, owner of the property
subject to such lease, the identity of any of the primary lessors from whom the
property may be sublet and a description of each such arrangement, if any, and
whether any consents are required under such lease in connection with the
transactions contemplated by this Agreement.
(m) Intellectual Property.
----------------------
(i) Schedule 4(m)(i) of the Disclosure Schedule lists all
Target Registered Intellectual Property Rights owned by, filed in the name
of, or applied for, by and lists any proceedings or actions before any
court, tribunal, including the United States Patent and Trademark Office or
equivalent authority anywhere in the world, related to any of the Target
Registered Intellectual Property Rights or Target Intellectual Property.
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(ii) Each item of Target Registered Intellectual
Property Rights is valid and subsisting, and all necessary registration,
maintenance and renewal fees in connection with such Target Registered
Intellectual Property Rights have been paid and all necessary documents and
certificates in connection with such Target Registered Intellectual
Property Rights have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such
Target Registered Intellectual Property Rights. Except as set forth on
Section 4(m)(ii) of the Disclosure Schedule, there are no actions that must
be taken by Target within one hundred twenty (120) days of the Closing
Date, including the payment of any registration, maintenance or renewal
fees or the filing of any responses to United States Patent and Trademark
Office actions, documents, applications or certificates for the purposes of
obtaining, maintaining, perfecting or preserving or renewing any Target
Registered Intellectual Property Rights. In each case in which the Target
has acquired all rights, title and interest in, as opposed to the right to
use, any Technology or Intellectual Property Right from any person, Target
has obtained a valid and enforceable assignment sufficient to irrevocably
transfer all rights in such Technology and the associated Intellectual
Property Rights to Target. Except as set forth on Section 4(m)(ii) of the
Disclosure Schedule, Target has not claimed a particular status in the
application for any Intellectual Property Rights, which claim of status was
not at the time made, or which has since become, inaccurate or false or
that will no longer be true and accurate as a result of the Closing.
(iii) None of the Sellers and the directors and officers of the
Target has any Knowledge of any facts or circumstances that would render
any Target Intellectual Property invalid or unenforceable. Except as set
forth on Section 4(m)(iii) of the Disclosure Schedule, without limiting the
foregoing, none of the Sellers and the directors and officers of the Target
has any Knowledge of any information, materials, facts or circumstances,
including any information or fact that would constitute prior art, that
would render any of the Target Registered Intellectual Property Rights
invalid or unenforceable, or would adversely effect any pending application
for any Target Registered Intellectual Property Right and the Target has
not misrepresented or failed to disclose, and none of the Sellers and the
directors and officers of the Target has any Knowledge of any
misrepresentation or failure to disclose by Target of, any fact or
circumstances in any application for any Target Registered Intellectual
Property Right that would constitute fraud or a misrepresentation with
respect to such application or that would otherwise affect the validity or
enforceability of any Target Registered Intellectual Property Right.
(iv) Each item of Target Intellectual Property is free and
clear of any Security Interests except for non-exclusive licenses granted
to end-user customers in the Ordinary Course of Business. Target is the
exclusive owner or exclusive licensee of all Target Intellectual Property.
Without limiting the foregoing (a) Target is the exclusive owner of all
Trademarks used in connection with the operation or conduct of the business
of Target, including the sale, licensing, distribution or provision of any
products or services by
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<PAGE>
Target and (b) Target owns exclusively, and has good title to, all
Copyrights that are products of Target or which Target otherwise purports
to own.
(v) Except as set forth on Section 4(m)(v) of the Disclosure
Schedule, all Intellectual Property of Target will be fully transferable,
alienable or licensable by Buyer without restriction and without payment of
any kind to any third party, other than royalties and fees payable in the
Ordinary Course of Business by Target prior to the date hereof.
(vi) To the extent that any Technology of Target has been
developed or created by a third party for Target, Target has a written
agreement with such third party with respect thereto and Target thereby
either (a) has obtained ownership of, and is the exclusive owner of, or (b)
has obtained a license, sufficient for the conduct of its business as
currently conducted and as proposed to be conducted, to all such
Intellectual Property Rights of the third party in such Technology by
operation of law or by valid assignment, to the fullest extent it is
legally possible to do so.
(vii) Except as set forth on Section 4(m)(vii) of the Disclosure
Schedule and with the exception of "shrink-wrap" or similar widely-
available commercial end-user licenses, all Technology used in or necessary
to the conduct of the business of Target as presently conducted or
currently contemplated to be conducted by Target was written and created
solely by either (a) employees of Target acting within the scope of their
employment or (b) by third parties who have validly and irrevocably
assigned all of their rights, including Intellectual Property Rights
therein, to Target, and no third party owns or has any rights to any of the
Target Intellectual Property.
(viii) All current and former software development personnel of
Target and current and former consultants and contractors engaged in
software development for Target have entered into a valid and binding
written proprietary information, confidentiality and assignment agreement
with Target sufficient to vest title in Target of all Technology, including
all accompanying Intellectual Property Rights, created by such employee in
the scope of his or her employment with Target.
(ix) Except as set forth on Section 4(m)(ix) of the Disclosure
Schedule, no person who has licensed Technology or Intellectual Property
Rights to Target has ownership rights or license rights to improvements
made by Target in such Technology or Intellectual Property Rights.
(x) Target has not transferred ownership of, or granted any
exclusive license of or right to use, or authorized the retention of any
exclusive rights to use or joint ownership of, any Technology or
Intellectual Property Right that is or was Target Intellectual Property, to
any other person.
