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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C., 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
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or
--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-25898
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2821358
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 HARTWELL AVENUE, LEXINGTON, MA 02173
- --------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 674-0009
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
The number of shares outstanding of the registrant's
common stock at May 4, 1998 was 9,306,925
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q/A
<TABLE>
<CAPTION>
Page
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Part I - Financial Information:
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Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of March 28, 1998 and
December 27, 1997 3
Condensed Consolidated Statements of Operations for the three months ended
March 28, 1998 and March 29, 1997 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 28, 1998 and March 29, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information: 15
- ----------------------------
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6(a) - Exhibits
10.1 Securities Purchase Agreement
10.2 Secured Subordinated Convertible Promissory Note
10.3 Series A Convertible Preferred Stock Purchase Warrant
27 Financial Data Schedule
6(b) - Reports on Form 8-K
SIGNATURE(S) 17
</TABLE>
2
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 28, 1998 DECEMBER 27, 1997
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 616 $ 2,481
Accounts receivable, trade, net of allowances for doubtful accounts
of $131 and $193, at March 28, 1998 and December 27, 1997 8,235 10,506
Receivables from manufacturing contractor 1,699 1,678
Inventories 3,332 2,864
Prepaid expenses 386 274
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Total current assets 14,268 17,803
Property and equipment, net 3,571 3,906
Other assets 89 150
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TOTAL ASSETS $ 17,928 $ 21,859
======== ========
CURRENT LIABILITIES:
Revolving line of credit $ 5,976 $ 8,500
Accounts payable 7,781 6,148
Accrued expenses and other current liabilities 1,238 1,429
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Total current liabilities 14,995 16,077
Commitments and contingencies - -
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding - -
Common Stock, $.01 par value; 20,000,000 shares authorized;
9,298,405 shares issued and outstanding at March 28, 1998;
9,172,548 shares issued and outstanding at December 27, 1997 93 92
Additional paid-in capital 36,176 35,994
Accumulated deficit (33,336) (30,304)
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Total stockholders' equity 2,933 5,782
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Total liabilities and stockholders' equity $ 17,928 $ 21,859
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 28, 1998 MARCH 29, 1997
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<S> <C> <C>
Net sales $ 8,141 $13,964
Cost of sales 7,309 11,550
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Gross profit 832 2,414
Operating expenses:
Selling, general, and 2,154 3,299
administrative
Research and development 1,639 1,481
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Total operating expenses 3,793 4,780
Income (loss) from operations (2,961) (2,366)
Other expense (income):
Interest expense 109 106
Other expense (income) (38) (115)
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Income (loss) before income taxes (3,032) (2,357)
Provision (benefit) for income taxes - -
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Net income (loss) $(3,032) $(2,357)
======= =======
Net income (loss) per common and
equivalent share - diluted $ (0.33) $ (0.26)
======= =======
Net income (loss) per common and
equivalent share - primary $ (0.33) $ (0.26)
======= =======
Common and equivalent shares used
in computing net income (loss) per
share - diluted 9,199 9,077
======= =======
Common and equivalent shares used
in computing net income (loss) per
share - primary 9,199 9,077
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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<TABLE>
<CAPTION>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
THREE MONTHS ENDED
MARCH 28, 1998 MARCH 29, 1997
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<S> <C> <C>
Cash flows provided by (used for) operating activities:
Net income (loss) $(3,032) $(2,357)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 407 265
Amortization of capitalized software costs - 201
Provision for bad debts - 361
Change in operating assets and liabilities:
Accounts receivable 2,271 3,032
Receivable due from manufacturing contractor (21) 1,181
Inventories (468) 2,982
Prepaids and other assets (51) (192)
Accounts payable 1,633 (2,493)
Accrued expenses and other current liabilities (191) (979)
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Net cash provided by (used for) operating activities 548 2,001
Cash flows provided by (used for) investing activities:
Purchase of property and equipment (72) (280)
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Net cash used for investing activities (72) (280)
Cash flows provided by (used for) financing activities:
Proceeds from issuance of common stock and
exercise of common stock options 183 80
Proceeds (payments) from revolving line of credit, net (2,524) (5,500)
Principal payments on capital lease obligations - (21)
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Net cash provided by (used for) financing activities (2,341) (5,441)
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Net change in cash and cash equivalents (1,865) (3,720)
Cash and cash equivalents, beginning of period 2,481 13,895
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Cash and cash equivalents, end of period $ 616 $10,175
======= =======
Supplemental disclosures of cash flow information:
Interest paid: $ 102 $ 146
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation:
-----------------------
The accompanying financial statements have been presented on a going concern
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
The Company has continued to incur substantial losses from operations, has
lost a significant customer, is not in compliance with all of the covenants
required by its lender, has unresolved class action litigation concerning
alleged violations of securities laws and needs additional financing to continue
operations, all of which raise substantial doubt about its ability to continue
as a going concern. The Company has hired financial management with experience
in working with financially troubled companies. The Company also has retained
investment banking counsel to advise it on the possible sale of equity
securities, as well as to introduce and assist it in the evaluation of potential
merger and partnering opportunities. However, no assurance can be provided that
the Company will be successful in raising capital or entering into a business
alliance. The financial statements do not include any adjustments relating to
the recovery and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The accompanying condensed unaudited consolidated financial statements have
been prepared by Number Nine Visual Technology Corporation (the "Company") in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the applicable rules and regulations of the
Securities and Exchange Commission. The condensed unaudited consolidated
financial statements include the accounts of the Company, its foreign sales
corporation and its wholly-owned German subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation. In the opinion
of management, the accompanying financial statements contain all adjustments
(consisting of normal and recurring accruals) necessary to present fairly all
financial statements. The financial statements herein should be read in
conjunction with the Company's consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K, as amended, for
its fiscal year ended December 27, 1997. Operating results for the three month
period ended March 28, 1998 may not necessarily be indicative of the results to
be expected for any other interim period or for the full year.
B. Cash and Cash Equivalents:
--------------------------
As of March 28, 1998, included in cash and cash equivalents is approximately
$616,000 invested in overnight or money market mutual funds comprised of
obligations which are issued or guaranteed as to principal and interest by the
U.S. government and thus constitute direct obligations of the United States of
America with a dollar-weighted average maturity of 90 days or less.
C. Inventories:
------------
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
MARCH 28, 1998 DECEMBER 27, 1997
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<S> <C> <C>
Raw materials $ 784 $ 527
Work in process 580 715
Finished goods 1,968 1,622
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$3,332 $2,864
====== ======
</TABLE>
6
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The market for the Company's products is characterized by rapid technological
advances, frequent new product life cycles, product obsolescence, changes in
customer requirements, evolving industry standards, significant competition and
rapidly changing pricing.
At December 30, 1995 and June 28, 1996, a portion of inventory related to
several of the Company's products was identified as in excess of current
requirements based on a number of factors such as an acceleration of product
transitions, further deterioration of memory inventory value, continued pressure
on pricing of older products, lower than expected sales activity of certain
products and excess component inventories. Accordingly, during the fourth
quarter of 1995 and second quarter of 1996, the Company wrote off approximately
$8.0 and $5.7 million of inventory, respectively related to these products.
Management has developed a program to reduce the remaining inventory to desired
levels over the near term and believes no loss will be incurred on its
disposition. No estimate can be made of a range of amounts of loss that are
reasonably possible should the program not be successful. At March 28, 1998 and
December 27, 1997, the Company had a $1.7 million, due from a manufacturing
contractor, which arose from components sold by the Company at cost to the
contractor for assembly into finished goods.
D. Debt:
-----
The Company is party to an amended loan and security agreement with a
commercial bank providing for a revolving credit facility of $15 million.
Pursuant to this agreement, the Company may borrow an amount equal to 65% of
qualified accounts receivable (as defined in the agreement) up to the maximum
amount at an interest rate per annum equal to either the prime rate (8.50% as of
March 28, 1998) plus 1.25% or at the Libor Rate (as defined in the agreement)
plus 2.5%, plus an unused line fee at a rate of 0.5% per annum on the unused
portion of the maximum borrowing amount. The agreement expires on December 2,
1998 and is renewable on a yearly basis thereafter. The loan balance is
collateralized by substantially all of the Company's assets.
The agreement contains financial covenants including, but not limited to, a
minimum current ratio, minimum tangible net worth, a maximum debt to tangible
net worth ratio, and minimum quarterly net loss. The agreement also gives the
lender the right to call the loan in the event of a material adverse change in
the Company's business and prohibits the Company from paying dividends without
the consent of the lender. The Company is not in compliance with certain
covenants currently. The Company has received a waiver from the lender for
noncompliance with certain covenants in the agreement, which is effective until
September 30, 1998. If the Company is not in compliance with all of the
covenants of the lender, there can be no assurance that the lender will grant
additional waivers and/or amendments, nor can there be any assurance that
alternative financing will be available. The Company believes that the lender
will continue to allow the Company to operate under its forebearance agreement
while the Company seeks to secure additional permanent financing. Should the
lender refuse to grant any future waiver or amendment, and the line of credit is
not available to the Company, management anticipates that it would require
alternative financing. However, if the Company is not able to secure alternative
financing, the Company's liquidity would be adversely affected.
E. Recently Issued Accounting Standards
------------------------------------
Financial Accounting Standards Board Statement No. 129 ("FAS 129") "Disclosure
of Information about Capital Structure" is effective for financial statements
issued for periods ending after December 31, 1997. FAS 129 establishes standards
for disclosure of information about securities, liquidation preference of
preferred stock and redeemable stock.
7
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Financial Accounting Standards Board Statement No. 131 ("FAS 131")
"Disclosure about Segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. FAS 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates.
Financial Accounting Standards Board Statement No. 132 ("FAS 132")
"Employers' Capital Disclosures about Pensions and other Postretirement
Benefits" is effective for fiscal years beginning after December 15, 1997,
although earlier application is encouraged. FAS 132 establishes standards
related to the disclosure requirements for pensions and other postretirement
benefits. FAS 132 requires additional information to be disclosed regarding
changes in the benefit obligation and fair value of plan assets, as well as
eliminates other disclosures no longer considered useful.
The Company does not believe that the implementation of FAS 129, FAS 131 or
FAS 132 will have a material impact on the Company's financial statements.
Financial Accounting Standards Board Statement No. 130 ("FAS 130")
"Reporting Comprehensive Income" is effective for fiscal years beginning after
December 31, 1997, although earlier application is permitted. The Company
intends to adopt the requirements of this pronouncement in its financial
statements for the quarter ending March 28, 1998. FAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. FAS 130 requires that all
components of comprehensive income shall be reported in the financial statements
in the period in which they are recognized. Furthermore, a total amount for
comprehensive income shall be displayed in the financial statement where the
components of other comprehensive income are reported. The Company was not
previously required to present comprehensive income or the components thereof in
its financial statements under generally accepted accounting principles. The
Company had no additional comprehensive income other than reported on the income
statement for the quarter ended March 28, 1998.
F. Income Taxes:
-------------
At March 28, 1998, the Company had net operating loss carryforwards of
approximately $28.9 million and $32.6 million available to offset future federal
and state taxable income, respectively. The federal net carry-forwards begin to
expire in 2010 and the state net carry-forwards begin to expire in 2000.
G. Contingencies:
--------------
On June 11, 1996, a complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff RBI, an Alaskan limited
partnership, against the Company, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of the Company's initial
public offering, Robertson, Stephens & Company, Cowen & Company and Unterberg
Harris (the "Managing Underwriters"). On or about July 17, 1996, a complaint
was filed in the United States District Court for the District of Massachusetts
by named plaintiff John Foley against the Company, each member of the Company's
Board of Directors, other than John G. Thompson, (Andrew Najda, Stanley W.
Bialek, Gill Cogan, Dr. Paul R. Low, Dr. Fouad H. Nader and William H.
Thalheimer), Kevin M. Hanks, former Chief Financial Officer and Treasurer of the
Company, and the Managing Underwriters. On or about October 16, 1996, an
additional complaint was filed in the United States District Court for the
District of Massachusetts by named plaintiff Robert Schoenhofer against the
Company, each member of the Company's Board of Directors (other than John G.
Thompson), Mr. Hanks, and the Managing Underwriters. Each of the plaintiffs
purports to represent a class of purchasers of the Common Stock of the Company
between and including May 26, 1995 through January 31, 1996. Each complaint
alleges that the named defendants violated the Securities Act of 1933 and the
Securities Exchange Act of 1934 by, among other things, issuing to the investing
public false and misleading statements regarding the Company's business,
products, sales and earnings during the class period in question. The plaintiffs
seek unspecified damages, interest, costs and fees. By order of the District
Court, these actions have been consolidated into a single action. It is possible
that other claims may be made against the Company or that there may be other
consequences from the lawsuits. The defendants deny any liability, believe they
have meritorious defenses, and intend to vigorously defend these and any similar
lawsuits that may be filed, although the ultimate outcome of these matters
cannot yet be determined. If the lawsuits are not resolved satisfactorily for
the Company, there could be a material adverse effect on the Company's future
financial condition and results of operations and, accordingly, income (loss).
The Company does not believe that the ultimate liability, if any, is estimable
or probable, and therefore no provision for any liability that may result from
the actions has been recognized in the accompanying consolidated financial
statements.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and other parts of this Form 10-Q contain forward-looking statements
involving risks and uncertainties as defined in the Private Securities
Litigation Reform Act of 1995. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed here and those included in publicly available filings with the
Securities and Exchange Commission, such as this report.
OVERVIEW
Since its founding in 1982, Number Nine has introduced successive generations
of video/graphics subsystems providing advanced video/graphics performance in
desktop PCs. The Company has focused on providing a broad line of high-
performance hardware and software video/graphics solutions, targeting both OEMs
and two-tier and retail distribution customers. The Company's series of 128-bit
proprietary accelerators have been recognized as some of the highest performance
graphics products available to the desktop PC market. During the third quarter
of 1997, the Company began shipping products utilizing its third generation
proprietary 128-bit graphics accelerator chip technology, Ticket to Ride.
Additionally, the Company has begun development of its fourth generation 128-bit
graphics accelerator chip technology. There can be no assurance that the
Company's latest generation product, Revolution3D utilizing the Ticket to Ride
chip will be successful or that the fourth generation product will be completed
and marketed successfully. The Company also markets Hawkeye95, a display control
utilities and driver software suite, which enhances user control over various
graphics functions and is designed to improve PC system graphics performance
under Windows95. In addition, the Company has begun to ship several new
video/graphics products, including the second and third generations of its
Imagine 128 accelerator board for Apple PowerMac PCI computers, and next-
generation merchant accelerator chip based products in its Vision, Motion and
Reality product families. During 1998, the Company currently plans to develop
several different products with 3-D capabilities and anticipates that most of
its products will also incorporate motion video acceleration.
