<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C., 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1999
------------
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
-------
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2821358
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 HARTWELL AVENUE, LEXINGTON, MA 02421-3141
--------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 674-0009
--------------
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 August 10,
1999 was 10,291,633.
<PAGE>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information:
- -------------------------------
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of July 3, 1999 and
January 2, 1999 1
Condensed Consolidated Statements of Operations for the three
and six months ended July 3, 1999 and June 27, 1998 2
Condensed Consolidated Statements of Cash Flows for the six months ended
July 3, 1999 and June 27, 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk
Part II - Other Information:
- ----------------------------
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities and Use of Proceeds 20
Item 3 - Defaults Upon Senior Securities 21
Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 5 - Other Information 21
Item 6 - Exhibits and Reports on Form 8-K 22
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURE(S) 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION:
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JULY 3, 1999 JANUARY 2, 1999
------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents, inclusive of restricted cash of $0 and
$117 at July 3, 1999 and January 2, 1999 respectively $ 74 $ 413
Accounts receivable, trade, net of allowances for doubtful
accounts of $102 and $122, at July 3, 1999 and January 2, 1999 2,379 2,542
Inventories, net 1,561 1,052
Prepaid expenses 1,077 711
-------- --------
Total current assets 5,091 4,718
Property and equipment, net 2,019 2,581
Deferred financing costs 410 --
Other assets 39 41
-------- --------
Total assets $ 7,559 $ 7,340
======== ========
Current Liabilities:
Revolving line of credit $ 1,267 $ 1,301
Note payable to manufacturing contractor 490 476
Accounts payable 2,522 2,684
Related-party accounts payable 1,434 1,218
Accrued expenses and other current liabilities 649 594
Deferred revenue -- 40
-------- --------
Total current liabilities 6,362 6,313
Deferred revenue 168 --
Commitments and contingencies -- --
Preferred Stock $.01 par value; Series B Redeemable Convertible
Preferred Stock, 300 shares issued and outstanding at July 3,
1999, no shares issued and outstanding at January 2, 1999
(liquidation value of $3 million) 2,652 --
Stockholders' (deficit) Equity:
Preferred Stock $.01 par value; 5,000,000 shares authorized;
Series A Convertible Preferred Stock, 2,500,894 shares issued and
outstanding at July 3, 1999, 3,350,894 shares issued and
outstanding at January 2, 1999 (at liquidation preference)
Common Stock, $.01 par value; 20,000,000 shares authorized; 6,877 9,215
10,281,633 shares issued and outstanding at July 3, 1999;
9,394,385 shares issued and outstanding at January 2, 1999 103 94
Additional paid-in capital, net of costs 39,498 35,936
Accumulated deficit (48,101) (44,218)
-------- --------
Total stockholders' (deficit) equity (1,623) 1,027
-------- --------
Total liabilities and stockholders' (deficit) equity $ 7,559 $ 7,340
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
-1-
<PAGE>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 3, 1999 JUNE 27, 1998 JULY 3, 1999 JUNE 27, 1998
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Net product sales $ 1,668 $ 3,785 $ 4,881 $ 11,926
Net product royalty sales 267 -- 804 --
-------- -------- -------- --------
Total revenue 1,935 3,785 5,685 11,926
Cost of sales 1,179 4,800 2,682 12,109
-------- -------- -------- --------
Gross margin 756 (1,015) 3,003 (183)
Operating expenses:
Selling, general, and administrative 1,331 2,220 3,083 4,374
Research and development 1,441 1,304 2,843 2,943
-------- -------- -------- --------
Total operating expenses 2,772 3,524 5,926 7,317
Loss from operations (2,016) (4,539) (2,923) (7,500)
Other income (expense):
Interest expense (75) (183) (113) (292)
Other income, net 7 225 12 263
-------- -------- -------- --------
Loss before income taxes (2,085) (4,497) (3,024) (7,529)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (2,085) $ (4,497) $ (3,024) $ (7,529)
Accretion of beneficial conversion feature (829) -- (829) --
Series B Convertible Preferred
stock dividend (30) -- (30) --
-------- -------- -------- --------
Net loss available to common shareholders $ (2,944) $ (4,497) $ (3,883) $ (7,529)
======== ======== ======== ========
Net loss per common share,
basic-diluted $ (0.30) $ (0.48) $ (0.40) $ (0.81)
======== ======== ======== ========
Weighted average common shares
outstanding, basic-diluted 9,854 9,317 9,630 9,258
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-2-
<PAGE>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 3, 1999 JUNE 27, 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,024) $(7,529)
Adjustments to reconcile net loss to net cash
Provided by (used for) operating activities:
Depreciation and amortization 589 735
Provision for bad debts 26 272
Amortization of deferred financing costs 41 --
Change in operating assets and liabilities:
Accounts receivable 136 5,745
Receivable due from manufacturing contractor -- 1,678
Inventories (509) 1,655
Prepaids and other assets (363) (381)
Accounts payable (162) (4,527)
Related-party accounts payable 216 --
Deferred revenue 127 --
Note payable to manufacturing contractor 14 --
Accrued expenses and other current liabilities 55 (541)
------- -------
Net cash used for operating activities (2,854) (2,893)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (27) (48)
------- -------
Net cash used for investing activities (27) (48)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance cost 32 --
Proceeds from exercise of common stock options, net 2 258
Proceeds from issuance of Series B Redeemable
Convertible Preferred Stock 3,000 --
Payments on revolving line of credit, net (34) (7,842)
Payments on issuance costs on Series B Preferred Stock (458) --
Advances on convertible subordinated promissory note -- 9,102
Advances on notes payable with manufacturing contractor, net -- 1,166
------- -------
Net cash provided by financing activities 2,542 2,684
------- -------
Net change in cash and cash equivalents (339) (257)
Cash and cash equivalents, beginning of period 413 2,481
------- -------
Cash and cash equivalents, end of period $ 74 $ 2,224
======= =======
Supplemental disclosure of non-cash financing activities:
Series B Preferred common stock dividend 30 --
Deferred financing costs associated with warrants issued to
Secured lender 451 --
Common stock warrants issued in conjunction with Series B
Preferred 348 --
Beneficial conversion feature of Series B Preferred 829 --
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE>
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.
We have continued to incur substantial losses from operations and are in
violation of our current loan and security agreement with our bank. We have
unresolved class action litigation concerning alleged violations of securities
laws, and need additional financing to continue operations, all of which raises
substantial doubt about our 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. We have retained investment-banking
counsel to advise us on the possible sale of equity securities, as well as to
introduce and assist us in the evaluation of potential merger and partnering
opportunities.
We have prepared the accompanying condensed unaudited consolidated financial
statements 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. Our condensed unaudited
consolidated financial statements include our accounts, our foreign sales
corporation and our wholly-owned German subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation. In the opinion
of our 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 our consolidated financial statements and notes thereto
contained in our Annual Report on Form 10-K, as amended, for our fiscal year
ended January 2, 1999. Operating results for the three month period and six
month period ended July 3, 1999 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 July 3, 1999, cash and cash equivalents consisted of $74,000 invested in
overnight and 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):
JULY 3, 1999 JANUARY 2, 1999
------------ ---------------
Raw materials $ 181 $ 448
Work in process 3 3
Finished goods 1,377 601
------ ------
$1,561 $1,052
====== ======
The market for our 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.
D. ROYALTY AND SERVICE REVENUE RECOGNITION
- -------------------------------------------
We recognize revenue from product sales upon shipment. In addition, we
recognize revenue from product royalty, support and commission fees. Under our
current royalty arrangements, we earn and recognize revenue for royalty and
commission fees when our royalty partner, SGI Inc. and S3 Inc., ship product.
Service revenue is recognized over the lifetime of the warranty period
associated with the product, typically one to three years.
During the second quarter of 1999, we were appointed a sales agent of S3
Incorporated. Under this role, we provide engineering development, technical and
customer support for the SR9 graphics accelerator board. We also provide
administrative duties such as order entry, invoicing and collections. In
exchange for these services, S3 Inc. pays us a royalty. Product royalty sales
for this business were $75,000 in the second quarter of 1999, representing 3.9%
of net sales during the quarter.
During the fourth quarter of 1998, we entered into a Product Distribution
Agreement with SGI. Under this agreement, SGI Inc. appointed us as an authorized
sales agent with respect to selling and marketing the Digital Flat Panel
Solution Pack. Acting as an agent of SGI Inc., we are authorized to sell and
market the Digital Flat Panel Solution Pack to distributors and certain OEM
customers. We provide technical and customer support for the Revolution JV-FP
graphics subsystem component of the Digital Flat Panel Solution Pack, and
provide administrative duties such as order entry, invoicing and collections. In
exchange for providing these services, SGI pays us a royalty, sales commission
and support fee. These product royalty sales were $192,000 in the second quarter
of 1999, representing 10.1% of net sales during the quarter. The Product
Distribution Agreement with SGI expired on June 30, 1999. We are currently
working with SGI to define the terms of our continuing relationship.
Under our current royalty arrangements, we earn and recognize revenue for
royalty and commission fees when our royalty partner, SGI Inc. and S3 Inc., ship
product.
-4-
<PAGE>
E. RELATED-PARTY TRANSACTIONS:
- ------------------------------
During the fourth quarter of 1998, we entered into a Product Distribution and
Procurement Agreement with Silicon Graphics. Under this agreement, and upon our
request, Silicon Graphics may place orders for manufacture of Number Nine
Products, implementing our technical designs. Silicon Graphics then would resell
this product to Number Nine. At July 3, 1999, we had purchased $1.2 million of
finished good products from Silicon Graphics under this agreement since the
fourth quarter of 1998 and recognized the corresponding accounts payable
liability, approximately $1.4 million, net, in our balance sheet for the period
ended July 3, 1999.
Also under this agreement, Silicon Graphics appointed us an authorized sales
representative with respect to selling and marketing the Digital Flat Panel
Solution Pack, through June 30, 1999. Acting as an agent of Silicon Graphics, we
are authorized to do the following:
. Sell and market the Digital Flat Panel Solution Pack to national and
international distributions, and to strategic OEM customers,
. Provide technical and customer support for the Revolution(R) IV-FP graphics
subsystem component of the Digital Flat Panel Solution Pack, and
. Provide administrative duties such as order entry, invoicing and collection
services for the sales of Digital Flat Panel Solution Pack
In exchange for providing these services, Silicon Graphics pays us a royalty,
sales commission and support fee. Product royalty sales were $192,000 in the
second quarter of 1999, representing 10.1% of net sales during the quarter. The
Product Distribution Agreement with SGI expired on June 30, 1999. We are
currently working with SGI to define the terms of our continuing relationship.
F. DEBT:
- --------
Number Nine was party to an amended loan and security agreement with a
commercial bank that provided for a revolving credit facility of $3 million, as
adjusted, through March 31, 1999. Pursuant to this agreement, we were able to
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 (7.75% as of January 2, 1999) plus 1% 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 expired on December 2, 1998, however we were operating under
forbearance agreements with the commercial bank. The most recent forbearance
agreement expired on March 31, 1999 and was subsequently replaced by a credit
facility with another major commercial bank at more favorable financial terms
for us. The loan balance was collateralized by substantially all of our assets.
The agreement contained 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 gave the
lender the right to call the loan in the event of a material adverse change in
our business and prohibited us from paying dividends without the consent of the
lender. We received a waiver from the lender for noncompliance with certain
covenants in the agreement for 1997 and 1998. As of March 31, 1999, we were not
in compliance with certain covenants of the lender. We operated under a
forbearance agreement with the commercial bank until March 31, 1999 when the
facility was replaced.
