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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1997
REGISTRATION NO. 333-21343
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ACCELGRAPHICS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER)
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DELAWARE 3670 77-0450627
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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1942 ZANKER ROAD, SAN JOSE, CALIFORNIA 95112 (408) 441-1556
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
JEFFREY W. DUNN
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ACCELGRAPHICS, INC.
1942 ZANKER ROAD, SAN JOSE, CALIFORNIA 95112, (408) 441-1556
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
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MICHAEL W. HALL JOHN W. CAMPBELL
EDMUND S. RUFFIN, JR. TAMARA POWELL TATE
AMY L. CUSTALOW DAVID LORIE
MARIBETH YOUNGER MORRISON & FOERSTER LLP
VENTURE LAW GROUP, A PROFESSIONAL CORPORATION 425 MARKET STREET
2800 SAND HILL ROAD SAN FRANCISCO, CALIFORNIA 94105
MENLO PARK, CALIFORNIA 94025 (415) 268-7000
(415) 854-4488
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED MAXIMUM
DOLLAR AMOUNT MAXIMUM OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
- -----------------------------------------------------------------------------------------------------------
Common Stock............................ $29,900,000 $10.00 $29,900,000 $9,060.61
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(1) Dollar amount to be registered consists of 2,990,000 shares of Common Stock
at $10.00 per share.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) Previously paid in connection with the Company's initial filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Dated April 10, 1997
2,600,000 Shares
LOGO
Common Stock
------------------------------
Of the 2,600,000 shares of Common Stock offered hereby, 2,145,000 shares
are being issued and sold by AccelGraphics, Inc. ("AccelGraphics" or the
"Company") and 455,000 shares are being sold by certain selling stockholders
(the "Selling Stockholders"). See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Application has been made to have the Common Stock
approved for quotation on the Nasdaq National Market under the symbol "ACCL." It
is currently estimated that the initial public offering price will be between
$9.00 and $10.00 per share. See "Underwriting" for information relating to the
determination of the initial public offering price.
------------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 HEREOF.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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==================================================================================================
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount (1) Company (2) Stockholders (2)
- --------------------------------------------------------------------------------------------------
Per Share.................. $ $ $ $
Total (3).................. $ $ $ $
==================================================================================================
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses, estimated at $750,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 390,000
additional shares of Common Stock at the Price to Public less the
Underwriting Discount to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
----------------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected that
delivery of certificates for such shares will be made at the offices of Cowen &
Company, New York, New York, on or about , 1997.
COWEN & COMPANY
ROBERTSON, STEPHENS & COMPANY
SOUNDVIEW FINANCIAL GROUP, INC.
, 1997
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[PICTURE]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN
MARKET AND MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
The AccelGraphics logo, AccelGraphics(R), AccelVIEW(R) and AG300(R) are
registered trademarks of the Company. AccelECLIPSE(TM), AccelSTAR(TM), AG500(TM)
and Flying Carpet(TM) are trademarks of the Company. This Prospectus also
contains the trademarks of other companies.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Except as set forth in the Consolidated
Financial Statements or as otherwise noted, all information in this Prospectus
(i) assumes a one-for-two reverse stock split of the Common Stock and Preferred
Stock which was effective on March 13, 1997, (ii) assumes the conversion of all
outstanding shares of Preferred Stock into Common Stock upon the closing of this
offering, (iii) reflects the reincorporation of the Company from California to
Delaware which was effective on March 12, 1997, and (iv) assumes no exercise of
the Underwriters' over-allotment option. See "Description of Capital Stock" and
"Underwriting."
THE COMPANY
AccelGraphics, Inc. ("AccelGraphics" or the "Company") is a leading
provider of high-performance, cost-effective, 3-dimensional ("3D") graphics
subsystems, software accelerators and application utility software products for
the professional Windows NT and Windows 95 markets. The Company pioneered the
development of professional 3D graphics subsystems for use with Microsoft's
Windows NT operating system ("NT"). A 3D graphics subsystem integrates graphics
acceleration chip(s), specialized hardware, firmware, software and memory. The
Company's 3D graphics subsystems, when included in an Intel Pentium, Pentium Pro
or Digital Alpha-based computer, create a new class of computer system called a
"Personal Workstation." Personal Workstations, which often sell for less than
$10,000, provide capabilities and performance comparable to more expensive 3D
graphics RISC/UNIX workstations. In January 1995, AccelGraphics shipped what the
Company believes was the first 3D graphics subsystem for NT and currently offers
four distinct 3D graphics subsystem product lines.
3D computing is a highly effective way to realistically and intuitively
visualize, analyze, animate and communicate data. Engineers, designers,
scientists and researchers who previously used 2-dimensional ("2D") technology
now can work faster and more efficiently by using 3D technology to create,
modify and complete more sophisticated models. 3D computing is inherently
complex and computationally demanding, requiring up to or greater than half a
billion calculations per second. Since the 1980s, professionals have primarily
used RISC/UNIX workstations for 3D computing. However, RISC/UNIX workstation
vendors have developed proprietary operating systems, processors, buses,
application programming interfaces ("APIs") and 3D graphics subsystems,
resulting in expensive systems which are often difficult to integrate into
corporate computing networks.
In contrast to RISC/UNIX workstations, 3D capabilities of the personal
computer ("PC") have been extremely limited due to restrictions of PC operating
systems and the lack of sufficient microprocessor power, application software
and high-performance standard 3D APIs. Several technological innovations,
including Intel's Pentium and Pentium Pro processors and PCI bus architecture,
Microsoft's NT operating system and the introduction of OpenGL, a
high-performance 3D graphics API, have overcome many of these limitations.
However, to perform fully functional, high-performance 3D computing, an NT-based
integrated 3D graphics subsystem is required.
The Company's products include a family of 3D graphics subsystems for
applications based on OpenGL and other 3D APIs, such as Autodesk's Heidi.
Through the Company's extensive experience in 3D algorithms, the interaction of
3D applications with OpenGL and overall 3D graphics system integration,
AccelGraphics delivers robust, well-integrated subsystem solutions to the
professional 3D graphics market. According to IDC, the world wide unit volume of
3D graphics subsystems for workstations will grow at a compounded annual growth
rate of 106% from 36,000 units in 1996 to over 650,000 units in the year 2000.
The Company sells its products through original equipment manufacturers
("OEMs") and a worldwide network of value added resellers ("VARs") and
distributors. Digital Equipment Corporation ("Digital"), Epson Direct,
Hewlett-Packard Company ("HP"), Hitachi, Ltd., Samsung Electronics Co., Ltd. and
Tri-Star Computer Corporation purchase the Company's fully-integrated 3D
graphics subsystems for use in high-performance Personal Workstations. Revenues
from Digital and HP accounted for 51% of the Company's revenue in 1996. The
Company also has technical relationships with Intel Corporation and Microsoft
Corporation, as well as with key component suppliers including 3Dlabs, Inc.,
Cirrus Logic, Inc., Evans & Sutherland Computer Corporation, and Mitsubishi
Electric Corporation. To enhance the performance of applications which use the
Company's 3D graphics subsystems, AccelGraphics has developed relationships,
some of which include joint engineering projects, with many leading independent
software vendors ("ISVs") such as Autodesk, Inc. and Autodesk Inc.'s Kinetix
division, Computer Associates International, Inc., Electronic Data Systems
Corporation's Unigraphics division, Matra Datavision S.A., Microsoft
Corporation's Softimage, Parametric Technology Corporation, Ricoh Corporation,
Structural Dynamics Research Corporation and Visible Decisions, Inc.
The Company was incorporated in April 1994 in the State of California and
commenced operations in late 1994. The Company will be reincorporated in
Delaware in March 1997. The Company's principal executive offices are located at
1942 Zanker Road, San Jose, California 95112. Its telephone number is (408)
441-1556.
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THE OFFERING
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Common Stock offered:
By the Company................................. 2,145,000 shares
By the Selling Stockholders.................... 455,000 shares
Common Stock to be outstanding after the
offering....................................... 7,906,307 shares(1)
Use of proceeds.................................. General corporate purposes including
payment of certain indebtedness, working
capital, capital expenditures, research
and development and potential acquisitions
of businesses and technologies. See "Use
of Proceeds."
Nasdaq National Market symbol.................... ACCL
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
THREE MONTHS ENDED
----------------------------------------- YEAR ENDED
JUNE DECEMBER 31,
MAR. 31, 30, SEPT. 30, DEC. 31, -------------------
1996 1996 1996 1996 1995 1996
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 2,371 $3,067 $ 4,260 $ 8,973 $ 3,911 $ 18,671
Gross profit......................................... 901 1,052 1,401 3,240 1,410 6,594
Income (loss) from operations........................ (532) (589) (578) 864 (4,401) (835)
Net income (loss).................................... $ (560) $ (595) $ (598) $ 821 $ (4,465) $ (932)
Pro forma net loss per share (2)..................... $ (0.15)
Shares used to compute pro forma net loss per share
(2)................................................ 6,272
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<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 2,979 $ 2,979 $ 18,435
Working capital.................................................... 5,030 5,030 20,486
Total assets....................................................... 8,439 8,439 23,895
Long term obligations.............................................. 1,782 1,782 34
Mandatorily redeemable convertible preferred stock................. 8,930 -- --
Total stockholders' equity (deficit)............................... (5,170) 3,760 20,964
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- ---------------
(1) Based on shares outstanding at December 31, 1996, excluding 63,250 shares of
Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $2.36 per share and 1,006,867 shares of Common
Stock issuable upon exercise of outstanding options at a weighted average
exercise price of $1.30 per share. See "Management -- Stock Option and
Incentive Plans."
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing pro forma net loss per
share.
(3) Reflects the conversion of all outstanding shares of Redeemable Convertible
Preferred Stock into 4,508,657 shares of Common Stock upon the closing of
this offering.
(4) Adjusted to reflect the receipt of estimated net proceeds from the sale by
the Company shares of Common Stock offered hereby at an assumed initial
public offering price of $9.00 per share and the payment of approximately
$1,748,000 of indebtedness to Kubota Corporation. See "Use of Proceeds" and
"Capitalization."
4
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Prospectus.
LIMITED HISTORY OF PROFITABILITY AND UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company has incurred a net operating loss in each year since commencing
operations in late 1994. As a result, the Company had an accumulated deficit as
of December 31, 1996 of approximately $5.5 million. The Company has only one
quarter of profitability, which may not be indicative of future operating
results, and the Company does not believe that current revenue growth rates are
sustainable. To date, the Company has earned substantially all of its revenues
from sales of its AG300/500, AccelPRO and AccelPRO TX hardware product lines.
There can be no assurance that the Company will ever achieve profitability on an
annual basis in the future or that it can sustain profitability on a quarterly
basis. The Company has completed only slightly more than two years of operations
and is subject to the risks inherent in the operation of a new business, such as
the difficulties and delays often encountered in the development and production
of new, complex technologies. There can be no assurance that the Company will be
able to address these risks.
The Company expects to expand its research and development, sales and
marketing and administrative capabilities. The anticipated increase in the
Company's operating expenses caused by this expansion could have a material
adverse effect on the Company's operating results if revenues do not increase at
an equal or greater rate. Also, the Company's expenses for these and other
activities are based in significant part on its expectations regarding future
revenues and are fixed to a large extent in the short term. Accordingly, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall, which would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SIGNIFICANT VARIABILITY IN QUARTERLY RESULTS
The Company's quarterly operating results have varied significantly in the
past and are likely to vary significantly in the future. The Company's quarterly
results are affected by a wide variety of factors including the gain or loss of
significant customers, size and timing of individual orders, timely introduction
and market acceptance of new products offered by the Company and its
competitors, availability, reliability and cost of components, the Company's
success in negotiating original equipment manufacturer ("OEM") and other
customer agreements, customer order deferrals in anticipation of new products,
technological changes in operating systems or applications, variations in
manufacturing quality or capacities, changes in the pricing policies of the
Company or its competitors, changes in demand for 3-dimensional ("3D") graphics
functionality, changes in the mix of revenues from products having differing
gross margins, changes in sales channel mix, changes in average sales prices,
warranty expenses, fluctuations in the Company's expense levels, the Company's
success at expanding its direct sales force and indirect distribution channels,
risks related to international operations, extraordinary events such as
litigation or acquisitions and general industry and economic conditions, as well
as other factors. Any of the above risks could have a material adverse effect on
the Company's business, financial condition and results of operations.
Quarterly revenues and operating results depend primarily on the volume,
timing and shipment of orders during the quarter, which are difficult to
forecast because customers generally place their orders on an as-needed basis
and, accordingly, the Company has historically operated with a relatively small
backlog. The Company's third party distribution channels provide the Company
with limited information regarding the quantity of the Company's products in the
sales channel. This reduces the Company's ability to predict fluctuations in
revenues resulting from a surplus or a shortage in its distribution channel and
could contribute to volatility in the Company's results of operations and cash
flows. A surplus of inventory in the distribution
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channel could unexpectedly cause a reduction in product shipments and revenues.
Moreover, a disproportionate percentage of the Company's revenues in any quarter
may be generated in the last month of a quarter. As a result, a shortfall in
revenues in any quarter as compared to expectations may not be identifiable
until near the end of the quarter. The Company may experience relatively weak
demand in third quarters due to historically weak summer sales in Europe.
The Company's gross margins are impacted by the sales channel mix, mix of
products sold, increased competition and related decreases in unit average
selling prices, introduction of new products, availability, reliability and cost
of components from the Company's subcontractors and suppliers, and general
economic conditions. Currently, the Company is focusing on increasing its sales
to OEMs, which have historically yielded lower margins than other channels.
Individual product lines generally provide higher margins at the beginning of
the life cycle and lower margins as the product line matures. In addition, the
Company's markets are characterized by rapidly changing technology and declining
average selling prices. Accordingly, the Company's gross margins may decline
from the levels experienced to date, which could have an adverse effect on the
Company's business, financial condition and results of operations.
A significant portion of the Company's operating expenses are relatively
fixed in the short term and planned expenditures are based on revenue forecasts.
As a result, if revenues are below levels needed to offset these operating
expenses, the Company's business, financial condition and results of operations
may be disproportionately affected because only a portion of the Company's
expenses vary with revenue. The Company generally must plan production, order
components and undertake its development, sales and marketing activities several
months in advance of shipping product and recognizing revenues. Accordingly, any
shortfall in revenues in a given quarter may impact the Company's operating
results and cash balances in a magnified way due to the Company's inability to
adjust expenses or inventory during the quarter to match the level of revenues
for the quarter. In addition, in the event the Company's customers desire to
purchase products in excess of forecasted amounts, the Company may not have
sufficient inventory or access to sufficient manufacturing capacity to meet such
demands. Although the Company has experienced growth in revenues in recent
quarters, there can be no assurance that the Company will sustain such revenue
growth or be profitable on an operating basis in any future period. For the
foregoing reasons, the Company believes that period-to-period comparisons of its
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarter the Company's revenues or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RAPID TECHNOLOGICAL CHANGE
The computer industry in general, and the markets for the Company's
products in particular, are characterized by ongoing technological developments,
evolving industry standards and rapid changes in customer requirements. Customer
preferences can change rapidly and new technology can quickly render existing
products obsolete. In order to keep pace with this rapidly changing market
environment, the Company must continually develop and incorporate into its
products technological advances and new features desired by customers at
competitive prices. There can be no assurance that the Company will be
successful in developing and marketing, on a timely basis or at all, competitive
products, product enhancements and new products that respond to technological
changes or changes in customer requirements and industry standards, or that the
Company's enhanced or new products will adequately address the changing needs of
the marketplace. Additionally, application programming interfaces ("APIs") have
evolved and changed over time. Although OpenGL has developed into a leading
industry standard API for professional 3D graphics development, it is likely
that industry standards will continue to evolve to meet rapidly changing
customer requirements. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new products that
respond to these evolving standards. Failure by the Company to respond
effectively to changes in the 3D graphics market, to develop or acquire new
technology or to successfully conform to industry standards would have a
material adverse effect on the business, financial condition and results of
operations of the Company. Operating systems and independent software vendor
("ISV") applications
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are updated from time to time. The Company must constantly monitor these changes
and upgrade its products to remain compatible with any upgrades in operating
systems and ISV applications. There can be no assurance that the Company will be
successful in developing new versions or enhancements to its products or that
the Company will not experience delays in the upgrade of its products. In the
event that there are delays in the completion of any upgrade to its products,
the Company's business, financial condition and results of operations would be
materially adversely affected. In addition, the Company strives to achieve
compatibility between the Company's products and 3D graphics applications the
Company believes are or will become popular and widely adopted. The Company
invests substantial resources in development efforts aimed at achieving such
compatibility. Any failure by the Company to anticipate or respond adequately to
changes in applications could result in a loss of competitiveness and could
adversely affect the Company's business, financial condition and results of
operations. See " -- Dependence on ISV Relationships" and "Business -- Research
and Development."