The Company's past operating results have been, and its future operating
results will continue to be, subject to fluctuations from quarter to quarter due
to a variety of factors, including: the gain or loss of significant customers;
changes in the mix of products sold and in the mix of sales by distribution
channels; the Company's ability to introduce new technologies and products on a
timely basis; availability and timing of component shipments and cost of
components obtained from the Company's suppliers; availability and cost of
manufacturing and foundry capacity; new product introductions by the Company's
competitors; delays in related product introductions by others; market
acceptance of the Company's products; product returns or price protection
charges from customers; reductions in sales of older generation products as
customers anticipate new products, giving rise to charges for obsolete or excess
inventory; and changes in product prices by the Company, its competitors and
suppliers, including possible decreases in unit average selling prices of the
Company's products caused by competitive pressures. In particular, in the second
quarter of 1996, the Company identified charges of approximately $5.7 million of
obsolete and excess finished goods and component inventory. There were a number
of events during the second quarter of 1996 that were the primary drivers for
this provision. These include an acceleration of product transitions, further
deterioration of memory inventory value, continued pressure on pricing of older
products, lower than expected sales activity of certain products and excess
component inventories. Operating results can also be adversely affected by
general economic and other conditions affecting the timing of customer orders, a
downturn in the market for PCs, and order cancellations or rescheduling. The
Company's sales to original equipment manufacturers ("OEMs"), which accounted
for 43.8% of net sales in 1997, 68.3% of net sales in 1996, and 52.8% of net
sales during 1995, are particularly susceptible to fluctuations.
The Company's sales to OEMs typically generate lower gross margins than retail
and distributor sales, but also generally entail lower marketing, sales and
product support costs. The Company's net sales, gross margins and
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profits have in the past, and may in the future, vary significantly depending on
the proportion of its sales to OEMs and other distribution channels, as well as
the mix of products sold in each channel. The Company's sales of merchant-based
technology products are typically at a significantly lower margin than the sales
of its proprietary technology products. The gross margin on all of the Company's
products is significantly impacted by costs of components, particularly memory
costs, which have varied widely over the past several years, as well as
significant pricing pressure on its products as a result of competition.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 28, 1998 AND MARCH 29, 1997
Net Sales: Net sales decreased 42%, to $8.1 million in the first quarter of
1998 from approximately $14.0 million in the first quarter of 1997. This
decrease was primarily attributable to lower sales of the Company's prorprietary
128-bit products to the Company's OEM customers. Net sales of the Company's
proprietary 128-bit products decreased 62% to $3.9 million in the first quarter
of 1998 from $10.3 million in the first quarter of 1997, representing 48.1% of
net sales in the first quarter of 1998 compared to 73.6% in net sales in the
first quarter of 1997. Sales of 64-bit products represented the remaining $4.2
million or 51.9% of net sales during the first quarter of 1998 compared to
approximately $3.7 million or 26.4% of net sales in the first quarter of 1997.
Sales to OEMs decreased 33%, to approximately $5.9 million in the first quarter
of 1998 from approximately $8.8 million in the first quarter of 1997,
representing 72.8% in the first quarter of 1998 compared to 62.9% of net sales
in the first quarter of 1997. The decrease in OEM sales was primarily a result
of essentially no sales to Dell Computer Corporation ("Dell") during the first
quarter of 1998 compared to net sales of 35.7% or approximately $5.0 million
during the first quarter of 1997. The loss of net sales to Dell was partially
offset by new sales activity with International Business Machines Corporation
("IBM"), which represented approximately $2.6 million or 32.1% of net sales in
the first quarter of 1998. Sales to Micron Electronics, Inc. represented 12.3%
in the first quarter of 1998 compared to 12.9% of net sales in the first quarter
of 1997. Net sales to the Company's retail and two-tier distribution customers
decreased 62%, to $1.0 million during the first quarter of 1998 compared to $2.6
million during the first quarter of 1997. Total international sales decreased
19% to $3.5 million in the first quarter of 1998 from approximately $4.3 million
in the first quarter of 1997.
Gross Profit: Gross profit decreased 66%, to $832,000 in the first quarter
of 1998 from $2.4 million in the first quarter of 1997. The decrease in gross
profit during the first quarter of 1998 was largely attributable to the
significantly lower net sales level and continued pricing pressure across the
Company's products compared to the first quarter of 1997. The Company's gross
profit margin decreased to 10.2% in the first quarter of 1998 from 17.3% in the
first quarter of 1997, due primarily to decreased net sales of the Company's
proprietary 128-bit products, which tend to generate higher gross margins than
products utilizing merchant 64-bit chip technology, as well as continued pricing
pressure across the Company's products. The Company's future prospects will
depend in part on its ability to successfully manage its product transitions and
fluctuating component costs, particularly memory, and control inventory as new
products are introduced. There can be no assurance that the Company will be
successful in managing these changes. While the Company reserves for anticipated
charges based upon historical rates of product returns, component cost
fluctuations, and other factors, there can be no assurance that reductions in
sales and returns of older generation products will not give rise to charges for
obsolete or excess inventory or substantial price protection charges. The
effects of planned new product introductions, anticipated stock rotations and
sales activity during future periods, as further described in "Certain Factors
That May Affect Future Results of Operations" may have a negative impact on
gross margin.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased 33%, to approximately $2.2 million in the
first quarter of 1998 from $3.3 million in the first quarter of 1997, primarily
as a result of decreased headcount and lower marketing costs as the Company
controlled variable discretionary spending. As a percentage of net sales,
selling, general and administrative expenses increased to 27.2% in the first
quarter of 1998 from 23.6% in the first quarter of 1997, primarily attributable
to lower sales in the recent quarter. The Company currently expects that
selling, general and administrative expenses will increase during subsequent
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quarters, although not necessarily as a percentage of net sales, as the Company
begins to market and sell its newer technology.
Research and Development Expenses: Research and development expenses
increased 7%, to $1.6 million in the first quarter of 1998 from approximately
$1.5 million in the first quarter of 1997, resulting primarily from increased
staffing to support continued development of both proprietary based
video/graphics products. During the first quarter of 1998, the Company continued
the development of its fourth generation proprietary 128-bit video/graphics
accelerator chip, and began to develop its fifth generation proprietary 128-bit
video/ graphics accelerator chip. As a percentage of net sales, research and
development expenses increased to 19.8% in the first quarter of 1998 from 10.7%
in the first quarter of 1997, primarily attributable to lower sales in the
recent quarter and increased expenditures on research and development. The
Company currently expects that research and development expenses will continue
to increase, although not necessarily as a percentage of net sales, primarily as
a result of continued investment in the Company's proprietary technology
efforts.
Interest Expense/Income: Net interest expense for the first quarter of 1998
was $109,000 compared to interest expense of $106,000 in the first quarter of
1997.
Other Expense/Income: Other income totaled $43,000 in the first quarter of
1998 compared to other income of $115,000 in the first quarter of 1997. Other
income during the first quarter of 1998 and the first quarter of 1997 was
primarily attributable to interest earned on cash and cash equivalents.
Provision (Benefit) for Income Taxes: During the first quarter of 1998 and
the first quarter of 1997, the Company did not provide an income tax benefit due
to the uncertainty of realizing the benefit from future taxable income. In 1997,
the Company increased its valuation allowance against the remainder of its net
deferred tax asset, of approximately $1.8 million. Valuation of the net deferred
tax asset was dependent upon generating sufficient taxable income in near-term
periods. Principally as a result of the net losses incurred in 1997, management
estimates of future taxable income have been reduced. As a result, management
believes it is less likely than not that the remaining net deferred tax asset
will be realized.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This report contains forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Such statements are based
on management's current expectations and are subject to a number of factors and
uncertainties which could cause actual results to differ materially from those
described in the forward-looking statements. The Company cautions investors that
there can be no assurance that actual results or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to the
following:
The Company is dependent on sole or limited source suppliers for certain key
components and has experienced limited availability, delays in shipments and
unanticipated cost fluctuations related to the supply of components,
particularly memory chips. The Company is actively working with memory component
suppliers to secure pricing and volume commitments for future production.
Additionally, the Company's suppliers could impact the availability of key
components, particularly memory and graphics accelerator chips, to the extent
that they reduce the Company's lines of credit and payment terms. In such an
event, the Company could have difficulty securing sufficient supply to meet
customer requirements. There can be no assurance that commitments will be
secured in sufficient amounts to meet the needs of the Company or at prices that
will enable the Company to attain profitability.
The PC industry in general, and the market for the Company's products in
particular, are characterized by rapid technological advances, frequent new
product introductions, short product life cycles, product obsolescence, changes
in customer requirements or preferences for competing products, evolving
industry standards, significant
11
<PAGE>
competition, and rapidly changing pricing. In this regard, the life cycle of
products in the Company's markets is often as short as six to twelve months.
Therefore, the Company's future prospects will depend in part on its ability to
enhance the functionality of its existing products in a timely manner and to
continue to identify, develop and achieve market acceptance of products that
incorporate new technologies and standards and meet evolving customer needs.
There can be no assurance that the Company will be successful in managing
product transitions, including controlling inventory of older generation
products as new products are introduced. The Company has in the past experienced
and could in the future experience reductions in sales of older generation
products as customers anticipate new product introductions. For example, the
Company is currently completing its development efforts on its fourth generation
proprietary 128-bit video/graphics accelerator chip, while its third generation
proprietary 128-bit video/graphics accelerator chip is nearing the end of its
product life cycle. The Company's ability to successfully transition its
Revolution 3D products to its fourth generation proprietary-based 128-bit
products will depend on such factors. While the Company reserves for anticipated
returns based upon historical rates of product returns and other factors, there
can be no assurance that reductions in sales and returns of older generation
products by distributors, which are primarily attributable to customer stock
rotation, will not give rise to charges for obsolete or excess inventory or
substantial price protection charges.
The volume and timing of orders received during a particular quarter are very
difficult to forecast. The Company's customers can change delivery schedules or
cancel orders with limited or no penalties. For example, in September 1996 the
Company received notice from Dell that Dell would discontinue buying its
merchant graphics solution from the Company in the fourth quarter of 1996. In
addition, during the first quarter of 1997, Dell reduced its purchases of the
Company's proprietary Imagine 128 Series 2 4MB VRAM product. As a result, the
Company's net sales to Dell in 1997 were not significant, $4.9 million during
1997 compared to $62.7 million during 1996. Future sales to Dell are uncertain
and depend upon the performance and pricing of new Company products and their
acceptance by Dell. Customers generally order on an as-needed basis, and as a
result, the Company has historically operated without significant backlog.
Moreover, as is often the case in the PC industry, a disproportionate percentage
of the Company's net sales in any quarter may be generated in the final month or
weeks of a quarter. Consequently, a shortfall in sales in any quarter as
compared to management expectations may not be identifiable until the end of the
quarter. Because a significant portion of operating expense levels are
relatively fixed, the timing of expense levels is based in large part on the
Company's expectations of future sales. As a result of the decline in net sales
to the Company's OEM customers, primarily Dell, and product transitions, net
sales declined in the first quarter of 1998 compared to the first quarter of
1997. If sales do not meet the Company's expectations, it may be unable to
quickly adjust spending, which could have a material adverse effect on the
Company's operating results.
The Company's products have historically been based both on merchant and
proprietary-based video/graphic accelerator chips. These product lines have each
contributed gross profit for the Company during the last few years. However, the
Company believes that over the long-term, its proprietary-based products will
become an increasingly more important factor in determining success for the
Company, and the Company currently anticipates reduced sales of merchant based
products. For example, during 1996, the Company's reliance on its proprietary
products increased as a percentage of net sales and gross profit throughout
1996. If sales of the Company's proprietary-based products do not meet the
Company's expectations or if there are delays in the completion and availability
of these proprietary-based products, the Company may have significantly reduced
sales, which could have a material adverse effect on the Company's operating
results.
Due primarily to industry seasonality, demand for the Company's products
historically has been strongest during the fourth calendar quarter, and sales in
the subsequent calendar quarter have tended to decline. Net sales decreased
44.3% in the first quarter of 1998 from the fourth quarter of 1997 and 40.8% in
the first quarter of 1997 from the fourth quarter of 1996, although period-to-
period comparisons of financial results should not be relied upon as an
indication of future performance. Quarterly peaks in sales also tend to coincide
with peak working capital requirements.
The Company has been served notice of three lawsuits seeking class action
status on or about June 11, 1996, July 16, 1996 and October 16, 1996,
respectively, filed in the United States District Court for the District of
12
<PAGE>
Massachusetts naming as defendants the Company, the members of the Board of
Directors during the period in question, the former Chief Financial Officer and
Treasurer of the Company, and the Selling Shareholders and Managing Underwriters
of the Company's 1995 initial public offering. The alleged class of plaintiffs
consists of all persons who purchased shares of the Company's Common Stock on
the open market between and including May 26, 1995 through January 31, 1996. The
plaintiffs, who seek unspecified damages, interest, costs and fees, allege,
among other things, that the Company's Registration Statement and Prospectus in
its initial public offering and other public statements and reports filed with
the Securities and Exchange Commission during the class period in question
contained false and materially misleading statements. The defendants deny
liability, believe they have meritorious defenses and intend to vigorously
defend against these and any similar lawsuits that may be filed, although the
ultimate outcome of these matters cannot yet be determined. If the lawsuits are
not resolved satisfactorily for the Company, there could be a material adverse
effect on the Company's future financial performance and results of operations
and accordingly, income (loss).
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been presented on a going concern
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. (See Note B of Condensed
Consolidated Financial Statements including in the Company's Annual Report on
Form 10-K for the year ending Decmeber 27, 1997 as filed with the Commission.)
The Company has continued to incur substantial losses from operations, lost a
significant customer, is not in compliance with all of the covenants required by
its lender, has unresolved class actions litigation concerning alleged
violations of securities laws, and needs additional financing to continue
operations, all of which raises substantial doubt about its ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The Company
has retained investment banking counsel to advise it on the possible sale of
equity securities, as well as to introduce and assist it in the evaluation of
potential merger and partnering opportunities. However, no assurance can be
provided that the Company will be successful in raising capital or entering into
a business alliance. The financial statements do not include any adjustments
relating to the recovery and classifications of recorded asset amounts or the
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Several factors in the development of the Company's business during 1995,
1996 and 1997 have had a significant impact on its balance sheet and cash flows.
During 1995 and 1996, the Company experienced significantly higher sales to two-
tier and retail distribution channel customers. These customers tend to order
toward the end of each quarter and to pay more slowly than OEM customers. The
Company has since shifted its business, increasing sales to its OEM customers.
In addition, the Company's manufacturing strategy has focused on purchasing a
higher proportion of components directly from manufacturers, which reduces
component costs but requires longer-term commitments and faster payment compared
to distributor suppliers. Finally, the fluctuating cost of memory components has
resulted in variable gross and operating margins, and limited availability at
times has required the use of cash when necessary to secure supplies of memory.
The Company incurred valuation adjustments for inventory during the fourth
quarter of 1995 and second quarter of 1996, and recorded charges to cost of
sales associated with obsolete and excess inventory of $8.0 million and $5.7
million, respectively. The Company determined that the market value for this
material was substantially less than the cost to procure and build, and the
Company has written down the components to estimated net realizable value less
selling costs. Significant pricing pressure for the Company's products has been
experienced during 1997 resulting in lower gross margin and less net income. In
combination, these factors have resulted in the Company requiring more working
capital and generating less cash flow from operations than anticipated.
