<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 April 3, 1999
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or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-25898
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2821358
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Hartwell Avenue, Lexington, MA 02421-3141
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 674-0009
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's common stock outstanding at May 11,
1999 was 9,766,787.
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I - Financial Information:
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Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of April 3, 1999 and
January 2, 1999 1
Condensed Consolidated Statements of Operations for the three months
ended April 3, 1999 and March 28, 1998 2
Condensed Consolidated Statements of Cash Flows for the three months
ended April 3, 1999 and March 28, 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
Part II - Other Information:
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Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities and Use of Proceeds 18
Item 3 - Defaults Upon Senior Securities 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other Information
Item 6 Exhibits and Reports on Form 8-K 20
(a) Exhibits
Financial Data Schedule
(b) - Reports on Form 8-K
SIGNATURE(S) 21
</TABLE>
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Part I Financial Information:
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Item 1 Financial Statements
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
April 3, 1999 January 2, 1999
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents, inclusive of restricted cash of $0 and $ 1,809 $ 413
$117 at April 3, 1999 and January 2, 1999, respectively
Accounts receivable, trade, net of allowances for doubtful 1,687 2,542
accounts of $96 and $122, at April 3, 1999 and January 2, 1999,
respectively
Inventories, net 1,529 1,052
Prepaid expenses 601 711
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Total current assets 5,626 4,718
Property and equipment, net 2,306 2,581
Deferred financing costs 451 -
Other assets 39 41
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Total assets $ 8,422 $ 7,340
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Current liabilities:
Revolving line of credit $ - $ 1,301
Note payable to manufacturing contractor 483 476
Accounts payable 1,550 2,684
Related-party accounts payable 1,950 1,218
Accrued expenses and other current liabilities 506 594
Deferred revenue 640 40
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Total current liabilities 5,129 6,313
Deferred revenue 140 -
Commitments and contingencies (Note H) - -
Preferred Stock, $0.01 par value; Series B Redeemable Convertible 1,823 -
Preferred Stock, 300 shares issued and outstanding at April 3,
1999, no shares issued and outstanding at January 2, 1999
(liquidation value of $3 million)
Stockholders' equity:
Preferred Stock $.01 par value; 5,000,000 shares authorized; 9,215 9,215
Series A Convertible Preferred Stock, 3,350,894 shares issued
and outstanding at April 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; 94 94
9,416,187 shares issued and outstanding at April 3, 1999;
9,394,385 shares issued and outstanding at January 2, 1999
Additional paid-in capital, net of costs 37,318 35,936
Accumulated deficit (45,157) (44,218)
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Total stockholders' equity 1,470 1,027
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Total liabilities and stockholders' equity $ 8,422 $ 7,340
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
April 3, 1999 March 28, 1998
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<S> <C> <C>
Net product sales $3,213 $ 8,141
Net product royalties 537 -
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Total revenue 3,750 8,141
Cost of sales 1,503 7,309
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Gross profit 2,247 832
Operating expenses:
Selling, general, and 1,752 2,154
administrative
Research and development 1,401 1,639
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Total operating expenses 3,153 3,793
Loss from operations (906) (2,961)
Other income (expense):
Interest expense 38 109
Other income, net (5) (38)
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Loss before income taxes (939) (3,032)
Provision for income taxes - -
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Net loss $ (939) $(3,032)
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Net loss per common share
- diluted $(0.10) $(0.33)
====== =======
- basic $(0.10) $(0.33)
====== =======
Common shares used in computing
Net loss per share
- diluted 9,407 9,199
====== =======
- basic 9,407 9,199
====== =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 3, 1999 March 28, 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (939) $(3,032)
Adjustments to reconcile net income to net cash
Provided by (used for) operating activities:
Depreciation and amortization 292 407
Provision for bad debts 3 -
Change in operating assets and liabilities:
Accounts receivable 852 2,271
Receivable due from manufacturing contractor - (21)
Inventories (477) (468)
Prepaids and other assets 112 (51)
Accounts payable (1,134) 1,633
Related-party accounts payable 732 -
Deferred revenue 600 -
Note payable to manufacturing contractor 7 -
Accrued expenses and other current liabilities (88) (191)
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Net cash provided by (used for) operating activities (40) 548
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Cash flows from investing activities:
Purchase of property and equipment (17) (72)
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Net cash used for investing activities (17) (72)
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Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance 32 -
costs
Exercise of common stock options, net - 183
Proceeds from issuance of Redeemable Convertible
Preferred Stock 3,000 -
Payments of issuance costs on Series B Preferred Stock (20) -
Payments on revolving line of credit, net (1,301) (2,524)
Payments on issuing costs on Series B Preferred Stock (258) -
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Net cash provided by (used for) financing activities 1,453 (2,341)
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Net change in cash and cash equivalents 1,396 (1,865)
Cash and cash equivalents, beginning of period 413 2,481
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Cash and cash equivalents, end of period $ 1,809 $ 616
======= =======
Supplemental disclosure of non-cash financing transaction:
Deferred financing costs associated with common stock
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.
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation:
-----------------------
The accompanying financial statements have been presented on a going concern
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
We have continued to incur substantial losses from operations, 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 the our Annual Report on Form 10-K, as amended, for our fiscal year
ended January 2, 1999. Operating results for the three month period ended April
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 April 3, 1999, cash and cash equivalents consisted of $1.8 million
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:
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Inventories consisted of (in thousands):
April 3, 1999 January 2, 1999
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Raw materials $ 284 $ 448
Work in process 3 3
Finished goods 1,242 601
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$1,529 $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.
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D. Debt:
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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 May 12, 1999, prime rate was 7.75% and the 90 day
LIBOR rate of 5.0%. 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
$302,000 and will be treated at interest expense, amortized over the life of the
credit facility.
Due to the timing of closing the new loan and security agreement, there was
no outstanding balance on our new borrowing facility as of April 3, 1999.
Borrowing began in the first week of the second quarter of 1999.
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
April 3, 1999, $483,000 was outstanding and is subject to payment on demand.