SHORT PRODUCT LIFE CYCLES
The market for the Company's products is characterized by frequent new
product introductions and rapid product obsolescence. The life cycles of the
Company's products are difficult to estimate. Generally, life cycles of personal
computer 3D graphics subsystems are relatively short, approximately six to
fifteen months. The Company must constantly monitor industry trends and select
new technologies and features for its products, as well as monitor the timing of
introduction of new products. Moreover, short product life cycles, coupled with
single-source supply of components used in the Company's products, may prevent
the Company from being able, in a timely manner, to reduce its procurement
commitments, production or inventory levels in response to obsolescence,
unexpected shortfalls in orders, revenues or declines in prices or, conversely,
to increase production in response to unexpected increases in demand. Failure to
respond to the market adequately could have a material adverse effect on the
Company's business, financial condition and results of operations. The timing of
the end of a product's life cycle is difficult to predict and is typically
characterized by steep declines in unit sales, pricing and margins. As new
products are planned and introduced, the Company may not be able to control the
inventory levels of older products and phase out production, potentially
resulting in excess inventory and the expenses associated therewith. The Company
could experience unexpected reductions in revenues from older generation
products as customers anticipate new products. To the extent the Company is
unsuccessful in managing product transitions, its business, financial condition
and results of operations would be adversely affected. See "Business -- Research
and Development."
RELIANCE ON THIRD PARTY DISTRIBUTION AND MAJOR OEMS
The Company relies on OEMs, value added resellers ("VARs") and a network of
distributors for both domestic and international revenues. In particular, sales
to Digital Equipment Corporation ("Digital") and Hewlett-Packard Company ("HP")
accounted for approximately 28% and 23% of 1996 revenues, respectively, and
sales to NeTpower, Inc. ("NeTpower"), a former customer, accounted for
approximately 17% of the Company's revenues in 1995. The Company believes that
its future success may depend upon its ability to broaden its customer base.
There can be no assurance that a major customer will not reduce, delay or
eliminate its purchases from the Company, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, HP has a non-exclusive manufacturing license pursuant to which it is
granted the right to manufacture or have manufactured the Company's products in
the event of the Company's bankruptcy, receivership or failure to supply HP with
specified quantities of products due to a cause not associated with the
negligence of either party for the term of the agreement or until the Company is
out of bankruptcy or receivership. Digital has a non-exclusive manufacturing
license pursuant to which it is granted the right to manufacture the Company's
products in the event that the Company is unable to supply Digital with
specified quantities of products, until the Company demonstrates its ability and
readiness to assume its obligations. In the event the Company were required to
grant such nonexclusive manufacturing rights to Digital, HP or any other OEM
that subsequently may obtain such rights, such grant could have the effect of
decreasing the value of the Company's ownership rights with respect to such
products and/or decrease the Company's revenues, either of which could have an
adverse effect on the Company's business, financial condition or results of
operations. The Company's customer agreements are short term and
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automatically renew each year and generally may be canceled for convenience upon
written notice by either party. Generally, there are no minimum purchase
requirements for the Company's OEMs, VARs and distributors. Some of the
Company's OEMs, VARs and distributors offer competitive products manufactured
internally or by third parties. There can be no assurance that the Company's
OEMs, VARs and distributors will give a priority to the marketing of the
Company's products as compared to competing products or alternative solutions or
that such OEMs, VARs and distributors will continue to offer the Company's
products. Moreover, there can be no assurance that the Company will continue to
sell substantial quantities of its products to these OEMs, VARs and
distributors, or that upon any termination of the Company's relationships with
any of these OEMs, VARs or distributors, the Company would be able to obtain
suitable alternate distributions channels. The loss of one or more of the
Company's OEMs, VARs or distributors could have a material adverse effect on the
Company's business, financial condition and results of operations. Additionally,
the Company's southern and northern European distributor maintains a credit
limit with the Company for the purchase of a certain amount of the Company's
products. In the event that the demand for the Company's products exceeds this
credit limit, the Company may be unable to increase the credit limit and supply
this distributor with additional quantities of products. Accordingly, the
Company may experience significant backlog and delays in the supply of
additional products to this distributor, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Customers, Sales and Marketing."
Although the Company seeks information from end users who purchase the
Company's products from OEMs, VARs and distributors, the Company generally does
not sell directly to end users and cannot directly observe their experience with
the Company's products. The Company also does not have direct control over the
marketing and support efforts of its OEMs, VARs and distributors. This may
result in the inability of the Company to identify potential opportunities with
these customers and may cause a potential delay by the Company in the
recognition and correction of any problems with such OEM, VAR or distributor
sales or support organizations. Failure of the Company to respond to customer
preferences or experience with its products or the failure of OEMs, VARs or
distributors to market and support the Company's products successfully, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Customers, Sales
and Marketing."
DEPENDENCE ON SUBCONTRACTORS AND SOLE-SOURCE SUPPLIERS
The Company relies on subcontractors to manufacture, subassemble, test and
ship the Company's products. The Company relies on sole-source suppliers for
certain critical components, such as 3Dlabs, Inc. ("3Dlabs") for its graphics
acceleration chips, Mitsubishi Electric Corporation ("Mitsubishi") for its
graphics acceleration chips and 3DRAM chips and Nan Ya PCB Service Co. ("Nan
Ya") for its printed circuit boards. In addition, there is a limited
availability of certain application specific integrated circuit chipsets that
provide VRAM and DRAM memory. The Company procures its components and products
through purchase orders and does not have specific requirement agreements with
any of its subcontractors or suppliers. Each of the Company's subcontractors and
suppliers can cease supplying the services, products or components at any time
with no penalty. In the event it becomes necessary for the Company to replace a
key subcontractor or supplier, the Company could incur significant manufacturing
set-up costs and delays while new sources are located and alternate components
are integrated into the design of the Company's products. There can be no
assurance that the Company will be able to maintain its current subcontractor
and supplier relationships or that the Company will be able to find suitable
replacement subcontractors and suppliers, if necessary. Although the Company
maintains ongoing efforts to obtain required quantities of products, component
shortages may exist from time to time, and there can be no assurance that the
Company's current subcontractors and suppliers will continue to provide
sufficient quantities of suitable quality product components at acceptable
prices. The Company's emphasis on maintaining low inventory may accentuate the
effects of any shortages that may result from sole source products or
subcontractors. The inability of the Company to obtain product components at
their historical cost levels would directly affect the cost of the Company's
products. Also, product components may contain undetected errors or "bugs" when
first supplied
8
<PAGE> 10
to the Company that, despite testing by the Company, are discovered only after
the Company's product has been installed and used by customers. There can be no
assurance that errors will not be found in the Company's products due to errors
in the product components, or that any such errors will not impair the market
acceptance of these products or require significant product recalls. Problems
encountered by customers and product recalls could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company's ability to respond to greater than anticipated market
demand may be constrained by availability of services, products or components.
Further, one of the Company's subcontractors is located in Hong Kong. When Hong
Kong transitions to the authority of the Peoples' Republic of China, the Company
could experience disruption in the supply of products from that subcontractor.
The loss of subcontractors or suppliers or the failure of subcontractors or
suppliers to meet the Company's price, quality, quantity and delivery
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Products" and
"-- Manufacturing."
DIFFICULTIES IN MANAGING GROWTH
The Company has experienced significant growth in its business over the
past two years which has placed demands on the Company's operational and
financial personnel and systems, outside manufacturing capacity, research and
development, technical support and other resources. The Company is expanding its
sales and marketing organizations, developing its distribution channels to
penetrate different and broader markets, funding additional research and
development and increasing its support organization to accommodate its growing
customer base. With continued growth, the Company may find it necessary to
enhance existing and implement new financial and management information systems
and controls and train its personnel to effectively operate such systems. Any
delay in the implementation of or any disruptions in the transition to such new
and enhanced systems and controls and personnel training could adversely affect
the Company's ability to accurately forecast sales demand and adjust third party
manufacturing to such demand, adjust purchasing levels, accurately record and
control inventory levels and record and report financial and management
information on a timely and accurate basis. Inaccuracy in demand forecasts in
the environment in which the Company operates can quickly result in either
insufficient or excess inventory and disproportional overhead expenses. Certain
of the Company's officers have recently joined the Company, including the
Company's Vice President of Engineering, and the Company anticipates further
significant increases in the number of employees. The Company plans to expand
the geographic scope of its customer base and operations. Failure to manage
these changes and to expand effectively any of these areas would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Manufacturing."
DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL
The success of the Company depends to a large extent upon its ability to
continue to attract and retain highly skilled personnel. Competition for
employees in the high technology sector in general, and in the graphics industry
in particular, is intense, and there can be no assurance that the Company will
be able to attract and retain sufficient numbers of qualified employees. The
Company has recently experienced a significant expansion in the overall level of
its business and the scope of its operations, including research and
development, marketing, sales, technical support and administration. It may
become increasingly difficult to hire, train and assimilate the new employees
needed given the market conditions. If the Company is unable to continue to
attract and retain sufficient numbers of qualified employees, it may be required
to rely on more expensive consultants. The Company has not entered into
employment agreements with any of its key personnel. Additionally, the Company
has not required its key personnel to enter into noncompetition agreements with
the Company. The Company's inability to retain, attract and assimilate certain
members of the executive management team or key employees would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Employees," "Management -- Executive Officers and
Directors" and "-- Executive Compensation."
9
<PAGE> 11
COMPETITION
The market for 3D graphics accelerators is extremely competitive and
subject to rapid change. The Company expects competition to increase in the
future from existing competitors and from new market entrants with products that
may be less costly than the Company's products or provide better performance or
additional features not currently provided by the Company. The Company competes
with the following three major groups: professional 3D graphics board companies
(including Intergraph Corporation and Dynamic Pictures, Inc.), RISC/UNIX
workstation companies (including Sun Microsystems, Inc. ("Sun") and Silicon
Graphics, Inc. ("SGI")) and traditional volume personal computer ("PC") board
suppliers (including ELSA GmbH, Diamond Multimedia Systems, Inc. and Matrox
Electronic Systems Ltd.). A variety of potential actions by any of the Company's
competitors could have a material adverse effect on the Company's business,
financial condition and results of operations. Such actions may include
reduction of product prices, increased promotion, announcement or accelerated
introduction of new or enhanced products, product giveaways, product bundling or
other competitive actions.
Many of the companies that currently compete with the Company or that may
compete with the Company have longer operating histories and significantly
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition and larger customer bases, than the Company. As a
result, these competitors may be able to respond more quickly and effectively to
new or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion, sale and support of their
products than the Company. Consequently, the Company expects to continue to
experience increased competition, which could result in significant price
reductions, loss of market share and lack of acceptance of new products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete against current or future competitors successfully or
that competitive pressures faced by the Company will not have a material adverse
effect upon its business, financial condition and results of operations.
RISK OF MIGRATION TO THE MOTHERBOARD
The Company's 3D graphics subsystems function with Personal Workstations to
provide additional 3D and 2-dimensional ("2D") graphics performance and
functionality. As technology becomes more widely utilized, it may become
economically feasible to incorporate certain 3D graphics capabilities onto PC
motherboards or into microprocessors. The Company recognizes that migration
could occur with respect to the functionality provided by the Company's current
products. The Company's success is largely dependent on its ability to continue
to develop products which incorporate higher performance technologies and
additional functionality which system manufacturers have not yet fully
incorporated into PC motherboards or microprocessors. While the Company believes
that a market will continue to exist for add-in subsystems that provide
additional performance and advanced functionality and that offer flexibility in
systems configuration, there can be no assurance that the incorporation of
certain 3D and 2D capabilities onto PC motherboards or microprocessors will not
adversely affect the market for the Company's products and consequently, the
Company's business, financial and results of operations could be materially
adversely affected.
DEPENDENCE ON ISV RELATIONSHIPS
The Company's business strategy includes developing strategic relationships
with major ISVs that serve the 3D graphics market, including Autodesk, Inc.
("Autodesk") and Autodesk's Kinetix division ("Kinetix"), Computer Associates
International, Inc., Electronic Data Systems Corporation's ("EDS") Unigraphics
division, Matra Datavision S.A., Microsoft Corporation's ("Microsoft")
Softimage, Parametric Technology Corporation ("PTC"), Ricoh Corporation,
Structural Dynamics Research Corporation ("SDRC") and Visible Decisions, Inc.
The Company has devoted substantial engineering and management resources to
developing relationships with its ISV partners. If any of the Company's current
or future ISV partners were to cease supporting the Company's products, such
action could have a material adverse effect on the Company's business, financial
condition and results of operations. Further, there can be no assurance that the
Company
10
<PAGE> 12
will be able to successfully sustain its relationships or enter into new
relationships with major ISVs on terms acceptable to the Company or at all. See
"Business -- Strategic Relationships."
UNCERTAINTY REGARDING DEVELOPMENT OF 3D GRAPHICS MARKET
The 3D graphics market on NT workstations has recently begun to develop and
is rapidly evolving. The Company's future financial performance will depend in
large part on the continued growth of this market and the demand for 3D graphics
for professional 3D applications. The failure of the 3D graphics market to
achieve anticipated growth levels or a substantial change in 3D graphics
customer preferences would have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, demand
for the Company's products is also dependent upon the widespread development of
3D graphics applications by ISVs, the success of the Company's customers in
effectively developing a market for the Company's products and the willingness
of end users to pay for enhanced 3D capabilities on NT workstations. The
Company's products currently are designed for use on NT and/or Windows 95
workstations. In the event that end users, and particularly businesses, delay
their adoption of or fail to adopt NT or Windows 95, the market for the
Company's products would be diminished and the Company's business, financial
condition and results of operations could be materially adversely affected.