On March 31, 1999, we entered into a new loan and security agreement with a
new major commercial bank for a secured working capital line of credit. This
line of credit replaced the previous borrowing facility. Under this agreement,
we can borrow up to 80% of qualified accounts receivable up to a maximum amount
of $15 million, at an annual interest rate of either prime rate plus 1% or at
the LIBOR rate plus 3.25%. Our present intent is to use prime rate plus 1% for
this borrowing facility. On August 9, 1999, prime rate was 8.0% and the 90 day
LIBOR rate was 5.37%. We can lower these interest rates by achieving certain
financial objectives. In addition, we incur an unused line fee calculated at a
rate of .375% per annum on the unused portion of the maximum borrowing amount.
The line of credit agreement is collateralized by substantially all the assets
of our company. This agreement requires the bank approval for the payment of any
dividends other than dividends on Series B Convertible Preferred Stock (the
"Series B Preferred"). It also requires that we achieve certain financial
covenants, including quarterly profitability targets in the second quarter of
1999. This agreement expires on December 31, 2001. In connection with this
credit facility, the bank received a warrant to purchase 211,000 shares of
Common Stock at an exercise price of $2.86 per share for a ten year period.
These warrants have been valued, using the Black-Scholes methodology, at
$451,000 and will be treated as interest expense, amortized over the life of the
credit facility. The amount of amortization for the quarter ended July 3, 1999
was $41,000. We are currently in violation of certain financial covenants of
this agreement, including profitability for the second of 1999. We are
negotiating with the bank for a waiver of these violations at this time.
We have entered into a note payable with one of our manufacturing contractors.
Under the terms of the note payable, we converted approximately $1.4 million of
accounts payable with the manufacturing contractor into a note payable. The note
payable is a six (6) month note that bears interest at the rate of 5.99% per
annum, and was to be repaid in six equal monthly installments. The first
principal and interest payment was made in June 1998. However, as of July 3,
1999, $490,000 was outstanding and is subject to payment on demand.
G. SERIES B CONVERTIBLE PREFERRED STOCK:
- ---------------------------------------
On March 31 1999, we sold 300 shares of Series B Preferred Stock at a stated
price of $10,000 per share. Proceeds from the offering, net of issuance costs
were approximately $3 million. Holders of the Series B Preferred are entitled to
receive a 4% dividend payable, at our option, in cash or shares of our common
stock. The Series B Preferred has beneficial conversion features which are
convertible into common stock at the lower of (i) $4.27 per share, or (ii) 88%
of the average of the ten lowest closing bid prices during the thirty day period
prior to the conversion date. Holders of the Series B Preferred may only begin
converting a portion of their shares on or after July 28, 1999. The right of
conversion is thereafter limited to up to 25% of the shares of Series B
Preferred during the first month after they become eligible for conversion, up
to 50% during the second month after they become eligible for conversion and up
to 100% following the third month after they become eligible for conversion.
Subject to certain restrictions, we have the option to redeem the Series B
Preferred at any time. The redemption amount is calculated as 110% of the Series
B Preferred investment prior to October 31, 1999, if the closing bid price is
less than $1.60 per share, and
-5-
<PAGE>
118% in all other instances. The Series B Preferred automatically converts into
common stock three years after the date of issuance.
In addition, the investor received a three year warrant to purchase 195,000
shares of our common stock at an exercise price of $3.45 per share. We also
issued a three-year warrant to purchase 30,000 shares of our common stock at
$3.45 per share to the broker involved with this transaction. The total value of
both of these warrants is estimated to be approximately $348,000 and is included
in additional paid-in capital.
The carrying value of the Series B Preferred is approximately $2.7 million,
net of the estimated value of the warrants, described above, associated with
this transaction. The Company issued 14,526 shares, at $2.07 per share, of its
common stock as payment for the quarterly dividend, valued at $30,000 to the
holder of its 4% Series B Convertible Preferred Stock during the second quarter
of 1999. The estimated intrinsic value of the beneficial conversion feature of
the Series B Convertible Preferred Stock, estimated to be approximately $830,000
at the time of the closing of this transaction and initially charged to
additional paid-in capital, has been accreted to this class of preferred stock
and accounted for on the Company's records as if it were an additional dividend
to the holder.
H. SERIES A CONVERTIBLE PREFERRED STOCK:
- ----------------------------------------
In May 1999, the holder of Series A Convertible Preferred Stock converted
850,000 shares of this class of stock into 850,000 shares of common stock of the
Company, leaving a remaining balance of 2,500,894 shares of Series A Convertible
Preferred Stock outstanding.
I. EARNINGS (LOSS) PER SHARE:
- ----------------------------
Basic earnings (loss) per share (EPS) is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
July 3, 1999 JUNE 27, 1998
------------- --------------
<S> <C> <C>
Basic EPS Computation
Numerator:
Net loss............................................... $(3,024) $(7,529)
Accretion of beneficial conversion feature............. (829) --
Series B Convertible Preferred stock dividend.......... (30) --
Net loss available to common shareholders.............. $(3,883) $(7,529)
Denominator:
Weighted average common shares outstanding............. 9,630 9,258
Basic EPS................................................. $ (0.40) $ (0.81)
Diluted EPS Computation:
Numerator
Net loss............................................... $(3,024) $(7,529)
Accretion of beneficial conversion feature............. (829) --
Series B Convertible Preferred stock dividend.......... (30) --
Net loss available to common shareholders.............. $(3,883) $(7,529)
Denominator:
Weighted average common shares outstanding............. 9,630 9,258
Stock options.......................................... -- --
------- -------
Total Shares........................................ 9,630 9,258
Diluted EPS............................................... $ (0.40) $ (0.81)
</TABLE>
Potentially dilutive securities, at July 3, 1999, include stock options
outstanding to purchase 1,096,854 shares, warrants to purchase approximately
1,030,000 of common stock, 2,500,894 shares of Series A Convertible Preferred
Stock and 1,466,276 shares of Series B Convertible Preferred Stock. However,
such securities have not been included in the net loss per common share
calculation because their effect would be antidilutive.
J. RECENTLY ISSUED ACCOUNTING STANDARDS:
- ----------------------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The adoption of SOP 98-1 had no material effect on
our results of operations or financial condition.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position No. 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." This statement provides guidance in the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. The adoption of SOP 98-5 had
no material effect on our results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Due to our limited use of derivative instruments,
we do not believe the adoption of FAS 133 will have a material effect on our
results of operations or financial condition.
K. INCOME TAXES:
- ----------------
At January 2, 1999, we had net operating loss carryforwards of approximately
$45.8 million and $49.4 million available to offset future federal and state
taxable income, respectively. The federal carryforwards begin to expire in 2010
and the state carryforwards begin to expire in 2000.
L. 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 Number Nine, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of our initial public
offering, Robertson Stephens & Company, Cowen & Company and Unterberg Harris
(the "Managing Underwriters"). On or about July 17, 1996,
-6-
<PAGE>
John Foley, as plaintiff, filed a complaint in the United States District Court
for the District of Massachusetts against Number Nine, each member of our 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, our former Chief
Financial Officer and Treasurer and the Managing Underwriters. On or about
October 16, 1996, Robert Schoenhofer, as plaintiff, filed an additional
complaint in the United States District Court for the District of Massachusetts
against Number Nine, each member of our Board of Directors, Mr. Hanks, and the
Managing Underwriters. Each of the plaintiffs purports to represent a class of
purchasers of our Common Stock 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 our 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 us or that there may be other consequences from the lawsuits. On
June 1, 1999, the District Court issued a memorandum and order dismissing the
majority of Federal securities law claims asserted in all three complaints
against the Company, certain directors and officers and the Managing
Underwriters of the Company's 1995 Initial Public Offering. As a result of the
significant reduction in the scope of the plaintiffs' claims and discussions
with plaintiffs' counsel, the Company believes the plaintiffs' current
settlement position would be within the range of the directors and officers
liability insurance coverage amount ($8,000,000) at the time of the commencement
of this litigation. The Company does not believe that this litigation will have
a material adverse effect on its future financial condition and results of
operations, and accordingly no provision for any liability is required in the
accompanying financial statements.
A foreign inventor has asserted claims against several PC manufacturers,
including our customers, that the graphic technology included in their systems
infringes the inventor's patents. Certain of our customers have notified us of
these assertions and their intent to seek indemnification from us in the event
these claims are successful and the infringing technology was included in
products that we sold. We believe there are meritorous defenses to these claims
and that if the technology in fact infringes the inventor's rights, we would
have rights of indemnification from its suppliers. While we cannot assure you,
we do not expect this matter to have a material adverse effect on us.
-7-
<PAGE>
Item 2 - 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 our founding in 1982, we have introduced successive generations of
video/graphics subsystems providing advanced video/graphics performance in
desktop PCs. We have focused on providing a broad line of high-performance
hardware and software video/graphics solutions, targeting both Original
Equipment Manufacturers ("OEMs") and two-tier and retail distribution
customers. Our 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, we began shipping products utilizing
our third generation proprietary 128-bit graphics accelerator chip technology,
Ticket to Ride/TM/. During the third quarter of 1998, we began shipping our
fourth generation proprietary 128-bit video/graphics accelerator chip, Ticket to
Ride/TM/ IV, and the related graphics board product, Revolution(R) IV. Also
during the third quarter 1998, we announced our first jointly developed product
with our strategic partner, SGI Inc.; the Digital Flat Panel Solution Pack, a
digital flat panel monitor containing the first all digital high resolution
display system, the SGI 1600 SW Digital Flat Panel. During the second quarter of
1999, we began shipping our newest product, SR9, using the Savage4 graphics
accelerator chip from S3 Inc. We cannot assure you that our products,
Revolution/TM/ 3D, which utilizes the Ticket to Ride/TM/ chip and Revolution(R)
IV which utilizes the Ticket to Ride/TM/ IV chip, will be successful and
marketed successfully.
We also market Hawkeye, 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 Windows 95 and Windows 98 operating
systems.
Our past operating results have been, and our 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,
. Our ability to introduce new technologies and products on a timely basis,
. Availability and timing of component shipments and cost of components
obtained from our suppliers,
. Availability and cost of manufacturing and foundry capacity,
. New product introductions by our competitors,
. Delays in related product introductions by others,
. Market acceptance of our 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 our product pricing, or changes in our competitors and suppliers
pricing, including possible decreases in unit average selling prices of our
products caused by competitive pressures.
Our operating results may 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. Our sales to OEMs,
which accounted for 57.9% of net sales in the first six months of 1999, 79.2% of
net sales in 1998, and 43.8% of net sales in 1997, are particularly susceptible
to fluctuations.
Our sales to OEMs typically generate lower gross margins than retail and
distributor sales, but also generally entail lower marketing, sales and product
support costs. Our net sales, gross margins and profits have in the past, and
may
-8-
<PAGE>
in the future, vary significantly depending on the proportion of our sales to
OEMs and other distribution channels, as well as the mix of products sold in
each channel. Our sales of merchant-based technology products are typically at a
significantly lower margin than the sales of our proprietary technology
products. The gross margin on all of our products is significantly impacted by
costs of components, particularly memory costs and controller chips, which have
varied widely over the past several years, as well as significant pricing
pressure on our products as a result of competition.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JULY 3, 1999 AND JUNE 27, 1998
Net Sales: Net sales decreased 50% to $1.9 million in the second quarter of
1999 from approximately $3.8 million in the second quarter of 1998. This
decrease was primarily attributable to lower sales of our proprietary 128-bit
products to our OEM customers, as well as lower sales in international two-tier
and retail distribution customers, as our fourth generation proprietary 128-bit
video/graphics accelerator chip nears the end of its product life cycle. Net
sales of our proprietary 128-bit products decreased 46% to $980,000 in the
second quarter of 1999 from $1.8 million in the second quarter of 1998,
representing 50.6% of net sales in the second quarter of 1999 compared to 47.4%
of net sales in the second quarter of 1998. Sales of 64-bit products represented
the remaining $955,000 or 49.4.% of net sales during the second quarter of 1999
compared to approximately $2.0 million or 52.6% of net sales in the second
quarter of 1998.