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E. Redeemable Convertible Preferred Stock
--------------------------------------
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 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 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 $1.8 million, net of
estimated intrinsic value of the beneficial conversion terms, estimated to be
approximately $830,000, and net of the estimated value of the warrants,
described above, associated with this transaction.
F. 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.
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G. Income Taxes:
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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.
H. 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, 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. The
defendants deny any liability, believe they have meritorious defenses, and
intend to vigorously defend these and any similar lawsuits that may be filed,
although the ultimate outcome of these matters cannot yet be determined. If the
lawsuits are not resolved satisfactorily for us, there could be a material
adverse effect on our future financial condition and results of operations and,
accordingly, income (loss). We do not believe that the ultimate liability, if
any, is estimable or probable, and therefore no provision for any liability that
may result from the actions has been recognized in the accompanying consolidated
financial statements.
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<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. In addition, we began to
develop our fifth generation proprietary 128-bit video/graphics accelerator
chip. 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 or that the fifth generation product will
be completed 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,
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<PAGE>
. 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 79.2% of net sales in 1998, 43.8% of net sales in 1997, and
68.3% of net sales in 1996, 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 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 April 3, 1999 and March 28, 1998
Net Sales: Net sales decreased 53% to $3.8 million in the first quarter of
1999 from approximately $8.1 million in the first 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 third 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 45% to $2.2 million in the
first quarter of 1999 from $4.0 million in the first quarter of 1998,
representing 57.9% of net sales in the first quarter of 1999 compared to 49.4%
of net sales in the first quarter of 1998. Sales of 64-bit products represented
the remaining $1.6 million or 42.1.% of net sales during the first quarter of
1999 compared to approximately $4.2 million or 51.9% of net sales in the first
quarter of 1998.
Sales to OEMs decreased 75%, to approximately $1.5 million in the first
quarter of 1999 from approximately $5.9 million in the first quarter of 1998,
representing 39.5% in the first quarter of 1999 compared to 72.8% of net sales
in the first quarter of 1998. The decrease is attributable to a decrease in
sales to IBM from $2.6 million during the first quarter of 1998 to essentially
no sales during the first quarter of 1999, partially offset by sales of $1.5
million for non-recurring engineering efforts associated with a design win with
a major PC manufacturer for our SR9 graphics subsystem product.
Net sales to our domestic retail and two-tier distribution customers
increased 60% to $1.6 million in the first quarter of 1999 compared to
$1.0 million during the first quarter of 1998. Total international sales
decreased 93% to $234,000 in the first quarter of 1999 from approximately
$3.5 million in the first quarter of 1998.
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, through June 30, 1999. 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, 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
$537,000 in the first quarter of 1999, representing 14.1% of net sales during
the quarter.
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<PAGE>
Gross Profit: Gross profit was approximately $2.2 million in the first
quarter of 1999 compared to gross profit of approximately $832,000 in the first
quarter of 1998. As a percentage of net sales, gross profit improved to 57.9% in
the first quarter of 1999 from 10.3% in the first quarter of 1998. The increase
in gross profit during the first quarter of 1999 was largely attributable to
improved gross profit on sales of our Revolution IV products, representing 10.4%
of net sales. Sales of non-recurring engineering efforts associated with a
design win with a major PC manufacturer for our SR9 graphics subsystem product,
representing 39.5% of net sales, and net product royalties, representing 14.1%
of net sales, also contributed to the increase in gross profit in the first
quarter of 1999. In the first 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 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 18%, to approximately $1.8 million in the
first quarter of 1999 from $2.2 million in the first 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 47.4% in the first quarter of 1999 from
27.2% in the first quarter of 1998, primarily attributable to lower sales in the
first 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
decreased 13%, to approximately $1.4 million in the first quarter of 1999 from
approximately $1.6 million in the first quarter of 1998, resulting primarily
from decreased headcount, and closely controlled discretionary spending. 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. In addition, we began to develop our
fifth generation proprietary 128-bit video/graphics accelerator chip. As a
percentage of net sales, research and development expenses increased to 36.8% in
the first quarter of 1999 from 19.8% in the first quarter of 1998, primarily
attributable to lower sales in the first 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 proprietary technology efforts.
Interest Expense: Net interest expense for the first quarter of 1999 was
$38,000 compared to interest expense of $109,000 in the first quarter of 1998.
This decrease was attributable to lower average outstanding loan balances during
the first quarter of 1999, as compared to the first quarter of 1998.
Other Expense/Income: Other income totaled approximately $5,000 in the first
quarter of 1999 compared to other income of $38,000 in the first quarter of
1998. Other income during the first quarter of 1999 and the first quarter of
1998, was primarily attributable to interest income.
Provision for Income Taxes: During the first quarter of 1999 and the first
quarter of 1998, we did not provide an income tax benefit due to the uncertainty
of realizing the benefit from future taxable income.
-10-
<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 prospectus.
Competing Technologies May Render Some or All of Our Products or Future
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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
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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
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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
maintain and increase the volume and profitability of the products manufactured
for such customers would have a material adverse effect on our business.
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<PAGE>
The Highly Competitive Market for Our Products May Adversely Affect Our
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Business Results. Our current and prospective competitors include many
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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.
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.,
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. Our principal competitors on chip
technology include Intel Corporation, 3DFX Interactive, Inc., 3DLabs Inc., Ltd.,
Nvidia Corporation, ATI Technologies, Inc. and Matrox Electronic Systems, Inc.
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
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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
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Enhance Our Services, Take Advantage of Future Opportunities or Respond to
- --------------------------------------------------------------------------
Competitive Pressures. We require substantial working capital to fund our
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business. We have had significant operating losses and negative cash flow from
operations. Additional 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 materially adversely affect 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.
-12-
<PAGE>
We Depend Upon a Limited Group of Suppliers for Key Components. We depend
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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
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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
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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.