(xi) Section 4(m)(xi) of the Disclosure Schedule lists all
contracts, licenses and agreements to which Target is a party with respect
to any Technology or Intellectual
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<PAGE>
Property Rights. Target is not in breach of nor has Target failed to
perform under, any of the foregoing contracts, licenses or agreements and,
to the Knowledge of the Sellers and the directors and officers of the
Target, no other party to any such contract, license or agreement is in
breach thereof or has failed to perform thereunder.
(xii) Section 4(m)(xii) of the Disclosure Schedule lists all
material contracts, licenses and agreements between Target and any other
person wherein or whereby Target has agreed to or assumed any obligation or
duty to warrant, indemnify, reimburse, hold harmless, guaranty or otherwise
assume or incur any obligation or liability or provide a right of
rescission with respect to the infringement or misappropriation by Target
or such other person of the Intellectual Property Rights of any person
other than Target.
(xiii) To the Knowledge of the Sellers and the directors and
officers of the Target, there are no contracts, licenses or agreements
between Target and any other person with respect to Target Intellectual
Property under which there is any dispute regarding the scope of such
agreement, or performance under such agreement, including with respect to
any payments to be made or received by Target thereunder.
(xiv) To the Knowledge of the Sellers and the directors and
officers of the Target, the operation of the business of the Target as it
currently is conducted or is contemplated to be conducted by Target,
including but not limited to the design, development, use, import,
branding, advertising, promotion, marketing, manufacture and sale of the
products, technology or services, including products, technology or
services currently under development, of Target does not and will not and
will not when conducted by Buyer in substantially the same manner following
the Closing, infringe or misappropriate any Intellectual Property Rights of
any person, violate any right of any person, including any right to privacy
or publicity, or constitute unfair competition or trade practices under the
laws of any jurisdiction, and Target has not received notice from any
person claiming that such operation or any act, product, technology or
service, including products, technology or services currently under
development, of Target infringes or misappropriates any Intellectual
Property Rights of any person or constitutes unfair competition or trade
practices under the laws of any jurisdiction, nor do the Sellers and the
directors and officers of the Target have any Knowledge of any Basis
therefore. To the Knowledge of any of the Sellers and the directors and
officers of the Target, no person is infringing or misappropriating any
Target Intellectual Property Right.
(xv) No Intellectual Property or service of Target is
subject to any proceeding or outstanding decree, order, judgment or
settlement agreement or stipulation that restricts in any manner the use,
transfer or licensing thereof by Target or may affect the validity, use or
enforceability of such Intellectual Property.
(xvi) No (i) product, technology, service or publication of
Target, (ii) material published or distributed by Target or (iii) conduct
or statement of Target constitutes obscene material, a defamatory statement
or material, false advertising or, to the
-15-
<PAGE>
Knowledge of any of the Sellers and the directors and officers of the
Target, otherwise violates in any material respect any law or regulation.
(xvii) Except as set forth on Section 4(m)(xvii) of the
Disclosure Schedule, the Intellectual Property of Target constitutes all
the Technology and Intellectual Property Rights used in and/or necessary to
the conduct of the business of Target as it currently is conducted, and, to
the Knowledge of any of the Sellers and the directors and officers of the
Target, as it is currently planned or contemplated to be conducted by
Target, including, without limitation, the design, development,
manufacture, use, import and sale of products, technology and performance
of services, including products, technology or services currently under
development.
(xviii) Except to the extent resulting from the continuation of
contracts and licenses of target following the Closing on the terms
applicable prior to the Closing, neither this Agreement nor the
transactions contemplated by this Agreement will result in (a) either the
granting by Buyer to any third party of any right to or with respect to any
Technology or Intellectual Property Right owned by, or licensed to, by
Buyer, (ii) Buyer being obligated to pay any royalties or other amounts to
any third party in excess of those payable by the Buyer or Target,
respectively, prior to the Closing.
(xvix) The products and services of Target shall not fail to
perform any function specified in the product specifications therefor, or
otherwise be adversely affected in any material respect, solely as a result
of the date change from December 31, 1999 to January 1, 2000, including
without limitation, date data century recognition, calculations which
accommodate same century and multi-century formulas and date values, and
date data interface values which reflect the correct century. In addition,
to the Knowledge of any of the Sellers and the directors and officers of
the Target, all of the products and services upon which Target is
materially reliant, either individually or in the aggregate, including,
without limitation, information technology systems such as financial and
order entry systems, non-information technology systems such as phones and
facilities, third party licensed software and the products and services of
the customers, vendors and suppliers of Target are designed to be used
prior to, during, and after the year ending December 31, 2000, and such
products and services will operate during each such time period without
error relating to date data, including without limitation any error
relating to, or the product of, date data that represents or references
different centuries or more than one century.
(n) Tangible Assets. The Target owns or leases all buildings,
----------------
machinery, equipment, and other tangible assets necessary for the conduct of its
business as presently conducted and as presently proposed to be conducted. Each
such tangible asset is free from patent and latent defects, has been maintained
in accordance with normal industry practice, is in good operating condition and
repair, subject to normal wear and tear, and is suitable for the purposes for
which it presently is used and presently is proposed to be used.
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<PAGE>
(o) Inventory. The inventory of the Target consists solely of
----------
finished goods, all of which is merchantable and fit for the purpose for which
it was procured or manufactured, and none of which is slow-moving, obsolete,
damaged, or defective, subject only to the reserve for inventory write down set
forth on the face of the Most Recent Balance Sheet.