Sales to OEMs decreased 65%, to approximately $1.3 million in the second
quarter of 1999 from approximately $3.7 million in the second quarter of 1998,
representing 68.4% of net sales in the second quarter of 1999 compared to 97.4%
of net sales in the second quarter of 1998. The decrease is primarily
attributable to a decrease in sales to IBM from $1.6 million during the second
quarter of 1998 to $81,000 in sales during the second quarter of 1999. This
decrease was partially offset by sales of $500,000 for non-recurring engineering
efforts associated with a design win with IBM for our SR9 graphics subsystem
product.
Royalty sales increased to $267,000 in the second quarter of 1999 from nothing
for the second quarter of 1998, because, in part, we were appointed a sales
agent of S3 Incorporated. Under this role, we provide engineering development,
technical and customer support for the SR9 graphics accelerator board. We also
provide administrative duties such as order entry, invoicing and collections. In
exchange for these services, S3 Inc. pays us a royalty. Product royalty sales
for this business were $75,000 in the second quarter of 1999, representing 3.9%
of net sales during the quarter.
During the fourth quarter of 1998, we entered into a Product Distribution
Agreement with SGI. Under this agreement, SGI Inc. appointed us as an authorized
sales agent with respect to selling and marketing the Digital Flat Panel
Solution Pack. Acting as an agent of SGI Inc., we are authorized to sell and
market the Digital Flat Panel Solution Pack to distributors and certain OEM
customers. We provide technical and customer support for the Revolution IV-FP
graphics subsystem component of the Digital Flat Panel Solution Pack, and
provide administrative duties such as order entry, invoicing and collections. In
exchange for providing these services, SGI pays us a royalty, sales commission
and support fee. These product royalty sales were $192,000 in the second quarter
of 1999, representing 10.1% of net sales during the quarter. The Product
Distribution Agreement with SGI expired on June 30, 1999. We are currently
working with SGI to define the terms of our continuing relationship.
Net sales to our domestic retail and two-tier distribution customers increased
529% to $767,000 in the second quarter of 1999 compared to $122,000 during the
second quarter of 1998. Total international sales decreased 106% to ($103,000)
in the second quarter of 1999 from approximately $1.8 million in the second
quarter of 1998.
Gross Profit: Gross profit was approximately $756,000 in the second quarter of
1999 compared to gross margin loss of approximately $1.0 million in the second
quarter of 1998. As a percentage of net sales, gross profit improved to 39.1% in
the second quarter of 1999 from a loss of 26.8% in the second quarter of 1998.
The increase in gross profit during the second quarter of 1999 was largely
attributable to sales of non-recurring engineering efforts associated with a
design win at IBM for our SR9 graphics subsystem product, representing 25.8% of
net sales, and net product royalties, representing 13.8% of net sales. In the
second quarter of 1998, we experienced significant pricing pressure across all
of our products resulting in price protection claims and customer returns.
Our future prospects will depend in part on our ability to successfully manage
our product transitions and fluctuating component costs, particularly memory
components and control inventory as new products are introduced. We cannot
assure you that we will be successful in managing these changes. While we
reserve for anticipated charges, based upon historical rates of product returns,
price protection claims, component cost fluctuations, and other factors, we
cannot assure you that reductions in sales and returns of older generation
products will not give rise
-9-
<PAGE>
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 40%, to approximately $1.3 million in the
second quarter of 1999 from $2.2 million in the second quarter of 1998,
primarily as a result of decreased headcount and lower marketing costs as we
controlled variable discretionary spending. As a percentage of net sales,
selling, general and administrative expenses increased to 68.4% in the second
quarter of 1999 from 57.9% in the second quarter of 1998, primarily attributable
to lower sales in the second quarter of 1999. We currently expect that selling,
general and administrative expenses will increase during subsequent quarters,
although not necessarily as a percentage of net sales, as we begin to market and
sell our newer technology.
Research and Development Expenses: Research and development expenses increased
8%, to approximately $1.4 million in the second quarter of 1999 from
approximately $1.3 million in the second quarter of 1998, resulting primarily
from closely controlled discretionary spending and development costs associated
with the introduction of our SR9 product family in the second quarter of 1999.
As a percentage of net sales, research and development expenses increased to
73.7% in the second quarter of 1999 from 34.2% in the second quarter of 1998,
primarily attributable to lower sales in the second quarter of 1999. We
currently expect that research and development expenses will increase in
subsequent quarters, although not necessarily as a percentage of net sales,
primarily as a result of continued investment in our development efforts.
Interest Expense: Net interest expense for the second quarter of 1999 was
$75,000 compared to interest expense of $183,000 in the second quarter of 1998.
This decrease was attributable to lower average outstanding loan balances during
the second quarter of 1999, as compared to the second quarter of 1998.
Other Expense/Income: Other income totaled approximately $7,000 in the second
quarter of 1999 compared to other income of $225,000 in the second quarter of
1998. Other income during the second quarter of 1998 was primarily attributable
to the settlement of certain accounts payable balances, while other income
during the second quarter of 1999 was primarily attributable to interest income.
Provision for Income Taxes: During the second quarter of 1999 and the second
quarter of 1998, we did not provide an income tax benefit due to the uncertainty
of realizing the benefit from future taxable income.
RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED JULY 3, 1999 AND JUNE 27,
1998
Net Sales: Net sales decreased 52% to $5.7 million in the first six months of
1999 from approximately $11.9 million in the first six months of 1998. This
decrease was primarily attributable to lower sales of our proprietary 128-bit
products to our OEM customers, as well as lower sales in international two-tier
and retail distribution customers, as our fourth generation proprietary 128-bit
video/graphics accelerator chip nears the end of its product life cycle. Net
sales of our proprietary 128-bit products decreased 46% to $3.2 million the
first six months of 1999 from $5.9 million in the first six months of 1998,
representing 56.1% of net sales in the first six months of 1999 compared to
49.6% of net sales in the first six months of 1998. Sales of 64-bit products
represented the remaining $2.5 million or 43.9.% of net sales during the first
six months of 1999 compared to approximately $6.2 million or 52.1% of net sales
in the first six months of 1998.
Sales to OEMs decreased 65%, to approximately $3.3 million in the first six
months of 1999 from approximately $9.5 million in the first six months of 1998,
representing 57.9% in the first six months of 1999 compared to 79.8% of net
sales in the first six months of 1998. The decrease is attributable to a
decrease in sales to IBM from $4.2 million during the first six months of 1998
to $146,000 in sales during the first six months of 1999. This decrease was
partially offset by sales of $2.0 million for non-recurring engineering efforts
associated with a design win with IBM for our SR9 graphics subsystem product.
Royalty sales increased to $804,000 in the first six months of 1999 from
nothing in the first six months of 1998, because, in part, we were appointed a
sales agent of S3 Incorporated. Under this role, we provide engineering
development, technical and customer support for the SR9 graphics accelerator
board. We also provide administrative duties such as order entry, invoicing and
collections. In exchange for these services, S3 Inc. pays us a royalty. Product
royalty sales for this business were $75,000 in the first six months of 1999,
representing 1.3% of net sales during the first six months of 1999.
-10-
<PAGE>
During the fourth quarter of 1998, we entered into a Product Distribution
Agreement with SGI. Under this agreement, SGI Inc. appointed us as an authorized
sales agent with respect to selling and marketing the Digital Flat Panel
Solution Pack. Acting as an agent of SGI Inc., we are authorized to sell and
market the Digital Flat Panel Solution Pack to distributors and certain OEM
customers. We provide technical and customer support for the Revolution IV-FP
graphics subsystem component of the Digital Flat Panel Solution Pack, and
provide administrative duties such as order entry, invoicing and collections. In
exchange for providing these services, SGI pays us a royalty, sales commission
and support fee. These product royalty sales were $729,000 in the first six
months of 1999, representing 12.8% of net sales during the quarter. The Product
Distribution Agreement with SGI expired on June 30, 1999. We are currently
working with SGI to define the terms of our continuing relationship.
Net sales to our domestic retail and two-tier distribution customers increased
118% to $2.4 million in the first six months of 1999 compared to $1.1 million
during the first six months of 1998. Total international sales decreased 98% to
$131,000 in the first six months of 1999 from approximately $5.3 million in the
first six months of 1998.
Gross Profit: Gross profit was approximately $3.0 million in the first six
months of 1999 compared to gross margin loss of approximately $183,000 in the
first six months of 1998. As a percentage of net sales, gross profit improved to
52.6% in the first six months of 1999 from a loss of 1.5% in the first six
months of 1998. The increase in gross profit during the first six months of 1999
was largely attributable to sales of non-recurring engineering efforts
associated with a design win at IBM for our SR9 graphics subsystem product,
representing 35.1% of net sales, and net product royalties representing 14.1% of
net sales. In the first six months of 1998, we experienced significant pricing
pressure across all of our products resulting in price protection claims and
customer returns.
Our future prospects will depend in part on our ability to successfully manage
our product transitions and fluctuating component costs, particularly memory
components and control inventory as new products are introduced. We cannot
assure you that we will be successful in managing these changes. While we
reserve for anticipated charges, based upon historical rates of product returns,
price protection claims, component cost fluctuations, and other factors, we
cannot assure you 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 30%, to approximately $3.1 million in the
first six months of 1999 from $4.4 million in the first six months of 1998,
primarily as a result of decreased headcount and lower marketing costs as we
controlled variable discretionary spending. As a percentage of net sales,
selling, general and administrative expenses increased to 54.4% in the first six
months of 1999 from 37.0% in the first six months of 1998, primarily
attributable to lower sales in the first six months of 1999. We currently expect
that selling, general and administrative expenses will increase during
subsequent quarters, although not necessarily as a percentage of net sales, as
we begin to market and sell our newer technology.
Research and Development Expenses: Research and development expenses
decreased 3%, to approximately $2.8 million in the first six months of 1999 from
approximately $2.9 million in the first six months of 1998, resulting primarily
from closely controlled discretionary spending in the first six months of 1999.
As a percentage of net sales, research and development expenses increased to
49.1% in the first six months of 1999 from 24.4% in the first six months of
1998, primarily attributable to lower sales in the first six months of 1999. We
currently expect that research and development expenses will increase in
subsequent quarters, although not necessarily as a percentage of net sales,
primarily as a result of continued investment in our development efforts.
Interest Expense: Net interest expense for the first six months of 1999 was
$113,000 compared to interest expense of $292,000 in the first six months of
1998. This decrease was attributable to lower average outstanding loan balances
during the first six months of 1999, as compared to the first six months of
1998.
Other Expense/Income: Other income totaled approximately $12,000 in the first
six months of 1999 compared to other income of $263,000 in the first six months
of 1998. Other income during the first six months of 1998 was primarily
attributable to the settlement of certain accounts payable balances, while other
income during the first six months of 1999 was primarily attributable to
interest income.
Provision for Income Taxes: During the first six months of 1999 and the first
six months of 1998, we did not provide an income tax benefit due to the
uncertainty of realizing the benefit from future taxable income.
-11-
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Investing in our common stock is very risky. You should be able to bear a
complete loss of your investment. You should carefully consider the following
factors, in addition to other information in this report.
Competing Technologies May Render Some or All of Our Products or Future
-----------------------------------------------------------------------
Products Noncompetitive or Obsolete. The PC industry in general, and the market
- -----------------------------------
for our 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 competition, and
. rapidly changing pricing.
In this regard, the life cycle of products in our markets is often as short as
nine to twelve months. Therefore, our future prospects depend, in part, upon our
ability to:
. continually update our existing products in a timely manner, and
. continue to identify, develop and achieve market acceptance of products that
incorporate new technologies and standards and meet evolving customer needs.