Costs of Defending Shareholder Litigation and the Possible Liability
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Relating to Such Litigation Could Divert Funds and Management Efforts Away from
- -------------------------------------------------------------------------------
the Manufacturing, Marketing and Sales of Our Products. We have been served
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notice of three lawsuits seeking class action status on or about June 11, 1996,
July 16, 1996 and October 16, 1996, respectively, filed in the United States
District Court for the District of Massachusetts naming as defendants our
company, the members of the Board of Directors during the period in question,
our former Chief Financial Officer and Treasurer, and the selling shareholders
and managing underwriters of our 1995 initial public offering. The alleged class
of plaintiffs consists of all persons who purchased shares of our common stock
on the open market between and including May 26, 1995 through January 31, 1996.
The plaintiffs, who seek unspecified damages, interest, costs and fees, allege,
among other things, that our Registration Statement and Prospectus in our
initial public offering and other public statements and reports filed with the
Securities and Exchange Commission during the class period in question contained
false and materially misleading statements. The defendants deny liability,
believe they have meritorious defenses and intend to vigorously defend against
these and any similar lawsuits that may be filed, although the ultimate outcome
of these matters cannot yet be determined. By order of the District Court, these
actions have been consolidated into a single action. If the lawsuit is not
resolved satisfactorily for us, there could be a material adverse effect on our
business.
-13-
<PAGE>
We May Have to Indemnify or Pay Damages to Some of Our OEM Customers for
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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.
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 were
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
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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. 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 April 29, 1999, we would be required
to issue up to 3,707,721 shares of common stock at a price per share that is
only approximately $.25 more than the last sale price of the common stock of
$2.50 on April 29, 1999. If the sale price of the common stock increases, 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 April 29, 1999, we would
be required to issue up to 1,422,273 shares of common stock at a price per share
that is approximately $.39 less than the last sale price of the common stock of
$2.50 on April 29, 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
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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 is currently approximately $2.44 per share. If the
series A and 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 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.
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<PAGE>
Our Computer System or our Suppliers' Computer System Could Fail When the
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Year Changes to 2000. We use a number of computer software programs and
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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 second
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
. 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 1999 will approximate an
additional $200,000.
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<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 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.
Significant pricing pressure for our products has been experienced during
1997, 1998 and the first quarter 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 quarter 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 $40,000 in the first quarter of 1999,
compared to operating activities which generated cash of approximately $548,000
in the first quarter of 1998. In the first quarter of 1999, cash was generated
through the net decrease to accounts receivable of $852,000.
In addition, a net decrease to accounts payable used cash of approximately
$402,000 net of a $732,000 increase in related party accounts payable. Decreases
in accounts receivable have primarily been attributable to lower sales levels in
the first quarter 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 April 3, 1999,
our principal sources of liquidity consisted of approximately $1.8 million of
cash and cash equivalents and a maximum borrowing capacity of $15 million
available under our revolving line of credit, as described below.
In the first quarter of 1999, investing activities used cash of
approximately $17,000 for purchases of computer and office equipment compared to
$72,000 for purchases and office equipment in the first quarter of 1998.
Financing activities provided cash of approximately $1.5 million during the
first quarter of 1999, attributable to the $3.0 million proceeds from issuing
Series B Preferred, partially offset by a reduction of the outstanding balance
of the revolving credit facility by $1.3 million. During the first quarter of
1998, financing activities used cash of $2.3 million attributable mostly to the
reduction of the outstanding balance of the revolving credit facility by
$2.5 million, partially offset by the issuance of common stock and the exercise
of common stock options.
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 credity 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.
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<PAGE>
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 May 12, 1999, the prime rate was 7.75% and the 90 day
LIBOR rate of 5.0%. 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.
Due to the timing of closing the new loan and security agreement, there was
no outstanding balance on our new borrowing facility as of April 3, 1999.
Borrowing began in the first week of the second quarter of 1999.
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 April
3, 1999, $483,000 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 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 118% in all other instances. The Series B
Preferred automatically converts into common stock three years after the date of
issuance.
We believe that our existing cash balances plus funds generated from product
sales, together with our new working capital line of credit and the preferred
stock financing described above, will be sufficient to fund operations at
anticipated levels through the second quarter of 1999. The additional new
financing, new revolving credit facility, and retained investment-banking
counsel should be beneficial to our efforts to fund operations into the second
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 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.
-17-
<PAGE>
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. The
defendants deny any liability, believe they have meritorious defenses, and
intend to vigorously defend these and any similar lawsuits that may be filed,
although the ultimate outcome of these matters cannot yet be determined. If the
lawsuits are not resolved satisfactorily for us, there could be a material
adverse effect on our future financial condition and results of operations and,
accordingly, income (loss). We do not believe that the ultimate liability, if
any, is estimable or probable, and therefore no provision for any liability that
may result from the actions has been recognized in the accompanying consolidated
financial statements.
A foreign inventor has asserted claims against several PC manufacturers,
including 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. On March 31, 1999, the Company sold 300 shares of
Series B Convertible Preferred Stock, par value $.01 per share
("Preferred Stock") to an investor. The preferred stock pays a 4%
dividend in cash or common stock at the option of the Company. This
preferred stock has liquidation preference over the common stock of the
Company, but does not have preference over the Series A Preferred
Stock. The holder of the Series B Preferred Stock does not have voting
rights and does not have rights to a seat on the Company's Board of
-18-
<PAGE>
Directors. In addition, the investor received a three year warrant to
purchase 195,000 shares of common stock of the Company at $3.45 per
share. The Company issued a three-year warrant to Brighton Capital to
purchase 30,000 shares of the Company's common stock at an exercise
price of $3.45 per share. The Company also issued a ten-year warrant to
FSC Corporation to purchase 211,000 shares of the Company's common
stock at an exercise price of $2.86 per share.
(2) Underwriter. No underwriters were involved in this transaction.
(3) Consideration. The Company sold the 300 shares of Series B
preferred Stock at a stated value of $10,000 per share. The Company
received $3,000,000 less the brokers commission and legal fees for the
holder of this preferred stock of $200,000. The broker also received a
three year warrant to purchase 30,000 shares of common stock of the
Company at $3.45 per share. The warrant to FSC Corporation was issued
in conjunction with the Company entering into a new credit facility.