LIMITED HISTORY OF PRODUCT DEVELOPMENT
The Company's products are complex, are based on relatively new technology
and have a limited history of reliability. The Company generally provides a
three-year warranty for its products. In general, the Company's return policy
permits return within five days after receipt of products that do not meet
product specifications. Companies engaged in the development and production of
new, complex technologies and products often encounter difficulties in
performance and reliability and delays in product introduction and volume
shipments. Additionally, products as complex as those offered by the Company may
contain undetected errors or "bugs" when introduced that, despite testing by the
Company, are discovered only after a product has been installed and used by
customers. There can be no assurance that the Company will be successful in
resolving any problems with the Company's existing or future products. Failure
by the Company to resolve manufacturing or operational problems with any
existing product or any new product in a timely manner would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The success of the Company will likely depend on its ability to develop and
market new products that provide superior performance at competitive prices. Any
quality, reliability or performance problems with such products, regardless of
materiality, or any other actual or perceived problems with the Company's
products, could have a material adverse effect on market acceptance of such
products and the Company's reputation. There can be no assurance that such
problems or perceived problems will not arise or that, even in the absence of
such problems, the Company's products will receive market acceptance. A failure
of the Company's products to receive market acceptance for any reason would have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, the announcement by the Company of new
products and technologies could cause customers to defer purchases of the
Company's existing products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Products," "-- Manufacturing" and " -- Competition."
SOFTWARE DEFECTS
The Company is continuing to upgrade and improve features of AccelVIEW 3D,
Flying Carpet and software incorporated into its hardware products. The
Company's software products, and its hardware products incorporating any
software, are extremely complex as a result of such factors as advanced
functionality, the diverse operating environments in which they may be deployed,
the need for interoperability and the multiple versions of such products that
must be supported for diverse operating platforms, languages and standards.
These products may contain undetected errors or failures when first introduced
or as new versions are released. The Company generally provides a three-year
warranty for its products. In general, the Company's return policy permits
return within five days after receipt of products that do not meet product
11
<PAGE> 13
specifications. There can be no assurance that, despite testing by the Company
and by current and potential customers, errors will not be found in new products
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance. Such loss or delay would likely have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, new versions or upgrades to operating systems and ISV applications
may require upgrades to the Company's software products to maintain
compatibility with these new versions or upgrades. There can be no assurance
that the Company will be successful in developing new versions or enhancements
to its software or that the Company will not experience delays in the upgrade of
its software products. In the event the Company experiences delays or is unable
to maintain compatibility with operating systems and ISV applications, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business -- Products."
INTERNATIONAL REVENUES
The Company's international revenues accounted for approximately 22% and
31% of the Company's 1995 and 1996 revenues, respectively, and primarily
consisted of sales to third party distributors based in the United Kingdom and
Germany. However, the Company believes that products sold to its European
distributors are resold throughout Europe. The Company expects that
international revenues will continue to account for a significant portion of its
total revenues in future periods. International revenues are subject to certain
inherent risks, including unexpected changes in regulatory requirements and
tariffs, government controls, political instability, longer payment cycles,
difficulties in collecting accounts receivable, difficulties in staffing and
managing foreign operations and potentially adverse tax consequences. The
Company's inability to obtain foreign regulatory approvals on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations. Fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to end
users in a particular country, leading to a reduction in sales in that country.
The impact of future exchange rate fluctuations cannot be predicted adequately.
To date, the Company has not found it appropriate to hedge the risks associated
with fluctuations in exchange rates, as substantially all of the Company's
foreign sales have been denominated in U.S. dollars. However, if future
transactions are denominated in foreign currencies, the Company may undertake
hedge transactions. There can be no assurance that any hedging techniques
implemented by the Company would be successful or that the Company's results of
operations would not be materially adversely affected by exchange rate
fluctuations. In general, certain seasonal factors and patterns impact the level
of business activities at different times in different regions of the world. For
example, sales in Europe are adversely affected in the third quarter of each
year as many customers and end users reduce their business activities during the
summer months. These seasonal factors and currency fluctuation risks could have
a material adverse effect on the Company's business, financial condition and
results of operations. Further, because the Company operates in different
countries, the Company's management must address differences in regulatory
environments and cultures. Failure to address these differences successfully
could be disruptive to the Company's operations and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Customers, Sales and Marketing."
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
Although the Company has three patent applications filed in the United
States, these claims are not related to the Company's current product lines.
Instead, the Company relies exclusively on trade secret and copyright protection
for its proprietary technology. Despite the Company's precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
technologies without authorization or to develop competing technologies
independently. Furthermore, the laws of certain countries in which the Company
does business, including countries in which the Company does a significant
amount of business, such as the United Kingdom and Germany, may not protect the
Company's software and intellectual property rights to the same extent as the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. If unauthorized
copying or misuse of the Company's products were to occur to any substantial
degree, or if a competitor of the Company were to effectively duplicate the
12
<PAGE> 14
Company's proprietary technology, the Company's business, financial condition
and results of operations would be materially adversely affected. Furthermore,
while the Company requires employees and consultants to enter into
confidentiality agreements, there can be no assurance that proprietary
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its trade secrets. Certain technology used
by the Company's products is licensed from third parties, generally on a
non-exclusive basis. The termination of any such license, or the failure of any
third party licensor to adequately maintain or update its product, could result
in delay in the Company's ability to ship its products while it seeks to
implement technology offered by alternative sources, if any. Any required
replacement licenses could prove to be either unavailable or costly.
Although the Company has not received notices from third parties alleging
infringement claims that the Company believes would have a material adverse
effect on the Company's business, there can be no assurance that third parties
will not claim that the Company's current or future products or manufacturing
processes infringe the proprietary rights of others. Any such claim, with or
without merit, could result in costly litigation or might require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
FUTURE CAPITAL REQUIREMENTS
The Company's future capital requirements will depend upon many factors,
including the development of new products, the success of the Company's research
and development efforts, the expansion of the Company's sales and marketing
efforts and the status of competitive products. The Company believes that the
net proceeds of this offering and funds available under its existing bank line
of credit will be adequate to fund its operations for at least 12 months
following the offering. There can be no assurance, however, that the Company
will not require additional financing during such time. Further, there can be no
assurance that any additional financing will be available to the Company on
acceptable terms, if at all. If additional funds are raised by issuing equity
securities, further dilution to the existing stockholders could result. The
inability to obtain acceptable financing would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
The Company currently has no specific use planned for a significant portion
of the proceeds of the Common Stock being issued and sold by it in the offering
other than the payment of certain indebtedness to Kubota Corporation. As a
consequence, the Company's management will have discretion to allocate a large
percentage of these proceeds to uses which the stockholders may not deem
desirable, and there can be no assurance that the proceeds can or will yield a
return. See "Use of Proceeds."
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this offering, the Company's directors and officers and
their affiliates will beneficially own approximately 52% of the outstanding
Common Stock. As a result, these stockholders will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principal and Selling Stockholders."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; BENEFITS TO EXISTING
STOCKHOLDERS
There has been no public market for the Common Stock prior to this offering, and
there can be no assurance that an active trading market will develop or be
sustained after this offering. The initial public offering price will be
determined through negotiations among the Company, the representatives of the
Underwriters and the selling stockholders. See "Underwriting" for a discussion
of the factors to be considered in determining the
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<PAGE> 15
initial public offering price. The negotiated public offering price may not be
indicative of the market price for the Common Stock following this offering. In
recent years, the stock market in general, and the stock prices of technology
companies in particular, have experienced extreme price fluctuations, sometimes
without regard to the operating performance of particular companies. Factors
such as quarterly variations in actual or anticipated operating results, changes
in earnings estimates by analysts, market conditions in the industry,
announcements by competitors, regulatory actions and general economic conditions
may have a significant effect on the market price of the Common Stock. Following
fluctuations in the market price of a corporation's securities, securities class
action litigation has often resulted. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
consummation of this offering will result in the creation of a public market for
the Company's Common Stock that will permit secondary sales by existing
stockholders and allow them to realize any unrealized gain on their shares of
Common Stock. See "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is expected to be substantially higher
than the book value per share of Common Stock. At an estimated offering price of
$9.00 per share, investors purchasing shares of Common Stock in this offering
will incur immediate and substantial dilution of $6.35 in the pro forma net
tangible book value per share of Common Stock in this offering and will have
paid approximately 68% of the total consideration paid for all shares of Common
Stock outstanding. After this offering, such investors will only own
approximately 33% of the Company's outstanding Common Stock. To the extent
outstanding options and warrants to purchase the Company's Common Stock are
exercised, there will be further dilution to new stockholders. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
7,906,307 shares of Common Stock, assuming no issuance of any shares nor
exercise of any outstanding stock options or warrants after December 31, 1996.
On the date of this Prospectus, the 2,600,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option) will be
immediately eligible for sale in the public market. An additional 5,672,027
shares of Common Stock (including approximately 353,811 shares issuable upon
exercise of vested options) will be eligible for sale beginning 181 days after
the date of this Prospectus, unless earlier released, in whole or in part, by
Cowen & Company. Certain stockholders holding 4,177,708 shares of Common Stock
(assuming exercise of outstanding warrants for 63,250 shares of Common Stock)
are entitled to registration rights with respect to their shares of Common
Stock. If such stockholders, by exercising their demand registration rights,
cause a significant number of securities to be registered and sold in the public
market, such sales could have an adverse effect on the market price of the
Company's Common Stock. Sales of significant amounts of such shares in the
public market after this offering, or the prospect of such sales, could
adversely affect the market price of the Common Stock. Such sales also might
make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. See "Description of Capital Stock," "Shares Eligible for
Future Sale" and "Underwriting."
BLANK CHECK PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deterring or preventing a change of control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of Common Stock. The Company has no current
plans to issue shares of Preferred Stock. The Company's
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<PAGE> 16
Certificate of Incorporation and Bylaws provide for, among other things, the
prospective elimination of cumulative voting with respect to the election of
directors, the elimination of actions to be taken by written consent of the
Company's stockholders and certain procedures such as advance notice procedures
with regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors. In addition, the Company's
charter documents provide that the Company's Board of Directors be divided into
three classes, each of which serves for a three-year term. The foregoing
provisions could have the effect of making it more difficult for a third party
to effect a change in the control of the Board of Directors. In addition, these
provisions could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, or of
making the Company less attractive to a potential acquiror of a majority of the
outstanding voting stock of the Company, and may complicate or discourage a
takeover of the Company. The foregoing provisions may also result in the
Company's stockholders receiving less consideration for their shares than might
otherwise be available in the event of a takeover attempt of the Company. See
"Description of Capital Stock."
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,145,000 shares
offered by the Company are estimated to be approximately $17,204,000
($20,468,000 if the Underwriters' over-allotment option is exercised in full) at
an assumed initial public offering price of $9.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses.
Currently, the Company plans to use approximately $1,748,000 of the net proceeds
to pay indebtedness to Kubota Corporation pursuant to a Subordinated Promissory
Note dated June 20, 1995, which indebtedness bears interest per annum at the
prime rate of interest as reported in The Wall Street Journal and is due and
payable on June 20, 1998. The Company intends to use the remaining net proceeds
from this offering for general corporate purposes, including working capital,
capital expenditures and research and development. A portion of the proceeds may
also be used to acquire or invest in complementary businesses or products, to
obtain the right to use complementary technologies and to acquire or expand
distribution channels. From time to time, the Company evaluates potential
acquisitions of such businesses, products or technologies. However, the Company
has no present understandings, commitments or agreements with respect to any
material acquisition of other businesses, products or technologies.
Pending use of the net proceeds for the above purposes, the Company intends
to invest such funds in short-term, interest-bearing, investment-grade
obligations. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders.
The principal purposes of this offering are to create a public market for
the Company's shares of Common Stock, to create an increased awareness of the
Company, to increase the Company's equity capital and to facilitate future
access by the Company to public equity markets.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
In addition, the Company's existing bank line of credit currently prohibits the
payment of cash dividends on its capital stock without the bank's consent.
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<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis, (ii) pro forma giving effect to the
conversion of all outstanding Preferred Stock of the Company into Common Stock
upon the closing of this offering and the changes in the number of authorized
shares of Common and Preferred Stock (all of which will occur in connection with
the sale of Common Stock offered hereby), and (iii) pro forma, as adjusted to
give effect to the sale by the Company of the shares of Common Stock offered
hereby at an assumed initial public offering price of $9.00 per share and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations.......................................... $ 1,782 $ 1,782 $ 34
-------- -------- ---------
Mandatorily redeemable convertible preferred stock, $0.001 par
value:
Series A, 3,477,000 shares designated; 3,446,997 shares
issued and outstanding actual; no shares issued and
outstanding, pro forma and as adjusted.................... 5,745 -- --
Series B, 1,100,000 shares designated; 1,061,660 shares
issued and outstanding actual; no shares issued and
outstanding, pro forma and as adjusted.................... 3,185 -- --
-------- -------- ---------
8,930 -- --
-------- -------- ---------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized actual; 2,000,000 shares authorized, pro forma
and as adjusted........................................... -- -- --
Common Stock, $0.001 par value; 50,000,000 shares authorized;
1,252,650 shares issued and outstanding actual, 5,761,307
shares issued and outstanding pro forma, 7,906,307 shares
issued and outstanding as adjusted (1).................... 1 6 8
Additional paid-in capital................................... 785 9,710 26,912
Notes receivable from stockholders........................... (89) (89) (89)
Deferred stock compensation.................................. (396) (396) (396)
Cumulative translation adjustment............................ (5) (5) (5)
Accumulated deficit.......................................... (5,466) (5,466) (5,466)
-------- -------- ---------
Total stockholders' equity (deficit)...................... (5,170) 3,760 20,964
-------- -------- ---------
Total capitalization.................................... $ 5,542 $ 5,542 $20,998
======== ======== =========
</TABLE>
- ---------------
(1) Excludes 63,250 shares of Common Stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $2.36 per share, 1,006,867
shares of Common Stock issuable upon exercise of outstanding options at a
weighted average exercise price of $1.30 per share and 1,909,536 shares
available for future issuance under the 1995 Stock Plan. See
"Management -- Stock Option and Incentive Plans," "Description of Capital
Stock" and Note 7 of Notes to Consolidated Financial Statements.
17
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company at December 31, 1996
was approximately $3.8 million, or $0.65 per share of Common Stock. Pro forma
net tangible book value per share represents the amount of pro forma total
tangible assets, less the amount of pro forma total liabilities, divided by the
pro forma number of shares of Common Stock outstanding. After giving effect to
the sale by the Company of the 2,145,000 shares of Common Stock offered hereby
at an assumed price of $9.00 per share, the Company's pro forma net tangible
book value as of December 31, 1996 would have been $21.0 million, or $2.65 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.00 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $6.35 per share to new investors purchasing
shares in the offering. The following table illustrates the dilution and pro
forma net tangible book value per share to new investors as of December 31,
1996:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 9.00
Pro forma net tangible book value per share prior to this offering........ $0.65
Increase per share attributable to new investors.......................... 2.00
------
Pro forma net tangible book value per share after this offering............. 2.65
-------
Dilution to new investors................................................... $ 6.35
=======
</TABLE>
The following table sets forth, on a pro forma basis, as of December 31,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by (i) existing
stockholders and (ii) new investors at an assumed offering price of $9.00 per
share (before deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).................... 5,761,307 72.9% $ 8,945,000 31.7% $ 1.55
New investors(1)............................ 2,145,000 27.1 19,305,000 68.3 9.00
--------- ----- ----------- -----
Total.................................. 7,906,307 100.0% $28,250,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 5,306,307 shares or approximately
67.1% of the total shares of Common Stock outstanding after this offering
and will increase the number of shares held by new investors to 2,600,000
shares or approximately 32.9% of the total shares of Common Stock
outstanding after the offering.