We cannot assure you that we will be successful in managing product
transitions, including controlling inventory of older generation products when
introducing new products. We have experienced and could, in the future,
experience reductions in sales of older generation products as customers delay
purchases in anticipation of new product introductions. We establish reserves
for anticipated product returns, based upon historical return rates of product
returns and other factors. However, we cannot assure you that reductions in
sales and returns of older generation products by distributors, primarily
attributable to customer stock rotation, will not give rise to charges for
obsolete or excess inventory or substantial price protection charges.
Dramatic Reductions in Sales to Significant Customers May Adversely Affect Our
------------------------------------------------------------------------------
Sales. The volume and timing of orders received during a particular quarter are
- -----
very difficult to forecast. Our customers can change delivery schedules or
cancel orders with limited or no penalties. For example, in September 1996 Dell
decided to stop buying our merchant graphics solution starting in the fourth
quarter of 1996. In addition, during the third quarter of 1997, Dell reduced its
purchases of our proprietary Imagine 128 Series 2 4MB VRAM product. As a result,
our net sales to Dell decreased dramatically from $62.7 million during 1996 to
$4.9 million during 1997. Future sales to significant customers are uncertain
and depend upon the performance and pricing of our new products and their
acceptance by these customers.
Customers generally order on an as-needed basis, and as a result, we have
historically operated without significant backlog. Moreover, as is often the
case in the PC industry, a disproportionate percentage of our 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 significant portions
of operating expense levels are relatively fixed, the timing of expense levels
is based in large part on our expectations of future sales. If sales do not meet
our expectations, we may be unable to quickly adjust spending, which could have
a material adverse effect on our business.
Our Success Depends Heavily Upon Sales to a Limited Group of OEMs. We try to
------------------------------------------------------------------
provide a broad line of high-performance hardware and software video/graphics
solutions, targeting both OEMs and two-tier and retail distribution customers.
The PC industry has a limited number of major OEMs driving the majority of PC
sales. While we are pursuing a significant portion of our business derived from
the limited number of major OEMs, we cannot assure you that we will be
successful in establishing profitable relationships with major OEMs. In
addition, major OEMs exercise significant price pressure on their suppliers,
generating lower gross margins than those of retail and distribution customers.
Our failure to establish profitable relationships with major OEM customers or to
-12-
<PAGE>
maintain and increase the volume and profitability of the products manufactured
for such customers would have a material adverse effect on our business.
The Highly Competitive Market for Our Products May Adversely Affect Our
-----------------------------------------------------------------------
Business Results. Our current and prospective competitors include many
- ----------------
companies that have substantially greater name recognition and financial,
technical, manufacturing and marketing resources than we have. We cannot assure
you that we will be able to compete successfully against current and future
competitors.
The market for our products is highly competitive. Our ability to compete
successfully depends upon a number of factors both within and beyond our
control, including:
. Product performance,
. Product features,
. Product availability,
. Price,
. Quality,
. Timing of our new product introductions compared with the timing of our
competitors' product introductions,
. Emergence of new video/graphics and PC standards,
. Customer support, and
. Industry and general economic trends.
We compete by offering products emphasizing high performance and quality,
utilizing merchant chips. Commencing in the third quarter of 1999, we no longer
design and manufacture our own chips. The trend in our industry is for close
alliances between chip and board manufacturers leveraging their respective
competitive advantages for the benefit of the customer. We strive to improve our
current products and to introduce new products in order to provide a broad
product line where demand justifies it. Our current principal competitors
include ATI Technologies, Inc., Diamond Multimedia Systems, Inc., which was
recently acquired by S3 Incorporated, a chip manufacturer, and Matrox Electronic
Systems, Inc. Each of these named competitors markets graphics accelerator
products that are marketed in competition with our 64-bit and 128-bit graphics
accelerator products.
Numerous competitors, particularly in higher-volume, lower-priced product
categories, have lowered their prices, which may result in reduced sales and/or
lower margins for our products. In addition, many companies compete on the basis
of their integrated circuit design capabilities by:
. supplying accelerator chips on a merchant basis,
. producing board-level products, and
. integrating the accelerator chip that will be placed directly on the CPU
motherboard.
We expect this trend to continue for low-end video/graphic accelerator
subsystems; however, we believe the market for video/graphic accelerator
subsystems in mid-range to high-end PCs will continue to exist.
Several of our board-level competitors, as well as various independent
software developers, offer software products with features comparable to our
HawkEye software utilities. Future enhancements to such competing software
products that we do not match, or the inclusion of comparable features in future
versions of the Windows operating system, reduce the demand for our HawkEye
utilities software. In addition, we may eventually experience indirect
competition from suppliers of memory components, CPU manufacturers and others to
the extent they integrate advanced graphics processing capabilities into future
generations of products.
We May Not Be Profitable or Generate Cash from Operations in the Future. We
-----------------------------------------------------------------------
have incurred significant losses in the last several years. We intend to
continue to expend significant financial and management resources on the
development of additional products, sales and marketing, improved technology and
expanded operations. Although we believe that operating losses and negative cash
flows may diminish in the near future, we may not be profitable or generate cash
from operations in the foreseeable future.
If We Do Not Secure Additional Financing, We May Be Unable to Develop or
------------------------------------------------------------------------
Enhance Our Services, Take Advantage of Future Opportunities or Respond to
- --------------------------------------------------------------------------
Competitive Pressures. We require substantial working capital to fund our
- ---------------------
business. We have had significant operating losses and negative cash flow from
operations. Additional
-13-
<PAGE>
financing may not be available when needed on favorable terms or at all. If
adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our services, take advantage of future
opportunities or respond to competitive pressures, which could have a material
adverse effect on our business. Our capital requirements depend on several
factors, including the rate of market acceptance of our products, the ability to
expand our customer base, the growth of sales and marketing and other factors.
If capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated.
We Depend Upon a Limited Group of Suppliers for Key Components. We depend on
---------------------------------------------------------------
sole or limited source suppliers for certain key components and have
experienced:
. limited availability,
. delays in shipments, and
. unanticipated cost fluctuations related to the supply of components,
particularly memory chips.
We actively work with memory component suppliers to secure pricing and volume
commitments for future production. Additionally, our suppliers could make key
components, such as memory graphics accelerator chips, less available to the
extent that they reduce our lines of credit and payment terms. In such an event,
we could have difficulty securing sufficient supply to meet customer
requirements. We cannot assure you that we will secure commitments in sufficient
amounts to meet our needs or at prices that will enable us to attain
profitability.
The Loss of Key Members of Our Management Staff Could Delay and May Prevent
---------------------------------------------------------------------------
the Achievement of Our Business Objectives. Our future success will depend, to a
- ------------------------------------------
significant extent, upon the efforts and abilities of our senior management and
professional, technical, sales and marketing personnel. The competition for such
personnel is intense. The loss and failure to promptly replace any one of these
key members could significantly delay and may prevent the achievement of our
business objectives. Accordingly, our failure to hire, retain or adequately
replace key personnel could have a material adverse effect on our business.
The Value of Our Stock Has in the Past and May in the Future Change Suddenly
----------------------------------------------------------------------------
and Significantly. The trading price of our common stock has been subject to
- -----------------
significant fluctuations to date, and could be subject to wide fluctuations in
the future, in response to many factors, including the following:
. Quarter-to-quarter variations in our operating results,
. Announcements of technological innovations,
. New products or significant OEM system design wins by us or our competitors,
. General conditions in the markets for our products or the computer industry,
. The price and availability of purchased components,
. General financial market conditions,
. Changes in earnings estimates by analysts, or
. Other events or factors.
In this regard, we do not endorse or accept responsibility for the estimates
or recommendations issued by stock research analysts from time to time. The
volatility of public stock markets, and technology stocks specifically, have
frequently been unrelated to the operating performance of the specific
companies. These market fluctuations may adversely affect the market price of
our common stock.
We May Have to Indemnify or Pay Damages to Some of Our OEM Customers for
------------------------------------------------------------------------
Possible Intellectual Property Infringement Claims Filed or Threatened to Be
- ----------------------------------------------------------------------------
Filed. It is common in the PC industry for companies to assert intellectual
- -----
property infringement claims against other companies. As a consequence, we
indemnify some OEM customers in certain respects against intellectual property
claims relating to our products. If an intellectual property claim were to be
brought against us, or any of our OEM customers, and we, or any of our OEM
customers, were found to be infringing upon the rights of others, we could be
required to:
. pay infringement damages,
. pay licensing fees,
. modify our products so that they are not infringing, or
. discontinue offering products that were found to be infringing.
-14-
<PAGE>
Any of the above-listed actions could have a material adverse effect on our
business. Several OEM customers recently sent us notices of potential indemnity
claims based upon notices of infringement that they have received from a patent
owner. Subsequently, the patent owner filed patent infringement lawsuits in the
U.S. and elsewhere against several of such OEM customers and a number of other
major PC systems manufacturers. We provide multimedia subsystems to our OEM
customers for use in such OEM customers' products that are alleged to infringe
on the patent owner's rights. Based upon our preliminary evaluation of the
patent, we do not believe the infringement claims are meritorious as to our
products sold to our customers. However, under the indemnity agreements or if we
are directly sued, we may be required to dedicate significant management time
and expense to defending ourselves or assisting our OEM customers in their
defense of this or other infringement claims, regardless of merit, which could
have a material adverse effect on our business. If an intellectual property
claim were to be brought against any of our suppliers and the supplier was found
to be infringing upon the rights of others, the supplier could be enjoined from
further shipments of our products to us, which could have a material adverse
effect on our business.
If the Series A or Series B Preferred Stock is Converted or We Issue
--------------------------------------------------------------------
Additional Shares of Equity Securities, The Value of Those Shares of Common
- ---------------------------------------------------------------------------
Stock Then Outstanding May Be Diluted. To the extent that we raise additional
- -------------------------------------
capital by issuing equity securities at a price or a value per share less than
the then current price per share of common stock, the value of the shares of
common stock then outstanding will be diluted or reduced. At present, we have
two arrangements to issue additional equity securities which could result in
dilution to the present common stockholders. One arrangement involves the
issuance of our Series A preferred stock, each share of which was purchased or
acquired for $2.75 and all of which are convertible into shares of common stock
on a one for one basis. In May, 1999, the holder of Series A preferred stock
converted 850,000 shares into common stock. Based on the number of shares of
Series A preferred stock presently outstanding and an outstanding warrant to
purchase additional shares of Series A preferred stock, as of August 9, 1999, we
would be required to issue up to 2,857,721 shares of common stock at a price per
share that is only approximately $.75 more than the last sale price of the
common stock of $2.00 on August 9, 1999. If the sale price of the common stock
decreases, we may be required to issue shares of common stock at a price per
share that would be less than the then current price per share.
We also have an arrangement which involves the issuance of our Series B
preferred stock (and payment of dividends thereunder in shares of common stock),
which is convertible from and after July 28, 1999 into shares of common stock at
a price per share equal to the lesser of:
. $4.2703, or
. 88% of the average of the 10 lowest closing prices during the 30 trading days
immediately prior to the date of conversion.
Based on the number of shares of Series B preferred stock presently
outstanding and the applicable conversion price as of August 9, 1999, we would
be required to issue up to 1,696,545 shares of common stock at a price per share
that is approximately $.23 less than the last sale price of the common stock of
$2.00 on August 9, 1999. In anticipation of price fluctuations that may reduce
the conversion price, we have registered for resale up to 3,022,137 shares of
common stock which would become issuable upon conversion of the Series B
preferred stock if the conversion price fell as low as approximately $1.05 per
share. If the conversion price fell even further, then more than 3,022,137
shares of common stock would be issuable upon conversion of the series B
preferred stock.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution, or such equity securities may have rights,
preferences or privileges senior to those of our common stockholders.