In the first quarter ending March 28, 1998, the Company continued to incur
losses on reduced revenue while marketplace pricing pressure has increased. The
Company's operating activities provided cash of approximately $549,000 in the
first quarter of 1998, compared to operating activities which provided cash of
approximately $2.0
13
<PAGE>
million in the first quarter of 1997. In the first quarter of 1998, a net
decrease in accounts receivable and an increase in accounts payable, provided
cash of approximately $2.3 million and $1.6 million, respectively, which was
offset by a net loss from operations of $3.0 million and an increase of
inventories of $467,000. Decreases in accounts receivable have primarily been
attributable to lower sales levels in the first quarter of 1998. The Company
believes it can operate with lower levels of working capital relative to net
sales and has committed additional resources to the management and control of
its receivables and inventories. At March 28, 1998, the Company's principal
sources of liquidity consisted of approximately $616,000 of cash and cash
equivalents and approximately $8.8 million available under its revolving line of
credit, pending approval of the debt covenant waivers and subject to the
Company's receivables described below.
In the first quarter of 1998, investing activities used cash of approximately
$72,000 for purchases of computer and office equipment compared to $280,000 for
purchases and office equipment in the first quarter of 1997. Financing
activities used cash of $2.3 million during the first quarter of 1998,
attributable to the reduction of the outstanding balance of the revolving credit
facility by $2.5 million. During the first quarter of 1997, financing activities
used cash of $5.4 attributable to the reduction of the outstanding balance of
the revolving credit facility by $5.5 million.
As of March 28, 1998, approximately $6.0 million was outstanding under the
Company's revolving credit facility (the "Loan Agreement"). The Loan Agreement
contains financial covenants including, but not limited to, a minimum current
ratio, minimum tangible net worth, a maximum debt to tangible net worth ratio,
and maximum quarterly net loss. The Loan Agreement also gives the lender the
right to call the loan in the event of a material adverse change in the
Company's business and prohibits the Company from paying dividends without the
consent of the lender. The Company has been out of compliance with certain terms
of its Loan Agreement from time to time and as a result has entered into
amendments revising certain covenants in such Loan Agreement or has required a
waiver from its lender. On May 7, 1998, The Company executed a forebearance
agreement with this lender which the Company is required to have its outstanding
loan balance within its defined borrowing capacity by June 19, 1998. This
agreement will also permit the Company to borrow within this borrowing capacity
through September 30, 1998 up to a maximum amount of $4.5 million.
On April 17, 1998, the Company received a short term loan of $3.0 million
due May 17, 1998 from a stratgic partner as part of a technology and financial
relationship. On May 7, 1998, the Companies signed financing and technology
agreements. The financing is structured as a loan pursuant to which the Company
may borrow up to $9.0 million, of which $3.0 was borrowed in April, 1998. This
loan is convertible into preferred stock at a conversion price of $2.75 per
share. The loan, if not converted, is payable on demand 180 days after September
30, 1998. The loan is subordinate to the Company's existing secured line of
credit and is secured by essentially all of the Company's assets. The strategic
partner was issued a 3-year warrant to purchase up to 3% of the outstanding
common stock at the time of exercise at a price of $2.75 per share only if the
Company repays outstanding princial and interest under this loan.
The Company believes that its existing cash balances plus funds generated
from product sales, and financing arrangements described above would be
sufficient to fund operations at anticipated levels through the third quarter of
1998. However, after the third quarter of 1998, future growth in sales,
significant losses and limitations of credit/terms by suppliers, and/or
continued increases in working capital required by the Company's business would
result in the need for the Company to obtain additional equity or debt
financing. Additionally, the Company believes that working capital requirements
for future product releases, as well as continued investments in operations,
particularly research and development, will require additional equity or debt
financing. No assurances can be given that any additional financing will be
available to the Company on acceptable terms, if at all.
PART II. OTHER INFORMATION:
- -------- ------------------
Item 1 - Legal Proceedings
14
<PAGE>
From time to time, the Company is involved in litigation relating to claims
arising out of its operation in the normal course of business. Other than the
litigation discussed below, the Company is currently not a party to any
additional legal proceeding the adverse outcome of which, individually or in the
aggregate, management believes would have a material adverse effect on the
financial position or results of operations of the Company.
On June 11, 1996, a complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff RBI, an Alaskan limited
partnership, against the Company, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of the Company's initial
public offering, Robertson, Stephens & Company, Cowen & Company and Unterberg
Harris (the "Managing Underwriters"). On or about July 17, 1996, a complaint
was filed in the United States District Court for the District of Massachusetts
by named plaintiff John Foley against the Company, each member of the Company's
Board of Directors, (Andrew Najda, Stanley W. Bialek, Gill Cogan, Dr. Paul R.
Low, Dr. Fouad H. Nader and William H. Thalheimer), Kevin M. Hanks, former Chief
Financial Officer and Treasurer of the Company, and the Managing Underwriters.
On or about October 16, 1996, an additional complaint was filed in the United
States District Court for the District of Massachusetts by named plaintiff
Robert Schoenhofer against the Company, each member of the Company's Board of
Directors, Mr. Hanks, and the Managing Underwriters. Each of the plaintiffs
purports to represent a class of purchasers of the Common Stock of the Company
between and including May 26, 1995 through January 31, 1996. Each complaint
alleges that the named defendants violated the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, by, among other
things, issuing to the investing public false and misleading statements
regarding the Company's business, products, sales and earnings during the class
period in question. The plaintiffs seek unspecified damages, interest, costs and
fees. By order of the District Court, these actions have been consolidated into
a single action. It is possible that other claims may be made against the
Company or that there may be other consequences from the lawsuits. The
defendants deny any liability, believe they have meritorious defenses, and
intend to vigorously defend these and any similar lawsuits that may be filed,
although the ultimate outcome of these matters cannot yet be determined. If the
lawsuits are not resolved satisfactorily for the Company, there could be a
material adverse effect on the Company's future financial condition and results
of operations and, accordingly, income (loss). The Company does not believe that
the ultimate liability, if any, is estimable or probable, and therefore no
provision for any liability that may result from the actions has been recognized
in the accompanying consolidated financial statements.
A foreign inventor has asserted claims against several PC manufacturers,
including customers of the Company, that the graphics technology included in
their systems infringes the inventor's patents. Certain of the Company's
customers have notified the Company of these assertions and their intent to seek
indemnification from the Company in the event these claims are successful and
the infringing technology was included in products sold by the Company. The
Company believes there are meritorious defenses to these claims and that if the
technology in fact infringes the inventor's rights, the Company would have
rights of indemnification from its suppliers. While there can be no assurance,
the Company does not expect this matter to have a material adverse effect on the
Company.
Item 2 - Changes in Securities
On March 26, 1998, the Company issued and sold 15,000 shares of Common Stock
to one person pursuant to the exercise of an option granted under its 1989 Stock
Option Plan. The purchase price paid upon the exercise of this option was $0.27
per share. These shares were issued in reliance upon the exemption from
registration set forth in Rule 701 promulgated under the Securities Act of 1933,
as amended.
Item 3 - Defaults Upon Senior Securities
Not Applicable
15
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
--------
The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q/A.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<C> <S>
10.1 Securities Purchase Agreement
10.2 Secured Subordinated Convertible Promissory Note
10.3 Series A Convertible Preferred Stock Purchase Warrant
27* Financial Data Schedule
</TABLE>
---------------------------------
* Previously filed with the Securities and Exchange Commission on May 12, 1998.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarterly period ended March 28,
1998.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
Date: May 12, 1998 /s/ Andrew Najda .
----------------------------------------------
Andrew Najda
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 1998 /s/ Timothy J. Burns .
------------------------------------------------
Timothy J. Burns
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibits Page
- -------------- ----------------------- ----
<C> <S> <C>
10.1 Securities Purchase Agreement
10.2 Secured Subordinated Convertible Promissory Note
10.3 Series A Convertible Preferred Stock Purchase Warrant
27* Financial Data Schedule
</TABLE>
* Previously filed with the Securities and Exchange Commission on May 12, 1998.
18
<PAGE>
Exhibit 10.1
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "AGREEMENT") is made and entered
---------
into as of May 7, 1998, by and between Number Nine Visual Technology
Corporation, a Delaware corporation (the "COMPANY"), and Silicon Graphics, Inc.,
-------
a Delaware corporation (the "INVESTOR").
--------
R E C I T A L S
---------------
WHEREAS, the Company and the Investor entered into a Securities Purchase
Agreement dated as of April 17, 1998 (the "PURCHASE AGREEMENT") pursuant to
------------------
which the Company sold and the Investor purchased a promissory note in the
aggregate principal amount of Three Million Dollars ($3,000,000) (the "ORIGINAL
--------
NOTE") and the Company issued to the Investor warrants (collectively the
- ----
"ORIGINAL WARRANTS") convertible into 1,031,489 shares and 486,000 shares
- ------------------
respectively, of the Company's Series A Convertible Preferred Stock, $.01 par
value per share ("SERIES A CONVERTIBLE PREFERRED STOCK");
------------------------------------
WHEREAS, subject to the terms and conditions set forth herein, the Investor
desires to loan to the Company an aggregate amount of Nine Million Dollars
($9,000,000) (the "AGGREGATE COMMITMENT") in such installments and under such
--------------------
conditions set forth herein;
WHEREAS, in consideration of the Aggregate Commitment and upon receipt of
each installment of the Aggregate Commitment from the Investor, the Company
shall issue to Investor a secured subordinated convertible promissory note
issuable upon receipt of each installment of the Aggregate Commitment (each a
"NOTE" and, collectively, the "NOTES"), which Notes shall be convertible into
- ----- -----
shares of Series A Convertible Preferred Stock as described herein
(collectively, the "PREFERRED SHARES");
----------------
WHEREAS, the first installment of the Aggregate Commitment shall be made on
the date hereof by surrender of the Original Note and the Original Warrants by
the Investor to the Company for cancellation, and, in connection therewith the
Company shall issue a new Note in the aggregate principal amount of Three
Million Dollars ($3,000,000) (the "INITIAL NOTE) pursuant to the terms and
------------
conditions set forth in this Agreement and the Company shall issue to Investor a
warrant exercisable for shares of Series A Convertible Preferred Stock on the
terms and conditions set forth therein (the "WARRANT");
-------
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
<PAGE>
-2-
1. AUTHORIZATION, ISSUANCE, SALE AND DELIVERY OF THE NOTES AND THE
---------------------------------------------------------------
WARRANT.
--------
1.1 Authorization. As of the Initial Closing (as defined below), the
-------------
Company's Board of Directors will have authorized the issuance and sale,
pursuant to the terms and conditions of this Agreement, of the Notes (including
the Initial Note) and the Warrant.
1.2 Agreement to Loan Aggregate Commitment. Subject to the terms and
--------------------------------------
conditions set forth herein, the Investor hereby agrees to loan the Company the
Aggregate Commitment.
1.3 Agreement to Purchase, Sell and Deliver the Notes and the Warrant.
-----------------------------------------------------------------
The Company hereby agrees to issue and sell to the Investor at the
Initial Closing and each Subsequent Closing, and the Investor agrees to purchase
from the Company at the Initial Closing and each Subsequent Closing, the Notes
in the aggregate principal amount equal to the Aggregate Commitment. The
Company hereby agrees to issue and sell to the Investor at the Initial Closing,
and the Investor agrees to purchase from the Company at the Initial Closing, the
Initial Note, in the aggregate principal amount of $3,000,000 by surrender of
the Original Note and the Original Warrants by the Investor to the Company for
cancellation. The Company shall also issue to the Investor the Warrant
exercisable for such number of shares of Series A Convertible Preferred Stock
(the "WARRANT SHARES") and pursuant to such terms and conditions as set forth in
--------------
the Warrant, which is attached hereto as EXHIBIT B.
---------
2. CLOSING.
-------
2.1 The Initial Closing. The purchase and sale of the Initial Note and
-------------------
the issuance of the Warrant will take place on May 7, 1998 at the offices of
Testa, Hurwitz & Thibeault, LLP, High Street Tower, 125 High Street, Boston,
Massachusetts 02110, at 4:00 p.m. Boston time, subject to the satisfaction of
the conditions set forth in Articles 6 and 7, or at such other time and place as
the Company and the Investor mutually agree upon (which time and place are
referred to in this Agreement as the "INITIAL CLOSING"). At the Initial Closing,
---------------
the Company will deliver to the Investor the Initial Note, against delivery to
the Company by the Investor of the Original Note and the Original Warrants for
cancellation.
2.2 Subsequent Closings.
-------------------
(a) From and after the Initial Closing, the Company may request
additional installments (subject to Section 2.2(b) herein) of the Aggregate
Commitment at one or more subsequent closings (individually, a "SUBSEQUENT
----------
CLOSING" and collectively, the "SUBSEQUENT CLOSINGS"). The Company shall request
- ------- -------------------
a Subsequent Closing by delivering a written notice to the Investor no less than
two (2) days prior to the intended Subsequent Closing, specifying the amount
(subject to Section 2.2(b) herein) and date of the applicable installment and
certifying that all representations and warranties of the Company set forth in
Section 4 remain true and correct (except as to such changes as have occurred in
the ordinary course of the Company's business and which do not have,
individually or in the aggregate, a Material Adverse Effect) and all conditions
set forth in Section 8 herein have been satisfied. At each such
<PAGE>
-3-
Subsequent Closing, the Investor shall advance the requisite installment of the
Aggregate Commitment, it being understood that the advancement of such
installment by the Investor shall constitute an express representation by the
Investor that all conditions set forth in Section 9 herein have been satisfied.
At each such Subsequent Closing, the Company shall issue and deliver to the
Investor a Note against advancement to the Company by the Investor of the
installment amount of the Aggregate Commitment. The Company will not sell
additional Notes to any person other than the Investor without the prior written
consent of the Investor.
(b) The Company shall not request an advance of an installment at any
Subsequent Closing in an amount in which the principal, and any accrued interest
thereon, of a Note shall be convertible into greater than 19.9% of the Company's
issued and outstanding Common Stock (assuming conversion of the Preferred
Shares) as of the date of the advance of such installment (the "THRESHOLD
---------
RESTRICTION"); provided, however, that there shall be no such Threshold
- ----------- --------- -------
Restriction if the Company has complied with the Stockholder Notice set forth in
Section 8.6 herein.
3. THE NOTES.
---------
3.1 Form of Note. Each Note to be issued by the Company to the Investor
------------
hereunder at the Initial Closing and each Subsequent Closing shall be
substantially in the form attached hereto as EXHIBIT A. Each such Note shall be
---------
identical in form, except that the principal amount of each Note shall be
modified to reflect the amount and original issue date of the applicable
installment of the Aggregate Commitment. Each of the Notes shall be secured by
all of the Company's assets and intellectual property as evidenced by a Security
Agreement by and between the Company and the Investor entered into as of the
date hereof, such Security Agreement to be in the form attached hereto as
EXHIBIT C.