(p) Contracts. Section 4(p) of the Disclosure Schedule lists the
----------
following contracts and other agreements to which the Target is a party:
(i) any agreement or group of related agreements for the lease
of personal or real property to or from any Person providing for lease
payments in excess of $5,000 per annum;
(ii) any agreement or group of related agreements for the
purchase or sale of raw materials, commodities, supplies, products or other
personal property, or for the furnishing or receipt of services, the
performance of which will extend over a period of more than one year,
result in a material loss to the Target, or involve consideration in excess
of $5,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement or group of related agreements under which
Target has created, incurred, assumed or guaranteed any indebtedness for
borrowed money or any capitalized lease obligation, under which it has
imposed a Security Interest on any of its assets, tangible or intangible;
(v) any agreement concerning confidentiality or
noncompetition;
(vi) any agreement with any of the Sellers and their
Affiliates, other than the Target;
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan or
arrangement for the benefit of its current or former directors, officers,
and employees;
(viii) any collective bargaining agreement;
(ix) any agreement for the employment of any individual on a
full-time, part-time, consulting or other basis providing annual
compensation in excess of $5,000 or providing severance benefits;
(x) any agreement under which Target has advanced or loaned
any amount to any of its directors, officers or to any of its employees
outside the Ordinary Course of Business;
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<PAGE>
(xi) any agreement under which the consequences of a default or
termination could have a material adverse effect on the business,
financial condition, operations, results of operations, or future
prospects of the Target; or
(xii) any other agreement or group of related agreements the
performance of which involves consideration in excess of $5,000.
The Sellers have delivered to the Buyer a correct and complete copy of each
written agreement listed in Section 4(p) of the Disclosure Schedule, as amended
to date, and a written summary setting forth the terms and conditions of each
oral agreement referred to in Section 4(p) of the Disclosure Schedule. With
respect to each such agreement: (A) the agreement is legal, valid, binding,
enforceable, and in full force and effect; (B) the agreement will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C) no
party is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default, or permit termination,
modification, or acceleration, under the agreement; and (D) no party has
repudiated any provision of the agreement.
(q) Notes and Accounts Receivable. All notes and accounts receivable
------------------------------
of the Target are reflected properly on their books and records, are valid
receivables subject to no set offs or counterclaims, are current and
collectible, and will be collected in accordance with their terms at their
recorded amounts, subject only to the reserve for bad debts set forth on the
face of the Most Recent Balance Sheet.
(r) Powers of Attorney. There are no outstanding powers of attorney
-------------------
executed on behalf of the Target.
(s) Insurance. Section 4(s) of the Disclosure Schedule sets forth
----------
each insurance policy, including policies providing property, casualty,
liability, and workers' compensation coverage and bond and surety arrangements,
to which the Target has been a party, a named insured, or otherwise the
beneficiary of coverage at any time. With respect to each such insurance policy:
(A) the policy is legal, valid, binding, enforceable, and in full force and
effect; (B) the policy will continue to be legal, valid, binding, enforceable,
and in full force and effect on identical terms following the consummation of
the transactions contemplated hereby; (C) neither the Target nor any other party
to the policy is in breach or default, including with respect to the payment of
premiums or the giving of notices, and no event has occurred which, with notice
or the lapse of time, would constitute such a breach or default, or permit
termination, modification, or acceleration, under the policy; and (D) no party
to the policy has repudiated any provision thereof. The Target is and has been
covered by insurance during its existence in scope and amount customary and
reasonable for the businesses in which it has engaged. Section 4(s) of the
Disclosure Schedule also describes any self-insurance arrangements affecting the
Target.
(t) Litigation. Section 4(t) of the Disclosure Schedule sets forth
-----------
each instance in which the Target (i) is subject to any outstanding injunction,
judgment, order, decree, ruling, or
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<PAGE>
charge or (ii) is a party or, to the Knowledge of any of the Sellers and the
directors and officers of the Target, is threatened to be made a party to any
action, suit, proceeding, hearing, or investigation of, in, or before any court
or quasi-judicial or administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator. None of the actions, suits,
proceedings, hearings, and investigations set forth in Section 4(t) of the
Disclosure Schedule could result in any material adverse change in the business,
financial condition, operations, results of operations, or future prospects of
the Target. None of the Sellers and the directors and officers of the Target has
any reason to believe that any such action, suit, proceeding, hearing, or
investigation may be brought or threatened against the Target.
(u) Employees. To the Knowledge of any of the Sellers and the
----------
directors and officers of the Target, no executive, key employee or group of
employees has any plans to terminate employment with the Target. The Target is
not a party to or bound by any collective bargaining agreement, nor has it
experienced any strikes, grievances, claims of unfair labor practices or other
collective bargaining disputes. The Target has not committed any unfair labor
practice. None of the Sellers and the directors and officers of the Target has
any Knowledge of any organizational effort presently being made or threatened by
or on behalf of any labor union with respect to employees of the Target.
(v) Employee Benefits. Section 4(v) of the Disclosure Schedule lists
------------------
each Employee Benefit Plan that the Target maintains or to which the Target
contributes or with respect to which the Target has any actual or contingent
liability. No circumstance exists and no event, including any action or the
failure to do any act, has occurred with respect to any Employee Benefit Plan
maintained or formerly maintained or contributed to by the Target, or to which
Target is or has been required to contribute, that could subject Buyer to any
Liability that could reasonably be expected to have a material adverse effect on
its business, financial condition, results of operations or assets, including
subjecting the assets of the business of Target to any Security Interest, under
ERISA or the Code, nor will the transactions contemplated by this Agreement give
rise to any such Liability or Security Interest. Target has delivered to Buyer
correct and complete copies of the plan documents and summary plan descriptions,
and, if applicable, the most recent determination letter received from the
Internal Revenue Service which addresses the Tax Reform Act of 1986, the most
recent Form 5500 Annual Report, and all related trust agreements, insurance
contracts, and other funding agreements which implement each such Employee
Benefit Plan. Target does not contribute to, has never contributed to, has never
been required to contribute to, and does not have any Liability with respect to,
any plan subject to Title IV of ERISA.