If Our Common Stock is Delisted From the Nasdaq Stock Market, It Would Be More
------------------------------------------------------------------------------
Difficult for Stockholders to Sell Shares of Our Common Stock. In order for our
- -------------------------------------------------------------
common stock to continue to be listed on the Nasdaq Stock Market, we must comply
with all of Nasdaq's continued listing requirements. If Nasdaq determines that
we have violated any of its continued listing requirements, our common stock
could be delisted. The issuance and conversion of our Series A and Series B
preferred stock could cause Nasdaq to determine that we have violated up to
three of its continued listing requirements. The first of the three applicable
Nasdaq rules requires that our common stock have a minimum bid price per share
of $1.00. Our bid price was $1.97 per share as of August 9, 1999. If the Series
B preferred stock is converted at its current discount price and the common
stock issued upon conversion is subsequently sold in the public market, the bid
price of our common stock may be reduced to less than $1.00 per share, in which
case Nasdaq may determine that a violation exists and our common stock may be
delisted. The second applicable Nasdaq rule requires us to comply with the more
onerous requirements for initial listing if Nasdaq determines that we have
undergone a change in control or a change in financial structure. Depending on
the number
-15-
<PAGE>
of shares of common stock issued upon conversion of the Series A and Series B
preferred stock, Nasdaq may deem the issuance of such preferred stock to be a
change in control or a change in financial structure and a violation that could
result in delisting. The third applicable Nasdaq rule permits Nasdaq to delist a
security if it deems it necessary to protect investors and the public interest.
Therefore, if Nasdaq determines that the returns on the Series A and Series B
preferred stock are excessive compared with the returns received by our common
stockholders, and such excess returns are egregious, Nasdaq could delist our
common stock. We currently do not meet the minimum net tangible assets
requirement of $4.0 million for continued listing on the National Market System
on the Nasdaq Stock Market. Nasdaq Stock Market has notified us of their intent
to change the listing status of our common stock, currently on the National
Market System. We formally appealed this decision, and attended the appeal
hearing with Nasdaq regarding this matter. We have not yet been informed of
Nasdaq's final decision.
Our Computer System or our Suppliers' Computer System Could Fail When the Year
------------------------------------------------------------------------------
Changes to 2000. We use a number of computer software programs and operating
- ---------------
systems in our internal operations, including applications used in financial
business systems and various administration functions. We also include software
programs in our products. The Year 2000 issue refers to potential problems with
computer systems or any equipment with computer chips or software that use dates
where the date has been stored as just two digits to represent the year, such as
98 for 1998. On January 1, 2000, any clock or date recording mechanism which
incorporates date sensitive software, using only two digits to represent the
year, may recognize a date using 00 as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations, causing disruption of
operations, or, among other things, a temporary inability to process
transactions, send invoices, or engage in normal operating business activities.
We have conducted an assessment of our Year 2000 readiness to determine the
extent of any potential problems. Our assessment revealed that all our products
are not keyed to a two digit date storage system. That is, our drivers and BIOS
do not reference or update the time or date, nor are they affected by the system
clock. Based upon our assessment, we consider all our products to be Year 2000
compliant. Our assessment also revealed that our principal information systems
correctly define the Year 2000 and do not require any modification. As a result,
we do not expect to incur any material costs associated with Year 2000 issues.
However, we cannot assure you that, to date, we have identified all material
Year 2000 issues associated with our products.
We have conducted an assessment of our Year 2000 readiness of the applications
used in financial business systems and various administrative functions to
determine the extent of any potential problems. We obtained Year 2000 compliance
statements from the manufacturers of our core internal information systems.
While these applications have been tested by their manufacturers, we will
continue to test our mission critical applications for Year 2000 compliance. As
a result, we do not expect to incur any material costs associated with Year 2000
issues. However, we cannot assure you that, to date, we have identified all
material Year 2000 issues associated with internal information systems which
could have a material adverse effect on our business.
We are in the process of contacting our customers, suppliers, financial
institutions, creditors, service providers and governmental agencies, with whom
we have a material relationship, in an effort to verify the Year 2000 readiness
of these third parties that are in a position to impact us materially. We have
limited or no control over the actions of these third parties. Thus, while we
expect that we will be able to resolve any significant Year 2000 problems, we
cannot assure you that all material Year 2000 issues associated with third
parties will be identified and corrected on a timely basis, or that corrections
made by third parties will be compatible with our information systems. The
failure of our systems and applications or those operated by third parties to
properly operate or manage dates beyond 1999 could have a material adverse
effect on our business.
At this point, we do not believe we will be adversely affected, in a material
manner, by the Year 2000 issue. We are actively developing a contingency plan to
address any Year 2000 issues that may arise. We intend to design and implement
such a contingency plan prior to the end of the third quarter of 1999, which
will be based in part upon the balance of the responses we expect to receive
from third parties. We will attempt to identify and resolve all Year 2000
problems that could materially affect our business operations. However,
management believes that it is not possible to determine with complete
certainty, that all Year 2000 problems affecting us have been identified or
corrected. The number of devices that could be affected and the interactions
among such devices are simply too numerous. In addition, we cannot accurately
predict how many Year 2000 problem-related failures will occur or the severity,
duration or financial consequences of these perhaps inevitable and unforeseen
failures. As a result, we are uncertain whether we or our clients might
experience:
. a significant number of operational inconveniences and inefficiencies that
may divert our time and attention, and financial and human resources, from
our ordinary business activities, and/or
-16-
<PAGE>
. a lesser number of serious system failures that may require significant
efforts by us or our clients to prevent or alleviate material business
disruptions.
Based on the foregoing, we do not believe that the Year 2000 problem will have
a material adverse effect on our business. Our ability to achieve Year 2000
compliance and the level of incremental costs associated therewith could be
adversely impacted by, among other things, the availability and cost of
programming and testing resources, vendors' abilities to modify proprietary
software and unanticipated problems identified in the ongoing compliance review.
Currently, we estimate that we have spent approximately $500,000 on Year 2000
compliance. We estimate that our expense during the last half of 1999 will
approximate an additional $200,000.
-17-
<PAGE>
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 Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended January 2, 1999 as filed with the Commission.)
We have continued to incur substantial losses from operations. We will need
additional financing to continue operations, which raises substantial doubt
about our 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. We have retained investment-banking counsel to advise us on
the possible sale of equity securities, as well as to introduce and assist us in
the evaluation of potential merger and partnering opportunities.
Significant pricing pressure for our products has been experienced during
1997, 1998 and the first half of 1999, resulting in lower gross margin and
higher net loss. Due to these factors, we have generated less cash flow from
operations than anticipated, and therefore require more working capital.
In the first half of 1999, we continued to incur losses on reduced revenue
while pricing pressure in our industry has increased. Our operating activities
used cash of approximately $2,854,000 in the first half of 1999, compared to
operating activities which used cash of approximately $2,893,000 in the first
half of 1998. In the first half of 1999, cash was generated through the net
decrease to accounts receivable of $136,000 and an increase of $216,000 in
related party accounts payable.
In addition, an increase in inventory of $509,000 and a net decrease to
accounts payable used cash of approximately $162,000. Decreases in accounts
receivable have primarily been attributable to lower sales levels in the first
half of 1999. We believe we can operate with lower levels of working capital
relative to net sales and have committed additional resources to the management
and control of our receivables and inventories. At July 3, 1999, our principal
sources of liquidity consisted of approximately $74,000 of cash and cash
equivalents and a maximum borrowing capacity of $15 million based on qualified
accounts receivable balances, under our revolving line of credit, as described
below.
In the first half of 1999, investing activities used cash of approximately
$27,000 for purchases of computer and office equipment compared to $48,000 for
purchases and office equipment in the first half of 1998. Financing activities
provided cash of approximately $2.5 million during the first half of 1999,
attributable to the $3.0 million proceeds from issuing Series B Preferred,
partially offset by a cost associated with this financing of $458,000. During
the first half of 1998, financing activities provided cash of $2.7 million
attributable mostly to advances of $9.1 million made against certain convertible
subordinated promissory notes and partially offset by a reduction of the
outstanding balance of the revolving credit facility by $7.8 million.
As of January 2, 1999, approximately $1.3 million was outstanding under our
then revolving credit facility (the "Prior Loan Agreement"). This Prior Loan
Agreement was subsequently replaced on March 31, 1999 by a new credit facility
with a major commercial bank and at more favorable financial terms to us. The
Prior Loan Agreement contained 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 Prior Loan
Agreement also gave the lender the right to call the loan in the event of a
material adverse change in our business and prohibited us from paying dividends
without the consent of the lender. We were not in compliance with certain terms
of our Prior Loan Agreement from time to time and as a result had entered into
amendments and forbearance agreements revising and waiving certain covenants in
the Prior Loan Agreement. We had received such a forbearance arrangement from
the lender for noncompliance with certain covenants in the Prior Loan Agreement,
which was effective until March 31, 1999. Under this forbearance agreement, the
maximum amount we could borrow was $3.0 million.
The Prior Loan Agreement initially expired on December 2, 1998, but was extended
through forbearance agreements until March 31, 1999.
On March 31, 1999, we entered into a loan and security agreement with a major
commercial bank for a secured working capital line of credit. This line of
credit replaces the current borrowing facility. Under this agreement, we can
borrow up to 80% of qualified accounts receivable up to a maximum amount of $15
million, at an annual interest rate of either prime rate plus 1% or at the LIBOR
rate plus 3.25%. Our present intent is to use prime rate plus 1% for this
borrowing facility. On August 5, 1999, the prime rate was 8.0% and the 90 day
LIBOR rate of 5.37%.
-18-
<PAGE>
We can lower these interest rates by achieving certain financial objectives. In
addition, we incur an unused line fee calculated at a rate of .375% per annum on
the unused portion of the maximum borrowing amount. The bank also received a
warrant to purchase up to 211,000 shares of common stock, as of the date of
closing, at an exercise price of $2.86 for a ten year period. The line of credit
agreement is collaterized by substantially all the assets of our company. This
agreement requires bank approval for the payment of any dividends other than
dividends on Series B Preferred. It also requires that we achieve certain
financial covenants, including quarterly profitability targets in the second
quarter of 1999. This agreement expires on December 31, 2001.
As of July 3, 1999, we had outstanding indebtedness to the bank of $1,267,000.
We are currently in violation of certain financial covenants of this agreement,
including profitability for the second quarter of 1999. We are negotiating with
the bank for a waiver of these violations at this time.
We have entered into a note payable with one of our manufacturing contractors.
Under the terms of the note payable, we converted approximately $1.4 million of
accounts payable with the manufacturing contractor into a note payable. The note
payable is a six (6) month note, bears interest at the rate of 5.99% per annum,
and was to be repaid in six equal monthly installments. The first principal and
interest payment was made in June 1998. However, as of July 3, 1999, $490,000
was outstanding and is subject to payment on demand.
On March 31 1999, we sold 300 shares of Series B Stock at a stated price of
$10,000 per share. Proceeds from the offering, net of issuance costs were
approximately $3 million. Holders of the Series B Preferred are entitled to
receive a 4% dividend payable, at our option, in cash or shares of our common
stock. The Series B Preferred has beneficial conversion features which entitles
holders to convert their shares into common stock at the lower of (i) $4.27 per
share, or (ii) 88% of the average of the ten lowest closing bid prices during
the thirty day period prior to the conversion date. Holders of the Series B
Preferred may only begin converting a portion of their shares on or after July
28, 1999. The right of conversion is thereafter limited to up to 25% of the
shares of Series B Preferred during the first month after they become eligible
for conversion, up to 50% during the second month after they become eligible for
conversion and up to 100% following the third month after they become eligible
for conversion. Subject to certain restrictions, we have the option to redeem
the Series B Preferred at any time. The redemption amount is calculated as 110%
of the Series B Preferred investment prior to October 31, 1999, if the closing
bid price is less than $1.60 per share, and 118% in all other instances. The
Series B Preferred automatically converts into common stock three years after
the date of issuance.