(4) Exemption from registration claimed. The Company issued the Series
B Convertible Preferred Stock in reliance upon Regulation D under
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 and exercise. Each share of Series B Preferred
Stock is convertible into common stock of the Company at $4.27 per
share, if the closing bid price for the common stock is $4.27 per share
or higher. If the closing bid price for a period of 90 days prior to
the conversion date is less than $4.27 per share, the preferred stock
is convertible into common stock at 88 per cent of the average of the
ten lowest closing bid prices during the thirty day period prior to the
conversion date. The conversion is limited to 25 per cent per month
commencing on July 31, 1999. The Company has the option to redeem the
preferred stock at any time. The redemption amount is 118 per cent of
the preferred stock investment. If the closing bid price of the common
stock is less than $1.60 prior to October 31, 1999, the redemption
amount is 110 per cent of the preferred stock investment. The preferred
stock is automatically converted into common stock three years after
date of issuance.
(6) Use of proceeds. The proceeds for the sale of Series B Convertible
Preferred Stock were used for working capital purposes.
(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
In May 1999, the Company announced the appointment of Wallace E. Smith as
President, Chief Executive Officer and a member of the Board of Directors. He
replaces Andrew Najda, who resigned as Chief Executive Officer and Chairman of
the Board of Directors. William H. Thalheimer was appointed Chairman of the
Board of Directors. In addition, Timothy J. Burns was appointed Chief Financial
Officer and Treasurer.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
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<PAGE>
The following is a list of exhibits filed as part of this Quarterly
Report on Form 10-Q.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
3.1 Restated By-Laws, as amended
4.1 * Convertible Preferred Stock Purchase Agreement dated March 31,
1999 by and between the Company and KA Investment LDC
4.2 * Registration Rights Agreement by and between the Company and KA
Investments LDC
4.3 * Common Stock Purchase Warrant dated March 31, 1999 issued by the
Company to Brighton Capital Ltd.
4.4 * Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of Number Nine Visual Technology
Corporation
4.5 * Common Stock Purchase Warrant dated March 31, 1999 issued by the
Company to KA Investments LDC
4.6 * Common Stock Purchase Warrant dated March 31, 1999 issued by the
Company to FSC Corporation
10.1 * Loan and Securities Agreement dated March 31, 1999 by and between
the Company and BankBoston, N.A.
10.2 * Revolving Credit Note dated March 31, 1999 issued by the Company
to BankBoston, N.A.
27.1 Financial Data Schedule
99.1 Employee and Director resignation letter, dated April 6, 1999,
between the Registration and Andrew Najda
</TABLE>
. Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference from our Current Report on Form 8-K filed
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarterly period ended April 3,
1999.
-20-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
Date: May 14, 1999 By: /s/ Timothy J. Burns
------------------------------------------------
Timothy J. Burns
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 14, 1999 By: /s/ William L. Ralph .
--------------------------------------------------
William L. Ralph
Chief Operating Officer
(Duly Authorized Officer)
-21-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
3.1 Restated By-Laws, as amended
4.1 * Convertible Preferred Stock Purchase Agreement dated March 31,
1999 by and between the Company and KA Investment LDC
4.2 * Registration Rights Agreement by and between the Company and KA
Investments LDC
4.3 * Common Stock Purchase Warrant dated March 31, 1999 issued by the
Company to Brighton Capital Ltd.
4.4 * Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of Number Nine Visual Technology
Corporation
4.5 * Common Stock Purchase Warrant dated March 31, 1999 issued by the
Company to KA Investments LDC
4.6 * Common Stock Purchase Warrant dated March 31, 1999 issued by the
Company to FSC Corporation
10.1 * Loan and Securities Agreement dated March 31, 1999 by and between
the Company and BankBoston, N.A.
10.2 * Revolving Credit Note dated March 31, 1999 issued by the Company
to BankBoston, N.A.
27.1 Financial Data Schedule
99.1 Employee and Director resignation letter, dated April 6, 1999,
between the Registrant and Andrew Najda
</TABLE>
. Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference from our Current Report on Form 8-K filed
-22-
<PAGE>
EXHIBIT 3.1
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
RESTATED BY-LAWS, AS AMENDED
ARTICLE I - - STOCKHOLDERS
--------- ------------
Section 1. Annual Meeting. An annual meeting of the stockholders. for the
--------- --------------
election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix.
Section 2. Special Meetings. Special meetings of the stockholders, for
--------- ----------------
any purpose or purposes prescribed in the notice of the meeting, may be called
by the Chairman of the Board, if any, the Chief Executive Officer, if any, the
President or the Board of Directors, by the affirmative vote of a majority of
the Whole Board, provided, however, that a special meeting for the purpose of
election of directors may only be called by the Board of Directors. Special
meetings of the stockholders shall be held at such place, on such date, and at
such time as shall be fixed by the Board of Directors or the person calling the
meeting. The term "Whole Board" shall mean the total number of authorized
directors, whether or not there exists any vacancies in previously authorized
directorships.
Section 3. Notice of Meetings. Written notice of the place, date, and
--------- ------------------
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation, as amended and restated from time to time).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted that might have been
transacted at the original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of a
--------- ------
majority of the voting power of the outstanding shares of the stock entitled to
vote at the meeting present, in person or by proxy, shall constitute a quorum
for all purposes, unless or except to the extent that the presence of a larger
number may be required by law. Where a separate vote by a class or classes, or
series thereof, is required, the holders of a majority of the voting power of
the outstanding shares of such class or classes, or series, present, in person
or by proxy, shall constitute a quorum entitled to take action with respect to
that vote on that matter.
-1-
<PAGE>
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the voting power of the shares of stock entitled
to vote who are present, in person or by proxy, may adjourn the meeting to
another place, date, or time.
Section 5. Organization. Such person as the Board of Directors may have
--------- ------------
designated or, in the absence of such a person, the Chairman of the Board, if
any, or, in his absence, the Chief Executive Officer, if any, or, in his
absence, the President, or, in his absence, such person as may be chosen by the
holders of a majority of the shares entitled to vote who are present, in person
or by proxy, shall call to order any meeting of the stockholders and act as
chairman of the meeting. In the absence of the Secretary of the Corporation,
the secretary of the meeting shall be such person as the chairman of the meeting
appoints.