- ---------
3.2 Conversion of Note. Subject to the terms, conditions and
------------------
obligations of the parties herein and the terms and conditions set forth in the
Notes, which terms and conditions are incorporated herein by reference, Investor
may convert all or a portion of the principal outstanding under the Note and
accrued interest thereon into shares of Series A Convertible Preferred Stock in
accordance with Section 4 of the Note.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
---------------------------------------------
represents and warrants to the Investor that the statements in this Section 4
are true and correct, except as set forth in the Disclosure Letter from the
Company dated as of the date hereof (the "DISCLOSURE LETTER"). The term
-----------------
"CLOSING" used herein shall refer to the Initial Closing or any subsequent
Closing as the case may be.
4.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all corporate power and authority required to
(a) own and hold its properties; (b) carry on its business as presently
conducted; (c) enter into this Agreement, the Notes, the Warrant, the Security
Agreement and the Technology Agreements (as defined in Section 6.8 herein)
(collectively, the "TRANSACTION DOCUMENTS") and to consummate the transactions
---------------------
<PAGE>
-4-
contemplated hereby and thereby; and (d) to issue, sell and deliver the Notes,
the Warrant, the Preferred Shares and the Warrant Shares and the shares of the
Company's Common Stock, $.01 par value per share (the "COMMON STOCK") issuable
------------
upon conversion of the Preferred Shares and the Warrant Shares (the "CONVERSION
----------
SHARES," and, together with the Notes, the Warrant, the Preferred Shares and the
- ------
Warrant Shares, are hereinafter the "SECURITIES"). The Company is qualified to
----------
do business and is in good standing in each jurisdiction in which the failure to
so qualify would have a Material Adverse Effect. As used in this Agreement,
"MATERIAL ADVERSE EFFECT" means a material adverse effect on, or a material
- ------------------------
adverse change in, the business, operations, financial condition, results of
operations, assets or liabilities of the Company.
4.2 Capitalization. As of the date hereof, the capitalization of the
--------------
Company is as follows:
(a) Preferred Stock. 5,000,000 authorized shares of Preferred Stock,
---------------
$.01 par value, of which 3,400,000 shares have been approved by the Board of
Directors and, upon filing of a Certificate of Designation with the Secretary of
State of Delaware, will be designated as Series A Convertible Preferred Stock,
the terms of which are set forth in EXHIBIT D attached hereto, none of which is
---------
issued or outstanding.
(b) Common Stock. 20,000,000 authorized shares of Common Stock of
------------
which 9,291,925 shares are issued and outstanding. All of such outstanding
shares are validly issued, fully paid and non-assessable. No such outstanding
shares were issued in violation of any preemptive right.
(c) Options, Warrants, Reserved Shares. Except for the Transaction
----------------------------------
Documents and the Securities and the plans set forth in the SEC Documents (as
defined below) (the "PLANS"), there are not outstanding any options, warrants,
-----
rights (including conversion or preemptive rights) or agreements for the
purchase or acquisition from the Company of any shares of its capital stock or
any securities convertible into or ultimately exchangeable or exercisable for
any shares of the Company's capital stock. Except for the rights granted to
Investor under the Transaction Documents and the Securities and any stock
repurchase rights of the Company under the Plans, no shares of the Company's
outstanding capital stock, or stock issuable upon exercise, conversion or
exchange of any outstanding options, warrants or rights, or other stock issuable
by the Company, are subject to any rights of first refusal or other rights to
purchase such stock (whether in favor of the Company or any other person),
pursuant to any agreement, commitment or other obligation of the Company.
4.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, partnership,
limited liability company, trust, joint venture, association or other entity.
4.4 Due Authorization. All corporate action on the part of the
-----------------
Company, its officers, directors and shareholders necessary for the
authorization, execution, delivery of, and the performance of all obligations of
the Company under the Transaction Documents, and the authorization, issuance,
reservation for issuance and delivery of all of the Securities being sold or
issued under this Agreement has been taken or will be taken prior to the
Closing, and this
<PAGE>
-5-
Agreement constitutes, valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except as may be limited by (a) applicable bankruptcy, insolvency,
reorganization or others laws of general application relating to or affecting
the enforcement of creditors' rights generally, (b) the effect of rules of law
governing the availability of equitable remedies and (c) the fact that any
indemnification or contribution provision contained in the Transaction Documents
may be unenforceable insofar as the enforceability of such provision may be
sought under United States federal or state securities laws.
4.5 Valid Issuance of Securities.
----------------------------
(a) The Preferred Shares and the Warrant Shares have been duly
reserved for issuance upon conversion of the Notes and the exercise of the
Warrant, the Conversion Shares have been duly reserved for issuance upon
conversion of the Preferred Shares and the Warrant Shares, and the Preferred
Shares, the Warrant Shares and the Conversion Shares when so issued, will be
duly authorized, validly issued, fully paid and nonassessable shares of capital
stock with no personal liability attaching to the ownership thereof and will be
free and clear of all liens, charges, restrictions, claims and encumbrances
imposed by or through the Company except as set forth in the Transaction
Documents.
(b) Based in part on the representations made by the Investor in
Section 4 hereof, the Notes, and the Preferred Shares, the Warrant Shares and
the Conversion Shares, when so issued, will be issued in compliance with the
registration and prospectus delivery requirements of the Securities Act of 1933,
as amended (the "1933 ACT"), or in compliance with applicable exemptions
therefrom, and the registration and qualification requirements of all applicable
securities laws of the Commonwealth of Massachusetts and the State of
California, as applicable.
(c) The issuance of the Notes and the Warrant hereunder do not
require, and the Preferred Shares, the Warrant Shares and the Conversion Shares,
when so issued, will not require the approval of the stockholders of the Company
under the rules of The Nasdaq National Market.
4.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any United States federal, state or local governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for the filing of such
qualifications or filings under the 1933 Act and the regulations thereunder,
under The Nasdaq National Market rules and all applicable United States federal
and state securities laws as may be required in connection with the transactions
contemplated by this Agreement. All such qualifications will be effective on
the Closing and all such filings have been or will be made within the time
prescribed by law.
4.7 Non-Contravention. The execution, delivery and performance of
-----------------
the Transaction Documents by the Company, and the consummation by the Company of
the transactions contemplated hereby and thereby, do not and will not (i)
contravene or conflict with
<PAGE>
-6-
the Certificate of Incorporation or By-laws of the Company; (ii) constitute a
material violation of any provision of any United States federal, state, local
or, to the Company's knowledge, foreign (non-United States) law binding upon or
applicable to the Company; or (iii) constitute a default or require any consent
under, give rise to any right of termination, cancellation or acceleration of,
or to a loss of any benefit to which the Company is entitled under, or result in
the creation or imposition of any lien, claim or encumbrance on any assets of
the Company under, any contract to which the Company is a party or any permit,
license or similar right relating to the Company or by which the Company may be
bound or affected in such a manner as would have Material Adverse Effect.
4.8 Litigation. Except as disclosed in the SEC Documents, there is
----------
no action, suit, proceeding, claim, arbitration or investigation ("ACTION")
------
pending: (a) against the Company, its activities, properties or assets or, to
the best of the Company's knowledge, against any officer, director or employee
of the Company in connection with such officer's, director's or employee's
relationship with, or actions taken on behalf of, the Company which is
reasonably likely to have a Material Adverse Effect, (b) that seeks to prevent,
enjoin, alter or delay the transactions contemplated by this Agreement or the
Investor Rights Agreement. Except as individually or in the aggregate is not
reasonably likely to have a Material Adverse Effect, (i) there is no Action
pending or, to the best of the Company's knowledge, threatened, relating to the
current or prior employment of any of the Company's current or former employees
or consultants, their use in connection with the Company's business of any
information, technology or techniques allegedly proprietary to any of their
former employers, clients or other parties, or their obligations under any
agreements with prior employers, clients or other parties, and (ii) the Company
is not a party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality. No
Action by the Company is currently pending nor does the Company have a current
intent to initiate any Action which is reasonably likely to have a Material
Adverse Effect.
4.9 Intellectual Property.
---------------------
(a) Ownership or Right to Use. To the Company's knowledge, the
Company has title to and owns, or is licensed or otherwise possesses legally
enforceable rights to use, all patents or patent applications, software, know-
how, registered or unregistered trademarks and service marks and any
applications therefor, registered or unregistered copyrights, trade names, and
any applications therefor, trade secrets or other confidential or proprietary
information ("INTELLECTUAL PROPERTY") necessary to enable the Company to carry
---------------------
on its business as currently conducted or as presently proposed to be conducted,
except where any deficiency therein would not have a Material Adverse Effect.
(b) Licenses; Other Agreements. The Company is not currently
--------------------------
subject to any exclusive licenses (whether such exclusivity is temporary or
permanent) to any material portion of the Intellectual Property of the Company.
To the Company's knowledge, there are not outstanding any licenses or agreements
of any kind relating to any Intellectual Property of the Company, except for
agreements with OEM's and other customers of the Company entered into in the
ordinary course of the Company's business. The Company is not
<PAGE>
-7-
obligated to pay any royalties or other payments to third parties with respect
to the marketing, sale, distribution, manufacture, license or use of any
Intellectual Property, except as the Company may be so obligated in the ordinary
course of its business or as disclosed in the Company's SEC Documents (as
defined below) or where the failure to make such payments would not have a
Material Adverse Effect.
(c) No Infringement. To the Company's knowledge, the Company has not
---------------
violated or infringed and is not currently violating or infringing, and the
Company has not received any communications alleging that the Company (or any of
its employees or consultants) has violated or infringed, any Intellectual
Property of any other person or entity, to the extent that any such violation or
infringement, either individually or together with all other such violations and
infringements, would have a Material Adverse Effect.
(d) Employees and Consultants. To the Company's knowledge, no
-------------------------
employee of or consultant to the Company is in default under any term of any
employment contract, agreement or arrangement relating to Intellectual Property
of the Company or any non-competition arrangement, other contract, or any
restrictive covenant relating to the Intellectual Property of the Company, which
default would have a Material Adverse Effect.
4.10 Compliance with Law and Charter Documents. The Company is not
-----------------------------------------
in violation or default of any provisions of its Certificate of Incorporation or
By-laws, both as amended, and except for any violations that would not, either
individually or in the aggregate, have a Material Adverse Effect. The Company
has complied and is in compliance with all applicable statutes, laws, and
regulations and executive orders of the United States of America, and all
states, and, to the Company's knowledge, foreign countries (non-United States)
and other governmental bodies and agencies having jurisdiction over the
Company's business or properties except where such noncompliance would not,
either individually or in the aggregate, have a Material Adverse Effect.
4.11 Registration Rights. Except as provided in the Investor Rights
-------------------
Agreement or as described in, or filed as exhibits to, the SEC Documents (as
defined below) effective upon the Closing, the Company is not currently subject
to any grant or agreement to grant to any person or entity any rights (including
piggyback registration rights) to have any securities of the Company registered
with the Securities and Exchange Commission ("SEC") or any other governmental
---
authority.
4.12 SEC Documents.
-------------
(a) The Company has furnished to the Investor prior to the date hereof
copies of its Annual Report on Form 10-K, as amended, for the fiscal year ended
December 27, 1997 ("FORM 10-K"), and all other registration statements, reports
---------
and proxy statements filed by the Company with the SEC on or after December 27,
1997 (the Form 10-K and such registration statements, reports and proxy
statements, are collectively referred to herein as the "SEC DOCUMENTS"). Each
-------------
of the SEC Documents, as of the respective date thereof, did not, and each of
the registration statements, reports and proxy statements filed by the Company
with the SEC after the date hereof and prior to the Closing will not, as of the
date thereof, contain any untrue
<PAGE>
-8-
statement of a material fact or omit to state a material fact necessary in order
to make the statements made therein, in light of the circumstances under which
they were made, not misleading, except as may have been corrected in a
subsequent SEC Document. The Company is not a party to any material contract,
agreement or other arrangement which was required to have been filed as an
exhibit to the SEC Documents that is not so filed.
(b) The Company has provided the Investor with its audited financial
statements (the "AUDITED FINANCIAL STATEMENTS") for the fiscal year ended
----------------------------
December 27, 1997 (the "BALANCE SHEET DATE") and its unaudited financial
------------------
statements as of March 28, 1998. Since December 28, 1997, the Company has duly
filed with the SEC all registration statements, reports and proxy statements
required to be filed by it under the Securities Exchange Act of 1934, as
amended, and the 1933 Act. The audited and unaudited consolidated financial
statements of the Company included in the SEC Documents filed prior to the date
hereof fairly present, in conformity with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis (except as may be
----
indicated in the notes thereto), the consolidated financial position of the
Company and its consolidated subsidiaries as at the date thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject to normal year and audit adjustments in the case of unaudited
interim financial statements).
(c) Except as and to the extent reflected or reserved against in the
Company's Audited Financial Statements and the unaudited financial statements as
of March 28, 1998 (including the notes thereto), the Company has no material
liabilities (whether accrued or unaccrued, liquidated or unliquidated, secured
or unsecured, joint or several, due or to become due, vested or unvested,
executory, determined or determinable) other than: (i) liabilities incurred in
the ordinary course of business since the Balance Sheet Date that are consistent
with the Company's past practices, (ii) liabilities with respect to agreements
to which the Investor is a party, and (iii) other liabilities that either
individually, or in the aggregate, would not result in a Material Adverse
Effect.
4.13 Absence of Certain Changes Since Balance Sheet Date. Since the
---------------------------------------------------
Balance Sheet Date, and, except as set forth in the Disclosure Letter, the
business and operations of the Company have been conducted in all material
respects in the ordinary course consistent with past practice and there has not
been:
(a) any declaration, setting aside or payment of any dividend or other
distribution of the assets of the Company with respect to any shares of capital
stock of the Company, or any repurchase, redemption or other acquisition by the
Company or any subsidiary of the Company of any outstanding shares of the
Company's capital stock;
(b) any damage, destruction or casualty loss, whether or not covered
by insurance, except for such occurrences that have not resulted, and are not
expected to result, in a Material Adverse Effect;
(c) any waiver by the Company of a valuable right or of a material
debt owed to it, except for such waivers that have not resulted, and are not
expected to result, in a Material Adverse Effect;
<PAGE>
-9-
(d) any material change or amendment to, or any waiver of any material
rights under, a material contract or arrangement by which the Company or any of
its assets or properties is bound or subject, except for changes, amendments, or
waivers that are expressly provided for or disclosed in this Agreement or that
have not resulted, and are not expected to result, in a Material Adverse Effect;
(e) any change by the Company in its accounting principles, methods or
practices or in the manner it keeps its accounting books and records, except any
such change required by a change in GAAP; and
(f) any other event or condition of any character, except for such
events and conditions that have not resulted, and are not expected to result, in
a Material Adverse Effect.
4.14 Full Disclosure. This Agreement, the Disclosure Letter and the
---------------
SEC Documents with respect to the business, operations, assets, results of
operations and financial condition of the Company, and the transactions
contemplated by the Transaction Documents do not contain any untrue statement of
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
5. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF THE INVESTOR.