We are currently discussing with several financial institutions and high net
worth individuals the terms of an equity investment in the Company. We have
received an advance of this investment in the amount of $300,000 on August
3, 1999. This advance has taken the form of a demand note at an interest rate of
10% per annum. We believe that this note will be converted into equity upon the
completion of this financing.
We believe that our existing cash balances plus funds generated from product
sales, together with our new working capital line of credit and the anticipated
equity financing described above, will be sufficient to fund operations at
anticipated levels through the third quarter of 1999. The planned new financing,
and new revolving credit facility should be beneficial to our efforts to fund
operations into the third quarter of 1999. However future growth in sales,
significant losses and limitations of credit terms by suppliers, and/or
continued increases in working capital required by our business, 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 us on acceptable
terms, if at all. 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 we be
unable to continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its
Investment Policy. The primary objectives of the Company's Investment Policy are
to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. The
Company's marketable securities consist of overnight and 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
-19-
<PAGE>
days or less. Interest income is recognized when earned. The Company believes
that the effect, if any, of reasonable possible near-term changes in the
interest rates on its financial position, results of operations and cash flows
would not be material due to the short-term nature of these investments.
PART II. OTHER INFORMATION:
- ----------------------------
ITEM 1 - LEGAL PROCEEDINGS
From time to time, we are involved in litigation relating to claims arising
out of our operations in the normal course of business. Other than the
litigation discussed below, we are currently not a party to any additional legal
proceedings that if adversely adjudicated, in the belief of management, would
individually or in the aggregate have a material adverse effect on our financial
position or results of our operations.
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 Number Nine, Andrew Najda and Stanley W. Bialek (the
"Selling Stockholders") and the managing underwriters of our initial public
offering, Robertson Stephens & Company, Cowen & Company and Unterberg Harris
(the "Managing Underwriters"). On or about July 17, 1996, John Foley, as
plaintiff, filed a complaint in the United States District Court for the
District of Massachusetts against Number Nine, each member of our 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, our former Chief
Financial Officer and Treasurer and the Managing Underwriters. On or about
October 16, 1996, Robert Schoenhofer, as plaintiff, filed an additional
complaint in the United States District Court for the District of Massachusetts
against Number Nine, each member of our Board of Directors, Mr. Hanks, and the
Managing Underwriters. Each of the plaintiffs purports to represent a class of
purchasers of our Common Stock 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 our 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 us or that there may be other consequences from the lawsuits. On
June 1,1999, the District Court issued a memorandum and order dismissing the
majority of Federal securities law claims against the Company, directors and
officers and the Managing Underwriters of the Company's 1995 Initial Public
Offering. As a result of the significant reduction in the scope of the
plaintiffs' claims and discussions with the plaintiffs' counsel, the Company
believes that the plaintiffs' current settlement position would be within the
range of the directors and officers liability insurance coverage amount
($8,000,000) at the time of the commencement of this litigation. The Company
does not believe that this litigation will have a material adverse effect on its
future financial condition and results of operation. Accordingly, the Company
believes that no provision for any liability is required in the accompanying
financial statements.
A foreign inventor has asserted claims against several PC manufacturers,
including our customers, that the graphics technology included in their systems
infringes the inventor's patents. Certain of our customers have notified us of
these assertions and their intent to seek indemnification from us in the event
these claims are successful and the infringing technology was included in
products that we sold. We believe there are meritorious defenses to these claims
and that if the technology in fact infringes the inventor's rights, we would
have rights of indemnification from its suppliers. While we cannot assure you,
we do not expect this matter to have a material adverse effect on us.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) (1) Securities sold
I. On April 27,1999, the Company issued to S3 Incorporated a two year
warrant to purchase up to 300,000 shares of its common stock at an
exercise price of $2.49 per share.
II. In May, 1999 the holder of Series A Convertible Preferred Stock
converted 850,000 shares of this class of stock into 850,000 of the
Company's common stock.
-20-
<PAGE>
III. During the quarter ended July 3, 1999, the Company issued an aggregate
of 920 shares of its common stock to two employees in connection with
its stock option plans at an weighted average price of $2.17 per
share.
IV. On July 3, 1999, the Company issued to the holder of the Series B
Convertible Preferred Stock a quarterly dividend in the amount of
14,526 shares of its common stock.
(2) Underwriter. No underwriters were involved in these transactions.
(3) Consideration
I. The warrant to S3 Incorporated was issued in connection with a joint
project with the Company that resulted in a significant design award
at a major PC OEM customer.
II. The Company received 850,000 shares of Series A Convertible Preferred
Stock in exchange for common stock.
III. The Company received $2,000 for the issuance of its common stock from
its stock option plans.
IV. There was no other consideration received with respect to the issuance
of 14,526 shares of its common stock as a quarterly dividend to the
holder of the Series B Convertible Preferred Stock.
(4) Exemption from registration claimed. The Company issued the securities in
those transactions in reliance upon Section 4(2) of the Securities Act of
1933, as amended, because none of these transactions involved any public
offering by the Company.
(5) Terms of conversion or exercise. The warrant issued to S3 Incorporated to
purchase up to 300,000 shares of the Company's common stock at an exercise
price of $2.49 per share is exercisable over a two year period commencing
April 27,1999.
(6) Use of proceeds.
Not applicable.
(d) Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 OTHER INFORMATION
The Company's adjourned annual meeting of shareholders was held on July 9, 1999
with the following results:
1. Dr. Fouad H. Nader was re-elected as a Class A director to serve until
2002. The vote was 5,419,932 shares for and 95,856 shares withheld their
vote.
2. The proposal to increase the authorized amount common stock by 10,000,000
shares from 20,000,000 shares to 30,000,000 shares was approved. The vote
was 5,204,070 shares for, 287,676 shares against, 24,042 shares abstained
from voting.
3. The proposal to issue more than 1,883,236 shares of common stock upon
conversion of 300 shares of Series B Convertible Preferred Stock was
approved. The vote was 5,082,350 shares for, 214,683 shares against, 60,567
shares abstained and there were broker non votes of 158,188 shares.
4. The adoption of the 1999 Employee Director and Consultant Stock Option Plan
was approved. The vote was 5,043,338 shares for, 266,770 shares against,
47,492 shares abstained and there were 158,188 broker non votes.
5. The appointment of PricewaterhouseCoopers L.L.P. as the Company's
independent public accountants for the fiscal year January 1, 2000 was
approved. The vote was 5,464,680 shares for, 29,465 shares against and
21,643 shares abstained
In July, 1999, the Company announced the appointment of Dr. John William
Poduska and Mr. Edward L. Breslow as members of its Board of Directors.
-21-
<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
Exhibit Number Description
-------------- -----------
4.1 Common Stock Purchase Warrant dated April 27, 1999
issued by the Company to S3 Incorporated
10.1 Employment Agreement with Wallace E. Smith
27.1 Financial Data Schedule
(b) Reports on Form 8-K
One report on Form 8-K, dated March 31,1999 was filed on April 12, 1999.
This report described the terms of agreement for the sales of Series B
Convertible Preferred Stock and the working capital debt financing agreement
with a major commercial bank.
-22-
<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: August 17,1999
By: /s/ Timothy J. Burns
--------------------------------
Timothy J. Burns
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 17,1999
By: /s/ William L. Ralph
--------------------------------
William L. Ralph
Chief Operating Officer
(Principal Operating
Officer)
-23-
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
4.1 Common Stock Purchase Warrant dated April 27, 1999
issued by the Company to S3 Incorporated
10.1 Employment Agreement with Wallace E. Smith
27.1 Financial Data Schedule
-24-
<PAGE>
Exhibit 4.1
THIS WARRANT AND THE SECURITIES THAT MAY BE ACQUIRED UPON THE EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") OR UNDER THE PROVISIONS OF ANY APPLICABLE STATE SECURITIES
LAWS. NEITHER THIS WARRANT NOR THE SECURITIES THAT MAY BE ACQUIRED UPON THE
EXERCISE OF THIS WARRANT MAY BE SOLD, PLEDGED, TRANSFERRED, ASSIGNED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER PROVISIONS OF THE ACT AND ALL APPLICABLE STATE SECURITIES LAWS;
AND IN THE CASE OF ANY EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION DOES NOT REQUIRE
REGISTRATION OF THE WARRANT OR THE OTHER SECURITIES.
WARRANT TO PURCHASE THREE HUNDRED THOUSAND (300,000) SHARES OF
COMMON STOCK OF NUMBER NINE VISUAL TECHNOLOGY CORPORATION
Warrant No. S3-1 Void After April 26, 2001
__________________________________
THIS CERTIFIES THAT, for value received, S3 Incorporated ("S3") or assigns
--
(S3), or assigns such assigns who may be the registered holder or holders
hereof, are hereinafter referred to as the "Holder") is entitled to subscribe
------
for and purchase Three Hundred Thousand (300,000) shares of the fully paid and
nonassessable Common Stock (as adjusted pursuant to Section 8 hereof,
hereinafter, the "Warrant Shares") of Number Nine Visual Technology Corporation,
--------------
a Delaware corporation (hereinafter, the "Company"), at a purchase price of
-------
$2.49 per share, (such price and such other price as shall result, from time to
time, from the adjust-ments specified in Section 8 hereof is herein referred to
as the "Exercise Price"), subject to the provisions and upon the terms and
--------------
conditions hereinafter set forth. As used herein, the term "Common Stock" shall
mean the Company's presently authorized Common Stock, $.01 par value per share,
and any stock into which such Common Stock may hereafter be exchanged.
1. Registration of Warrant. The Company shall register this Warrant, upon
-----------------------
records to be maintained by the Company for that purpose (the "Warrant
-------
Register"), in the name of the record Holder hereof from time to time. The
- --------
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
<PAGE>
2. Registration of Transfers and Exchanges.
---------------------------------------
(a) The Company shall register the transfer of any portion of this
Warrant in the Warrant Register, upon surrender of this Warrant, with the Form
of Assignment attached hereto as Exhibit A duly completed and signed, to the
---------
Company at the office specified in or pursuant to Section 3(b). Upon any such
registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New Warrant"),
-----------
evidencing the portion of this Warrant so transferred shall be issued to the
transferee (a "Transferee") and a New Warrant evidencing the remaining portion
----------
of this Warrant not so transferred, if any, shall be issued to the transferring
Holder. The acceptance of the New Warrant by the Transferee thereof shall be
deemed the acceptance of such Transferee of all of the rights and obligations of
a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by the
Holder to the office of the Company specified in or pursuant to Section 3(b) for
one or more New Warrants, evidencing in the aggregate the right to purchase the
number of Warrant Shares which may then be purchased hereunder. Any such New
Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrant.
--------------------------------
(a) This Warrant shall be exercisable by the registered Holder on any
business day before 5:00 P.M. Eastern Standard time, at any time and from time
to time on or after April 26, 1999 to and including 5:00 P.M., Boston time on
April 26, 2001 (the "Expiration Date"). At 5:00 P.M. Eastern Standard time on
the Expiration Date, the portion of this Warrant not exercised prior thereto
shall be and become void and of no value.
(b) Subject to Sections 2(b), 6 and 10, upon surrender of this
Warrant, with the Notice of Exercise or Conversion attached hereto as Exhibit B
---------
duly completed and signed, to the Company at its office at 18 Hartwell Avenue,
Lexington, Massachusetts 02421, Attention: Chief Operating Officer, or at such
other address as the Company may specify in writing to the then registered
Holder, and upon payment of the Exercise Price multiplied by the number of
Warrant Shares that the Holder intends to purchase hereunder, in lawful money of
the United States of America, by certified or official bank check or checks or
wire transfer, all as specified by the Holder in the Notice of Exercise or
Conversion, the Company shall promptly (but in no event later than five (5)
business days after the Date of Exercise (as defined herein)) issue or cause to
be issued and cause to be delivered to or upon the written order of the Holder
and in such name or names as the Holder may designate, a certificate for the
Warrant Shares issuable upon such exercise, free of restrictive legends other
than legends which the Company may reasonably deem necessary to comply with
applicable state and federal securities laws for the issuance of such securities
and any legends placed on all registered shares of the Company relating to the
then current agreement between the Company and its transfer agent relating to
the issuance of "rights" to all holders of the Company's Common Stock. Any
person so designated by the Holder to receive Warrant Shares shall be deemed to
have become holder of record of such Warrant Shares as of the Date of Exercise
of this Warrant.