The foregoing computations assume no exercise of the Underwriters'
over-allotment option, outstanding warrants or outstanding options after
December 31, 1996. As of December 31, 1996, there were outstanding warrants to
purchase 63,250 shares of Common Stock at a weighted average exercise price of
$2.36 per share, and outstanding options to purchase 1,006,867 shares of Common
Stock, at a weighted average exercise price of $1.30 per share. To the extent
these warrants and options are exercised, there will be further dilution to new
investors. See "Capitalization," "Management -- Stock Option and Incentive
Plans," "Description of Capital Stock" and Note 7 of Notes to Consolidated
Financial Statements.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. The consolidated statement of
operations data for the years ended December 31, 1995 and 1996, and the
consolidated balance sheet data as of December 31, 1995 and 1996 are derived
from consolidated financial statements of the Company that have been audited by
Price Waterhouse LLP, independent accountants, and are included elsewhere in
this Prospectus. The historical results are not necessarily indicative of the
results to be expected for any future period. The Company operates and reports
on a fiscal year ending on the Friday nearest December 31. For convenience,
fiscal years are shown in this Prospectus as ending on December 31.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................................... $ 3,911 $18,671
Cost of revenues................................................... 2,501 12,077
------- -------
Gross profit....................................................... 1,410 6,594
------- -------
Operating expenses:
Research and development........................................ 2,618 2,663
Sales and marketing............................................. 2,154 3,635
General and administrative...................................... 1,039 1,131
------- -------
Total operating expenses................................... 5,811 7,429
------- -------
Loss from operations............................................... (4,401) (835)
Interest expense................................................... (183) (145)
Other income, net.................................................. 119 48
------- -------
Net loss........................................................... $(4,465) $ (932)
======= =======
Pro forma net loss per share(1).................................... $ (0.15)
=======
Shares used to compute pro forma net loss per share(1)............. 6,272
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 1,373 $ 2,979
Working capital.................................................... 2,530 5,030
Total assets....................................................... 3,951 8,439
Long term obligations.............................................. 1,748 1,782
Mandatorily redeemable convertible preferred stock................. 5,745 8,930
Total stockholders' deficit........................................ (4,528) (5,170)
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing pro forma net loss per
share.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AccelGraphics, Inc. designs, develops and markets high-performance,
cost-effective, 3-dimensional ("3D") graphics subsystems, software accelerators
and application utility software products for the professional Windows NT and
Windows 95 markets. The Company commenced operations in late 1994. In December
1994, the Company purchased from Kubota Graphics, Inc. ("Kubota Graphics"), a
subsidiary of Kubota Corporation ("Kubota"), certain inventory and intangible
assets related to 3D graphics products, as well as certain property and
equipment for $1.2 million, a price which the Company believes represents Kubota
Graphics' lower of cost or market value. The Company used a portion of the
proceeds from a $3.3 million subordinated convertible note payable to Kubota to
pay the purchase price for such assets and the remaining portion of the proceeds
from the note was used for working capital. As part of the Series A Preferred
Stock financing of the Company, Kubota converted $1.65 million of the
outstanding principal of the note into 990,000 shares of Series A Preferred
Stock.
The Company introduced its first line of 3D graphics subsystems, the
AG300/500 product line, in January 1995. In mid 1996, the Company introduced its
AccelPRO and AccelPRO TX product lines, which are replacing the AG300/500
product line. To date, sales of the AG300/500, AccelPRO and AccelPRO TX product
lines have accounted for substantially all of the Company's revenues.
The Company's customers include original equipment manufacturers ("OEMs"),
value added resellers ("VARs") and distributors. Revenues from product sales are
generally recognized upon shipment less an allowance for estimated future
returns and exchanges. The Company's gross margin has varied with the mix of
revenues by sales channels. OEM revenues generally yield lower gross margins.
The Company expects to expand its research and development, sales and
marketing and administrative capabilities. The anticipated increase in the
Company's operating expenses caused by this expansion could have a material
adverse effect on the Company's operating results if revenues do not increase at
an equal or greater rate. Also, the Company's expenses for these and other
activities are based in significant part on its expectations regarding future
revenues and are fixed to a large extent in the short term. Accordingly, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets. To address these risks, the
Company must, among other things, respond to competitive developments, attract,
retain and motivate qualified persons, continue to upgrade its technologies and
commercialize its products. There can be no assurance that the Company will be
successful in addressing these and other risks.
Although the Company has experienced significant revenue growth since its
inception, particularly in its most recent quarter, the Company does not believe
that such growth rates are sustainable. Past revenue growth rates may not be
indicative of future revenue growth, if any, or future operating results. The
Company first attained quarterly profitability in the fourth quarter of 1996.
There can be no assurance that the Company will sustain profitability on a
quarterly basis or will achieve profitability on an annual basis. The Company's
limited operating history makes the prediction of future operating results
difficult, if not impossible. See "Risk Factors -- Limited History of
Profitability and Uncertainty of Future Financial Results" and "-- Significant
Variability in Quarterly Results."
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth selected items of the Company's consolidated
statements of operations as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996
------ -----
<S> <C> <C>
Revenues.................................................................... 100.0% 100.0%
Cost of revenues............................................................ 63.9 64.7
------ -----
Gross profit................................................................ 36.1 35.3
------ -----
Operating expenses:
Research and development.................................................. 66.9 14.3
Sales and marketing....................................................... 55.1 19.5
General and administrative................................................ 26.6 6.0
------ -----
Total operating expenses............................................... 148.6 39.8
------ -----
Loss from operations........................................................ (112.5) (4.5)
Interest expense............................................................ (4.7) (0.8)
Other income, net........................................................... 3.0 0.3
------ -----
Net loss.................................................................... (114.2)% (5.0)%
====== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenues
Revenues increased 377% from $3.9 million in 1995 to $18.7 million in 1996.
The increase was primarily due to sales of its AccelPRO and AccelPRO TX product
lines following their introductions in mid 1996 and, to a lesser extent, to
increased unit sales of the Company's AG300/500 product line.
Revenues from product sales are generally recognized upon product shipment,
less an allowance for estimated future returns and exchanges. Provisions for the
costs of technical support services for the Company's hardware products and
estimated future warranty claims are recorded as a cost of revenues upon
recognition of related revenues.
International revenues increased 582% from $850,000 in 1995 to $5.8 million
in 1996, representing 21.7% and 31.0%, respectively, of revenues. The increase
in international revenues is primarily a result of an increase in sales of the
Company's products in Europe and, to a lesser extent, in the Pacific Rim.
Revenues from the Company's international customers are generally denominated in
United States dollars. Although the effects of currency fluctuations have been
insignificant to date, there can be no assurance that such fluctuations will not
be significant in the future. See "Risk Factors -- International Revenues."
Revenues from the Company's former customer, NeTpower, Inc. ("NeTpower"),
accounted for 16.6% of revenues in 1995. NeTpower accounted for less than 1% of
revenues in 1996. Revenues from Digital and HP accounted for 27.9% and 22.8%,
respectively, of revenues in 1996. The loss of any major customer, or the delay
in or reduction of orders from such customers could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Reliance on Third Party Distribution and Major OEMs."
Gross Profit
Gross profit increased 368% from $1.4 million in 1995 to $6.6 million in
1996, representing 36.1% and 35.3%, respectively, of revenues. The absolute
dollar increase in gross profit resulted from increased revenues, while the
decline in gross profit as a percentage of revenues is primarily due to an
increased proportion of sales to OEMs, which generally yield lower margins. The
Company expects that gross margins may decrease over time as a result of
competitive pricing pressures and changes in sales channel and product mix.
21
<PAGE> 23
The Company's gross margin is affected by many factors, including the sales
channel mix, the mix of products sold, increased competition and related
decreases in unit average selling prices, introductions of new products and the
availability, reliability and cost of components and products from the Company's
subcontractors and suppliers. In addition, the Company orders products in
advance of planned shipments and, due to rapid technological changes or other
factors such as customers curtailing or changing timing or mix of orders, there
is a risk that the Company will forecast incorrectly and produce excess or
insufficient inventories of particular products. The Company's customers'
ability to reschedule or cancel orders without significant penalty could
adversely affect the Company's operating results, as the Company may be unable
to adjust its purchases from its subcontractors and suppliers to match such
customers' changes and cancellations. See "Risk Factors -- Dependence on
Subcontractors and Sole-Source Suppliers" and "-- Significant Variability in
Quarterly Results."
Operating Expenses
Research and Development. Research and development expenses increased from
$2.6 million in 1995 to $2.7 million in 1996, representing 66.9% and 14.3%,
respectively, of revenues. Research and development expenses consist primarily
of personnel costs and other personnel-related expenses, including the services
of outside consultants. Research and development expenses during 1995 were
negatively impacted by a heavy reliance on consultants, who are generally more
expensive than employees. In 1996, research and development expenses were
positively impacted by the receipt of a $190,000 non-recurring engineering fee
from a technical partner to facilitate the development of the Company's AccelPRO
product line. The Company anticipates that research and development expenses
will increase in absolute dollars, but decrease as percentage of revenues, as
the Company continues to add research and development personnel and support for
new product development activities.
Sales and Marketing. Sales and marketing expenses increased 68.8% from $2.2
million in 1995 to $3.6 million in 1996, representing 55.1% and 19.5%,
respectively, of revenues. Sales and marketing expenses consist primarily of
salaries, commissions, marketing expenses and technical support for the sales
organization. The absolute dollar increase in sales and marketing expenses was
due primarily to the expansion of the Company's sales efforts in the United
States, Europe and the Pacific Rim, as well as increased marketing and public
relations activities related to the introductions in 1996 of the AccelPRO and
AccelPRO TX product lines. The Company anticipates that sales and marketing
expenses will continue to increase in absolute dollars, but decrease as
percentage of revenues, as the Company expands its sales force and marketing
activities.
General and Administrative. General and administrative expenses increased
by 8.9% from $1.0 million in 1995 to $1.1 million in 1996, representing 26.6%
and 6.0%, respectively, of revenues. Increased general and administrative
expenses were due primarily to increased staffing and other costs incurred to
support the Company's growth. The Company anticipates that general and
administrative expenses will increase in absolute dollars, but decrease as
percentage of revenues, to support the Company's growth and for costs associated
with operating as a public company.
Interest Expense
Interest expense decreased from $183,000 in 1995 to $145,000 in 1996 and
was primarily related to interest on the subordinated convertible note payable
to Kubota. The decrease was the result of the conversion to Preferred Stock of
one half of the convertible note in June 1995.
Provision for Income Taxes
The Company recorded no provision for income taxes in 1995 and 1996 as it
incurred losses. At December 31, 1996, the Company had approximately $3.5
million of federal net operating loss carryforwards available to offset future
taxable income. Future annual use of these carryforwards may be limited as a
result of ownership change limitations.
At December 31, 1996, the Company had approximately $2.2 million of
deferred tax assets, comprised primarily of net operating loss and credit
carryforwards and reserves not currently deductible for tax purposes. The
Company believes the available objective evidence creates sufficient uncertainty
regarding the realizability of such deferred tax assets; therefore a full
valuation allowance has been recorded. The factors
22
<PAGE> 24
considered include the Company's history of losses, the lack of carryback
capacity to realize deferred tax assets, the limitation on the annual
utilization of net operating loss carryforwards, the uncertainty of the
development of the products and markets in which the Company competes and the
fact that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology. The Company believes that based on
the currently available evidence, it is more likely than not that the Company
will not generate sufficient taxable income to realize the Company's deferred
tax assets.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for the eight quarters ended December 31, 1996, and as a percentage
of the Company's revenues for the periods. In the opinion of management, the
data has been prepared on a basis consistent with the Company's annual
consolidated financial statements included elsewhere in the Prospectus and
includes all adjustments, consisting only of normal recurring adjustments that
management considers necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future period. See "Risk Factors -- Significant
Variability in Quarterly Results."
The Company operates under thirteen week quarters that end on the Friday
closest to the calendar quarter end. As a result, a fiscal quarter may not end
on the same day as the calendar quarter end. For convenience of presentation,
the following unaudited quarterly financial information has been shown as ending
on the last day of the calendar quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.............................. $ 284 $ 790 $ 1,036 $ 1,801 $ 2,371 $ 3,067
Cost of revenues...................... 220 497 661 1,123 1,470 2,015
------- ------- ------- ------ ------ ------
Gross profit.......................... 64 293 375 678 901 1,052
------- ------- ------- ------ ------ ------
Operating expenses:
Research and development............ 850 583 592 593 468 586
Sales and marketing................. 498 486 548 622 689 817
General and administrative.......... 256 263 227 293 276 238
------- ------- ------- ------ ------ ------
Total operating expenses.......... 1,604 1,332 1,367 1,508 1,433 1,641
------- ------- ------- ------ ------ ------
Income (loss) from operations......... (1,540) (1,039) (992) (830) (532) (589)
Interest expense...................... (54) (52) (38) (39) (37) (35)
Other income (expense), net........... 61 22 11 25 9 29
------- ------- ------- ------ ------ ------
Net income (loss)..................... $(1,533) $(1,069) $(1,019) $ (844) $ (560) $ (595)
======= ======= ======= ====== ====== ======
<CAPTION>
SEPT. 30, DEC. 31,
1996 1996
--------- ---------
<S> <C><C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.............................. $ 4,260 $ 8,973
Cost of revenues...................... 2,859 5,733
------ ---------
Gross profit.......................... 1,401 3,240
------ ---------
Operating expenses:
Research and development............ 794 815
Sales and marketing................. 955 1,174
General and administrative.......... 230 387
------ ---------
Total operating expenses.......... 1,979 2,376
------ ---------
Income (loss) from operations......... (578) 864
Interest expense...................... (36) (37)
Other income (expense), net........... 16 (6)
------ ---------
Net income (loss)..................... $ (598) $ 821
====== =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUES:
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 77.5 62.9 63.8 62.4 62.0 65.7
------ ------ ----- ----- ----- -----
Gross profit.......................... 22.5 37.1 36.2 37.6 38.0 34.3
------ ------ ----- ----- ----- -----
Operating expenses:
Research and development............ 299.3 73.8 57.1 32.9 19.7 19.1
Sales and marketing................. 175.4 61.5 52.9 34.5 29.1 26.6
General and administrative.......... 90.1 33.3 21.9 16.3 11.6 7.8
------ ------ ----- ----- ----- -----
Total operating expenses.......... 564.8 168.6 131.9 83.7 60.4 53.5
------ ------ ----- ----- ----- -----
Income (loss) from operations......... (542.3) (131.5) (95.8) (46.1) (22.4) (19.2)
Interest expense...................... (19.0) (6.6) (3.7) (2.2) (1.6) (1.1)
Other income (expense), net........... 21.5 2.8 1.1 1.4 0.4 0.9
------ ------ ----- ----- ----- -----
Net income (loss)..................... (539.8)% (135.3)% (98.4)% (46.9)% (23.6)% (19.4)%
====== ====== ===== ===== ===== =====
<CAPTION>
SEPT. 30, DEC. 31,
1996 1996
--------- ---------
<S> <C><C> <C>
AS A PERCENTAGE OF REVENUES:
Revenues.............................. 100.0% 100.0%
Cost of revenues...................... 67.1 63.9
----- -----
Gross profit.......................... 32.9 36.1
----- -----
Operating expenses:
Research and development............ 18.6 9.1
Sales and marketing................. 22.4 13.1
General and administrative.......... 5.5 4.3
----- -----
Total operating expenses.......... 46.5 26.5
----- -----
Income (loss) from operations......... (13.6) 9.6
Interest expense...................... (0.8) (0.4)
Other income (expense), net........... 0.4 (0.1)
----- -----
Net income (loss)..................... (14.0)% 9.1%
===== =====
</TABLE>
23
<PAGE> 25
Revenues in the fourth quarter of 1996 increased primarily due to a new OEM
customer and acceptance by the market of the Company's AccelPRO and AccelPROTX
product lines which comprised substantially all of revenues in the fourth
quarter. Revenues from inception through the first two quarters of 1996 resulted
primarily from sales of the AG300/500. Sales of the AG300/500 declined in the
third quarter as that product line matured and was replaced with the AccelPRO
and AccelPRO TX product lines. Gross margin in the second and third quarters of
1996 were adversely impacted by inventory reserves in contemplation of the
discontinuance of the Company's AG300/500 product line and increased
manufacturing overhead costs. Gross margin in the fourth quarter of 1996 was
positively impacted by lower component costs. Research and development expenses
were higher in the first quarter of 1995 due to a heavy reliance on consultants,
which are generally more expensive than employees, used in developing the
Company's initial product line. If the Company is unable to continue to attract
and retain sufficient numbers of qualified employees, it may be required to rely
on more expensive consultants. Research and development expenses in the first
quarter of 1996 were positively impacted by the receipt of a $190,000
non-recurring engineering fee from a technical partner to facilitate the
development of the Company's AccelPRO product line. General and administrative
expenses have varied over the eight quarters primarily due to the timing of the
Company's use of consultants for certain general and administrative functions.