(w) Guaranties. The Target is not a guarantor or otherwise liable
-----------
for any Liability or obligation, including indebtedness, of any other Person.
(x) Environmental, Health, and Safety Matters. Target is and has at
------------------------------------------
all times been in compliance in all material respects with all Environmental,
Health and Safety Requirements. There is no suit, claim, action or proceeding
pending or threatened against Target or any Basis therefore, in respect of (i)
noncompliance by Target with any such Environmental, Health and Safety
Requirements, (ii) personal injury, wrongful death, other tortious conduct, or
relating to materials,
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<PAGE>
commodities or products held, used, sold, transferred, manufactured or disposed
of by or on behalf of Target containing or incorporating any hazardous or toxic
materials, commodities or substances, or (iii) the presence or release or
threatened release into the environment of any pollutant, contaminant or toxic
or hazardous material, substance or waste, whether solid, liquid or gas (each a
"Hazardous Substance"), whether generated by Target or located at or about a
-------------------
site leased or otherwise used by Target or heretofore owned, leased or otherwise
used by Target or any predecessor entity. There have been no Hazardous
Substances generated by Target that have been disposed of or come to rest at any
site that has been included in any published United States federal, state or
local "superfund" site list or any other list of hazardous or toxic waste sites
published by any governmental authority in the United States. There are and have
been no underground storage tanks located on, no polychlorinated biphenyls or
polychlorinated biphenyls-containing equipment used or stored on, and no
hazardous waste, as defined by the Resource Conservation and Recovery Act, as
amended, stored on, any site operated by Target. There have been no releases or
threatened releases of Hazardous Substances on, upon, onto or from any site
owned, leased or otherwise used by Target or heretofore owned, leased or
otherwise used by Target or any predecessor entity.
(y) Certain Business Relationships with the Target. None of the
-----------------------------------------------
Sellers and their Affiliates has been involved in any business arrangement or
relationship with the Target within the past twelve months, and none of the
Sellers and their Affiliates owns any asset, tangible or intangible, which is
used in the business of Target. Target has not made any loan to, or entered into
any other transaction with, any of its officers, directors or employees.
(z) Consents. Section 4(z) of the Disclosure Schedule sets forth a
---------
true, correct and complete list of the identities of any Person whose consent or
approval is required and the matter, agreement or contract to which such consent
relates in connection with the execution, delivery and performance of this
Agreement and the transactions contemplated hereby.
(aa) Disclosure. The representations and warranties contained in this
-----------
Section 4 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 4 not misleading.
5. Post-Closing Covenants. The Parties agree as follows with respect to
-----------------------
the period following the Closing.
(a) General. In case at any time after the Closing any further
--------
action is necessary to carry out the purposes of this Agreement, each of the
Parties will take such further action, including the execution and delivery of
such further instruments and documents, as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party, unless the
requesting Party is entitled to indemnification therefor under Section 7 below.
The Sellers acknowledge and agree that from and after the Closing the Buyer will
be entitled to possession of all documents, books, records, including Tax
records, agreements, and financial data of any sort relating to the Target.
(b) Litigation Support. In the event and for so long as any Party
-------------------
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge,
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<PAGE>
complaint, claim, or demand in connection with (i) any transaction contemplated
under this Agreement or (ii) any fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, eve nt, incident, action,
failure to act or transaction on or prior to the Closing Date involving the
Target, each of the other Parties will cooperate with him or her and his or her
counsel in the contest or defense, make available their personnel and provide
such testimony and access to their books and records as shall be necessary in
connection with the contest or defense, all at the sole cost and expense of the
contesting or defending Party, unless the contesting or defending Party is
entitled to indemnification therefor under Section 7 below.
(c) Transition. None of the Sellers will take any action that is
-----------
designed or intended to have the effect of discouraging any lessor, licensor,
customer, supplier, or other business associate of the Target from maintaining
the same business relationships with the Target after the Closing as it
maintained with the Target prior to the Closing. Each of the Sellers will refer
all customer inquiries relating to the business of the Target to the Buyer from
and after the Closing.
(d) Confidentiality. Each of the Sellers will treat and hold as such
----------------
all of the Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement or their employment with
Target or Buyer following the Closing, and deliver promptly to the Buyer or
destroy, at the request and option of the Buyer, all tangible embodiments and
all copies of the Confidential Information which are in his or her possession.
In the event that any of the Sellers is requested or required, by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process, to disclose any
Confidential Information, that Seller will notify the Buyer promptly of the
request or requirement so that the Buyer may seek an appropriate protective
order or waive compliance with the provisions of this Section 5(d). If, in the
absence of a protective order or the receipt of a waiver hereunder, any of the
Sellers is, on the advice of counsel, compelled to disclose any Confidential
Information to any tribunal or else stand liable for contempt, that Seller may
disclose the Confidential Information to the tribunal; provided, however, that
the disclosing Seller shall use his or her reasonable best efforts to obtain, at
the reasonable request of the Buyer, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as the Buyer shall designate.