2
<PAGE>
A "Date of Exercise" means the date on which the Company shall have
----------------
received (i) this Warrant (or any New Warrant, as applicable), with the Notice
of Exercise or Conversion (or attached to such New Warrant) appropriately
completed and duly signed, and (ii) payment of the Exercise Price for the number
of Warrant Shares so indicated by the holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its entirety or,
from time to time, for a portion of the number of Warrant Shares. If less than
all of the Warrant Shares which may be purchased under this Warrant are
exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
(d) In lieu of exercising this Warrant or any portion hereof pursuant
to Section 3(b), the Holder shall have the right to convert this warrant (to the
extent then exercisable) or any portion hereof into Warrant Shares by executing
and delivering to the Company at its principal office the written Notice of
Exercise or Conversion, specifying the portion of the Warrant to be converted,
and accompanied by this Warrant. The number of Warrant Shares to be issued upon
such conversion shall be computed using the following formula:
X=(P)(Y)(A-B)/A
where:
X= the number of Warrant Shares to be issued to the Holder for the
portion of the Warrant being converted,
P= the percentage of the Warrant being converted,
Y= the total number of Warrant Shares issuable upon exercise of the
Warrant in full,
A= the average of the closing sale prices of the Common Stock for
the ten (10) trading days immediately prior to (but not
including) the Date of Exercise, and
B= the Exercise Price.
(e) In the event of a sale of substantially all the assets of the
Company or a merger or consolidation of the Company with or into any other
entity (other than a merger the sole purpose of which is to change the state of
incorporation of the Company) or a dissolution or the adoption of a plan of
liquidation of the Company, this Warrant shall terminate on the effective date
of such sale, merger, consolidation, dissolution or adoption (the "Effective
---------
Date") and become null and void, provided, however, that if this Warrant shall
- ---- -------- -------
not have otherwise
3
<PAGE>
terminate or expired, the Registration Holder hereof shall have the right until
5:00 p.m. Eastern Standard time on the day immediately prior to the Effective
Date to exercise its rights hereunder.
4. Registration Right.
------------------
(a) Request for Registration. Within forty-five (45) days of the
------------------------
date of this Warrant, the Company shall prepare and file with the Commission a
"Shelf" registration statement covering all of the Warrant Shares for an
offering to be made on a continuous basis pursuant to Rule 415. The registration
statement shall be on Form S-3 (or if the Company is not then eligible to
register for resale the Warrant Shares on Form S-3 such registration shall be on
another appropriate form in accordance herewith). The Company shall use its best
efforts to cause the registration statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof and shall use
its best efforts to keep such registration statement continuously effective
under the Securities Act until the date which is three years after the date that
such registration statement is declared effective by the Commission or such
earlier date when all Warrant Shares covered by such registration statement have
been sold or may be sold without volume restrictions pursuant to Rule 144(k) as
determined by the counsel to the Company.
(b) Registration Expenses.
---------------------
(i) All costs and expenses incurred or sustained in connection
with or arising out of the filing of a registration statement pursuant to this
Section 4(a) hereof, including, without limitation, all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger, telephone and delivery expenses, fees and disbursements of
counsel for the Company, fees and disbursements of all independent certified
public accountants, the reasonable fees and expenses of any special experts
retained by the Company of its own initiative in connection with such
registration, and fees and expenses of all (if any) other persons retained by
the Company (all such cost and expenses being herein called, collectively.
the"Registration Expenses"), will be borne and paid by the Company. The Company
will, in any case, pay its internal expenses (including, without limitation, all
salaries and expenses of its officer and employees performing legal or
accounting duties), the expense of any annual audit, and the fees and expenses
incurred in connection with the listing of the securities to be registered on
each securities exchange on which similar securities of the Company are then
listed.
(ii) The Company will not bear the cost of nor pay for any stock
transfer taxes imposed in respect of the transfer of any Warrant Shares to any
purchaser thereof by any Holder Warrant Shares in connection with any
registration of Warrant Shares pursuant to this Section 4(a).
(iii) To the extent that Registration Expenses incident to any
registration are under the terms of this Section 4, not required to be paid by
the Company, each Holder of Warrant Shares included in such registration will
pay all Registration Expenses which are clearly solely attributable to the
registration of such Holder's Warrant Shares included in
4
<PAGE>
such registration, and all other Registration Expenses not so attributable to
one Holder will be borne and paid by all sellers of securities included in such
registration in proportion to the number of securities so included by each such
seller.
(c) Indemnification.
---------------
(i) Indemnification by the Company. The Company will indemnify
------------------------------
each Holder requesting or joining in a registration and each underwriter of the
securities so registered, the officers, directors and partners of each such
person and each person who controls any thereof (within the meaning of the
Securities Act) against any and all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of any material fact contained in any prospectus,
offering circular or other document incident to any registration, qualification
or compliance (or in any related registration statement, notification or the
like) or any omission (or alleged omission) to state therein any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company and relating to
any action or inaction required of the Company in connection with any such
registration, qualification or compliance, and the Company will reimburse each
such Holder, underwriter, officer, director, partner and controlling person for
any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
- -------- -------
extent that any such claim, loss, damage or liability arises out of or is based
on any untrue statement or omission based upon written information furnished to
the Company in an instrument duly executed by such Holder, underwriter, officer,
director, partner or controlling person and stated to be specifically for use in
such prospectus, offering circular or other document.
(ii) Indemnification by Each Holder. Each Holder requesting or
------------------------------
joining in a registration will indemnify each underwriter of the securities so
registered, the Company and its officers and directors and each person, if any,
who controls any thereof (within the meaning of the Securities Act) and their
respective successors in title and assigns against any and all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of any material fact
contained in any prospectus, offering circular or other document incident to any
registration, qualification or compliance (or in any related registration
statement, notification or the like) or any omission (or alleged omission) to
state therein any material fact required to be stated therein or necessary to
make the statement therein not misleading, and such Holder will reimburse each
underwriter, the Company and each other person indemnified pursuant to this
paragraph (b) for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action; provided, however, that this paragraph (b) shall apply only
-------- -------
if (and only to the extent that) such statement or omission was made in reliance
upon written information furnished to such underwriter or the Company in an
instrument duly executed by any such Holder and stated to be specifically for
use in such prospectus, offering circular or other document (or related
registration statement, notification or the like) or any amendment or supplement
thereto; and provided further that each Holder's liability hereunder with
--------
respect to
5
<PAGE>
any particular registration shall be limited to an amount equal to the net
proceeds received by such Holder from the Warrant Shares sold by such Holder in
such registration.
(iii) Indemnification Proceedings. Each party entitled to
---------------------------
indemnification pursuant to this Section 4(c) (the "indemnified party") shall
-------------------
give notice to the party required to provide indemnification pursuant to this
Section 4(c) (the "indemnifying party") promptly after such indemnified party
--------------------
acquires actual knowledge of any claim as to which indemnity may be sought, and
shall permit the indemnifying party (at its expense) to assume the defense of
any claim or any litigation resulting therefrom; provided that counsel for the
--------
indemnifying party, who shall conduct the defense of such claim or litigation,
shall be acceptable to the indemnified party, and the indemnified party may
participate in such defense at such party's expense; and provided, further, that
-----------------
the failure by any indemnified party to give notice as provided in this
paragraph (iii) shall not relieve the indemnifying party of its obligations
under this Section 4 except to the extent that the failure results in a failure
of actual notice to the indemnifying party and such indemnifying party is
damaged solely as a result of the failure to give notice. No indemnifying party,
in the defense of any such claim or litigation, shall, except with the consent
of each indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation. The reimbursement required by
this Section 4(c) shall be made by periodic payments during the course of the
investigation or defense, as and when bills are received or expenses incurred.
(d) Rule 144 Requirements: Form S-3. The Company will make every
-------------------------------
effort in good faith to take all steps necessary to ensure that the Company will
be eligible to register securities on Form S-3 (or any comparable form adopted
by the Commission) and to make publicly available and available to the Holders
of the Warrant Shares, pursuant to Rule 144 of the Commission under the
Securities Act ("Rule 144"), such information as shall be necessary to enable
the Holders of the Warrant Shares to make sales of the Warrant Shares pursuant
to Rule 144. The Company will furnish to any Holder of the Warrant Shares, upon
request made by such Holder, a written statement signed by the Company,
addressed to such Holder, describing briefly the action the Company has taken or
proposes to take to comply with the current public information requirements of
Rule 144. The Company will, at the request of any Holder of the Warrant Shares,
upon receipt from such holder of a certificate certifying (a) that such Holder
has held such Warrant Shares for a period of not less than two (2) consecutive
years, (b) that such Holder has not been an affiliate (as defined in Rule 144)
of the Company for more than the ninety (90) preceding days, and (c) as to such
other matters as may be necessary to meet the requirements of rule 144, remove
from the stock certificates representing such Warrant Shares that portion of any
restrictive legend which relates to the registration provisions of the
Securities Act.
5. Payment of Taxes. The Company will pay all documentary stamp taxes
----------------
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a
6
<PAGE>
name other than that of the Holder, and the Company shall not be required to
issue or cause to be issued or deliver or cause to be delivered the certificates
for Warrant Shares unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid. The
Holder shall be responsible for all other tax liability that may arise as a
result of holding or transferring this Warrant or receiving Warrant Shares upon
exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or
----------------------
destroyed, the Company may in its discretion issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if reasonably satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it will at
-----------------------------
all times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holders (taking into account the adjustments
and restrictions of Section 8). The Company covenants that all Warrant Shares
that shall be so issuable and deliverable shall, upon issuance and the payment
of the applicable Exercise Price in accordance with the terms hereof, be duly
and validly authorized, issued and fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant Shares
-------------------
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 8. Upon each such adjustment of the Exercise
Price pursuant to this Section 8, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is outstanding,
(i) shall pay a stock dividend or otherwise make a distribution or distributions
on shares of its Common Stock, (ii) subdivide outstanding shares of Common Stock
into a larger number of shares, or (iii) combine outstanding shares of Common
Stock into a smaller number of shares, the Exercise Price shall be multiplied by
a fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock (excluding
treasury shares if any) outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective
7
<PAGE>
date in the case of a subdivision or combination, and shall apply to successive
subdivisions and combinations.
(b) In case of any reclassification of the Common Stock, then the
Holder shall have the right thereafter to exercise this Warrant only into the
shares of stock and other securities of the Company and property receivable upon
or deemed to be held by holders of Common Stock following such reclassification,
and the Holder shall be entitled upon such event to receive such amount of
securities or property equal to the amount of Warrant Shares such Holder would
have been entitled to had such Holder exercised this Warrant immediately prior
to such reclassification. The terms of any such reclassification shall include
such terms so as to continue to give to the Holder the right to receive the
securities or property set forth in this Section 8(b) upon any exercise
following any such reclassification.