Section 6. Conduct of Business. The chairman of any meeting of
--------- -------------------
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as may seem to him in order. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
Section 7. Notice of Stockholder Business and Nominations.
--------- ----------------------------------------------
A. Annual Meetings of Stockholders.
-------------------------------
(1) Nominations of persons for election to the Board of Directors
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this Section, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section.
(2) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (c) of paragraph A.(1) of
this Section, the stockholder must have (i) given timely notice thereof in
writing to the Secretary of the Corporation, (ii) such other business must
otherwise be a proper matter for stockholder action, (iii) if the stockholder,
or the beneficial owner on whose behalf any such proposal or nomination is made,
has provided the Corporation with a Solicitation Notice, as that term is defined
below in this paragraph A.(2), such stockholder or beneficial owner must, in the
case of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the Corporation's voting shares required
under applicable law to carry any such proposal, or in the case of a nomination
or nominations, have delivered a proxy statement and form of proxy to holders of
at least a percentage of the Corporation's voting shares reasonably believed by
such stockholder or beneficial owner to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice and (iv) if no
Solicitation Notice relating thereto has been timely provided pursuant to this
Section, the stockholder or beneficial holder proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section. To be
timely, a stockholder's notice shall be
-2-
<PAGE>
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the forty-fifth (45th) day nor earlier
than the close of business on the seventy-fifth (75th) day prior to the first
anniversary of the preceding year's mailing date for stockholder proxy
materials; provided, however, that in the event that the date of the annual
meeting is more than thirty (30) days before or more than sixty (60) days after
the date of the annual meeting in the preceding year or if an annual meeting was
not held in the preceding year, notice by the stockholder to be timely must be
so delivered not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or the close of
business on the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made by the Corporation. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case, pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; (c) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made (i)
the name and address of such stockholder, as they appear on the Corporation's
books, and of such beneficial owner and (ii) the class and number of shares of
the Corporation that are owned beneficially and held of record by such
stockholder and such beneficial owner; and (d) whether either such stockholder
or the beneficial owner intends to deliver a proxy statement and form of proxy
to holders of, in the case of a proposal, at least the percentage of the
Corporation's voting shares required under applicable law to carry the proposal
or, in the case of a nomination or nominations, a sufficient number of holders
of the Corporation's voting shares to elect such nominee or nominees (an
affirmative statement of such intent, a "Solicitation Notice").
(3) Notwithstanding anything in the second sentence of paragraph
A.(2) of this Section to the contrary, in the event that the number of directors
to be elected to the Board of Directors is increased and there is no public
announcement by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least seventy (70)
days prior to the first anniversary of the preceding year's annual meeting (or,
if the annual meeting is held more than thirty (30) days before or sixty (60)
days after such anniversary date, at least seventy (70) days prior to such
annual meeting), a stockholder's notice required by this Section shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive office of the Corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the Corporation.
-3-
<PAGE>
B. Special Meetings of Stockholders.
--------------------------------
Only such business shall be conducted at a special meeting of
stockholders as shall have been set forth in the Corporation's notice of
meeting. Nominations of persons for election to the Board of Directors may be
made at a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the direction of
the Board of Directors or (b) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by any stockholder
of the Corporation who is a stockholder of record at the time of giving of
notice of the special meeting, who shall be entitled to vote at the meeting and
who complies with the notice procedures set forth in this Section. In the event
the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board, any such stockholder may nominate a
person or persons (as the case may be), for election to such position(s) as
specified in the Corporation's notice of meeting, if the stockholder's notice
required by paragraph A.(2) of this Section shall be delivered to the Secretary
at the principal executive offices of the Corporation not earlier than the
ninetieth (90th) day prior to such special meeting nor later than the close of
business on the later of the sixtieth (60th) day prior to such special meeting,
or the tenth (10th) day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting.
C. General.
-------
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Section. Except as otherwise provided by law or these By-laws, the Chairman
of the meeting shall have the power and duty to determine whether a nomination
or any business proposed to be brought before the meeting was made or proposed,
as the case may be, in accordance with the procedures set forth in this Section
and, if any proposed nomination or business is not in compliance herewith to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section shall be deemed to affect any rights (i)
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of Preferred Stock to elect directors under specified
circumstances.
Section 8. Proxies and Voting. At any meeting of the stockholders, every
--------- ------------------
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument in writing or by a transmission permitted by law filed in accordance
with the procedure established for the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or
-4-
<PAGE>
transmission created pursuant to this Section may be substituted or used in lieu
of the original writing or transmission for any and all purposes for which the
original writing or transmission could be used, provided that such copy,
facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by voice vote. Any vote not taken by voice
shall be taken by ballots, each of which shall state the name of the stockholder
or proxy voting and such other information as may be required under the
procedure established for the meeting. The Corporation may, and to the extent
required by law, shall, in advance of any meeting of stockholders, appoint one
or more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who falls to act. If no inspector or alternate is able to act at a
meeting of stockholders, the person presiding at the meeting may, and to the
extent required by law, shall, appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his duties, shall
take and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his ability.
Except as otherwise provided in the terms of any class or series of
Preferred Stock of the Corporation, all elections at any meeting of stockholders
shall be determined by a plurality of the votes cast, and except as otherwise
required by law, all other matters determined by stockholders at a meeting shall
be determined by a majority of the votes cast affirmatively or negatively.
Section 9. Stock List. A complete list of stockholders entitled to vote
--------- ----------
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in such stockholder's name, shall be open to the examination of any
such stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
ARTICLE II - BOARD OF DIRECTORS
---------- ------------------
Section 1. General Powers, Number and Term of Office. The business and
--------- -----------------------------------------
affairs of the Corporation shall be managed by or under the direction of its
Board of Directors. The number of directors who shall constitute the Whole Board
shall be such number as the Board of Directors shall from time to time have
designated. Commencing prior to the Corporation's annual meeting of stockholders
or any special meeting in lieu thereof in 1996, the Board of Directors shall be
divided into three classes, as nearly equal in number as reasonably possible.