(e) Buyer Stock. Each certificate of the Buyer Stock will be
------------
imprinted with a legend substantially in the following form:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, or under the securities laws of any
state, and may not be sold, or otherwise transferred, in the absence of
such registration or an exemption therefrom under such Act and under any
such applicable state laws."
Each holder desiring to transfer any share of the Buyer Stock must furnish the
Buyer with (i) an opinion of counsel addressed to the Buyer, in form and
substance reasonably acceptable to the Buyer, to the effect that the proposed
transfer may be effected without registration under the Securities Act and (ii)
the written agreement of the proposed transferee to be bound by transfer
-21-
<PAGE>
restrictions of this Agreement. Each certificate representing Buyer Stock issued
upon or in connection with such transfer shall bear the restrictive legend set
forth above, in each case unless the opinion delivered pursuant to this section
shall state that such restrictions are no longer required in order to assure
compliance with the Securities Act. Whenever any of such restrictions shall
terminate as to any share of Buyer Stock, the holder thereof shall be entitled
to have a new certificate issued with the legends removed and the restrictions
on transfer in this section shall no longer apply.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of the Buyer. The obligation of
--------------------------------------
the Buyer to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in
Section 3(a) and Section 4 above shall be true and correct in all
material respects at and as of the Closing Date;
(ii) the Sellers shall have performed and complied with
all of their covenants, agreements and obligations hereunder in all
material respects through the Closing;
(iii) the Target shall have procured all of the third
party consents specified in Section 4(z) and received all
authorizations, consents and approvals of governments and governmental
agencies referred to in Section 3(a)(ii), Section 3(b)(ii) and Section
4(c) above;
(iv) the Buyer shall have received all consents necessary
to make its representations and warranties in Section 3(b)(iii) hereof
true and complete;
(v) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, (C) affect adversely the right of the Buyer to own the
Target Shares and to control the Target, or (D) affect adversely the
right of the Target to own its assets and to operate its businesses and
no such injunction, judgment, order, decree, ruling, or charge shall be
in effect;
(v) the Target shall have provided evidence to Buyer
of the conversion of the Convertible Promissory Notes issued to Sopha
Agroskin, Yuri Agroskin and Paul and Irene Breytman into Target Shares;
(vi) the relevant parties shall have entered into the
Escrow Agreement in form and substance as set forth in Exhibit B
---------
attached hereto, the Employment Agreements in form and substance as set
forth in Exhibit C attached hereto and the Noncompetition Agreements
---------
-22-
<PAGE>
in form and substance as set forth in Exhibit D hereto, and the same
---------
shall be in full force and effect;
(vii) the Target, Buyer and the relevant shareholders
of Target shall have entered into Amendment Number 1 to the Restricted
Stock Purchase Agreements in form and substance as set forth in Exhibit
-------
E hereto;
-
(viii) the Buyer shall have received the resignations,
effective as of the Closing, of each director and officer of the Target
other than those whom the Buyer shall have specified in writing at
least five business days prior to the Closing; and
(ix) all actions to be taken by the Sellers in
connection with consummation of the transactions contemplated hereby
and all certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will be
reasonably satisfactory in form and substance to the Buyer.
(b) Conditions to Obligation of the Sellers. The obligation of
----------------------------------------
the Sellers to consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in
Section 3(b) above shall be true and correct in all material respects
at and as of the Closing Date;
(ii) the Buyer shall have performed and complied with all
of its covenants, agreements and obligations hereunder in all material
respects through the Closing;
(iii) no action, suit, or proceeding shall be pending
or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before
any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement or (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect;
(iv) the Parties and the Target shall have received
all other authorizations, consents, and approvals of governments and
governmental agencies referred to in Section 3(a)(ii), Section
3(b)(ii), and Section 4(c) above;
(v) the relevant parties shall have entered into the
Escrow Agreement in form and substance as set forth in Exhibit B
---------
attached hereto and the Employment Agreements in form and substance as
set forth in Exhibit C attached hereto, and the same shall be in full
---------
force and effect;
(vi) the Buyer shall have granted to Mike Kapul, Mark
Shapiro, JoAnne Hu and Andre Shakhnovich stock options to purchase
85,000, 85,000, 45,000 and 15,000 shares
-23-
<PAGE>
of Buyer Stock (the "Stock Options"), such Stock Options to be granted
-------------
under and vest in accordance with the 1996 Stock Option/Stock Issuance
Plan of Buyer; and
(vii) all actions to be taken by the Buyer in connection
with consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Requisite Sellers.
7. Remedies for Breaches of this Agreement.
---------------------------------------
(a) Survival of Representations and Warranties. All of the
------------------------------------------
representations and warranties of the Sellers contained in Section 4(a),
Sections 4(c)-4(j) and Sections 4(l)-(aa) above shall survive the Closing
hereunder, even if the Buyer knew or had reason to know of any misrepresentation
or breach of warranty at the time of Closing, and continue in full force and
effect until April 1, 2001. All of the other representations and warranties of
Sellers contained in this Agreement, including the representations and
warranties contained in Section 4(b) and Section 4(k) above, shall survive the
Closing, even if Buyer knew or had reason to know of any misrepresentation or
breach of warranty at the time of Closing and continue in full force and effect
forever thereafter, subject to any applicable statutes of limitations. None of
the representations and warranties of Buyer contained in this Agreement shall
survive the Closing hereunder.
(b) Indemnification Provisions for Benefit of the Buyer.