------------------------------------------------------------------
The Investor hereby represents and warrants to the Company, and agrees that:
5.1 Authorization. This Agreement has been duly authorized by all
-------------
necessary corporate action on the part of the Investor. This Agreement
constitutes the Investor's valid and legally binding obligations, enforceable in
accordance with its respective terms, except as may be limited by (a) applicable
bankruptcy, insolvency, reorganization or other laws of general application
relating to or affecting the enforcement of creditors' rights generally, (b) the
effect of rules of law governing the availability of equitable remedies, and (c)
the fact that any indemnification or contribution provision contained in the
Transaction Documents may be unenforceable insofar as the enforceability of such
provision may be sought under United States federal, or state securities laws.
The Investor has full corporate power and authority to enter into the
Transaction Documents.
5.2 Purchase for Own Account. The Securities are being 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. The Investor also
represents that it has not been formed for the specific purpose of acquiring the
Securities.
5.3 Non-Contravention. The execution, delivery and performance of
-----------------
this Agreement by the Investor, and the consummation by the Investor of the
transactions contemplated hereby and thereby, do not and will not (i) contravene
or conflict with the Certificate of Incorporation or By-laws of the Investor;
(ii) constitute a material violation of any
<PAGE>
-10-
provision of any United States federal, state, local or, to the Investor's
knowledge, foreign (non-United States) law binding upon or applicable to the
Investor; or (iii) constitute a default or require any consent under, give rise
to any right of termination, cancellation or acceleration of, or to a loss of
any benefit to which the Investor is entitled under, or result in the creation
or imposition of any lien, claim or encumbrance on any assets of the Investor
under, any contract to which the Investor is a party or any permit, license or
similar right relating to the Investor or by which the Investor may be bound or
affected in such a manner as would have Material Adverse Effect.
5.4 Investment Experience. The Investor understands that the
---------------------
purchase of the Securities involves substantial risk. The Investor has
experience as an investor in securities of companies and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment in the
Securities and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of this investment
in the Securities and protecting its own interests in connection with this
investment.
5.5 Accredited Investor Status. The Investor is an "ACCREDITED
-------------------------- ----------
INVESTOR" within the meaning of Regulation D promulgated under the 1933 Act.
- --------
5.6 Restricted Securities. The Investor understands that the
---------------------
Securities to be issued to the Investor hereunder are characterized as
"RESTRICTED SECURITIES" under the 1933 Act 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.
The Investor is familiar with Rule 144 of the SEC, as presently in effect, and
understands the resale limitations imposed thereby and by the 1933 Act. The
Investor understands that the Company is under no obligation to register any of
the securities sold hereunder except as provided in the Investor Rights
Agreement.
5.7 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 has notified the Company of the proposed disposition
and has furnished the Company with a statement of the circumstances surrounding
the proposed disposition, and the Investor has furnished the Company, 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) of this Section 4.7, no
such registration statement will be required for any transfer of the Securities
in compliance with Rule 144,
<PAGE>
-11-
Rule 144A or Rule 145(d) of the SEC, or if such transfer otherwise is exempt, in
the reasonable opinion of the Company's legal counsel, from the registration
requirements of the 1933 Act.
5.8 Legends. Certificates evidencing the Preferred Shares, the
-------
Warrant Shares and the Conversion Shares, when so issued, will bear each of the
legends set forth below:
(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 REASONABLY 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.
(b) THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS SPECIFIED IN A CERTAIN INVESTOR RIGHTS AGREEMENT BETWEEN THE
COMPANY AND THE ORIGINAL HOLDER OF SUCH SHARES DATED AS OF [ ], A COPY OF
WHICH IS AVAILABLE FOR EXAMINATION AT THE ISSUER'S PRINCIPAL OFFICE.
(c) Any Legends required by any applicable state securities laws.
The Legend set forth in Section 5.8(a) hereof will be removed by the Company
from any certificate evidencing the Preferred Shares, the Warrant Shares or
Conversion Shares upon delivery to the Company of an opinion by 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 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 such securities.
6. CONDITIONS TO THE INVESTOR'S OBLIGATIONS AT THE INITIAL CLOSING. The
---------------------------------------------------------------
obligations of the Investor under Sections 1 and 2 of this Agreement are subject
to the fulfillment or waiver, on or before the Initial Closing, of each of the
following conditions:
6.1 Representations and Warranties True. Each of the representations
-----------------------------------
and warranties of the Company contained in Section 4 will be true and correct on
and as of the date hereof and on and as of the date of the Initial Closing,
except as set forth in the Disclosure Letter, as amended through the Initial
Closing, with the same effect as though such representations and warranties had
been made as of the Initial Closing.
<PAGE>
-12-
6.2 Performance. The Company will have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Initial Closing
and will have obtained all approvals, consents and qualifications necessary to
complete the purchase and sale described herein.
6.3 Securities Exemptions. The offer, sale and issuance of the
---------------------
Securities to the Investor pursuant to this Agreement will be exempt from the
registration requirements of the 1933 Act and the registration and/or
qualification requirements of all applicable state securities laws.
6.4 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Initial Closing and all
documents incident thereto will be reasonably satisfactory in form and substance
to the Investor, and the Investor will have received all such counterpart
originals and certified or other copies of such documents as it may reasonably
request. Such documents shall include (but not be limited to) the following:
(a) Certified Charter Documents. A copy of (i) the Certificate of
---------------------------
Incorporation and (ii) the By-laws of the Company (each as amended through the
date of the Initial Closing) certified by the Secretary of the Company as true
and correct copies thereof as of the Initial Closing.
(b) Board Resolutions. A copy, certified by the Secretary of the
-----------------
Company, of the resolutions of the Board of Directors of the Company providing
for the approval of the Transaction Documents and the issuance of the Securities
and the other matters contemplated hereby.
6.5 Opinion of Company Counsel. The Investor will have received an
--------------------------
opinion on behalf of the Company, dated as of the date of the Initial Closing,
from counsel to the Company, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC,
in form and substance reasonably satisfactory to the Investor.
6.6 Series A Convertible Preferred Stock Terms. The rights,
------------------------------------------
privileges and preferences of the Preferred Shares and the Warrant Shares shall
be as set forth in the terms of the Series A Convertible Preferred Stock set
forth in EXHIBIT E hereto, which terms shall have been approved and authorized
---------
by the Board of Directors of the Company as of the date hereof.
6.7 Security Agreement. The Company shall have executed a Security
------------------
Agreement substantially in the form attached hereto as EXHIBIT D in favor of the
---------
Investor and Marine Midland Bank shall have consented to Investor's security
interest in all of the Company's assets and intellectual property in accordance
with the Security Agreement.
6.8 Technology Agreements. The Company shall have entered into the
---------------------
Product Development & Marketing Agreement, the Patent License and the Agreement
for the Disclosure of SGI Restricted Confidential Information substantially in
the forms attached hereto as EXHIBIT F (collectively, the "TECHNOLOGY
--------- ----------
AGREEMENTS").
- ----------
<PAGE>
-13-
6.9 Marine Midland Bank; Extension of Forbearance Agreement. The
-------------------------------------------------------
Company shall have obtained an extension of its forbearance agreement with
Marine Midland Bank until September 30, 1998 satisfactory in form and substance
to the Investor.
7. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT THE INITIAL CLOSING. The
--------------------------------------------------------------
obligations of the Company to the Investor under this Agreement are subject to
the fulfillment or waiver on or before the Initial Closing, of each of the
following conditions:
7.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of the Investor contained in Section 5 will be true and correct on
and as of the date hereof and on and as of the date of the Initial Closing with
the same effect as though such representations and warranties had been made as
of the Initial Closing.
7.2 Cancellation of Original Note and Original Warrants. The
---------------------------------------------------
Investor will have delivered to the Company the Original Note and Original
Warrants for cancellation as specified in Section 1.3.
7.3 Securities Exemptions. The offer and sale of the Securities to
---------------------
the Investor pursuant to this Agreement will be exempt from the registration
requirements of the 1933 Act and the registration and/or qualification
requirements of all applicable state securities laws.
7.4 Technology Agreements; Security Agreement. The Investor shall
-----------------------------------------
have entered into the Technology Agreements and have agreed to and acknowledged
the Security Agreement.
7.5 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Initial Closing and all
documents incident thereto will be reasonably satisfactory in form and substance
to the Company and to the Company's legal counsel, and the Company will have
received all such counterpart originals and certified or other copies of such
documents as it may reasonably request.
8. CONDITIONS TO THE INVESTOR'S OBLIGATIONS AT SUBSEQUENT CLOSINGS. The
---------------------------------------------------------------
obligations of the Investor under Sections 1 and 2 of this Agreement with
respect to Subsequent Closings are subject to the fulfillment or waiver, on or
before each such Subsequent Closing, of each of the following conditions (except
for 8.6 which shall be applicable if the Company requests an advance of an
installment of the Aggregate Commitment greater than the Threshold Restriction):
8.1 Representations and Warranties True. Each of the representations
-----------------------------------
and warranties of the Company contained in Section 4 (including in the
Disclosure Letter) will be true and correct on and as of the date of the
Subsequent Closing, (except as to such changes as have occurred in the ordinary
course of the Company's business and which do not have, individually or in the
aggregate, a Material Adverse Effect).
8.2 Performance. The Company will have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be
<PAGE>
-14-
performed or complied with by it on or before the Subsequent Closing and will
have obtained all approvals, consents and qualifications necessary to complete
the purchase and sale described herein.
8.3 Securities Exemptions. The offer, sale and issuance of the
---------------------
Securities to the Investor at such Subsequent Closing will be exempt from the
registration requirements of the 1933 Act and the registration and/or
qualification requirements of all applicable state securities laws.
8.4 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Subsequent Closing and
all documents incident thereto will be reasonably satisfactory in form and
substance to the Investor, and the Investor will have received all such
counterpart originals and certified or other copies of such documents as it may
reasonably request.
8.5 No Material Adverse Effect. Between the Initial Closing and each
--------------------------
Subsequent Closing, there shall not have occurred any Material Adverse Effect.
8.6 Stockholder Notice. If the Company requests an advance of an
------------------
installment of the Aggregate Commitment in an amount greater than the Threshold
Restriction, the Company shall mail to all stockholders of the Company not later
than ten (10) days before the date of the intended Subsequent Closing a letter
complying with Rule 4460(i) of The Nasdaq National Market.
9. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT SUBSEQUENT CLOSINGS. The
--------------------------------------------------------------
obligations of the Company to the Investor under this Agreement are subject to
the fulfillment or waiver on or before each Subsequent Closing, of each of the
following conditions:
9.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of the Investor contained in Section 5 will be true and correct on
and as of the date of each Subsequent Closing.
9.2 Payment of Installment of Aggregate Commitment. The Investor
----------------------------------------------
will have delivered to the Company the requisite installment of the Aggregate
Commitment required to be delivered by it in connection with the Subsequent
Closing.
9.3 Securities Exemptions. The offer and sale of the Securities to
---------------------
the Investor at such Subsequent Closing will be exempt from the registration
requirements of the 1933 Act and the registration and/or qualification
requirements of all applicable state securities laws.
9.4 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Closing and all
documents incident thereto will be reasonably satisfactory in form and substance
to the Company and to the Company's legal counsel, and the Company will have
received all such counterpart originals and certified or other copies of such
documents as it may reasonably request.
<PAGE>
-15-
10. INDEMNIFICATION.
---------------
10.1 Agreement to Indemnify.
----------------------
(a) Company Indemnity. The Investor, its Affiliates (as defined
-----------------
below), and each officer and director, of any of the foregoing (collectively,
the "INVESTOR INDEMNITEES") shall each be indemnified and held harmless to the
--------------------
extent set forth in this Section 10 by the Company with respect to any and all
Damages (as defined below) incurred by any Investor Indemnitee as a result of
any inaccuracy or misrepresentation in, or breach of, any representation,
warranty, covenant or agreement made by the Company in this Agreement or the
Investor Rights Agreement (including any Exhibits and Schedules hereto).
(b) Investor Indemnity. The Company, its Affiliates, and each officer
------------------
and director, of any of the foregoing (collectively, the "COMPANY INDEMNITEES")
-------------------
shall each be indemnified and held harmless to the extent set forth in this
Section 10, by the Investor, in respect of any and all Damages incurred by any
Company Indemnitee as a result of any inaccuracy or misrepresentation in, or
breach of, any representation, warranty, covenant or agreement made by the
Investor in this Agreement or the Investor Rights Agreement (including any
Exhibits and Schedules hereto).
(c) Equitable Relief. Nothing set forth in this Section 10 shall be
----------------
deemed to prohibit or limit any Investor Indemnitee's or Company Indemnitee's
right at any time before, on or after the Closing Date, to seek injunctive or
other equitable relief for the failure of any Indemnifying Party to perform or
comply with any covenant or agreement contained herein.
10.2 Survival. All representations and warranties of the Investor
--------
and the Company contained herein, and all claims of any Investor Indemnitee or
Company Indemnitee in respect of any inaccuracy or misrepresentation in or
breach thereof, shall survive the Closing until twelve (12) months from the date
of this Agreement, regardless of whether the applicable statute of limitations,
including extensions thereof, may expire (except to the extent any such covenant
or agreement shall expire by its terms). All covenants and agreements of the
Investor and the Company contained herein or in the Investor Rights Agreement
shall survive the Closing in perpetuity (except to the extent any such covenant
or agreement shall expire by its terms). All claims of any Investor Indemnitee
or Company Indemnitee in respect of any breach of such covenants or agreements
shall survive the Closing until the expiration of twelve (12) months following
the non-breaching party's obtaining actual knowledge of such breach.
10.3 Claims for Indemnification. If any Investor Indemnitee or
--------------------------
Company Indemnitee (an "INDEMNITEE") shall believe that such Indemnitee is
----------
entitled to indemnification pursuant to this Section 10 in respect of any
Damages, such Indemnitee shall give the appropriate Indemnifying Party (which
for purposes hereof, in the case of an Investor Indemnitee, means the Company,
and in the case of a Company Indemnitee, means the Investor) prompt written
notice thereof. Any such notice shall set forth in reasonable detail and to the
extent then known the basis for such claim for indemnification. The failure of
such Indemnitee to give notice of any claim for indemnification promptly shall
not adversely affect such Indemnitee's right to indemnity hereunder except to
the extent that such failure adversely affects the right of the
<PAGE>
-16-
Indemnifying Party to assert any reasonable defense to such claim. Each such
claim for indemnity shall expressly state that the Indemnifying Party shall have
only the twenty (20) business day period referred to in the next sentence to
dispute or deny such claim. The Indemnifying Party shall have twenty (20)
business days following its receipt of such notice either (a) to acquiesce in
such claim by giving such Indemnitee written notice of such acquiescence or (b)
to object to the claim by giving such Indemnitee written notice of the
objection. If Indemnifying Party does not object thereto within such twenty (20)
business day period, such Indemnitee shall be entitled to be indemnified for all
Damages reasonably incurred by such Indemnitee in respect of such claim. If the
Indemnifying Party objects to such claim in a timely manner, the senior
management of the Company and the Investor shall meet to attempt to resolve such
dispute. If the dispute cannot be resolved by the senior management either party
may make a written demand for formal dispute resolution and specify therein the
scope of the dispute. Within thirty days after such written notification, the
parties agree to meet for one day with an impartial mediator and consider
dispute resolution alternatives other than litigation. If an alternative method
of dispute resolution is not agreed upon within thirty days after the one day
mediation, either party may begin litigation proceedings. Nothing in this
section shall be deemed to require arbitration.