The term of office of the first class shall expire at the annual meeting of
stockholders or any special meeting in lieu thereof in 1996, the term of office
of the second class shall expire at the annual meeting of stockholders or any
special meeting in lieu thereof in 1997, the term of office of the third class
shall expire at the annual meeting of stockholders or any special meeting in
lieu thereof in 1998,
-5-
<PAGE>
and with respect to each class, until their successors are duly elected and
qualified. At each annual meeting of stockholders or special meeting in lieu
thereof following such initial classification, directors elected to succeed
those directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders or special meeting
in lieu thereof after their election and until their successors are duly elected
and qualified.
Section 2. Vacancies and Newly Created Directorships. Subject to the
--------- -----------------------------------------
rights of the holders of any class or series of Preferred Stock, and except as
otherwise determined by the Board of Directors or required by law, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the directors then in office, though less than a
quorum, or the sole remaining director; a director so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
office of the class to which he has been elected expires, if applicable, and if
no such classes have been established, at the next annual meeting of
stockholders and until such director's successor shall have been duly elected
and qualified. In the event of any increase or decrease in the authorized number
of directors, (i) each director then serving as such shall nevertheless continue
as a director of the class of which he is a member until the expiration of his
current term or his prior death, retirement, removal or resignation and (ii) the
newly created or eliminated directorships resulting from such increase or
decrease shall if reasonably possible be apportioned by the Board of Directors
among the three classes of directors so as to ensure that no one class has more
than one director more than any other class. To the extent reasonably possible,
consistent with the foregoing rule, any newly created directorships shall be
added to those classes whose terms of office are to expire at the latest dates
following such allocation and newly eliminated directorships shall be subtracted
from those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to time by
resolution adopted by a majority of the directors then in office, although less
than a quorum. No decrease in the number of authorized directors constituting
the Board shall shorten the term of any incumbent director.
Section 3. Resignation. Any director may resign at any time upon written
--------- -----------
notice to the Corporation at its principal place of business or to the Chief
Executive Officer, President or Secretary. Such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
--------- ----------------
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required.
Section 5. Special Meetings. Special meetings of the Board of Directors
--------- ----------------
may be called by a majority of the Whole Board or by the Chairman of the Board,
if any, by the Chief Executive Officer, if a director, or by the President, if a
director, and shall be held at such place, on such date, and at such time as
they or he shall fix. Notice of the place, date, and time of each such special
meeting shall be given each director by whom it is not waived by mailing written
notice not less than five (5) days before the meeting, by sending written notice
by recognized overnight courier service not less than two (2) days before the
meeting or orally or by
-6-
<PAGE>
telegraphing or telexing or by facsimile transmission of the same not less than
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 6. Quorum. At any meeting of the Board of Directors, a majority
--------- ------
of the Whole Board shall constitute a quorum for all purposes. If a quorum shall
fail to attend any meeting, a majority of those present may adjourn the meeting
to another place, date, or time, without further notice or waiver thereof.
Section 7. Participation in Meetings by Conference Telephone. Members of
--------- -------------------------------------------------
the Board of Directors, or of any committee thereof, may participate in a
meeting of the Board of Directors or committee by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other and such participation shall constitute
presence in person at such meeting.
Section 8. Conduct of Business. At any meeting of the Board of Directors,
--------- -------------------
business shall be transacted in such order and manner as the Board of Directors
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law. Action may be taken by the Board of Directors without a meeting
if all members of the Board of Directors who are then in office consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 9. Powers. The Board of Directors may, except as otherwise
--------- ------
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges on
such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or non-negotiable,
secured or unsecured, to borrow funds and guarantee obligations, and to do all
things necessary in connection therewith;
(4) To remove any officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(5) To confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock option, stock purchase, bonus or
other compensation plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and
-7-
<PAGE>
(8) To adopt from time to time regulations not inconsistent herewith, for
the management of the Corporation's business and affairs.
Section 10. Compensation of Directors. Directors, as such, may receive,
---------- -------------------------
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
ARTICLE III - COMMITTEES
----------- ----------
Section 1. Committees of the Board of Directors. The Board of Directors,
--------- ------------------------------------
by a vote of a majority of the Whole Board, may from time to time designate
committees of the Board of Directors, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board of Directors
and shall, for those committees and any others provided for herein, elect a
director or directors to serve as the member or members, designating, if it
desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of a committee. Any committee so designated
may exercise the power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution that designates the committee or a supplemental resolution
of the Board of Directors shall so provide. In the absence or disqualification
of any member of any committee and any alternate member in his place, the member
or members of the committee present at the meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may by unanimous vote
appoint another member of the Board of Directors to act at the meeting in the
place of the absent or disqualified member.
Section 2. Conduct of Business. Each committee of the Board of Directors
--------- -------------------
may determine the procedural rules for meeting and conducting its business and
shall act in accordance therewith, except as otherwise provided herein or
required by law. Adequate provisions shall be made for notice to members of all
meetings of committees. One-third (1/3) of the members of any committee shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
ARTICLE IV - OFFICERS
---------- --------
Section 1. Generally. The officers of the Corporation shall consist of a
--------- ---------
President, one or more Vice Presidents, a Secretary, a Treasurer and such other
officers as may from time to time be appointed by the Board of Directors or the
Chief Executive Officer, including, without limiting the generality of the
foregoing, a Chairman of the Board, as Chief Executive Officer, a Vice Chairman
of the Board and one or more Assistant Secretaries and Assistant Treasurers.
Officers shall be elected by the Board of Directors, which shall consider that
subject at its first meeting after every annual meeting of stockholders. The
Chief Executive Officer may appoint from time to time Vice Presidents, Assistant
Secretaries and Assistant Treasurers. Each officer shall hold office until his
successor is elected and qualified or if earlier, until he dies, resigns, is
removed or becomes disqualified, unless a shorter term is specified by the Board
of Directors at the time of election of such officer. Any number of offices may
be held by the same person.