----------------------------------------------------
(i) Except for the representations and warranties in
Section 3(a), Section 4(b) and Section 4(k) above, in the event the
Sellers breach any of their representations and warranties (in each
case as such representations and warranties would read if all
qualifications as to materiality and Knowledge were deleted therefrom)
and covenants contained herein, and, if there is an applicable survival
period pursuant to Section 7(a) above, provided that the Buyer makes a
written claim for indemnification against any of the Sellers pursuant
to Section 10(h) below within such survival period, then each of the
Sellers agrees to indemnify the Buyer from and against the entirety of
any Adverse Consequences the Buyer may suffer through and after the
date of the claim for indemnification, including any Adverse
Consequences the Buyer may suffer after the end of any applicable
survival period, resulting from, arising out of, relating to, in the
nature of, or caused by such breach; provided, however, that the
-------- -------
Sellers shall not have any obligation to indemnify the Buyer from and
against any Adverse Consequences resulting from, arising out of,
relating to, in the nature of, or caused by such breach of any
representation, warranty or covenant of the Sellers contained in
Section 4(a), Sections 4(c)-4(j) and Sections 4(l)-(aa) above until the
Buyer has suffered Adverse Consequences by reason of all such breaches
or alleged breaches in excess of $25,000, at which point the Sellers
will be obligated to indemnify the Buyer from and against all such
Adverse Consequences relating back to the first dollar, up to an
aggregate liability equal to the Escrow Shares (the "Indemnity
Maximum")
-24-
<PAGE>
(ii) In the event of any breach of the representations and
warranties in Section 4(b) and Section 4(k) above or with respect to
any representation and warranty which is fraudulently made, and, if
there is an applicable survival period pursuant to Section 7(a) above,
provided that the Buyer makes a written claim for indemnification
against the Seller pursuant to Section 10(h) below within such survival
period, then the Sellers agree to indemnify the Buyer from and against
the entirety of any Adverse Consequences the Buyer may suffer through
and after the date of the claim for indemnification, including any
Adverse Consequences the Buyer may suffer after the end of any
applicable survival period resulting from, arising out of, relating to,
in the nature of, or caused by the breach, without giving any effect to
any of the limitations set forth in Section 7(b)(i) above. Further, in
the event any of the Sellers breaches any of his or her representations
and warranties in Section 3(a) above, and, if there is an applicable
survival period pursuant to Section 7(a) above, provided that the Buyer
makes a written claim for indemnification against the Seller pursuant
to Section 10(h) below within such survival period, then the Seller
agrees to indemnify the Buyer from and against the entirety of any
Adverse Consequences the Buyer may suffer through and after the date of
the claim for indemnification, including any Adverse Consequences the
Buyer may suffer after the end of any applicable survival period
resulting from, arising out of, relating to, in the nature of, or
caused by the breach, without giving any effect to any of the
limitations set forth in Section 7(b)(i) above.
(c) Matters Involving Third Parties.
--------------------------------
(i) If any third party shall notify Buyer (the "Indemnified
-----------
Party") with respect to any matter (a "Third Party Claim") which may
----- -----------------
give rise to a claim for indemnification against any of the Sellers
(each, an "Indemnifying Party") under this Section 7, then the
------------------
Indemnified Party shall promptly notify the Stockholders
Representative, as defined below, in writing; provided, however, that
-------- -------
no delay on the part of the Indemnified Party in notifying the
Stockholder Representative shall relieve an Indemnifying Party from any
obligation hereunder unless and then solely to the extent the
Indemnifying Party thereby is prejudiced.
(ii) The Stockholder Representative will have the right to
defend the Indemnified Party against the Third Party Claim with counsel
of its choice reasonably satisfactory to the Indemnified Party so long
as (A) the Stockholder Representative notifies the Indemnified Party in
writing within ten (10) days after the Indemnified Party has given
notice of the Third Party Claim that the Indemnifying Parties will
indemnify the Indemnified Party from and against the entirety of any
Adverse Consequences the Indemnified Party may suffer resulting from,
arising out of, relating to, in the nature of, or caused by the Third
Party Claim, (B) the estimated amount of the Third Party Claim,
together with all other Third Party Claims made against the Indemnified
Party, whether or not such claims have been settled, is less that the
Indemnity Maximum, (C) the Stockholder Representative provides the
Indemnified Party with evidence reasonably acceptable to the
Indemnified Party that the Stockholder Representative will have the
financial resources to defend against the Third Party Claim and fulfill
the indemnification obligations hereunder, (D) the Third Party Claim
-25-
<PAGE>
involves only money damages and does not seek an injunction or other
equitable relief, (E) settlement of, or an adverse judgment with
respect to, the Third Party Claim is not, in the good faith judgment of
the Indemnified Party, likely to establish a precedential custom or
practice adverse to the continuing business interests of the
Indemnified Party, and (F) the Stockholder Representative conducts the
defense of the Third Party Claim actively and diligently.
(iii) So long as the Stockholder Representative is
conducting the defense of the Third Party Claim in accordance with
Section 7(c)(ii) above, (A) the Indemnified Party may retain separate
co-counsel at its sole cost and expense and participate in the defense
of the Third Party Claim, (B) the Indemnified Party will not consent to
the entry of any judgment or enter into any settlement with respect to
the Third Party Claim without the prior written consent of the
Stockholder Representative, not to be withheld unreasonably, and (C)
the Stockholder Representative will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnified Party, not
to be withheld unreasonably.