10.4 Defense of Claims. In connection with any claim that may give
-----------------
rise to indemnity under this Section 10 resulting from or arising out of any
claim or Proceeding (as defined below) against an Indemnitee by a person or
entity that is not a party hereto, the Indemnifying Party may but shall not be
obligated to (unless such Indemnitee elects not to seek indemnity hereunder for
such claim), upon written notice to the relevant Indemnitee, assume the defense
of any such claim or proceeding if the Indemnifying Party with respect to such
claim or Proceeding acknowledges to the Indemnitee the Indemnitee's right to
indemnity pursuant hereto to the extent provided herein (as such claim may have
been modified through written agreement of the parties or arbitration hereunder)
and provides assurances, reasonably satisfactory to such Indemnitee, that the
Indemnifying Party will be financially able to satisfy such claim to the extent
provided herein if such claim or Proceeding is decided adversely; provided,
--------
however, that nothing set forth herein shall be deemed to require the
- -------
Indemnifying Party to waive any crossclaims or counterclaims the Indemnifying
Party may have against the Indemnified Party for damages. The Indemnified Party
shall be entitled to retain separate counsel, reasonably acceptable to the
Indemnifying Party, if the Indemnified Party shall reasonably determine, upon
the written advice of counsel, that an actual or potential conflict of interest
exists between the Indemnifying Party and the Indemnified Party in connection
with such Proceeding. The Indemnifying Party shall be obligated to pay the
reasonable fees and expenses of such separate counsel to the extent the
Indemnified Party is entitled to indemnification by the Indemnifying Party with
respect to such claim or Proceeding under this Section 10.4. If the
Indemnifying Party assumes the defense of any such claim or Proceeding, the
Indemnifying Party shall select counsel reasonably acceptable to such Indemnitee
to conduct the defense of such claim or Proceeding, shall take all steps
reasonably necessary in the defense or settlement thereof and shall at all times
diligently and promptly pursue the resolution thereof. If the Indemnifying
Party shall have assumed the defense of any claim or Proceeding in accordance
with this Section 10.4, the Indemnifying Party shall be authorized to consent to
a settlement of, or the entry of any judgment arising from, any such claim or
Proceeding, with the prior written consent of such
<PAGE>
-17-
Indemnitee, not to be unreasonably withheld; provided, however, that the
Indemnifying Party shall pay or cause to be paid all amounts arising out of such
settlement or judgment concurrently with the effectiveness thereof; provided,
further, that the Indemnifying Party shall not be authorized to encumber any of
the assets of any Indemnitee or to agree to any restriction that would apply to
any Indemnitee or to its conduct of business; and provided, further, that a
condition to any such settlement shall be a complete release of such Indemnitee
and its Affiliates, directors, officers, employees and agents with respect to
such claim, including any reasonably foreseeable collateral consequences
thereof. Such Indemnitee shall be entitled to participate in (but not control)
the defense of any such action, with its own counsel and at its own expense.
Each Indemnitee shall, and shall cause each of its Affiliates, directors,
officers, employees and agents to, cooperate fully with the Indemnifying Party
in the defense of any claim or Proceeding being defended by the Indemnifying
Party pursuant to this Section 10.4. If the Indemnifying Party does not assume
the defense of any claim or Proceeding resulting therefrom in accordance with
the terms of this Section 10.4, such Indemnitee may defend against such claim or
Proceeding in such manner as it reasonably may deem appropriate, including
settling such claim or proceeding after giving reasonable notice of the same to
the Indemnifying Party, on such terms as such Indemnitee may deem appropriate.
If any Indemnifying Party seeks to question the manner in which such Indemnitee
defended such claim or Proceeding or the amount of or nature of any such
settlement, such Indemnifying Party shall have the burden to prove by a
preponderance of the evidence that such Indemnitee did not defend such claim or
Proceeding in a reasonably prudent manner.
10.5 Certain Definitions. As used in this Section 10, (a)
-------------------
"AFFILIATE" means, with respect to any person or entity, any person or entity
---------
directly or indirectly controlling, controlled by or under direct or indirect
common control with such other person or entity; (b) "DAMAGES" means all
-------
damages, costs, expenses, or amounts paid in settlement to third parties,
including (1) interest on cash disbursements in respect of any of the foregoing
at the prime rate as published in the Wall Street Journal, as in effect from
time to time, compounded quarterly, from the date each such cash disbursement is
made until the date the party incurring such cash disbursement shall have been
indemnified in respect thereof, and (2) reasonable out-of-pocket costs, fees and
expenses (including reasonable costs, fees and expenses of attorneys,
accountants and other agents of, or other parties retained by, such party), and
(c) "PROCEEDING" means any action, suit, hearing, arbitration, proceeding
----------
(public or private) or investigation that is brought or initiated by or against
any United States federal, state, local or foreign governmental authority or any
other person or entity.
11. COVENANTS OF THE PARTIES. The Company covenants and agrees with the
------------------------
Investor, that for so long as (a) any of the Notes are outstanding, or (b) the
Investor continues to hold Preferred Shares (or Notes convertible for Preferred
Shares), based upon the then applicable conversion price, equal to at least five
percent (5%) of the then issued and outstanding shares of the Company's Common
Stock (provided, however, that such percentage shall not apply to Section 11.10
-------- --------
herein), and, with respect to Sections 11.7 and 11.8, the Investor covenants and
agrees with the Company, that:
<PAGE>
-18-
11.1 Financial Statements, Reports, Etc. The Company shall furnish
-----------------------------------
to the Investor:
(a) annually no later than prior to the start of each fiscal year,
consolidated capital and operating expense budgets, cash flow projections and
income and loss projections for the Company and its subsidiaries, if any, in
respect of such fiscal year, which shall have been approved by the Board of
Directors, all itemized in reasonable detail and prepared on a quarterly basis
(and on a monthly basis through September 30, 1998), and, promptly after
preparation, any revisions to any of the foregoing;
(b) promptly following receipt by the Company, each audit response
letter, accountant's management letter and other written report submitted to the
Company by its independent public accountants in connection with an annual or
interim audit of the books of the Company and its subsidiaries;
(c) promptly after the commencement thereof, notice of all actions,
suits, claims, proceedings, investigations and inquiries of the type described
in Section 4.8 which is reasonably like to have a Material Adverse Effect;
(d) promptly upon sending, making available or filing the same, all
press releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the SEC; and
(e) promptly, from time to time, such other information regarding the
business, prospects, financial condition, operations, property or affairs of the
Company and its subsidiaries as the Investor reasonably may request.
Investor agrees to maintain all such information provided by the
Company pursuant to this Section 11.1 on a confidential basis.
11.2 Inspection, Consultation and Advice. The Company shall permit
-----------------------------------
and cause each of its subsidiaries to permit the Investor and such persons as it
may designate, at such Investor's expense, to visit and inspect any of the
properties of the Company and its subsidiaries, examine their books and take
copies and extracts therefrom, discuss the affairs, finances and accounts of the
Company and its subsidiaries with their officers, employees and public
accountants (and the Company hereby authorizes said accountants to discuss with
such Investor and such designees such affairs, finances and accounts), and
consult with and advise the management of the Company and its subsidiaries as to
their affairs, finances and accounts, all at reasonable times and upon
reasonable notice, and subject to the Investor's obligation to maintain the
confidentiality of such information.
11.3 Use of Proceeds. The Company shall use the principal amount of
---------------
the Notes for working capital purposes and certain capital expenditures as
described in the Disclosure Letter.
<PAGE>
-19-
11.4 Activities of Subsidiaries. The Company will not organize or
--------------------------
acquire any entity that is a subsidiary unless such subsidiary is wholly-owned
(directly or indirectly) by the Company. The Company shall not permit any
subsidiary to consolidate or merge into or with or sell or transfer all or
substantially all its assets, except that any subsidiary may (i) consolidate or
merge into or with or sell or transfer assets to any other subsidiary, or (ii)
merge into or sell or transfer assets to the Company. The Company shall not
sell or otherwise transfer any shares of capital stock of any subsidiary, except
to the Company or another subsidiary, or permit any subsidiary to issue, sell or
otherwise transfer any shares of its capital stock or the capital stock of any
subsidiary, except to the Company or another subsidiary. The Company shall not
permit any subsidiary to purchase or set aside any sums for the purchase of, or
pay any dividend or make any distribution on, any shares of its stock, except
for dividends or other distributions payable to the Company or another
subsidiary.
11.5 Right of First Refusal. (a) Subject to 11.5(b), the Company
----------------------
shall, prior to any proposed issuance by the Company of any of its securities
(other than debt securities with no equity feature), offer to the Investor by
written notice the right, for a period of fifteen (15) days, to purchase for
cash at an amount equal to the price or other consideration for which such
securities are to be issued, any and all such securities; provided, however,
-------- -------
that the participation rights of the Investor pursuant to this Section 11.5
shall not apply to securities issued (A) as a stock dividend or upon any
subdivision of shares of Common Stock, provided that the securities issued
pursuant to such stock dividend or subdivision are limited to additional shares
of Common Stock, (B) pursuant to any subscriptions, warrants, options,
convertible securities, or other rights which are listed in the SEC Documents or
Disclosure Letter as being outstanding or authorized on the date of this
Agreement, (C) solely in consideration for the acquisition (whether by merger or
otherwise) by the Company or any of its subsidiaries of all or substantially all
of the stock or assets of any other entity, (D) pursuant to a firm commitment
public offering, and (E) pursuant to the exercise of options to purchase Common
Stock (appropriately adjusted to reflect stock splits, stock dividends,
combinations of shares and the like with respect to the Common Stock) granted to
directors, officers, employees or consultants of the Company in connection with
their service to the Company under the Plans or any Plan to be approved in the
future or issued pursuant to subscriptions, warrants, options, convertible
securities, or other rights outstanding or authorized on the date of this
Agreement and listed on the SEC Documents or the Disclosure Letter pursuant to
clause (B) above (the shares exempted by this clause (E) being hereinafter
referred to as the "RESERVED EMPLOYEE SHARES"). The Company's written notice to
------------------------
the Investor shall describe the securities proposed to be issued by the Company
and specify the number, price and payment terms. The Investor may accept the
Company's offer as to the any or all of the securities offered to it, by written
notice thereof given by it to the Company prior to the expiration of the
aforesaid fifteen (15) day period, in which event the Company shall promptly
sell and such Investor shall buy, upon the terms specified, the number of
securities to be purchased by such Investor. The Company shall be free at any
time prior to one hundred twenty (120) days after the date of its notice of
offer to the Investor, to offer and sell to any third party or parties the
remainder of such securities proposed to be issued by the Company (including but
not limited to the securities not agreed by the Investor to be purchased by it),
at a price and on payment terms no less favorable to the Company than those
specified in such notice of offer to the Investor. However, if such third party
sale or sales are not consummated within such one hundred twenty (120) day
period,
<PAGE>
-20-
the Company shall not sell such securities as shall not have been purchased
within such period without again complying with this Section 11.5.
(b) Notwithstanding the foregoing, the Investor's right set forth in
11.5(a) herein shall not apply to (i) any issuance by the Company of any of its
securities pursuant to a registration statement filed with the SEC on or after
August 31, 1998 and (ii) any issuance by the Company of its securities after
September 30, 1998, provided, however, if Investor has elected to convert the
--------- -------
principal and/or interest outstanding under any of the Notes and Investor
continues to hold Preferred Shares, based on the then applicable conversion
price, equal to at least five percent (5%) of the then issued and outstanding
shares of Common Stock, Investor shall maintain its rights under Section 11.5(a)
to participate on a pro-rata basis with respect to any such issuance of
securities by the Company after September 30, 1998.
11.6 No Solicitation. Except to the extent the Board of Directors of
---------------
the Company, after having consulted with and considered the advice of outside
counsel, determines in good faith that the failure to take such actions would
constitute a breach of fiduciary duties of the members of such Board of
Directors to its stockholders under applicable law, the Company will not
directly or indirectly at any time prior to September 30, 1998 (or authorize its
agents, investment bankers, officers, directors, employees, affiliates or
representatives of any of their respective family members to) solicit,
entertain, negotiate or discuss with any person or entity (other than Investor)
the sale or licensing of the Company's products (other than transactions
consistent with the Company's ordinary course of business) or the sale or
transfer of the Company or the Company's business, whether by asset sale, stock
sale, merger or otherwise or enter into any agreement or understanding with
respect thereto (and except with respect to any transaction permitted under
Section 11.5(b)(i)). If the Company (or any of its agents, investment bankers,
officers, directors, employees, affiliates or representatives or any of their
respective family members) shall receive any bona fide offer or proposal
concerning the above, the Company shall promptly deliver notice thereof to
Investor.
11.7 Public Announcements; Disclosure. Investor and the Company
--------------------------------
shall consult with each other before issuing any press release or otherwise
making any public statements (including, without limitation, any statement
contained in, or any filing of a Transaction Document as an exhibit to, any
filing with the SEC) with respect to the transactions contemplated hereby and
shall not issue any such press release or make any such public statement without
the prior written consent of both parties, except as may be required by law. In
the event any such public statement is required by law, each party shall make a
good faith effort to consult with the other party, and in any event shall notify
the other party in advance, prior to making such public statement. The Investor
shall designate a representative to respond to inquiries from the media and
press concerning the transactions contemplated by the Transaction Documents
which representative shall be subject to the terms of this Section 11.7.
11.8 Certificate of Designation; Investor Rights Agreement. At such
--------------------------- -------------------------
time as Investor determines that it expects to convert a Note or exercise the
Warrant, the Investor may request in writing that the Company file a Certificate
of Designation pursuant to its corporate charter setting forth the terms of the
Series A Convertible Preferred Stock, and the Company
<PAGE>
-21-
shall promptly file such Certificate of Designation with the Secretary of State
of Delaware. At such time as the Investor first converts a Note or exercises the
Warrant, the Company and the Investor shall enter into the Investor Rights
Agreement substantially in the form attached to this Agreement as EXHIBIT D.