General and administrative expenses in the fourth quarter of 1996 increased due
to increased personnel and related costs as well as other costs incurred to
support the Company's overall growth.
The Company's quarterly operating results have varied significantly in the
past and are likely to vary significantly in the future. The Company's quarterly
results are affected by a wide variety of factors including the gain or loss of
significant customers, size and timing of individual orders, timely introduction
and market acceptance of new products offered by the Company and its
competitors, availability, reliability and cost of components, the Company's
success in negotiating OEM and other customer agreements, customer order
deferrals in anticipation of new products, technological changes in operating
systems or applications, variations in manufacturing quality or capacities,
changes in the pricing policies of the Company or its competitors, changes in
demand for 3D graphics functionality, changes in the mix of revenues from
products having differing gross margins, changes in sales channel mix, changes
in average sales prices, warranty expenses, fluctuations in the Company's
expense levels, the Company's success at expanding its direct sales force and
indirect distribution channels, risks related to international operations,
extraordinary events such as litigation or acquisitions and general industry and
economic conditions, as well as other factors. Any of the above risks could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Quarterly revenues and operating results depend primarily on the volume,
timing and shipment of orders during the quarter, which are difficult to
forecast because customers generally place their orders on an as-needed basis
and, accordingly, the Company has historically operated with a relatively small
backlog. The Company's third party distribution channels provide the Company
with limited information regarding the quantity of the Company's products in the
sales channel. This reduces the Company's ability to predict fluctuations in
revenues resulting from a surplus or a shortage in its distribution channel and
could contribute to volatility in the Company's results of operations and cash
flows. A surplus of inventory in the distribution channel could unexpectedly
cause a reduction in product shipments and revenues. Moreover, a
disproportionate percentage of the Company's revenues in any quarter may be
generated in the last month of a quarter. As a result, a shortfall in revenues
in any quarter as compared to expectations may not be identifiable until near
the end of the quarter. The Company may experience relatively weak demand in
third quarters due to historically weak summer sales in Europe.
The Company's gross margins are impacted by the sales channel mix, mix of
products sold, increased competition and related decreases in unit average
selling prices, introduction of new products, availability, reliability and cost
of components from the Company's subcontractors and suppliers, and general
economic conditions. Currently, the Company is focusing on increasing its sales
to OEMs, which have historically yielded lower margins than other channels.
Individual product lines generally provide higher margins at the beginning of
the life cycle and lower margins as the product line matures. Generally, life
cycles of personal computer 3D graphics subsystems are relatively short,
approximately six to fifteen months. In addition, the Company's markets are
characterized by rapidly changing technology and declining average selling
prices.
24
<PAGE> 26
Accordingly, the Company's gross margins may decline from the levels experienced
to date, which could have an adverse effect on the Company's business, financial
condition and results of operations.
A significant portion of the Company's operating expenses are relatively
fixed in the short term and planned expenditures are based on revenue forecasts.
As a result, if revenues are below levels needed to offset these operating
expenses, the Company's business, financial condition and results of operations
may be disproportionately affected because only a portion of the Company's
expenses vary with revenue. The Company generally must plan production, order
components and undertake its development, sales and marketing activities several
months in advance of shipping product and recognizing revenues. Accordingly, any
shortfall in revenues in a given quarter may impact the Company's operating
results and cash balances in a magnified way due to the Company's inability to
adjust expenses or inventory during the quarter to match the level of revenues
for the quarter. In addition, in the event the Company's customers desire to
purchase products in excess of forecasted amounts, the Company may not have
sufficient inventory or access to sufficient manufacturing capacity to meet such
demands. Although the Company has experienced growth in revenues in recent
quarters, there can be no assurance that the Company will sustain such revenue
growth or be profitable on an operating basis in any future period. For the
foregoing reasons, the Company believes that period-to-period comparisons of its
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarter the Company's revenues or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of $7.3 million of Redeemable Convertible Preferred Stock and
Common Stock, the issuance of $3.3 million of convertible debt and, to a lesser
extent, credit lines. Cash used in operations was $4.6 million in 1995 and $1.3
million in 1996. For 1995, net cash used in operations was due primarily to the
net loss of $4.5 million and increases in accounts receivable and inventories
associated with higher revenues, which were partially offset by an increase in
accounts payable and other liabilities. Net cash used in operations for 1996 was
primarily due to the net loss of $932,000 and a $3.3 million increase in
accounts receivable which was partially offset by a decrease in inventories and
increases in accounts payable, accrued liabilities and customer deposits.
Net cash used in investing activities was approximately $250,000 in each of
1995 and 1996 due primarily to the purchase of property and equipment. The
Company has no significant capital spending or purchase commitments other than
normal purchase commitments and commitments under leases. Net cash provided by
financing activities was $4.1 million and $3.2 million in 1995 and 1996,
respectively, due primarily to proceeds from the issuance of Preferred Stock.
The Company has not invested in derivative securities or any other
financial instrument that involves a high level of complexity or risk.
Management expects that, in the future, cash in excess of current requirements
will be invested in investment-grade, interest-bearing securities.
At December 31, 1996, the Company had $3.0 million in cash and cash
equivalents. The Company has a revolving line of credit agreement with a bank,
which provides, through October 1997, for maximum borrowings in an amount up to
the lower of 80% of eligible accounts receivable or $3.0 million. Borrowings
under the line are secured by all of the Company's assets and bear interest at
the bank's prime rate plus 0.25% per annum (8.5% at December 31, 1996). The
agreement requires that the Company maintain certain financial ratios and levels
of tangible net worth and profitability and also restricts the Company's ability
to pay cash dividends. At December 31, 1996, there were no borrowings and $1.1
million of standby letters of credit to vendors were outstanding under the line
of credit.
The Company believes that existing cash and cash equivalents of $3.0
million, its available borrowings and lines of credit, together with anticipated
net proceeds from this offering, will be sufficient to finance its working
capital and capital expenditure requirements for at least the next 12 months.
Thereafter, the Company may require additional funds to support its working
capital requirements or for other purposes and may seek to raise such additional
funds through bank borrowings and public or private sales of its securities,
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including equity and debt securities. The Company's future capital requirements
will depend on numerous factors, including, without limitation, the success of
marketing, sales and distribution efforts, market acceptance of the Company's
products, the progress of its research and development programs, the costs
involved in defending and enforcing intellectual property rights, competition,
competing technological and market developments, and the effectiveness of
product commercialization activities and arrangements. There can be no assurance
that additional funds, if required, will be available to the Company on
favorable terms or at all.
RECENT INTERIM RESULTS
For the first quarter ended March 31, 1997, the Company had revenues of
approximately $11.8 million and expects income from operations and net income to
exeed $1.2 million and $800,000, respectively. These results compare with
revenues of $9.0 million and income from operations and net income of
approximately $860,000 and $820,000, respectively, for the fourth quarter ended
December 31, 1996. The revenues, income from operations and net income for the
first quarter are not necessarily indicative of the results to be expected for
any future period. See "Risk Factors -- Significant Variability in Quarterly
Results."
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BUSINESS
AccelGraphics is a leading provider of high-performance, cost-effective, 3D
graphics subsystems, software accelerators and application utility software
products for the professional Windows NT and Windows 95 markets. The Company
pioneered the development of professional 3D graphics subsystems for use with
Microsoft's Windows NT operating system ("NT"). A 3-dimensional ("3D") graphics
subsystem integrates graphics acceleration chip(s), specialized hardware,
firmware, software and memory. The Company's 3D graphics subsystems, when
included in an Intel Pentium, Pentium Pro or Digital Alpha based computer,
create a new class of computer system called a "Personal Workstation." Personal
Workstations, which often sell for less than $10,000, provide capabilities and
performance comparable to more expensive 3D graphics RISC/UNIX workstations. In
January 1995, AccelGraphics shipped what the Company believes was the first 3D
graphics subsystem for NT and currently offers four distinct 3D graphics
subsystem product lines.
The Company's products include a family of 3D graphics subsystems for
applications based on OpenGL and other 3D application programming interfaces
("APIs"), such as Autodesk's Heidi. Through the Company's extensive experience
in 3D algorithms, the interaction of 3D applications with OpenGL and overall 3D
graphics system integration, AccelGraphics delivers robust, well-integrated
subsystem solutions to the professional 3D graphics market. According to
International Data Corporation ("IDC"), the world wide unit volume of 3D
graphics subsystems for workstations will grow at a compounded annual growth
rate of 106% from 36,000 units in 1996 to over 650,000 units in the year 2000.
The Company sells its products through original equipment manufacturers
("OEMs") and a worldwide network of value added resellers ("VARs") and
distributors. Digital Equipment Corporation ("Digital"), Epson Direct,
Hewlett-Packard Company ("HP"), Hitachi, Ltd., Samsung Electronics Co., Ltd. and
Tri-Star Computer Corporation purchase the Company's fully-integrated 3D
graphics subsystems for use in high-performance Personal Workstations. The
Company also has technical relationships with Intel Corporation ("Intel") and
Microsoft, as well as with key component suppliers including 3Dlabs, Inc.
("3Dlabs"), Cirrus Logic, Inc., Evans & Sutherland Computer Corporation ("Evans
& Sutherland") and Mitsubishi Corporation ("Mitsubishi"). To enhance the
performance of applications which use the Company's 3D graphics subsystems,
AccelGraphics has developed relationships, some of which include joint
engineering projects, with many leading ISVs such as Autodesk, Inc. ("Autodesk")
and Autodesk's Kinetix Division ("Kinetix"), Computer Associates International,
Inc., Electronic Data System Corporation's ("EDS") Unigraphics division, Matra
Datavision S.A., Microsoft Corporation's Softimage, PTC, Ricoh Corporation,
Structural Dynamics Research Corporation ("SDRC") and Visible Decisions, Inc.
INDUSTRY BACKGROUND
3D computing is a highly effective way to realistically and intuitively
visualize, analyze, animate and communicate data. A 3D computer model provides a
detailed visual representation of an object's structural and behavioral
characteristics, thereby simulating that object's realistic appearance and
functionality. Engineers, designers, scientists and researchers who previously
used 2-dimensional ("2D") technology now can work faster and more efficiently by
using 3D technology to create, modify and complete more sophisticated models. In
addition, animators and creative artists use 3D computing to create the illusion
of reality in exciting and entertaining motion pictures, games and commercials.
3D computing is inherently complex and computationally demanding, requiring
up to or greater than half a billion calculations per second. As a result, early
efforts at 3D computing required expensive mainframe-class computers. 3D
computing remained largely inaccessible to most users except in industries such
as defense and nuclear power. However, in the 1980s, the 3D computing
marketplace grew dramatically with the introduction of lower cost, integrated
RISC/UNIX workstations. Today, the RISC/UNIX workstation is the primary
environment for 3D computing professionals, and according to IDC, total world
wide revenue of RISC/UNIX workstations was approximately $12 billion in 1996.
As the RISC/UNIX workstation market developed, vendors differentiated their
products by developing proprietary operating systems, buses, processors, APIs
and 3D graphics subsystems. While RISC/UNIX workstations continue to provide
high-performance 3D graphics capabilities, they remain costly due to
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relatively low production volumes, advanced technology, custom components and
proprietary architectures. In 1996, a RISC/UNIX workstation with advanced 3D
graphics capabilities typically ranged in price from $20,000 to over $100,000.
In addition, such workstations can be difficult and expensive to integrate into
corporate computing networks. Further, because many PC applications do not run
efficiently on RISC/UNIX workstations, users desiring access to both 3D graphics
and PC applications often purchased both a PC and a RISC/UNIX workstation for
their desktops.
In contrast to RISC/UNIX workstations, 3D capabilities of the PC have been
extremely limited due to restrictions of PC operating systems and the lack of
sufficient microprocessor power, application software and high-performance
standard 3D APIs. Several technological innovations, including Intel's Pentium
and Pentium Pro processors and peripheral component interconnect ("PCI") bus
architecture, Microsoft's NT operating system and the introduction of OpenGL, a
high-performance graphics API, have overcome many of these limitations. However,
systems based only on these technologies are still not able to satisfy the
demanding performance requirements of professional 3D computing. Specifically,
to perform fully functional, high-performance 3D computing, an integrated 3D
graphics subsystem is also required.
Creating a 3D graphics subsystem is substantially more demanding than
creating a 2D graphics subsystem. Both 2D and 3D require the display of pixels,
or dots, on the screen, but 3D typically requires 10 to 100 times more
computations in order to accurately display a dynamic 3D object, including
computations for 3D axis geometry (pixel location), color, depth, transparency,
lighting and textures. 3D graphics subsystems also need to support numerous
software applications that have been designed in different ways. Animation
applications, for instance, require different features and performance
characteristics than Mechanical Computer Aided Design ("MCAD") applications or
simulation applications because the end users have different requirements. At
the same time, performance within all 3D applications must meet certain
benchmarks to satisfy user expectations. For example, to convey a sense of
movement, interactive 3D graphics applications typically re-compute and
re-render each scene 20 to 30 times each second to achieve smooth motion in a
manner similar to that of television and motion pictures.
3D graphics subsystems are implemented in a series of processing steps
often called a "pipeline" as illustrated in the diagram below. The 3D graphics
pipeline takes commands from the application, processes these commands and
ultimately creates the individual pixels on the screen. Each stage of the 3D
graphics pipeline has particular complexities that require complete, integrated
solutions to overcome performance bottlenecks and potential errors. Regardless
of the underlying speed of the host central processing unit ("CPU") and graphics
subsystem, if each stage of the pipeline is not optimized, the performance
delivered to the end user may be unacceptably slow. In particular, the method by
which an application communicates to the graphics library and optimizes its
usage is critical.
3D GRAPHICS PIPELINE
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Many applications which utilize 3D graphics pipelines were previously only
available on RISC/UNIX workstations. However, 3D application developers have
recognized the market potential of the lower-cost Windows NT computing
environment and have either ported (the process of adapting software
applications to an operating system) or have begun to port their applications to
NT. One of the first significant 3D UNIX applications ported to NT was PTC's
ProENGINEER in late 1994 and in the fourth quarter of 1996, 27% of all new
ProENGINEER licenses sold by PTC were on NT. The NT version of PTC's ProENGINEER
has been an increasing portion of PTC's revenue since its introduction. IDC
predicts that the unit volume of 3D graphics subsystems enabling NT workstations
will grow at a compounded annual growth rate of 106% from 36,000 units in 1996
to over 650,000 units in the year 2000.