(iv) In the event any of the conditions in Section
7(c)(ii) above is or becomes unsatisfied, however, (A) the Indemnified
Party may defend against, and consent to the entry of any judgment or
enter into any settlement with respect to, the Third Party Claim in any
manner it reasonably may deem appropriate, and the Indemnified Party
need not consult with, or obtain any consent from, any Indemnifying
Party or the Stockholder Representative in connection therewith and (B)
the Indemnifying Parties will remain responsible for any Adverse
Consequences the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party
Claim to the fullest extent provided in this Section 7.
(e) Determination of Adverse Consequences. The Parties shall
--------------------------------------
make appropriate adjustments for insurance coverage in determining Adverse
Consequences for purposes of this Section 7. All indemnification payments under
this Section 7 shall be deemed adjustments to the Purchase Price.
(f) Exclusive Remedy. Except with respect to the indemnification
-----------------
obligations set forth in Section 7(b)(ii) hereof, notwithstanding anything in
this Agreement to the contrary, the sole and exclusive remedy of Buyer with
respect to indemnification under this Section 7 shall be to exercise its rights
to recover, under and pursuant to the Escrow Agreement, the Escrow Shares. Each
of the Sellers hereby agrees that he or she will not make any claim for
indemnification against the Target by reason of the fact that he or she was a
director, officer, employee or agent of any such entity or was serving at the
request of any such entity as a partner, trustee, director, officer, employee,
or agent of another entity, whether such claim is for judgments, damages,
penalties, fines, costs, amounts paid in settlement, losses, expenses or
otherwise and whether such claim is pursuant to any statute, charter document,
bylaw, agreement or otherwise, with respect to any action, suit, proceeding,
complaint, claim or demand brought by the Buyer against such Seller, whether
such
-26-
<PAGE>
action, suit, proceeding, complaint, claim, or demand is pursuant to this
Agreement, applicable law or otherwise.
8. Piggyback Registration Rights. Whenever Buyer proposes to file
------------------------------
a Registration Statement, prior to the declaration of effectiveness of such
Registration Statement it shall give written notice of the filing or the
intended filing to all Sellers and, upon the written request of a Seller given
within twenty (20) days after Buyer provides such notice, Buyer shall use its
best efforts to cause all Buyer Stock received by such Seller hereunder that
such Seller shall have requested to register to be included in the Registration
Statement; provided, however, that Buyer shall have the right to postpone or
-------- -------
withdraw any proposed registration pursuant to this Section 8 without obligation
to any Seller. The terms and conditions of these "piggyback" registration rights
shall in all respects be identical to and subject to those incidental
registration rights set forth in Section 5.2 of the Investor Rights Agreement
dated September 28, 1999 by and among Buyer and the investors set forth therein
and to the other obligations, rights and benefits described in Section 5.5,
Section 5.6 and Section 5.9 as if the terms "Seller" and "Buyer Stock" as used
herein were substituted for the terms "Holder" and "Registrable Common" as used
therein; provided, however, that in the event of any underwriter cutback
-------- -------
pursuant to Section 5.2.3, those shares of Buyer Stock held by Sellers shall be
cut back prior to any cut back of shares of Buyer Stock held by the parties to
such Investor Rights Agreement; provided, further, that the rights granted
hereunder shall not apply to the initial public offering of Buyer. The above
rights are conditioned on Buyer obtaining any consents, if any, required under
the Investor Rights Agreement and Buyer shall use reasonable efforts to obtain
such consents in a timely manner.
9. Termination of Agreement. The Buyer and the Requisite Sellers
-------------------------
may terminate or amend this Agreement by mutual written consent at any time
prior to the Closing. If Buyer and the Requisite Seller terminate this Agreement
in accordance with the foregoing, all rights and obligations of the Parties
hereunder shall terminate without any Liability of any Party to any other Party
except for any Liability of any Party then in breach.
10. Miscellaneous.
--------------
(a) Nature of Certain Obligations.
-----------------------------
(i) The covenants of each of the Sellers in Section 2(a)
above concerning the sale of his or her Target Shares to the Buyer and
the representations and warranties of each of the Sellers in Section
3(a) above concerning the transaction are several obligations. This
means that the particular Seller making the representation, warranty,
or covenant will be solely responsible to the extent provided in
Section 7 above for any Adverse Consequences the Buyer may suffer as a
result of any breach thereof.
(ii) The remainder of the representations, warranties, and
covenants in this Agreement are joint and several obligations. This
means that each Seller will be responsible to the extent provided in
Section 7 above for the entirety of any Adverse Consequences the Buyer
may suffer as a result of any breach thereof.
-27-
<PAGE>
(b) Press Releases and Public Announcements. No Party shall issue any
----------------------------------------
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the Buyer and the Requisite
Sellers; provided, however, that any Party may make any public disclosure it
-------- -------
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities, in which case the
disclosing Party will use its reasonable best efforts to advise the other
Parties prior to making the disclosure.
(c) No Third-Party Beneficiaries. This Agreement shall not confer any
-----------------------------
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(d) Entire Agreement. This Agreement, including the documents referred
-----------------
to herein, constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(e) Succession and Assignment. This Agreement shall be binding upon
--------------------------
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of his or its rights, interests, or obligations hereunder without the prior
written approval of the Buyer and the Requisite Sellers; provided, however, that
-------- -------
the Buyer may (i) assign any or all of its rights and interests hereunder to one
or more of its Affiliates and (ii) designate one or more of its Affiliates to
perform its obligations hereunder, in any or all of which cases the Buyer
nonetheless shall remain responsible for the performance of all of its
obligations hereunder.