-8-
<PAGE>
Section 2. Chairman of the Board. Unless otherwise provided by resolution
--------- ---------------------
of the Board of Directors, the Chairman of the Board, if any, shall preside at
all meetings of the stockholders and all meetings of the Board of Directors at
which he is present and shall have such authority and perform such duties as may
be prescribed by these by-laws or from time to time determined by the Board of
Directors. The Chairman of the Board shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized.
Section 3. Vice Chairman of the Board. The Vice Chairman of the Board, if
--------- --------------------------
any, shall have such powers and duties as may be delegated to him by the Board
of Directors. To the extent not otherwise provided herein, the Vice Chairman of
the Board shall perform the duties and exercise the powers of the Chairman of
the Board in the event of the Chairman's absence or disability.
Section 4. Chief Executive Officer. The Chief Executive Officer shall be
--------- -----------------------
the chief executive officer of the Corporation and shall, subject to the
direction of the Board of Directors, have general supervision and control of its
business. Unless otherwise provided by resolution of the Board of Directors, in
the absence of the Chairman of the Board, if any, the Chief Executive Officer
shall preside at all meetings of the stockholders and, if a director, meetings
of the Board of Directors. The Chief Executive Officer shall have general
supervision and direction of all of the officers, employees and agents of the
Corporation.
Section 5. President. Except for meetings at which the Chief Executive
--------- ---------
Officer or the Chairman of the Board, if any, presides, the President shall, if
present, preside at all meetings of stockholders, and if a director, at all
meetings of the Board of Directors. The President shall, subject to the control
and direction of the Chief Executive Officer and the Board of Directors, have
and perform such powers and duties as may be prescribed by these by-laws or from
time to time be determined by the Chief Executive Officer or the Board of
Directors. The President shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized. In the
absence of a Chief Executive Officer, the President shall be the chief executive
officer of the Corporation and shall, subject to the direction of the Board of
Directors, have general supervision and control of its business and shall have
general supervision and direction of all of the officers, employees and agents
of the Corporation.
Section 6. Vice President. Each Vice President shall have such powers and
--------- --------------
duties as may be delegated to him by the Board of Directors, the Chief Executive
Officer and the President. The Board of Directors may designate a Vice
President to perform the duties and exercise the powers of the President in the
event of the President's absence or disability.
Section 7. Treasurer. The Treasurer shall have the responsibility for
--------- ---------
maintaining the financial records of the Corporation. The Treasurer shall make
such disbursements of the funds of the Corporation as are authorized and shall
render from time to time an account of all such transactions and of the
financial condition of the Corporation. The Treasurer shall also perform such
other duties as the Board of Directors may from time to time prescribe.
-9-
<PAGE>
Section 8. Secretary. The Secretary shall issue all authorized notices
--------- ---------
for, and shall keep minutes of, all meetings of the stockholders and the Board
of Directors. The Secretary shall have charge of the corporate books and shall
perform such other duties as the Board of Directors may from time to time
prescribe.
Section 9. Delegation of Authority. The Board of Directors may from time
--------- -----------------------
to time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provisions hereof.
Section 10. Removal. Any officer of the Corporation may be removed at any
---------- -------
time, with or without cause, by the Board of Directors. Any officer elected or
appointed by the Chief Executive Officer may be removed at any time by the Board
of Directors or by the Chief Executive Officer.
Section 11. Resignation. Any officer may resign by giving written notice
---------- -----------
of his resignation to the Chairman of the Board, if any, the Chief Executive
Officer, if any, the President, or the Secretary, or to the Board of Directors
at a meeting of the Board, and such resignation shall become effective at the
time specified therein.
Section 12. Bond. If required by the Board of Directors, any officer
---------- ----
shall give the Corporation a bond in such sum and with such surety or sureties
and upon such terms and conditions as shall be satisfactory to the Board of
Directors, including without limitation a bond for the faithful performance of
the duties of his office and for the restoration to the Corporation of all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control and belonging to the Corporation.
Section 13. Action with Respect to Securities of Other Corporations.
---------- -------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President or the Chief
Executive Officer or any officer of the Corporation authorized by the President
or the Chief Executive Officer shall have power to vote and otherwise act on
behalf of the Corporation, in person or by proxy, at any meeting of stockholders
of or with respect to any action of stockholders of any other corporation in
which this Corporation may hold securities and otherwise to exercise any and all
rights and powers which this Corporation may possess by reason of its ownership
of securities in such other corporation.
ARTICLE V - INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------------------
Section 1. Right to Indemnification. Each person who was or is made a
--------- ------------------------
party or is threatened to be made a party to or is otherwise involved
(including, without limitation, as a witness) in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director or an officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "Indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such
-10-
<PAGE>
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than such law permitted the Corporation
to provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
Indemnitee in connection therewith; provided, however, that, except as provided
in Section 3 of this Article with respect to proceedings to enforce rights to
indemnification or as otherwise required by law, the Corporation shall not be
required to indemnify or advance expenses to any such Indemnitee in connection
with a proceeding (or part thereof) initiated by such Indemnitee unless such
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation.
Section 2. Right to Advancement of Expenses. The right to indemnification
--------- --------------------------------
conferred in Section 1 of this Article shall include the right to be paid by the
Corporation the expenses (including attorney's fees) incurred in defending any
such proceeding in advance of its final disposition; provided, however, that, if
the Delaware General Corporation Law requires, an advancement of expenses
incurred by an Indemnitee in his capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such Indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking, by or on behalf of
such Indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such Indemnitee is not entitled to be indemnified for such expenses
under this Section 2 or otherwise. The rights to indemnification and to the
advancement of expenses conferred in Sections 1 and 2 of this Article shall be
contract rights and such rights shall continue as to an Indemnitee who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the Indemnitee's heirs, executors and administrators. Any repeal or
modification of any of the provisions of this Article shall not adversely affect
any right or protection of an Indemnitee existing at the time of such repeal or
modification.