THE ACCELGRAPHICS SOLUTION
AccelGraphics pioneered the development of professional 3D graphics
subsystems for use with NT. In January 1995, AccelGraphics' AG300 was the first
3D graphics subsystem demonstrated and certified by PTC. The Company's 3D
graphics subsystems, when included in an Intel Pentium, Pentium Pro or Digital
Alpha based computer, create a new class of computer system called a "Personal
Workstation." Personal Workstations, which often sell for less than $10,000,
provide capabilities and performance comparable to more expensive 3D graphics
RISC/UNIX workstations. The Personal Workstation is now a viable, cost-effective
option for 3D professionals, and an affordable solution for users previously
limited to 2D graphics capabilities.
The AccelGraphics' solution includes high-performance, cost-effective, 3D
graphics subsystems, software accelerators and application utility software
integrated for optimal 3D graphics performance. The Company has extensive
experience in 3D algorithms, the interaction of 3D applications with OpenGL and
overall 3D graphics system integration. Through its detailed understanding of
application requirements and hardware capabilities, AccelGraphics delivers a
full featured, well-integrated subsystem solution to the 3D professional market.
An AccelGraphics-enabled Personal Workstation delivers the 3D graphics
performance many professionals require while also enabling them to operate their
PC applications on the same machine.
STRATEGY
The Company's objective is to become the leading supplier of
high-performance 3D graphics subsystems and 3D enabling software applications
for professional users. The Company's business strategy includes the following:
Extend Leadership Position in Professional 3D Graphics on Personal
Workstations. The Company believes that it has established a leading position in
3D graphics on Personal Workstations for professional applications. The Company
intends to build upon its brand name by introducing more 3D graphics subsystems
and feature-rich software applications, by continuing to integrate greater 3D
graphics functionality and performance for professional 3D graphics users and by
expanding its relationships with professional ISVs and OEMs.
Provide System Engineered Solutions. The Company creates integrated 3D
graphics solutions which are engineered to optimize each step of the 3D graphics
pipeline. AccelGraphics' strategy is to maximize overall Personal Workstation
performance by engineering its solutions to efficiently interface with all parts
of the system as well as effectively allocate processing power between the host
system and 3D graphics subsystem.
Cultivate Relationships with ISVs. The Company intends to continue forging
engineering and marketing relationships with leading ISVs and to expand joint
marketing activities. For example, the Company successfully supported the
migration to NT of UNIX software applications from EDS's Unigraphics division,
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<PAGE> 31
Microsoft's Softimage and SDRC. Through engineering involvement in the porting
of major 3D UNIX applications to the NT platform, the Company enhances the
performance of its graphics subsystems with these applications and often becomes
an ISV's initial preferred 3D graphics solution.
Expand OEM and International Sales. OEMs constitute the most significant
channel through which professional users purchase Personal Workstations
incorporating the Company's 3D graphics subsystems. The Company intends to add
personnel to provide more sales coverage and support for targeted OEM prospects
and customers. In addition, the Company intends to continue expanding its sales
presence in international markets by establishing additional relationships with
foreign distributors and hiring foreign resident sales personnel.
Develop and Penetrate New Markets. The Company plans to aggressively pursue
3D UNIX users as UNIX-based 3D graphics applications continue to migrate to the
NT platform. AccelGraphics also recognizes the market potential of 2D graphics
end users moving up to 3D graphics as end users discover that the power of
professional 3D computing has suddenly become affordable. As an example, over
20,000 former users of 2D technology have acquired the Company's 3D technology
in conjunction with Autodesk's Mechanical Desktop, a mechanical design and
modeling application which includes the Company's AccelVIEW 3D technology.
Focus on Value Added 3D Software. The Company intends to develop and offer
value added 3D software which provides enhanced features to other software
vendors' applications for 3D graphics professionals. The Company has
successfully developed and introduced its AccelVIEW 3D software product for
AutoCAD and its Flying Carpet plug-in to Netscape Navigator and Microsoft
Internet Explorer. The Company believes that such 3D software applications
provide not only a source of higher margin revenue, but an additional market
opportunity for graphics subsystem upgrades as users look for increased
productivity and performance.
Silicon Independence. The Company does not depend on either itself or any
other single provider for its silicon chip technology. This strategy of silicon
independence enables the Company to avoid the significant fixed costs and risks
associated with the development, manufacture and testing of 3D graphics
microprocessors and to benefit from the freedom and flexibility of selecting the
best chip available for each product offering.
PRODUCTS
The Company's product offerings include a range of professional 3D graphics
subsystems, accelerator software and application utility software products
marketed under the Accel brand name. In 1996, a majority of the Company's
revenues were derived from the AccelPRO and AccelPRO TX product lines. Each of
the Company's 3D graphics subsystem products support the PCI bus and major
professional 3D graphics APIs including OpenGL and Autodesk's Heidi. The
Company's products support NT and in some cases Windows 95. The Company's
products have been incorporated into systems that use Intel's Pentium and
Pentium Pro processors, Motorola's Power PC, Digital's Alpha and SGI's MIPS
processors. In addition, the Company has developed accelerator software and
software utilities that improve the 3D graphics capabilities of ISV
applications, including Autodesk's AutoCAD and Mechanical Desktop, Microsoft
Internet Explorer and Netscape Navigator.
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The Company's principal product lines are summarized below. Suggested end
user United States prices vary depending on system configuration.
- --------------------------------------------------------------------------------
HARDWARE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTRODUCTION SUGGESTED END USER
PRODUCT LINE DATE DESCRIPTION PRICE
-------------- -------------- --------------------------------- ---------------------
<S> <C> <C> <C>
AccelECLIPSE March 1997 3D graphics subsystems with $3,495 - $3,995
advanced texture, overlay and
anti-aliasing support
AccelPRO TX August 1996 High-performance 3D graphics $1,995 - $2,495
subsystems with advanced hardware
texture and anti-aliasing support
AccelPRO June 1996 High-performance 3D graphics $1,795 - $2,495
subsystems without hardware
texture support
AccelSTAR November 1996 Entry-level 3D graphics $595 - $695
subsystems with limited hardware
texture support
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SOFTWARE
----------------------------------------------------------------------------------------------
INTRODUCTION
PRODUCT DATE DESCRIPTION SUGGESTED END USER PRICE
-------------- -------------- ----------------------------------- -------------------------
<S> <C> <C> <C>
AccelVIEW 3D March 1996 Software add-on to Autodesk's $395
AutoCAD to deliver interactive 3D
graphics
Flying Carpet February 1997 Plug-in to Netscape Navigator and $49
Microsoft Internet Explorer for
display of and interaction with
very large VRML data sets
Flying Carpet February 1997 Data converter companion product to $49
Converter Flying Carpet
</TABLE>
AccelECLIPSE -- The AccelECLIPSE subsystem plugs into one PCI slot and
supports up to 1280 x 1024 resolution, integrated VGA, advanced tri-linear
texture MIP mapping hardware, overlays and anti-aliasing. The subsystem
incorporates Mitsubishi's 3DPRO chip set, including 15 MB of 3DRAM, an advanced
graphics memory chip architected by Mitsubishi and up to 16 MB of optional
texture memory. The AccelECLIPSE subsystem targets high-end visual simulation
users, professional animators and CAD designers.
AccelPRO TX -- The AccelPRO TX subsystem supports OpenGL features such as
Gouraud shading, anti-aliasing, transparency and advanced features such as
hardware texture mapping. The product incorporates the GLINT 500TX and GLINT
Delta chips from 3Dlabs, up to 16 MB of combined VRAM and DRAM memory supporting
up to 1280 x 1024 resolution and on-board VGA. The subsystem is targeted to
customers who seek a full featured 3D graphics subsystem solution for CAD
design, animation and network management applications.
AccelPRO -- The AccelPRO supports 1280 x 1024 resolution, 15 bits of color
and a 24 bit Z-buffer. The subsystem includes on-board VGA support and up to 16
MB of total graphics memory. The AccelPRO incorporates the GLINT 300SX and GLINT
Delta chips from 3Dlabs. The 3D graphics subsystem is targeted to customers who
seek excellent 3D performance but do not require hardware texture mapping
support.
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AccelSTAR -- The AccelSTAR is an entry level 3D graphics subsystem that
supports the full features of OpenGL including Gouraud shading, texture mapping
and transparency, and includes on-board VGA. The 3D graphics subsystem sells for
a price comparable to a high-end 2D graphics subsystem. The AccelSTAR
incorporates the Permedia and Delta chips from 3Dlabs and up to 8 MB of total
memory. The AccelSTAR is targeted to price sensitive customers who do not
require large amounts of texture memory.
AccelVIEW 3D -- AccelVIEW 3D enables users of AutoCAD Release 13c4 on NT or
Windows 95 to perform dynamic interactive design and viewing on any database
that has been created with AutoCAD. With AccelVIEW 3D, users are able to quickly
render single parts or assemblies, as well as dynamically manipulate and
seamlessly interact with and edit wireframe, hidden-line and shaded models.
AccelVIEW 3D is tightly integrated with AutoCAD and operates as if it were a
standard part of the application. AccelVIEW 3D can work either with or without
an add-on 3D subsystem card.
Flying Carpet -- The Flying Carpet plug-in is an advanced 3D viewer for
manipulating large models and assemblies. Unlike other Virtual Reality Markup
Language ("VRML") viewers that have limitations on model size or are very slow
if the models exceed two to four thousand polygons, Flying Carpet can handle
virtually unlimited model sizes and can manipulate them up to 10 times faster
than competitive VRML viewers. Accurate data of the model is always available
for close inspection and accurate analysis. The tools for navigating through or
around a 3D model environment are extensive and easy to learn. Flying Carpet is
designed for companies who are moving to a Web-based information access
architecture and want to integrate 3D geometric product data for collaborative
engineering. The Company licenses certain technology for Flying Carpet from
Resolution Technologies, Inc.
Flying Carpet Converter -- The Flying Carpet Converter allows customers to
convert common VRML 1.0 and 2.0 files to the high-performance native format
supported by Flying Carpet. When converted to this native format, typically
large data files are 3 to 5 times smaller and load 3 to 5 times faster across
the Internet or intranet than the corresponding VRML file.
The following is a glossary of product terms:
Anti-Aliasing: a technique used to reduce the jagged or stair-step
appearance of lines displayed on the screen.
API (Application Program Interface): the language and message format
used by a program to activate and interact with functions in another
program or in the hardware.
Bits of Color: related data that provides the information to identify
the color in the display.
Gouraud Shading: a display technique used to create a continuous
transition of color across a surface as well as create a smoother
overall appearance of an illuminated surface.
Hidden-Line Removal: the portions of a wireframe object which are
hidden from view when looking at an object.
Overlay: multiple layers of images displayed on top of each other.
Pixels: the smallest unit of a computer screen image; dots.
Render: the act of displaying on the screen the solid 3D image
calculated by the software application.
Texture Mapping: the process of applying a pre-determined image to a
surface (i.e. applying a picture of a brick building facade to a shape
representing a wall).
Tri-Linear MIP (Multi In Partem-Latin) Mapping: a rendering technique
used to improve the appearance of a textured surface when viewed at a
given distance combined with a technique for improving the appearance
of a textured surface.
Tri-Linear Texture: 3-dimensional images that are used to modify the
color of fragments.
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VRML (Virtual Reality Model Language): a universal description
language which allows navigation through 3-dimensional sites that are
placed on the World Wide Web.
Wireframe: an outline of a solid image.
Z-Buffer: a memory storage area used to keep depth information for
every pixel on the display.
TECHNOLOGY AND CORE COMPETENCIES
AccelGraphics invests in several key technologies and believes the Company
possesses skills in the various disciplines and technology areas which are
necessary for developing professional 3D computing products. These competencies
include:
OpenGL 3D Expertise. The Company enhances its products through a
proprietary high-performance 3D software implementation of OpenGL and is a
direct OpenGL licensee. The Company has invested thousands of engineering hours
in its version of the OpenGL software library, which currently contains four
times more lines of code than the original sample implementation made available
by SGI. The Company optimizes the performance of its OpenGL software library by
eliminating much of the testing and branching required to process data and
instruction streams, while adding routines optimized for various application
profiles. This effort has resulted in what the Company believes is the fastest
and most stable version of OpenGL available for Windows NT.
Software Systems Integration. The Company has invested in the development
and expansion of the "transport layer" of software that manages the direct
interfaces associated with various parts of the overall system. The parts of the
system include the virtual memory manager, the CPU and its timing, the PCI bus
implementation, the graphic board and chips, data buffer size specifications and
management, specific system configuration issues, NT register settings and other
device driver components. To ensure error-free operation with maximum
performance, the Company continually modifies and optimizes its software to
properly integrate with the various systems and applications that utilize the
Company's 3D graphics subsystems.
3D Development Tools. The Company has developed tools to determine how
applications operate and how they utilize the 3D graphics pipeline. Using these
proprietary development tools, AccelGraphics' engineers gain an understanding of
the structure and function of an application enabling them to optimize the API,
graphics libraries and hardware to efficiently process commands from each
application. The Company has developed specific features for, and optimized the
performance of, its software and its hardware with the goal that key
applications will perform better with its 3D graphics subsystems than with
competitive solutions.
Hardware Design and Systems Engineering. The Company's four distinct 3D
graphics subsystem product lines have been designed and introduced in the past
two years. An in-depth understanding of the importance of layout, trace lines,
memory interaction, chip characteristics, software implementation, BIOS
technologies and bus technology all contribute to building products and systems
that deliver reliable performance. By focusing on system level design, the
Company's 3D graphics subsystems integrate easily into Personal Workstations.
2D and 3D Expertise. In addition to the Company's 3D expertise, the Company
has extensive experience and maintains active software development efforts in 2D
graphics. The Company believes experience and competency in the smooth
implementation and interaction of 2D with 3D delivers a more robust solution to
a broader range of users.
STRATEGIC RELATIONSHIPS
The NT workstation market is comprised of many vendors collaborating to
produce a complete solution for end users. The Company has developed close
strategic relationships with key companies in this market and participates in
industry consortiums from several market segments. AccelGraphics believes these
relationships provide access to the leading-edge information and technology that
the Company needs to remain at the forefront of this rapidly changing market.
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The Company has technical relationships with Intel and Microsoft, as well
as with key component suppliers, including 3Dlabs, Mitsubishi, Cirrus Logic,
Inc. and Evans and Sutherland. These relationships include joint engineering
development and have often resulted in modifications to suppliers' product
features and performance through architectural review and early product
evaluation.
The Company maintains relationships, some of which include joint
engineering projects, with many leading ISVs such as Autodesk and Kinetix,
Computer Associates International, Inc., EDS's Unigraphics division, Matra
Datavision S.A., Microsoft's Softimage, PTC, Ricoh Corporation, SDRC and Visible
Decisions, Inc. Examples include developing overlay software with engineers from
Microsoft's Softimage group, engineering the migration from UNIX to NT with SDRC
and developing and then imbedding 3D technology to power Autodesk's Mechanical
Desktop. In the case of Autodesk, the Company receives royalty payments on each
sale of Mechanical Desktop. By providing resources and assisting its ISV
partners in their transition to NT, the Company has often gained a period of
market advantage for new NT applications. This advantage results from the
Company's 3D graphics subsystems often being the first subsystem certified by
the ISV and sometimes the only subsystem supported by the application for an
exclusive period of time.