(f) Counterparts. This Agreement may be executed in one or more
-------------
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are
---------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Notices. Any and all notices required or permitted to be given to
-------
a Party pursuant to the provisions of this Agreement will be in writing and will
be effective and deemed to provide such Party sufficient notice under this
Agreement on the earliest of the following: (i) at the time of personal
delivery, if delivery is in person; (ii) one business day after deposit with an
express overnight courier for United States deliveries or two business days
after such deposit for deliveries outside of the United States; or (iii) three
business days after deposit in the United States mail, by registered or
certified mail, return receipt requested, for United States deliveries. All
notices for delivery outside the United States will be sent by express courier.
All notices not delivered personally will be sent with postage and/or other
charges prepaid and properly addressed to the Party to be notified at the
address set forth below, or at such other address as such other Party may
designate by ten (10) days advance written notice to the other Parties hereto.
-28-
<PAGE>
If To The Sellers: Copy To:
Mr. Mike Kapul Robert Cochran, Esq.
Stockholder Representative Law Offices of Robert D. Cochran
11622 Bridge Park Court 2105 Woodside Road
Cupertino, California 95014 Woodside, California 94062
If To The Buyer: Copy To:
Lexar Media, Inc. Fenwick & West LLP
47421 Bayside Parkway Two Palo Alto Square
Fremont, California 94538 Palo Alto, CA 94306
Attention: Carlton Osborne, Esq. Attention: Dennis DeBroeck, Esq.
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other, including messenger service, telecopy, telex, ordinary mail, or
electronic mail, but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the intended recipient. Any Party may change the address
to which notices, requests, demands, claims, and other communications hereunder
are to be delivered by giving the other Parties notice in the manner herein set
forth.
(i) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the domestic laws of the State of California without giving
effect to any choice or conflict of law provision or rule, whether of the State
of California or any other jurisdiction, that would cause the application of the
laws of any jurisdiction other than the State of California.
(j) Amendments and Waivers. No amendment of any provision of this
-----------------------
Agreement shall be valid unless the same shall be in writing and signed by the
Buyer and the Requisite Sellers. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(k) Severability. Any term or provision of this Agreement that is
-------------
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
-29-
<PAGE>
(l) Expenses. Each of the Parties and the Target will bear his or its
---------
own costs and expenses, including legal fees and expenses, incurred in
connection with this Agreement and the transactions contemplated hereby. The
Sellers agree that the Target has not borne and will not bear any of the
Sellers' costs and expenses, including any of their legal fees and expenses, in
connection with this Agreement or any of the transactions contemplated hereby.
(m) Construction. The Parties have participated jointly in the
-------------
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter, regardless of the relative levels of specificity, which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
(n) Incorporation of Exhibits, Annexes, and Schedules. The
---------------------------------------------------
Exhibits, Annexes, and Schedules identified in this Agreement are incorporated
herein by reference and made a part hereof.
(o) Specific Performance. Each of the Parties acknowledges and
---------------------
agrees that the other Parties would be damaged irreparably in the event any of
the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, subject to the provisions set
forth in Section 10(p) below, in addition to any other remedy to which they may
be entitled, at law or in equity.
(p) Submission to Jurisdiction. Each of the Parties submits to the
---------------------------
jurisdiction of any state or federal court sitting in San Francisco, California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each Party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the Parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other Party with respect thereto. Any
Party may make service on any other Party by sending or delivering a copy of the
process (i) to the Party to be served at the address and in the manner provided
for the giving of notices in Section 10(h) above. Nothing in this Section 10(p),
however, shall affect the right of any
-30-
<PAGE>
Party to serve legal process in any other manner permitted by law or at equity.
Each Party agrees that a final judgment in any action or proceeding so brought
shall be conclusive and may be enforced by suit on the judgment or in any other
manner provided by law or at equity.
*****
-31-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the date first above written.
Buyer LEXAR MEDIA, INC.
----------------------------
By:
Title:
Sellers ____________________________
Name: Mark Shapiro
----------------------------
Name: Mike Kapul
----------------------------
Name: JoAnne Hu
----------------------------
Name: Andre Shakhnovich
----------------------------
Name: Yuri Agroskin
----------------------------
Name: Robert D. Cochran
----------------------------
Name: Igor Khurgin
----------------------------
Name: Elina Khurgin
----------------------------
Name: Dan Agroskin
----------------------------
Name: Moti Klots
-32-
<PAGE>
----------------------------
Name: Sopha Agroskin
----------------------------
Name: Paul Breytman
----------------------------
Name: Irene Breytman
-33-
<PAGE>
EXHIBIT 10.24
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C -- Additions Column D Column E
- ------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged Balance
beginning of costs and to other at end
Description period expenses accounts Deductions of period
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for bad debts
Year ended December 31, 1997 $ -- $ 29 $ -- $ -- $ 29
Year ended December 31, 1998 29 91 -- -- 120
Year ended December 31, 1999 120 100 -- 5 215
Returns, discounts, allowances
and price protection
Year ended December 31, 1997 $ -- $ 10 $ -- $ -- $ 10
Year ended December 31, 1998 10 271 -- 162 119
Year ended December 31, 1999 119 1,520 -- 1,124 515
</TABLE>
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated February 3, 2000 except for note 13 as to which the date is
March 24, 2000 relating to the consolidated financial statements of Lexar
Media, Inc. and March 24, 2000 for the consolidated financial statement
schedule listed in Item 16 of Form S-1, which appear in such Registration
Statement. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
March 27, 2000
1