Section 3. Right of Indemnitees to Bring Suit. If a claim under Section 1
--------- ----------------------------------
or 2 of this Article is not paid in full by the Corporation within sixty (60)
days after a written claim has been received by the Corporation, except in the
case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty (20) days, the Indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim.
If successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall also be entitled to be paid the expenses of
prosecuting or defending such suit. In (i) any suit brought by the Indemnitee
to enforce a right to indemnification hereunder (but not in a suit brought by
the Indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
Indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the Indemnitee is proper in the circumstances
because the Indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the Indemnitee has not met such applicable standard of
conduct, shall create a presumption that
-11-
<PAGE>
the Indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the Indemnitee, be a defense to such suit. In any suit
brought by the Indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the Indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article or otherwise shall be on the
Corporation.
Section 4. Non-Exclusivity of Rights. The rights to indemnification and
--------- -------------------------
to the advancement of expenses conferred in this Article shall not be exclusive
of any other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation as amended from time to
time, these by-laws, any agreement, any vote of stockholders or disinterested
directors or otherwise.
Section 5. Insurance. The Corporation may maintain insurance, at its
--------- ---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
Section 6. Indemnification of Employees and Agents of the Corporation.
--------- ----------------------------------------------------------
The Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses to
any employee or agent of the Corporation to the fullest extent of the provisions
of this Article with respect to the indemnification and advancement of expenses
of directors and officers of the Corporation.
ARTICLE VI - STOCK
---------- -----
Section 1. Certificates of Stock. Each stockholder shall be entitled to a
--------- ---------------------
certificate signed by, or in the name of the Corporation by, the Chairman or
Vice-Chairman of the Board of Directors, the President or a Vice President, and
by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant
Treasurer, certifying the number of shares owned by him. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only upon
--------- -------------------
the transfer books of the Corporation kept at an office of the Corporation or by
transfer agents designated to transfer shares of the stock of the Corporation.
Except where a certificate is issued in accordance with Section 4 of this
Article, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date. In order that the Corporation may determine the
--------- -----------
stockholders entitled to notice of or to vote at any meeting of stockholders, or
to receive payment of any dividend or other distribution or allotment of any
rights or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date on
which the resolution fixing the record date is adopted and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; provided, however, that if no
record date is fixed by the Board of Directors, the record date for determining
-12-
<PAGE>
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and, for determining
stockholders entitled to receive payment of any dividend or other distribution
or allotment of rights or to exercise any rights of change, conversion or
exchange of stock or for any other purpose, the record date shall be at the
close of business on the day on which the Board of Directors adopts a resolution
relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
--------- --------------------------------------
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and registration
--------- -----------
of certificates of stock shall be governed by such other regulations as the
Board of Directors may establish.
ARTICLE VII - NOTICES
----------- -------
Section 1. Notices. Except as otherwise specifically provided herein or
--------- -------
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by recognized
courier service, prepaid telegram, telex, mailgram or by facsimile transmission.
Any such notice shall be addressed to such stockholder, director, officer,
employee or agent at his last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mails, by courier or by telegram, telex,
facsimile transmission or mailgram, shall be the time of the giving of the
notice.
Section 2. Waivers. A written waiver of any notice, signed by a
--------- -------
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VIII - MISCELLANEOUS
------------ -------------
Section 1. Facsimile Signatures. In addition to the provisions for use of
--------- --------------------
facsimile signatures elsewhere specifically authorized in these by-laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 2. Corporate Seal. The Board of Directors may provide a suitable
--------- --------------
seal, containing the name of the Corporation, which seal shall be in the charge
of the Secretary. If and
-13-
<PAGE>
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Secretary or Treasurer or by an Assistant
Secretary or Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records. Each director, each
--------- ----------------------------------------
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his duties, be fully protected
in relying in good faith upon the books of account or other records of the
Corporation and upon such information, opinions, reports or statements presented
to the Corporation by any of its officers or employees or committees of the
Board of Directors so designated, or by any other person as to matters which
such director or committee member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
--------- -----------
fixed by the Board of Directors.
Section 5. Time Periods. In applying any provision of these by-laws that
--------- ------------
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
Section 6. Pronouns. Whenever the context may require, any pronouns used
--------- --------
in these by-laws shall include the corresponding masculine, feminine or neuter
forms.
ARTICLE IX - AMENDMENTS
---------- ----------
These by-laws may be amended or repealed by the affirmative vote of a
majority of the Whole Board at any meeting or by the stockholders by the
affirmative vote of seventy-five percent (75%) of the outstanding voting power
of the then-outstanding shares of capital stock of the Corporation, entitled to
vote generally in the election of directors, at any meeting at which a proposal
to amend or repeal these by-laws is properly presented.
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 1,809
<SECURITIES> 0
<RECEIVABLES> 1,687
<ALLOWANCES> 96
<INVENTORY> 1,529
<CURRENT-ASSETS> 5,626
<PP&E> 2,306
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,422
<CURRENT-LIABILITIES> 5,129
<BONDS> 0
0
9,215
<COMMON> 0
<OTHER-SE> (7,745)
<TOTAL-LIABILITY-AND-EQUITY> 8,422
<SALES> 3,213
<TOTAL-REVENUES> 3,750
<CGS> 1,503
<TOTAL-COSTS> 4,656
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> (939)
<INCOME-TAX> 0
<INCOME-CONTINUING> (939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (939)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
<PAGE>
Exhibit 99.1
April 6, 1999
Number Nine Board of Directors
18 Hartwell Ave.
Lexington, MA 02421-3141
Dear Board Members:
I want to inform you that for personal reasons I'm resigning from Number
Nine, both from CEO position and from Board of Directors. My last day of
employment will be May 7th.
It was a very difficult yet necessary decision for me. The eighteen years of
association with Number Nine from living room startup, through IPO and present
has been incredibly rich in experiences and sentiments. They will stay with me
forever.
I still do believe in Number Nine's mission and its destiny for success. I
truly with Number Nine and all Niner's the best in this long and winding road.
Sincerely,
/s/ Andrew Najda
Andrew Najda
CEO and Chairman of the Board