To develop advanced knowledge and influence the direction of new
technologies and products, the Company is actively involved in various
technology consortiums, industry standards organizations and special interest
groups. The Company's engineers are active in the OpenGL Architectural Review
Board, the VRML Consortium and the PCI Special Interest Group.
3D PROFESSIONAL MARKETS AND APPLICATIONS
The Company focuses on the professional 3D graphics market and has
engineered 3D solutions to support its ISV partners. In many cases, the
Company's products were the first NT-based products supported by these ISVs. The
following table illustrates various 3D market segments. Identified within each
market segment are selected ISVs, their 3D software applications and examples of
customers using the respective applications.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
ISV APPLICATION ISV CUSTOMER EXAMPLES
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
MECHANICAL COMPUTER AIDED DESIGN -- Electronic design of products prior to manufacturing
Autodesk Mechanical Desktop Siemens, Wisne Design
EDS Unigraphics II General Motors
Matra Datavision S.A. Prelude Design Renault
PTC Pro/ENGINEER Caterpillar, John Deere
Ricoh Corporation DESIGNBASE Hitachi, Mitsubishi
SolidWorks Corporation SolidWorks 97 Lockheed Martin
SDRC I-DEAS Master Series Ford Motor
- ----------------------------------------------------------------------------------------------
ENGINEERING ANALYSIS -- Verification of structural, vibration and thermal integrity
Altair Computing, Inc. HyperMesh Chrysler, Nissan Motor
ANSYS, Inc. ANSYS General Electric, 3M
Mechanical Dynamics Adams Caterpillar
Incorporated
- ----------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
ISV APPLICATION ISV CUSTOMER EXAMPLES
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
ANIMATION AND MULTIMEDIA AUTHORING -- Creation of motion pictures, games, commercials
Kinetix 3D Studio MAX Mindscape, DreamWorks
Microsoft Softimage 3D Industrial Light & Magic, Sony
NewTek, Inc. LightWave 3D LucasArts Entertainment,
Digital Domain
- ----------------------------------------------------------------------------------------------
ARCHITECTURE, ENGINEERING AND CONSTRUCTION -- Plant design, maintenance, and architectural
design
Bentley Systems, Microstation Amoco, Dow Chemical
Incorporated
CADCENTRE, Ltd. Plant Design Maintenance Brown & Root, British Nuclear
Fuels
EA Systems Inc. Plant Walk Mitsui Engineering
- ----------------------------------------------------------------------------------------------
NETWORK MANAGEMENT -- Network and facilities management with 3D interpretation capabilities
Computer Associates CA Unicenter TNG Xerox
International, Inc.
- ----------------------------------------------------------------------------------------------
VISUALIZATION -- Representation of complex data such as weather or fluids flows
Advanced Visual AVS Express NASA, Sandia National
Systems Inc. Laboratories
- ----------------------------------------------------------------------------------------------
FINANCIAL VISUALIZATION -- Decision support for financial analysis
Visible Decisions, Inc. Discovery Canadian Imperial Bank
- ----------------------------------------------------------------------------------------------
SIMULATION AND TRAINING SYSTEMS -- Flight training, driver education and corporate training
Sense 8 Corporation World Tool Kit Amoco, BMW
- ----------------------------------------------------------------------------------------------
</TABLE>
CUSTOMERS, SALES AND MARKETING
Sales. The Company's sales efforts consist of a combination of direct sales
to OEMs and a worldwide network of VARs and distributors. The Company maintains
a wholly-owned subsidiary, AccelGraphics Deutschland, to market its products in
Europe. As of December 31, 1996, direct sales, marketing and support staff
totaled 20 people located in Northern California, Southern California, Florida,
New Jersey, Ohio and Wiesbaden, Germany. Pacific Rim sales are directed by the
Vice President of Asia Sales out of the Company's San Jose headquarters.
International sales revenues represented approximately 31% of revenues in 1996.
OEMs. The Company and its distributors sell fully-integrated 3D graphics
subsystems to Digital, Epson Direct, HP, Hitachi, Ltd., Samsung Electronics Co.,
Ltd. and Tri-Star Computer Corporation for use in high-performance Personal
Workstations. AccelGraphics works closely with its OEM customers to ensure the
complete testing of the Company's 3D graphics subsystems within their Personal
Workstations to achieve maximum system performance and error-free integration.
The Product Purchase Agreement with HP provides for HP to supply the
Company non-binding forecasts of HP's requirements for products, and the Company
to provide HP product warranty and product support, indemnification and certain
manufacturing rights in the event the Company is declared bankrupt or goes into
receivership or is unable to supply HP with specified quantities of products due
to a cause not associated with the negligence of either party.
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<PAGE> 37
The OEM Agreement with Digital provides for Digital to supply the Company
non-binding forecasts of Digital's requirements for products, and the Company to
provide Digital product warranty and product support, indemnification and
certain manufacturing rights in the event that the Company is unable to supply
Digital with specified quantities of products until the Company demonstrates its
ability and readiness to assume its obligations. In addition, the agreement
provides for a pricing review period pursuant to which the parties will review
products purchased versus the contract pricing.
VARs and Distributors. The Company distributes its products in 32 countries
through a network of VARs and distributors. The Company sells its products in
the United States through large VARs such as Advanced Data Graphics, Inc., Avcom
Technologies, Inc., Cad Research, Inc. and New Technologies Solutions, Inc.
Distributors include Pioneer-Standard Electronics, Inc. and Wyle Electronics in
the United States, Performance Graphics, Ltd. in Europe and Memorex Telex Japan,
Ltd. in Asia. Sales to VARs and distributors accounted for 43% of the Company's
revenues in 1996.
Marketing. The Company's marketing efforts consist primarily of advertising
in targeted trade publications, exhibiting at industry trade shows and joint
marketing activities with ISVs. The Company's collaborative marketing efforts
include mailings by the ISVs to their customers on the behalf of the Company and
inclusion of the Company's promotional literature with the ISVs software
distributions. The Company also participates in joint demonstrations, pilot
programs and seeks to obtain reviews of its products in leading trade
publications such as Pro/E The Magazine.
Customer Support. The Company utilizes Software Support Inc. ("SSI") for
initial support within the United States for VARs, distributors and end users.
SSI is an 800 person support organization which services companies such as
Gateway 2000 and Cisco Systems. The Company maintains its own in-house pre- and
post-sale support staff to provide support for the rest of the world, OEM
support and extended support for the United States. In addition, the Company
utilizes its Web site as well as e-mail exchange to support its customers. The
Company generally provides a three-year warranty for its products. In general,
the Company's return policy permits return within five days after receipt of
products that do not meet product specifications.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $2.6 million in 1995 to
$2.7 million in 1996, representing 67% and 14% of revenues, respectively. The
Company believes that continued investment in research and development is
critical to the Company's success. The Company's research and development
organization consisted of 21 employees as of December 31, 1996.
The Company's hardware development efforts are focused on the design and
testing of new products incorporating advanced components into high performance
accelerators that make efficient use of the PCI bus, system BIOS architectures,
and graphic libraries. The hardware development team combines 2D and 3D graphic
processors, RAMDACS, graphic memory chips and firmware into integrated,
efficient graphics accelerators.
Software development efforts are focused on development of software and
firmware drivers to enhance the performance of applications, upgrades to the
Flying Carpet and AccelVIEW 3D applications and support for new graphics
accelerator chips that may be incorporated in future products. From time to
time, the Company also employs outside consultants to assist with the
development of specific projects.
The Company dedicates certain engineering personnel to its ISV partners to
optimize their applications with the Company's accelerator products. The
dedicated engineering personnel often work directly on-site with the ISV
engineering development team on development of the next generation of ISV
products. The Company also works with suppliers of graphics chip sets to specify
the next generation of requirements and components for the Company's new
products. The Company coordinates with leading personal computer and NT
workstation hardware and operating system vendors to remain abreast of emerging
industry trends and opportunities.
The markets for the Company's products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and rapid product obsolescence. The Company's
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<PAGE> 38
success will be substantially dependent upon its ability to continue to develop
and introduce competitive products and technologies on a timely basis with
features and functionality that meet changing customer requirements. The
Company's business would be adversely affected if the Company were to incur
delays in developing new products or enhancements, or if such products or
enhancements did not gain widespread market acceptance. The Company's business
would also be adversely affected if it were to select new chipsets from among
those chipsets offered by its various semiconductor vendors, new chipsets that
do not perform favorably on a price-performance basis compared to competing
products. In addition, there can be no assurance that products or technologies
developed by others will not render the Company's products or technologies
noncompetitive or obsolete. The Company must continually assess emerging
technologies and standards, and evolving market needs, and must continually
decide which technologies and product directions to pursue. If the Company were
to focus its efforts on technologies, standards or products that do not meet
emerging end user needs and do not achieve market acceptance, the Company could
miss one or more product cycles. In such an event, the Company's business,
financial conditions and results of operations would be adversely affected.
MANUFACTURING
All manufacturing and testing is completed by major contract manufacturers
on a turnkey basis in Hong Kong, Taiwan, and Singapore. This enables the Company
to avoid the cost of owning and operating a manufacturing facility while adding
flexibility to the manufacturing process. The Company does not have contract
commitments with these subcontractors and therefore these subcontractors are not
obligated to supply assemblies, products or services to the Company for any
specific time or at any specific price, except as provided for by specific
purchase orders. Although at present there is an abundance of turnkey
manufacturing in the world, there is no guarantee this will continue. Some long
lead time and sole-sourced items are forecasted and purchased by the Company and
are sold to the turnkey vendor upon demand. Quality auditing and root cause
failure analysis are performed by the Company to maintain quality. The Company
negotiates with vendors for the best pricing on key components and assigns the
pricing to the subcontractors, while receiving the benefit of the
subcontractors' volume purchase prices on the more standard parts.
The Company relies on subcontractors to manufacture, subassemble, test and
ship the Company's products. The Company relies on sole-source suppliers for
certain critical components, such as 3Dlabs for its graphics acceleration chips,
Mitsubishi for its graphics acceleration chips and 3DRAM chips and Nan Ya for
its printed circuit boards. In addition, there is some limited availability of
application specific integrated circuit chipsets that provide VRAM and DRAM
memory. The Company procures its components and products through purchase orders
and does not have specific requirement agreements with any of its subcontractors
or suppliers. Each of the Company's subcontractors and suppliers can cease
supplying the services, products or components at any time with no penalty. In
the event it becomes necessary for the Company to replace a key subcontractor or
supplier, the Company could incur significant manufacturing set-up costs and
delays while new sources are located and alternate components are integrated
into the design of the Company's products. There can be no assurance that the
Company will be able to maintain its current subcontractor and supplier
relationships or that the Company will be able to find suitable replacement
subcontractors and suppliers, if necessary. Although the Company maintains
ongoing efforts to obtain required quantities of products, component shortages
may exist from time to time, and there can be no assurance that the Company's
current subcontractors and suppliers will continue to provide sufficient
quantities of suitable quality product components at acceptable prices. The
inability of the Company to obtain product components at their historical cost
levels would directly affect the cost of the Company's products. In addition,
the Company's ability to respond to greater than anticipated market demand may
be constrained by availability of services, products or components. Further, one
of the Company's subcontractors is located in Hong Kong. When Hong Kong
transitions to the authority of the Peoples' Republic of China, the Company
could experience disruption in the supply products from that subcontractor. The
loss of subcontractors or suppliers or the failure of subcontractors or
suppliers to meet the Company's price, quality, quantity and delivery
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
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<PAGE> 39
PROPRIETARY RIGHTS
Although the Company has three patent applications filed in the United
States, these claims are not related to the Company's current product lines.
Instead, the Company relies exclusively on trade secret and copyright protection
for its proprietary technology. Despite the Company's precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
technologies without authorization or to develop competing technologies
independently. Furthermore, the laws of certain countries in which the Company
does business, including countries in which the Company does a significant
amount of business, such as the United Kingdom and Germany, may not protect the
Company's software and intellectual property rights to the same extent as the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. If unauthorized
copying or misuse of the Company's products were to occur to any substantial
degree, or if a competitor of the Company were to effectively duplicate the
Company's proprietary technology, the Company's business, financial condition
and results of operations would be materially adversely affected. Furthermore,
while the Company requires employees and consultants to enter into
confidentiality agreements, there can be no assurance that proprietary
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its trade secrets. Certain technology used
by the Company's products is licensed from third parties, generally on a
non-exclusive basis. The termination of any such license, or the failure of any
third party licensor to adequately maintain or update its product, could result
in delay in the Company's ability to ship its products while it seeks to
implement technology offered by alternative sources, if any. Any required
replacement licenses could prove to be either unavailable or costly.
While the Company has not received notices from third parties alleging
infringement claims that the Company believes would have a material adverse
effect on the Company's business, there can be no assurance that third parties
will not claim that the Company's current or future products or manufacturing
processes infringe the proprietary rights of others. Any such claim, with or
without merit, could result in costly litigation or might require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
COMPETITION
The market for 3D graphic accelerators is extremely competitive and subject
to rapid change. The Company expects competition to increase in the future from
existing competitors and from new market entrants with products that may be less
costly than the Company's products or provide better performance or additional
features not currently provided by the Company. The Company competes with the
following three major groups: professional 3D graphics board companies
(including Intergraph Corporation and Dynamic Pictures, Inc.), RISC/UNIX
workstation companies (including Sun and SGI) and traditional volume PC board
suppliers (including ELSA GmbH, Diamond Multimedia Systems, Inc. and Matrox
Electronic Systems Ltd.). A variety of potential actions by any of the Company's
competitors could have a material adverse effect on the Company's business,
financial condition and results of operations. Such actions may include
reduction of product prices, increased promotion, announcement or accelerated
introduction of new or enhanced products, product giveaways, product bundling or
other competitive actions.
Many of the companies that currently compete with the Company or that may
compete with the Company have longer operating histories and significantly
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition and larger customer bases, than the Company. As a
result, these competitors may be able to respond more quickly and effectively to
new or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion, sale and support of their
products than the Company. Consequently, the Company expects to continue to
experience increased competition, which could result in significant price
reductions, loss of market share and lack of acceptance of new products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to
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<PAGE> 40
compete against current or future competitors successfully or that competitive
pressures faced by the Company will not have a material adverse effect upon its
business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1996, the Company had 55 employees, including 20 in
sales, marketing and customer support, 21 in research and development and 14 in
finance and administration. None of the Company's employees are represented by a
labor union. The Company has not experienced work stoppages and believes it has
a good relationship with its employees. Competition for qualified personnel in
the industry in which the Company competes is intense. The Company believes that
its future success will depend in part on its continued ability to attract, hire
and retain qualified personnel. See "Risk Factors -- Dependence on Key
Personnel; Need to Attract and Retain Highly Skilled Personnel."
FACILITIES
The Company's principal facilities occupy approximately 13,000 square feet
in San Jose, California, pursuant to a lease which expires on March 31, 1998. In
April 1997, the Company entered into a new principal facilities lease for
approximately 25,000 square feet located in Milpitas, California, which will
expire in May 1999. The Company expects to move into its new facility in May
1997. The Company does not expect to incur significant penalties or fees with
respect to early termination of the San Jose lease. In addition, the Company
occupies various sales and support facilities in Florida, California and
Wiesbaden, Germany. The Company believes its new facilities are adequate to meet
its needs through the next twelve months.
LEGAL PROCEEDINGS
There are no material pending or threatened legal proceedings against the
Company. The Company from time to time is involved in routine legal matters
incident to its business.