---------
11.9 Board Observer Rights.
---------------------
(a) During the period from the date hereof until the Investor holds
Preferred Shares, based upon the then applicable conversion price, equal to at
least five percent (5%) of the then issued and outstanding shares of the
Company's Common Stock, based on the then applicable conversion price of such
securities, Investor shall be entitled to appoint a non-voting observer (the
"OBSERVER") to the Company's Board of Directors who is acceptable to the
- ---------
Company; and such Observer shall be entitled to attend all meetings of the
Company's Board of Directors and committees thereof (other than the audit,
nomination, governance, and compensation committees) and shall receive notice of
all meetings and all materials furnished to members of the Company's Board of
Directors in their capacities as such at the same time and in the same manner as
such notice and materials are provided to the Board of Directors, unless the
Board of Directors of the Company shall in good faith determine, after having
consulted with and considered the advice of outside counsel, that delivery of
such notice and/or materials to Investor would constitute a breach of fiduciary
duties of the members of such Board of Directors to its stockholders under
applicable law. Upon the request of the Board of Directors of the Company, the
Observer will excuse himself or herself from any portion of the Board or
committee meetings if the Board of Directors shall reasonably determine that the
Observer's presence may violate the attorney-client privilege, create a conflict
of interest or otherwise constitute a breach of fiduciary duties of the members
of such Board of Directors to its stockholders under applicable law. The
materials furnished to Investor and the discussions and presentations in
connection with or at such meetings shall be considered confidential information
and Investor shall not disclose such materials and discussions to any third
party; provided, however, that the foregoing shall not limit in any manner the
-------- -------
rights of Investor under the Technology Agreements.
(b) The Investor acknowledges that the use or disclosure of any information
which is material and non-public ("INSIDE INFORMATION"), or trading in the
------------------
securities of the Company on the basis of such Inside Information, may result in
civil and criminal penalties and enforcement proceedings commenced by the SEC
and others in the event the Investor, its affiliates or any of its employees
engages in transactions involving the capital stock of the Company. Because of
receipt of the confidential information provided to the Investor and its
Nominee, the Investor and its Nominee may be deemed to have Inside Information
regarding the Company.
(c) The Company acknowledges that the Observer will likely have, from time
to time, information that may be of interest to the Company ("INFORMATION")
-----------
regarding a wide variety of matters including, by way of example only, (a)
Investor's technologies, plans and services, and plans and strategies relating
thereto, (b) current and future investments Investor has made, may make, may
consider or may become aware of with respect to other companies and other
technologies, products and services, including, without limitation,
<PAGE>
-22-
technologies, products and services that may be competitive with the Company's,
and (c) developments with respect to the technologies, products and services,
and plans and strategies relating thereto, of other companies, including,
without limitation, companies that may be competitive with the Company. The
Company recognizes that a portion of such Information may be of interest to the
Company. Such Information may or may not be known by the Observer. The
Company, as a material part of the consideration for this Agreement, agrees that
Investor and its Observer shall have no duty to disclose any Information to the
Company or permit the Company to participate in any projects or investments
based on any Information, or to otherwise take advantage of any opportunity that
may be of interest to the Company if it were aware of such Information, and
hereby waives, to the extent permitted by law, any claim based on the corporate
opportunity doctrine or otherwise that could limit Investor's ability to pursue
opportunities based on such Information or that would require Investor or
Observer to disclose any such Information to the Company or offer any
opportunity relating thereto to the Company.
11.10 Termination of Purchase Agreement. The Company and the Investor
---------------------------------
hereby expressly agree that the terms of the Purchase Agreement shall terminate
as of the date hereof and have no further force and effect.
11.11 VESTING OF RESERVED EMPLOYEE SHARES. Except as disclosed in
-----------------------------------
the Plans, the Disclosure Letter delivered pursuant to the Purchase Agreement or
as otherwise approved by the Board of Directors, the Company shall not grant to
any of its employees options to purchase Reserved Employee Shares which will
become exercisable at a rate in excess of 25% per annum from the date of such
grant, nor will the Company accelerate the vesting of any outstanding options
without prior consultation with the Investor.
12. MISCELLANEOUS.
-------------
12.1 Successors and Assigns. The terms and conditions of this
----------------------
Agreement will inure to the benefit of and be binding upon the respective
successors and permitted assigns of the parties. Neither party may assign this
Agreement or any rights hereunder without the consent of the other party, except
that Investor may assign its rights hereunder to a wholly-owned subsidiary.
12.2 Governing Law. This Agreement will be governed by and construed
-------------
under the internal laws of the State of Delaware as applied to agreements among
Delaware residents entered into and to be performed entirely within Delaware,
without reference to principles of conflict of laws or choice of laws.
12.3 Counterparts. This Agreement may be executed in counterparts,
------------
each of which will be deemed an original, but all of which together will
constitute one and the same instrument.
<PAGE>
-23-
12.4 Headings. The headings and captions used in this Agreement are
--------
used for convenience only and are not to be considered in construing or
interpreting this Agreement. All references in this Agreement to sections,
paragraphs, exhibits and schedules will, unless otherwise provided, refer to
sections and paragraphs hereof and exhibits and schedules attached hereto, all
of which exhibits and schedules are incorporated herein by this reference.
12.5 Notices. Any notice required or permitted under this Agreement
-------
will be given in writing, shall be effective when received, and shall in any
event be deemed received and effectively given upon personal delivery to the
party to be notified one (1) business day after deposit with a nationally
recognized courier service such as Federal Express for next business day
delivery, or one (1) business day after being sent by facsimile with copy
delivered by a nationally recognized courier service such as Federal Express for
next business day delivery, addressed to the party to be notified at the
address indicated for such party on the signature page hereof or at such other
address as the Investor or the Company may designate by giving at least ten (10)
days advance written notice pursuant to this Section 12.5.
12.6 Financial Advisor; No Finder's Fees. The Company has retained
------------------ ----------------
Advest, Inc. ("ADVEST") as its exclusive financial advisor in connection with
------
the transactions contemplated by this Agreement. Other than any fee or
commission payable to Advest (which payment shall be the obligation of the
Company), each party represents that it neither is nor will be obligated for any
finder's or broker's fee or commission in connection with this transaction. The
Investor will indemnify and hold harmless the Company from any liability for any
commission or compensation in the nature of a finders' or broker's fee for which
the Investor or any of its officers, partners, employees or consultants, or
representatives is responsible. The Company will indemnify and hold harmless
the Investor from any liability for any commission or compensation in the nature
of a finder's or broker's fee for which the Company or any of its officers,
employees or consultants or representatives is responsible, including any fee or
compensation payable to Advest.
12.7 Amendments and Waivers. This Agreement may be amended and the
----------------------
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Investor. Any amendment or waiver
effected in accordance with this Section 12.7 will be binding upon the Investor,
the Company and their respective successors and assigns.
12.8 Severability. If any provision of this Agreement is held to be
------------
unenforceable under applicable law, such provision will be excluded from this
Agreement and the balance of the Agreement will be interpreted as if such
provision were so excluded and will be enforceable in accordance with its terms.
12.9 Entire Agreement. This Agreement, together with all Exhibits
----------------
and schedules hereto, constitutes 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.
<PAGE>
-24-
12.10 Further Assurances. From and after the date of this Agreement
------------------
upon the request of the Investor or the Company, the Company and the Investor
will 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.
12.11 Meaning of Include and Including. Whenever in this Agreement
--------------------------------
the word "include" or "including" is used, it shall be deemed to mean "include,
without limitation" or "including, without limitation," as the case may be, and
the language following "include" or "including" shall not be deemed to set forth
an exhaustive list.
12.12 Fees, Costs and Expenses. All fees, costs and expenses
------------------------
(including attorneys' fees and expenses) incurred by either party hereto in
connection with the preparation, negotiation and execution of the Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby, shall be the sole and exclusive responsibility of such party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-25-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
<TABLE>
<CAPTION>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION SILICON GRAPHICS, INC.
<S> <C>
By: /s/ Andrew Najda By:
------------------------------------ -----------------------------------
Name:/s/ ANDREW NAJDA Name:
---------------------------------- ---------------------------------
Title: Chairman of the Board & CEO Title:
--------------------------------- --------------------------------
Address: 18 Hartwell Avenue Address: 2011 N. Shoreline Blvd.
Lexington, Massachusetts 02173 Mountain View, California 94043-1389
Attention: Chief Executive Officer Attention: Director of Corporate Legal Services
Telephone No.: (781) 674-0009 Telephone No.: (650) 933-3009
Facsimile No.: (781) 869-7220 Facsimile No.: (650) 933-0652
</TABLE>
WITH COPIES TO:
William B. Asher, Jr., Esq.
Testa, Hurwitz & Thibeault, LLP
125 High Street; High Street Tower
Boston, Massachusetts 02110
Facsimile No.: (617) 248-7100
Neil H. Aronson, Esq.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Facsimile No.: (617) 542-2241
<PAGE>
-26-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
<TABLE>
<CAPTION>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION SILICON GRAPHICS, INC.
<S> <C>
By: By: /s/ DAVID ORTON
------------------------------------ ------------------------------------
Name: Name: David Orton
---------------------------------- ----------------------------------
Title: Title: Sr. Vice President
--------------------------------- --------------------------------
Address: 18 Hartwell Avenue Address: 2011 N. Shoreline Blvd.
Lexington, Massachusetts 02173 Mountain View, California 94043-1389
Attention: Chief Executive Officer Attention: Director of Corporate Legal Services
Telephone No.: (781) 674-0009 Telephone No.: (650) 933-3009
Facsimile No.: (781) 869-7220 Facsimile No.: (650) 933-0652
</TABLE>
WITH COPIES TO:
William B. Asher, Jr., Esq.
Testa, Hurwitz & Thibeault, LLP
125 High Street; High Street Tower
Boston, Massachusetts 02110
Facsimile No.: (617) 248-7100
Neil H. Aronson, Esq.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Facsimile No.: (617) 542-2241
<PAGE>
-27-
CONVERTIBLE NOTE PURCHASE AGREEMENT
LIST OF EXHIBITS
----------------
Exhibit A - Form of Secured Subordinated Convertible Promissory Note
Exhibit B - Form of Series A Convertible Preferred Stock Purchase Warrant
Exhibit C - Form of Security Agreement
Exhibit D - Form of Series A Convertible Preferred Stock Terms
Exhibit E - Form of Investor Rights Agreement
Exhibit F - Form of Technology Agreements
<PAGE>
Exhibit 10.2
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR
AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NUMBER NINE VISUAL TECHNOLOGY
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
SECURED SUBORDINATED CONVERTIBLE PROMISSORY NOTE
$3,000,000 May 7, 1998
FOR VALUE RECEIVED, Number Nine Visual Technology Corporation, a Delaware
corporation (the "Company"), hereby promises to pay to the order of Silicon
-------
Graphics, Inc., a Delaware corporation, (the "Investor"), no later than 180 days
--------
following demand made by the Investor at any time on or after September 30, 1998
(the "Maturity Date"), the principal amount of Three Million Dollars
-------------
($3,000,000) plus interest in arrears from and including the date hereof on the
principal balance from time to time outstanding, computed daily, at a rate per
annum equal to two percent (2%) above the rate of interest publicly announced
from time to time by Bank of America as its prime rate (the "Prime Rate"), which
----------
rate shall change as and when the Prime Rate changes. Any principal or interest
remaining unpaid following the date on which payment is due hereunder shall bear
interest at the rate equal to the lesser of: (a) four percent (4%) above the
Prime Rate and (b) the maximum rate permitted by law. This Note may not be
---
prepaid in whole or in part at any time prior to the Maturity Date. The Company
shall provide the Investor at least ten (10) days prior written notice of its
intent to pay the Note in whole or in part on the Maturity Date or at any time
thereafter following Investor's demand. Interest shall be calculated on the
basis of actual number of days elapsed over a year of 360 days. Notwithstanding
any other provision of this Note, the holder hereof does not intend to charge
and the Company shall not be required to pay any interest or other fees or
charges in excess of the maximum permitted by applicable law; any payments in
excess of such maximum shall be refunded to the Company or credited to reduce
principal hereunder. All payments received by the holder hereunder will be
applied first to costs of collection, if any, then to interest and the balance
to principal.
Payments of principal and interest will be made by check or by wire
transfer of funds, in immediately available United States funds, sent to the
holder at the address furnished to the Company for that purpose. Principal and
interest hereunder shall be payable in a single payment on demand made pursuant
to the preceding paragraph.
This Note is one of a series of Secured Subordinated Convertible Promissory
Notes of like tenor, issued or issuable by the Company pursuant to and entitled
to the benefits of a certain
<PAGE>
-2-
Securities Purchase Agreement, of even date herewith by and between the Company
and the Investor ("Purchase Agreement"), and each holder of this Note, by his,
------------------
her or its acceptance hereof, agrees to be bound by the provisions of the
Purchase Agreement. This Note will be registered on the books of the Company or
its agent as to principal and interest. Any transfer of this Note will be
effected only by surrender of this Note to the Company and reissuance of a new
note to the transferee.
1. Subordination. The Investor's rights to payment of principal and
-------------
interest hereunder shall be subject to the rights of the holders of Senior Debt
pursuant to the Intercreditor Agreement with Marine Midland Bank dated May 7,
1998.
2. Events of Default. The outstanding principal and accrued interest on
-----------------
this Note shall, at the option of the holder hereof, become immediately due and
payable without notice or demand, upon the happening of any one of the following
specified events:
(a) failure to pay any amount as herein set forth;
(b) default in the performance by the Company of any other obligation to
the holder under this Note, which default is not cured within thirty (30)
days after written notice of such default from the holder;
(c) default in the performance by the Company of any obligation to the
Investor pursuant to the Securities Purchase Agreement or the Security
Agreement which default is not cured within the applicable cure period, if
any, specified therein;
(d) the making of a general assignment for the benefit of creditors;
(e) the filing of any petition or the commencement of any proceeding by the
Company or any endorser or guarantor of this Note for any relief under any
bankruptcy or insolvency laws, or any laws relating to the relief of debtors,
readjustment of indebtedness, reorganizations, compositions, or extensions;
(f) the filing of any petition or the commencement of any proceeding
against the Company or any endorser or guarantor of this Note for any relief
under any bankruptcy or insolvency laws, or any laws relating to the relief
of debtors, readjustment of indebtedness, reorganizations, compositions, or
extensions, which proceeding is not dismissed within sixty (60) days;
(g) permanent suspension of the transaction of the usual business of the
Company; or
(h) the past or future making of a false representation or warranty by the
Company in connection with the Securities Purchase Agreement or the Security
Agreement.
3. Security. This Note is secured by certain assets of the Company
--------
pursuant to the terms of a Security Agreement dated as of May 7, 1998 by and
among the Company and the Investor.
<PAGE>
-3-
4. Conversion.
----------
(a) The principal outstanding under this Note and accrued interest thereon
shall be convertible, in whole or in part, whether or not the holder of this
Note has demanded payment therefore, at the option of the holder upon written
notice to the Company delivered at any time (such date of conversion referred to
herein as the Conversion Date), into shares of Series A Convertible Preferred
Stock, $.01 par value, of the Company ("Series A Preferred Stock"), at a
------------------------
conversion price per share as determined in accordance with Section 4(c) herein.
(b) The Company covenants and agrees that so long as (i) this Note is
outstanding and (ii) the holder of this Note is entitled to convert this Note
into Series A Preferred Stock, the Company will reserve a number of shares of
Series A Preferred Stock and Common Stock, $.01 par value, of the Company
("Common Stock") issuable upon conversion of the Series A Preferred Stock
- --------------
sufficient to enable the holder hereof to exercise the conversion rights
contained herein with respect to an amount equal to the amount of principal and
interest from time to time due hereupon.