(c) For the purposes of this Section 8, the following clauses shall
also be applicable:
(i) Record Date. In case the Company shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in securities
convertible or exchangeable into shares of Common Stock, or (B) to subscribe
for or purchase Common Stock or securities convertible or exchangeable into
shares of Common Stock, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(d) All calculations under this Section 8 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
If:
(i) the company shall declare a dividend (or any other
distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash
dividend on its Common Stock; or
(iii) the company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital
stock of any class or of any rights; or
8
<PAGE>
(iv) the approval of any stockholders of the Company
shall be required in connection with (i) any
reclassification of the Common Stock of the
Company, or (ii) any compulsory share exchange
whereby the Common Stock is converted into other
securities, cash or property of the Company or any
third party; or
(v) the Company shall authorize the sale of
substantially all of its assets or any
consolidation or merger of another corporation with
the Company (other than a merger the sole purpose
of which is to change the state of incorporation of
the Company); or
(vi) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the
affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close; provided, however, that the failure to mail such notice or any defect
-------- -------
therein or in the mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice.
9. Fractional Shares. The Company shall not be required to issue or cause
-----------------
to be issued fractional Warrant Shares on the exercise of this Warrant. The
number of full Warrant Shares which shall be issuable upon the exercise of this
Warrant shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of this Warrant so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section 9, be issuable
on the exercise of this Warrant, the Company shall, at its option, (i) pay an
amount in cash equal to the Exercise Price multiplied by such fraction or (ii)
round the number of Warrant Shares issuable, up to the next whole number.
10. Notices. Any and all notices or other communications or deliveries
-------
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 4.30 p.m. (Eastern Standard Time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section later than 4.30 p.m. (Eastern Standard Time) on any date and earlier
than 11.59 p.m. (Eastern Standard Time) on such date, (iii) the business day
following the date of mailing, if sent by nationally
9
<PAGE>
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given. The addresses for such
communications shall be: (1) if to the Company, to Number Nine Visual
Technology, Inc., 18 Hartwell Avenue, Lexington, MA 02173, Attention: Assistant
Treasurer (or to facsimile no. (781) 674-0009) with a copy to Mintz, Levin,
Cohn, Ferris, Glovsky & Popeo, P.C., One Financial Center, Boston, MA 02111,
Attention: Neil H. Aronson, Esquire (or facsimile no. (617) 542-2241 or (ii) if
to the Holder, to the Holder at the address or facsimile number appearing on the
Warrant Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 10.
11. Warrant Agent.
-------------
(a) The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the Holder, the Company may appoint a new warrant
agent (the "New Warrant Agent").
-----------------
(b) Any corporation into which any New Warrant Agent may be merged or
any corporation resulting from any consolidation to which any New Warrant Agent
shall be a party or any corporation to which any New Warrant Agent transfers
substantially all of its corporate trust or shareholders services business
shall be a successor warrant agent under this Warrant without any further act.
Any such successor warrant agent shall promptly cause notice of its succession
as warrant agent to be mailed (by first class mail, postage prepaid) to the
Holder at the Holder's last address as shown on the Warrant Register.
12. Representation and Warranties of the Company.
--------------------------------------------
(a) Organization and Good Standing. The Company is duly organized and
------------------------------
existing as a corporation in good standing in the State of Delaware. The Company
is duly qualified as a foreign corporation and authorized to do business in all
other jurisdictions in which the nature of its business or property makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of this Warrant or the
Warrant Shares or (y) adversely impair the company's ability to perform fully on
a timely basis its obligations under this Warrant. The Company has the
corporate power to own its properties and to carry on the business as now
conducted and as proposed to be conducted.
(b) Authorization. The execution delivery and performance by the
-------------
Company of this Warrant, and the issuance and sale by the Company of the Warrant
Shares hereunder (a) are within the Company's corporate power and authority, (b)
have been duly authorized by all necessary corporate proceedings, and (c) do not
conflict with or result in any breach of any provision of, or the creation of
any lien upon any of the property of the Company or require any consent or
approval pursuant to the Charter or by-laws of the Company or any law,
regulation, order, judgment, writ, injunction, license, permit, agreement or
instrument applicable to the Company.
10
<PAGE>
(c) Enforceability. The execution and delivery by the Company of
--------------
this Warrant, and the issuance and sale by the Company of the Warrant Shares
hereunder, will result in legally binding obligations of the Company,
enforceable against the Company in accordance with the respective terms and
provisions hereof and thereof, except to the extent that (a) such enforceability
is limited by bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting generally the enforcement of creditors' rights, and (b)
the availability of the remedy of specific performance or in injunctive or other
equitable relief is subject to the discretion of the court before which any
proceeding therefor may be brought.
(d) Reservation of Stock Issuable Upon Exercise of Warrant.
------------------------------------------------------
Sufficiennt shares of authorized but unissued Common Stock have been reserved
by appropriate corporate action in connection with the prospective exercise of
this Warrant. The issuance of this Warrant or the Warrant Shares will not
require any further corporate action by the stockholders or directors of the
Company, will not be subject to preemptive rights by any present or future
stockholder or other securities holders of the Company and will not conflict
with any provision of any agreement to which the Company is a party or by which
it is bound, and such Common Stock, when issued upon exercise of this Warrant in
accordance with its terms or upon conversion, will be duly authorized, validly
issued, fully paid and non-assessable.
13. Investment Representation. S3 represents and warrants to the Company
-------------------------
that S3 is (a) an "accredited investor" within the meaning of Rule 501(a)
promulgated under the Securities Act, and (b) acquiring the Warrant or Warrant
Shares for investment and not with a view to sell or otherwise distribute the
Warrant or Warrant Shares.
14. Miscellaneous.
-------------
(a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 14(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant; this
Warrant shall be for the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the Commonwealth of Massachusetts without
regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
(e) In case any one or more of the provisions of this Warrant shall
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Warrant shall not in any way be
affected or impaired thereby and the parties
11
<PAGE>
will attempt in good faith to agree upon a valid and enforceable provision which
shall be a commercially reasonable substitute therefor, and upon so agreeing,
shall incorporate such substitute provision in this Warrant.
(f) Nothing contained in this Warrant shall be construed as
conferring upon the Holder hereof the right to vote or to consent as
stockholders in respect of the meetings of stockholders or the election of
members of the Board of Directors of the Company or any other matter, or any
rights whatsoever as stockholders of the Company or as imposing any obligation
on such Holder to purchase any securities or as imposing any liabilities on such
Holder as a stockholder of the Company, whether such obligation or liabilities
are asserted by the Company or by creditors of the Company. Notwithstanding the
foregoing, the Company will furnish to each Holder of any warrants, promptly
upon their becoming available, copies of all financial statements, reports,
notices and proxy statements sent or made available generally by the Company to
its stockholders or otherwise filed pursuant to the provisions of the Securities
Act or the Exchange Act.
[THIS SPACE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
12
<PAGE>
IN WITNESS WHEREOF, the Company and S3 have caused this Warrant to be duly
executed by their duly authorized officer on the date first written above.
ATTEST: NUMBER NINE VISUAL TECHNOLOGY, INC.
/s/ By: /s/ William L. Ralph
- ------------------------------ ---------------------------------------
[SEAL] Name: William L. Ralph
Title: General Manager
S3 INCORPORATED
By: /s/ Walter D. Amaral
---------------------------------------
Name: Walter D. Amaral
Title: Senior Vice President
Finance and Chief
Financial Officer
<PAGE>
Exhibit 10.1
[LOGO APPEARS HERE]
April 22, 1999
Mr. Wallace E. Smith
Dear Wally,
I am please to provide you with the terms and conditions of your anticipated
employment by Number Nine Visual Technology Corporation (the "Company").
Position Your initial position will be President and Chief Executive Officer. In
addition to performing duties and responsibilities associated with this
position, you will be expected to perform such other duties and responsibilities
that may be assigned to you by the Company from time to time. As a full-time
employee of the Company, you shall devote your full business time and energies
to the business and the affairs of the Company.
Starting Date/Nature of Relationship Your employment with the Company shall
commence on or before May 10, 1999. If this date is not appropriate, please let
me know as soon as possible. No provision of this letter shall be construed to
create an express or implied employment contract for a specific period of time.
Either you or the Company may terminate the employment relationship at any time
for any reason.
Salary/Rate of Pay Your initial salary will be $8333.33 per pay period, paid
twice a month annualized at $200,000.
Incentive Bonus As discussed, your incentive bonus will be $50,000, paid out
under the following schedule: (a) $15,000 when 1999 milestone completed (b)
$35,000 minimum paid when the change of control of the Company is achieved. The
incentive bonus assigned to the sale of the Company will be calculated as
follows:
(1) Over $65 million - .05% for the CEO, .05% for all others on the
management team (at $65 million it equates to $32,500 per person, at
$85 million it equates to $42,500 per person)
(2) $85 - $100 million - 10% for the CEO and COB (at $100 million equates
to $57,500 per person)
.05% for all others on the management team (at $100 million equates to
$50,000 per person)
(3) $100 + million - .15% for the CEO and COB (at $125 million equates to
$95,000 per person)
.075% for all others on the management team (at $125 million equates
to $68,750 per person)
<PAGE>
W. Smith Offer
page two
Stock Options On the commencement of your employment, the Company will grant
you an option to purchase 300,000 shares of common stock at a purchase price
equal to the fair market value calculated on the date of the execution of your
employment agreement. The options will vest over four years with 25% vesting at
the end of each full year of employment with the Company and will be subject to
the terms of the Company's standard option agreement. Should there be a sale of
all or substantially all of the outstanding capital stock or assets of the
Company, or a merger or other transaction involving a transfer of all or
substantially all of the beneficial ownership of the Company prior to the
vesting of these options, then all of these unvested options will vest.
Benefits Upon your first day of employment, you will be eligible to
participate in the Company health, dental, and vision program which will be
provided subject to the terms and conditions of that coverage. After the first
90 days of employment with the Company, you will be eligible to receive such
benefits as are generally provided to other employees in accordance with Company
policy as in effect from time to time. (e.g:401K). The Company retains the right
to change, add or cease any particular benefit.
Confidentiality The Company considers the protection of its confidential
information and proprietary materials to be very important. Therefore, as a
condition of your employment, you and the Company will become parties to a
confidentiality agreement substantially in the form in the form of Attachment A
of this letter ("Confidentiality Agreement")
Severance Should Number Nine terminate you for reasons other than for cause
we will continue to pay you at your then current rate of pay and medical and
dental benefits for a period of 6 (six) months from the official date of
termination.
General This letter, together with the Confidentiality Agreement, will
constitute our entire agreement as to your employment by the Company and will
supersede any prior agreements or understandings, either in writing or oral.
This agreement is contingent on the successful completion of references. This
letter shall be governed by the laws of the Commonwealth of Massachusetts.
You may accept this offer of employment and the terms and conditions thereof by
signing the enclosed additional copy of this letter and the Confidentiality
Agreement, which execution will evidence your agreement with the terms and
conditions set forth herein and therein, and returning them to the Company.
<PAGE>
W. Smith Offer
page three
This offer will expire April 27, 1999, unless accepted by you prior to such
date.
Sincerely,
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
/s/ Lawrence W. Murphy
- -----------------------------
Lawrence W. Murphy
VP Human Resources (acting)
Accepted and Agreed:
/s/ Wallace E. Smith Date: 4/25/99
- ----------------------------- -----------------------
Wallace E. Smith
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> APR-04-1999
<PERIOD-END> JUL-03-1999
<CASH> 74
<SECURITIES> 0
<RECEIVABLES> 2,379
<ALLOWANCES> 102
<INVENTORY> 1,561
<CURRENT-ASSETS> 5,091
<PP&E> 2,019
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,559
<CURRENT-LIABILITIES> 6,362
<BONDS> 0
103
0
<COMMON> 6,877
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,559
<SALES> 1,935
<TOTAL-REVENUES> 1,935
<CGS> 1,179
<TOTAL-COSTS> 3,951
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (75)
<INCOME-PRETAX> (2,085)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,085)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,085)
<EPS-BASIC> (.30)
<EPS-DILUTED> (.30)
</TABLE>