(c) The conversion price per share of Series A Preferred Stock shall be
$2.75 (as such price may be adjusted for stock splits, stock dividends and the
like).
(d) If the holder of this Note elects to convert this Note in part, as
provided herein, the holder shall be entitled to a new note, which note shall be
dated as of the date of this Note and shall cover the remaining principal
balance outstanding hereunder which had not been converted into shares of Series
A Preferred Stock.
5. Expenses of Collection. The Company agrees to pay the holder's
----------------------
reasonable costs in collecting and enforcing this Note, including reasonable
attorney's fees.
6. Waiver by Holder. No waiver of any obligation of the Company under
----------------
this Note shall be effective unless it is in a writing signed by the holder. A
waiver by the holder of any right or remedy under this Note on any occasion
shall not be a bar to exercise of the same right or remedy on any subsequent
occasion or of any other right or remedy at any time.
7. Notice. Any notice required or permitted under this Note shall be in
------
writing and shall be deemed to have been given on the date of delivery, if
personally delivered to the party to whom notice is to be given, or on the fifth
business day after mailing, if mailed to the party to whom notice is to be
given, by certified mail, return receipt requested, postage prepaid, and
addressed as follows:
if to the Company, at
Number Nine Visual Technology Corporation
18 Hartwell Avenue
Lexington, Massachusetts 02173; and
<PAGE>
-4-
if to the holder, at the most recent address provided to the Company by the
holder for such purpose; or, in each case, to the most recent address, specified
by written notice, given to the sender pursuant to this paragraph.
8. Waiver by Company. The Company hereby expressly waives presentment,
-----------------
demand, and protest, notice of demand, dishonor and nonpayment of this Note, and
all other notices or demands of any kind in connection with the delivery,
acceptance, performance, default or enforcement hereof, and hereby consents to
any delays, extensions of time, renewals, waivers or modifications that may be
granted or consented to by the holder hereof with respect to the time of payment
or any other provision hereof or of the Security Agreement.
9. Severability. In the event any one or more of the provisions of this
------------
Note shall for any reason be held to be invalid, illegal or unenforceable, in
whole or in part or in any respect, or in the event that any one or more of the
provisions of this Note operate or would prospectively operate to invalidate
this Note, then and in any such event, such provision(s) only shall be deemed
null and void and shall not affect any other provision of this Note and the
remaining provisions of this Note shall remain operative and in full force and
effect and in no way shall be affected, prejudiced, or disturbed thereby.
10. Governing Law. This Note shall be governed by and construed and enforced
-------------
in accordance with the laws of the Commonwealth of Massachusetts.
NUMBER NINE VISUAL TECHNOLOGY
CORPORATION
[Corporate Seal] By: /s/ Andrew Najda
--------------------------------
Name: ANDREW NAJDA
------------------------------
Title: CHAIRMAN OF THE BOARD & CEO
-----------------------------
Attested:
By:
------------------------
Name:
----------------------
Title:
---------------------
<PAGE>
Exhibit 10.3
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS IS AVAILABLE WITH
RESPECT THERETO.
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE WARRANT
Warrant No. 1
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
-----------------------------------------
Void after Expiration Date (defined herein)
1. Issuance. This Warrant is issued to Silicon Graphics, Inc. ("SGI"), a
-------- ---
Delaware corporation, by Number Nine Visual Technology Corporation, a Delaware
corporation (hereinafter with its successors called the "Company").
-------
2. Purchase Price; Number of Shares.
--------------------------------
(a) Subject to the terms and conditions hereinafter set forth, the
registered holder of this Warrant (the "Holder"), commencing on the Exercise
------
Date (as defined herein), is entitled upon surrender of this Warrant with the
subscription form annexed hereto duly executed, at the office of the Company, 18
Hartwell Avenue, Lexington, Massachusetts 02173, or such other office as the
Company shall notify the Holder of in writing, to purchase from the Company at a
price per share (the "Purchase Price") of $2.75, the Warrant Shares (as defined
--------------
herein). Until such time as this Warrant is exercised in full or expires, the
Purchase Price and the Warrant Shares issuable upon exercise of this Warrant are
subject to adjustment as hereinafter provided.
(b) For purposes hereof, "Warrant Shares" shall be that number of fully
paid and nonassessable shares of Series A Convertible Preferred Stock, $.01 par
value, of the Company (the "Series A Preferred Stock") as are convertible into
------------------------
shares of the Company's Common Stock, $.01 par value per share (the "Common
------
Stock") equal to three percent (3%) of the Company's issued and outstanding
- -----
Common Stock, calculated on a fully diluted basis (excluding the Series A
Preferred Stock and any warrants or options that are not "in-the-money") as of
the Exercise Date.
<PAGE>
-2-
(c) For purposes hereof, "Exercise Date" shall mean the date upon which
the Company pays any outstanding principal and interest due under any of the
secured subordinated convertible promissory notes (the "Notes") issued pursuant
-----
to a Securities Purchase Agreement dated May 7, 1998 by and between the Company
and the Investor; provided, however, that if the Holder converts any portion of
-------- -------
the Notes into equity, the Warrant shall not be exercisable.
3. Payment of Purchase Price. The Purchase Price may be paid (i) in cash or
-------------------------
by check, (ii) by the surrender by the Holder to the Company of any promissory
notes or other obligations issued by the Company, with all such notes and
obligations so surrendered being credited against the Purchase Price in an
amount equal to the principal amount thereof plus accrued interest to the date
of surrender, (iii) by any combination of the foregoing.
4. Partial Exercise. This Warrant may be exercised in part, and the Holder
----------------
shall be entitled to receive a new warrant, which shall be dated as of the date
of this Warrant, covering the number of shares in respect of which this Warrant
shall not have been exercised.
5. Issuance Date. The person or persons in whose name or names any
-------------
certificate representing shares of Series A Preferred Stock is issued hereunder
shall be deemed to have become the holder of record of the shares represented
thereby as at the close of business on the date this Warrant is exercised with
respect to such shares, whether or not the transfer books of the Company shall
be closed.
6. Exercise; Expiration Date. This Warrant shall expire at the close of
-------------------------
business on the third (3rd) anniversary of the Exercise Date, and shall be void
thereafter.
7. Reserved Shares; Valid Issuance. The Company covenants that it will at
-------------------------------
all times from and after the date hereof reserve and keep available such number
of its authorized shares of Series A Preferred Stock and Common Stock free from
all preemptive or similar rights therein, as will be sufficient to permit the
exercise of this Warrant in full and the conversion into shares of Common Stock
of all shares of Series A Preferred Stock received upon such exercise. The
Company further covenants that such shares as may be issued pursuant to the
exercise of this Warrant and conversion of the shares of Series A Preferred
Stock acquired thereby, will, upon issuance, be duly and validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.
8. Dividends. If after May 7, 1998 (the "Authorization Date") the Company
--------- ------------------
shall subdivide the Series A Preferred Stock, by split-up or otherwise, or
combine the Series A Preferred Stock, or issue additional shares of Series A
Preferred Stock in payment of a stock dividend on the Series A Preferred Stock,
the number of shares issuable on the exercise of this Warrant shall forthwith be
proportionately increased in the case of a subdivision or stock dividend, or
proportionately decreased in the case of a combination, and the Purchase Price
shall forthwith be proportionately decreased in the case of a subdivision or
stock dividend, or proportionately increased in the case of a combination.
<PAGE>
-3-
9. Mergers and Reclassifications. If after the Authorization Date there
-----------------------------
shall be any reclassification, capital reorganization or change of the Series A
Preferred Stock (other than as a result of a subdivision, combination or stock
dividend provided for in Section 9 hereof), or any consolidation of the Company
with, or merger of the Company into, another corporation or other business
organization (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification or
change of the outstanding Series A Preferred Stock), or any sale or conveyance
to another corporation or other business organization of all or substantially
all of the assets of the Company, then, as a condition of such reclassification,
reorganization, change, consolidation, merger, sale or conveyance, lawful
provisions shall be made, and duly executed documents evidencing the same from
the Company or its successor shall be delivered to the Holder, so that the
Holder shall thereafter have the right to purchase, at a total price not to
exceed that payable upon the exercise of this Warrant in full, the kind and
amount of shares of stock and other securities and property receivable upon such
reclassification, reorganization, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Series A Preferred Stock which
might have been purchased by the Holder immediately prior to such
reclassification, reorganization, change, consolidation, merger, sale or
conveyance (or, if there are no holders of Series A Preferred Stock at such
time, by a holder of the number of shares of Common Stock which might have been
acquired by the Holder immediately prior to such reclassification,
reorganization, change, consolidation, merger, sale or conveyance upon the
exercise of this Warrant in full and the conversion into shares of Common Stock
of all shares of Series A Preferred Stock receivable upon such exercise), and in
any such case appropriate provisions shall be made with respect to the rights
and interest of the Holder to the end that the provisions hereof (including
without limitation, provisions for the adjustment of the Purchase Price and the
number of shares issuable hereunder) shall thereafter be applicable in relation
to any shares of stock or other securities and property thereafter deliverable
upon exercise hereof.
10. Fractional Shares. In no event shall any fractional share of Series A
-----------------
Preferred Stock be issued upon any exercise of this Warrant. If, upon exercise
of this Warrant as an entirety, the Holder would, except as provided in this
Section 12, be entitled to receive a fractional share of Series A Preferred
Stock, then the Company shall issue the next higher number of full shares of
Series A Preferred Stock, issuing a full share with respect to such fractional
share.
11. Certificate of Adjustment. Whenever the Purchase Price is adjusted, as
-------------------------
herein provided, the Company shall promptly deliver to the Holder a certificate
of a firm of independent public accountants setting forth the Purchase Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment.
12. Notices of Record Date, Etc. In the event of:
---------------------------
(a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right,
<PAGE>
-4-
(b) any reclassification of the capital stock of the Company, capital
reorganization of the Company, consolidation or merger involving the Company,
or sale or conveyance of all or substantially all of its assets, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right, or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any is to be fixed, as of which the holders of record in respect of
such event are to be determined. Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.
13. Amendment. The terms of this Warrant may be amended, modified or waived
---------
only with the written consent of the Company and the holder of this Warrant;
provided, however, if the holder of this Warrant transfers this Warrant with
- -------- -------
respect to any of the shares purchasable hereunder, this Warrant may be amended,
modified or waived only with the written consent of the Company and the holders
of the Warrants representing at least two-thirds of the number of shares of
Series A Preferred Stock then issuable upon the exercise of such Warrants. No
such amendment, modification or waiver shall be effective as to this Warrant
unless the terms of such amendment, modification or waiver shall apply with the
same force and effect to all of the other Warrants then outstanding.
14. Warrant Register; Transfers, Etc.
---------------------------------
A. The Company will maintain a register containing the name and address
of the registered holder of the Warrant, and if the holder of the Warrant
transfers this Warrant with respect to any of the shares purchasable
hereunder, the names and addresses of the holders of such Warrants. The
Holder may change its address as shown on the warrant register by written
notice to the Company requesting such change. Any notice or written
communication required or permitted to be given to the Holder may be given by
certified mail or delivered to the Holder at its address as shown on the
warrant register.
B. Subject to compliance with applicable federal and state securities
laws, as well as Section 17 hereof, this Warrant may be transferred by the
Holder with respect to any or all of the shares purchasable hereunder. Upon
surrender of this Warrant to the Company, together with the assignment hereof
properly endorsed, for transfer of this Warrant as an entirety by the Holder,
the Company shall issue a new warrant of the same denomination to the
assignee. Upon surrender of this Warrant to the Company, together with the
assignment hereof properly endorsed, by the Holder for transfer with respect
to a portion of the shares of Series A Preferred Stock purchasable hereunder,
the Company shall issue a new warrant to the assignee, in such denomination
as shall be requested by the Holder hereof, and shall
<PAGE>
-5-
issue to such Holder a new warrant covering the number of shares in respect
of which this Warrant shall not have been transferred.
C. In case this Warrant shall be mutilated, lost, stolen or destroyed,
the Company shall issue a new warrant of like tenor and denomination and
deliver the same (i) in exchange and substitution for and upon surrender and
cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost,
stolen or destroyed, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft or destruction of such Warrant (including a
reasonably detailed affidavit with respect to the circumstances of any loss,
theft or destruction) and of indemnity reasonably satisfactory to the
Company; provided, however, that so long as Silicon Graphics Computer Systems
-------- -------
is the registered holder of this Warrant, no indemnity shall be required
other than its written agreement to indemnify the Company against any loss
arising from the issuance of such new warrant.
15. No Impairment. The Company will not, by amendment of its Certificate of
-------------
Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this 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 Holder.
16. Governing Law. The provisions and terms of this Warrant shall be
-------------
governed by and construed in accordance with the internal laws of the State of
Delaware.
17. Successors and Assigns. This Warrant shall be binding upon the Company's
----------------------
successors and assigns and shall inure to the benefit of the Holder's
successors, legal representatives and permitted assigns. Notwithstanding the
foregoing, the holder of this Warrant may not transfer the Warrant without the
prior written consent of the Company which consent shall not be unreasonably
withheld, provided, however, no consent of the Company shall be required for
-------- -------
transfer of the Warrant to a wholly-owned subsidiary or a financial institution.
18. Business Days. If the last or appointed day for the taking of any action
-------------
required or the expiration of any right granted herein shall be a Saturday or
Sunday or a legal holiday in California, then such action may be taken or right
may be exercised on the next succeeding day which is not a Saturday or Sunday or
such a legal holiday.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
-6-
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
Dated: 5/7/98 , 1998 By: /s/ Andrew Najda
--------------- ----------------------------------------
Name: ANDREW NAJDA
--------------------------------------
Title: Chairman of the Board and CEO
-------------------------------------
(Corporate Seal)
Attest:
- ----------------------------
<PAGE>
-7-
SUBSCRIPTION
To: NUMBER NINE VISUAL Date: _________________________
TECHNOLOGY CORPORATION
18 Hartwell Avenue
Lexington, Massachusetts 02173
The undersigned hereby subscribes for __________ shares of Series A Preferred
Stock covered by this Warrant. The certificate(s) for such shares shall be
issued in the name of the undersigned or as otherwise indicated below:
SILICON GRAPHICS, INC.
By:_____________________________
Print Name:_____________________
Title:__________________________
Name for
Registration:___________________
Mailing Address:________________
________________________________
<PAGE>
-8-
ASSIGNMENT
For value received ____________________________ hereby sells, assigns and
transfers unto_____________________________________________________(please
print or typewrite name and address of Assignee) the within Warrant, and does
hereby irrevocably constitute and appoint _______________________ its attorney
to transfer the within Warrant on the books of the within named Company with
full power of substitution on the premises.
Dated:_______________________
SILICON GRAPHICS, INC.
By:______________________________
Print Name:______________________
Title:___________________________
In the Presence of:
_____________________________
Witness Signature