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<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company, including their ages and
positions as of December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
Jeffrey W. Dunn..................... 42 Chairman, President and Chief Executive Officer
Nancy E. Bush....................... 39 Vice President, Finance and Administration, Chief
Financial Officer, Assistant Secretary and Director
Stephen L. Bartlett................. 56 Vice President, Operations
Lew S. Epstein...................... 49 Vice President, Sales
Gregory C. Milliken................. 35 Vice President, Business Development
Niraj Swarup........................ 36 Vice President, Marketing
Keith H. Uhlin...................... 40 Vice President, Engineering
David E. Gold(1).................... 53 Director
Jos C. Henkens(1)(2)................ 44 Director
Shintaro Miyamoto................... 33 Director
David W. Pidwell(2)................. 49 Director
Peter L. Wolken(1)(2)............... 62 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Dunn co-founded the Company in November 1994 and serves as Chairman,
President and Chief Executive Officer. From February 1993 to December 1994, Mr.
Dunn was Vice President of Marketing at Kubota Graphics. From October 1988 to
January 1993, Mr. Dunn was Vice President of Worldwide Sales and Support for
Cygnet Systems, Inc., a manufacturer of robotic mass storage devices. Mr. Dunn
has also held sales and/or sales management positions at Xerox Corporation,
Avnet Computer Technologies, Inc. and Microcon Software Centers, Inc.
Ms. Bush co-founded the Company in November 1994 and serves as Chief
Financial Officer and Director and has been Vice President, Finance and
Administration and Assistant Secretary since December 1996. From January 1991 to
November 1994, Ms. Bush was employed with ATG Cygnet Inc., formerly Cygnet
Systems, Inc. Her positions at ATG Cygnet, Inc. included MIS Manager from
January 1991 to February 1992, Controller from February 1992 to October 1992,
Director of Finance from October 1992 to October 1993, Chief Financial Officer
and Vice President of Operations from October 1993 to September 1994 and Chief
Executive Officer from September 1994 to November 1994. In June 1993, Cygnet
Systems, Inc. declared Chapter 11 bankruptcy and became ATG Cygnet Inc. Prior to
1991, she held finance and manufacturing positions at Spectra Physics Inc. and
Corning Incorporated.
Mr. Bartlett joined the Company in July 1996 and was elected Vice
President, Operations in August 1996. From May 1993 to July 1995, Mr. Bartlett
was Director of Operations for Sigma Designs, Inc. From March 1991 to April
1993, Mr. Bartlett served as Vice President of Operations at Radius, Inc. and
from January 1988 to March 1991, he was Director of Operations for Radius, Inc.
Mr. Epstein joined the Company in August 1995 as Vice President, Sales.
From January 1994 to September 1995, Mr. Epstein was Vice President of Sales and
Support for Los Altos Technologies. From January 1993 to June 1994, he was Vice
President of Sales for Centric Engineering. From May 1990 to December 1992, Mr.
Epstein was Vice President of Sales and Support for Intergraph Corporation.
Mr. Milliken co-founded the Company and has been Vice President, Business
Development since December 1996. Mr. Milliken served as Vice President,
Marketing of the Company from 1994 to 1996. From March 1994 to July 1994, Mr.
Milliken served as Mechanical Industry Marketing Manager at Kubota Graphics and
from July 1994 to November 1994, Mr. Milliken was a Director of Product
Marketing at
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<PAGE> 42
Kubota Graphics. From January 1991 to February 1994, Mr. Milliken was a
Marketing Manager for Autodesk.
Mr. Swarup joined the Company in April 1996 as Director, Marketing and was
elected Vice President, Marketing in December 1996. Prior to joining
AccelGraphics, Mr. Swarup held various project manager and group marketing
manager positions at Sun from May 1990 to April 1996.
Mr. Uhlin joined the Company in November 1996 and was elected Vice
President, Engineering in December 1996. From September 1988 to November 1996,
Mr. Uhlin was Director of Advanced 3D Graphics for Cirrus Logic, Inc.
Mr. Gold has served as a director of the Company since June 1995. Since
February 1985, he has been a General Partner at Indosuez Ventures, a venture
capital firm. Mr. Gold is also a director of several private companies.
Mr. Henkens has served as a director of the Company since June 1995. Since
January 1983, Mr. Henkens has been associated with Advanced Technology Ventures,
a venture capital firm. Mr. Henkens is also a director of Actel Corporation,
Credence Systems Corporation, ParcPlace Digitalk, Inc. as well as a number of
private technology companies.
Mr. Miyamoto has served as director of the Company since October 1996. From
April 1985 to March 1992, Mr. Miyamoto served as Assistant Manager of Kubota.
Since April 1992, Mr. Miyamoto has been Manager of Kubota's U.S. office.
Mr. Pidwell has served as a director of the Company since February 1996.
Since March 1996, Mr. Pidwell has been a private investor in the Company. From
December 1987 to January 1996, Mr. Pidwell founded and was President and Chief
Executive Officer of Rasna Corporation, a mechanical design automation software
company. Mr. Pidwell is also a director of several private technology companies.
Mr. Wolken has served as a director of the Company since June 1995. Since
July 1981, he has been cofounder and General Partner of AVI Management Partners
I, II and III, a venture capital firm. Mr. Wolken serves as a director of a
number of private technology companies and is a director of Qualix Group Inc.
TERM OF OFFICE OF DIRECTORS AND OFFICERS
The Company's Bylaws currently provide for a Board of Directors consisting
of seven members. All directors hold office until the next annual meeting of
stockholders or until their successors are duly elected and qualified. However,
the Company's Bylaws and Certificate of Incorporation provide that as of the
record date for the Company's first annual stockholders' meeting when the
Company is exempt from Section 2115 of the California Corporation Code, the
Board of Directors will be divided into three classes with the directors of each
class serving staggered terms. Assuming the Company is exempt from such Section
2115 as of the record date for the Company's 1998 annual stockholders' meeting,
the Class I directors will be Messrs. Gold and Miyamoto, whose current terms
will end on the annual stockholders meeting held in 1998, the Class II directors
are Messrs. Henkens and Wolken, whose current terms will end on the annual
stockholders meeting held in 1999, and the Class III directors are Ms. Bush and
Messrs. Dunn and Pidwell, whose current terms will end on the annual
stockholders meeting held in 2000. Upon the expiration of the term of each class
of directors, members constituting such class of directors will be elected for a
three-year term at the next succeeding annual meeting of stockholders. The Board
of Directors elects the Company's officers, and such officers serve at the
discretion of the Board of Directors of the Company. The current Board of
Directors was elected pursuant to an Amended and Restated Voting Agreement
between the Company and the holders of Preferred Stock of the Company which
terminates upon the consummation of this offering. The Amended and Restated
Voting Agreement contains certain minimum share holding requirements for these
seats.
COMMITTEES OF THE BOARD OF DIRECTORS
There are currently two standing committees of the Board of Directors, the
Audit Committee and the Compensation Committee. The Audit Committee reviews the
Company's annual audit and meets with the
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<PAGE> 43
Company's independent auditors to review the Company's internal controls and
financial management practices. The Board's Audit Committee currently consists
of Messrs. Gold, Henkens and Wolken. The Compensation Committee recommends
compensation for certain of the Company's personnel to the Board and, together
with the Board of Directors, administers the Company's stock and option plans.
The Compensation Committee currently consists of Messrs. Henkens, Pidwell and
Wolken.
DIRECTOR COMPENSATION
The Company does not pay any compensation to directors for serving in that
capacity, nor does it reimburse directors for expenses incurred in attending
board meetings. However, nonemployee directors will be entitled to participate
in the 1997 Directors' Stock Option Plan. See "-- Stock Option and Incentive
Plans -- 1997 Directors' Stock Option Plan."
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid to the Company's Chief Executive Officer and each of the other
four most highly compensated officers who were serving as officers on December
31, 1996 (the "Named Officers") whose aggregate annual compensation exceeded
$100,000 for the year ended December 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#)
- ---------------------------------------------------------- -------- ------- ------------
<S> <C> <C> <C>
Jeffrey W. Dunn........................................... $181,192 $27,599 65,500
Chairman, President and Chief Executive Officer
Nancy E. Bush............................................. 102,692 22,999 22,000
Vice President, Finance and Administration and Chief
Financial Officer
Lew S. Epstein............................................ 126,006 61,049 23,500
Vice President, Sales
Gregory C. Milliken....................................... 105,654 18,399 --
Vice President, Business Development
Ralph E. Nichols(1)....................................... 140,618 9,619 16,000
Vice President, Engineering
</TABLE>
- ---------------
(1) Includes $33,186 of consultancy fees which Mr. Nichols received from
September through December 1996. Mr. Nichols resigned as Vice President,
Engineering from the Company in September 1996. Mr. Keith Uhlin, the
Company's current Vice President, Engineering, began employment with the
Company in November 1996.
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<PAGE> 44
OPTION GRANTS IN 1996
The following table provides certain summary information concerning options
granted during the year ended December 31, 1996 to the Named Officers.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS(1) VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(2)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION -----------------
NAME GRANTED(#)(2) IN 1996 PER SHARE DATE 5% 10%
- --------------------------- ------------- ----------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey W. Dunn............ 65,500 9.06% $0.30 03/14/06 $12,358 $31,317
Nancy E. Bush.............. 22,000 3.04 0.30 03/14/06 4,151 10,519
Lew S. Epstein............. 16,000 2.21 0.30 03/14/06 3,109 7,650
7,500 1.04 0.30 05/23/06 1,415 3,586
Ralph E. Nichols........... 16,000 2.21 0.30 03/14/06 3,019 7,650
</TABLE>
- ---------------
(1) Consists of stock options granted pursuant to the Company's 1995 Stock Plan.
The Company's options generally become exercisable at a rate of 12.5% after
six months following the date of grant and approximately 2% per month
thereafter, as long as the optionee remains an employee of or consultant to
the Company. The maximum term of each option granted is ten years from the
date of grant. The exercise price is equal to the fair market value of the
stock on the grant date as determined by the Board of Directors. See
"-- Stock Option and Incentive Plans."
(2) The 5% and 10% assumed compounded annual rates of stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock appreciation over the ten-year option
term will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the Common Stock appreciates over the option
term, no value will be realized from the option grants made to the persons
named in the Summary Compensation Table.
OPTION VALUES AT DECEMBER 31, 1996
The following table provides certain summary information concerning the
shares of Common Stock represented by outstanding stock options held by each of
the Named Officers as of December 31, 1996.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT DECEMBER 31, 1996(#) AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey W. Dunn........ -- -- 15,010 50,490 $ 120,080 $ 403,920
Nancy E. Bush.......... -- -- 5,041 16,959 40,328 132,650
Lew S. Epstein......... -- -- 30,967 73,158 250,961 591,714
Ralph E. Nichols....... 48,000 $ 10,080(2) 3,666 12,334 29,327 98,672
</TABLE>
- ---------------
(1) Calculated by multiplying the applicable number of shares by the difference
between the estimated fair value of the Company's Common Stock as of
December 31, 1996 ($8.30 per share) and the exercise price of the options.
(2) Calculated by multiplying the applicable number of shares by the difference
between the fair value of the Company's Common Stock as of the date of
exercise ($0.30 per share) and the exercise price of the exercised options.
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<PAGE> 45
STOCK OPTION AND INCENTIVE PLANS
1995 Stock Plan. The Company's 1995 Stock Plan (as amended, the "1995 Stock
Plan") was adopted by the Board of Directors and approved by the Company's
stockholders in December 1994. An aggregate of 3,300,000 shares of the Company's
Common Stock are reserved for issuance under the 1995 Stock Plan.
The 1995 Stock Plan provides for the granting to employees (including
officers and directors) of "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code (the "Code"), for the granting to
employees, consultants and nonemployee directors of nonstatutory stock options
and for the granting to employees of stock purchase rights. The 1995 Stock Plan
may be administered by the Board of Directors or a committee of the Board (the
"1995 Administrator"). The 1995 Administrator determines the terms of options
and stock purchase rights granted under the 1995 Stock Plan, including the
number of shares subject to the option or right, exercise price, term and
exercisability. The maximum number of shares which may be subject to options or
stock purchase rights granted to any one employee under the 1995 Stock Plan for
any fiscal year of the Company is 500,000. The exercise price of all incentive
stock options granted under the 1995 Stock Plan must be at least equal to the
fair market value of the Common Stock of the Company on the date of grant and
the exercise price of all nonstatutory stock options must be at least 85% of the
fair value of the Common Stock of the Company on the date of grant and 100% of
the fair value of the Common Stock on the date of grant for grants made to Named
Officers. The exercise price of any option granted to an optionee who owns stock
representing more than 10% of the voting power of the Company's outstanding
capital stock must equal at least 110% of the fair market value of the Common
Stock on the date of grant. The minimum purchase price of shares acquired by
exercising stock purchase rights is 85% of the fair market value of the Common
Stock on the date of grant. Payment of the exercise price may be made in cash,
promissory notes, shares or other consideration determined acceptable by the
1995 Administrator. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of stock of the Company, the
maximum term of an incentive stock option must not exceed five years. The term
of all other options must not exceed ten years.
If the Company consolidates or merges with or into another corporation,
then each option will be either assumed or an equivalent option substituted by
the successor corporation or, if not assumed or substituted, the unvested
portion of each option will be accelerated. If not terminated earlier, the 1995
Stock Plan will terminate in 2005. The 1995 Administrator has the authority to
amend or terminate the 1995 Stock Plan as long as such action does not adversely
affect any outstanding option.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
January 1997 and will be submitted for approval by the Company's stockholders in
March 1997. An aggregate of 400,000 shares of the Company's Common Stock are
reserved for issuance under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of 12
months' duration, with new offering periods other than the first offering period
commencing on or about February 1 and August 1 of each year. Each offering
period will consist of two consecutive purchase periods of six months duration
with the last day of such period being designated a purchase date. The initial
offering period is expected to commence on the date of this offering with the
first purchase date occurring on January 31, 1998 and subsequent purchase dates
to occur every six months thereafter. The Purchase Plan will be administered by
the Board of Directors or by a committee appointed by the Board. Employees
(including officers and employee directors) of the Company, or of any
majority-owned subsidiary designated by the Board, are eligible to participate
in the Purchase Plan if they are employed by the Company or any such subsidiary.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of the Company's Common
Stock at the beginning of the offering period or on the purchase date. Employees
may end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of employment with
the Company.
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<PAGE> 46
The Purchase Plan provides that in the event of a merger of the Company
with or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase stock under the Purchase Plan will be assumed or
an equivalent right substituted by the successor corporation, unless the Board
of Directors shortens the offering period so that employees' rights to purchase
stock under the Purchase Plan will be exercised prior to the merger or sale of
assets. The Board of Directors has the power to amend or terminate the Purchase
Plan as long as such action does not adversely affect any outstanding rights to
purchase stock thereunder. If not terminated earlier, the Purchase Plan will
have a term of twenty years.
1997 Directors' Stock Option Plan. The 1997 Directors' Stock Option Plan
(the "Directors' Plan") was adopted by the Board of Directors in January 1997
and will be submitted for approval by the Company's stockholders in March 1997.
An aggregate of 200,000 shares of the Company's Common Stock are reserved for
issuance under the Directors' Plan. The Directors' Plan provides for the grant
of nonstatutory stock options to nonemployee directors of the Company. The
Directors' Plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by the
Board of Directors. To the extent they arise, it is expected that conflicts of
interest will be addressed by abstention of the interested director from both
deliberations and voting regarding matters in which he or she has a personal
interest.
The Directors' Plan provides that each person who is or becomes a
nonemployee director of the Company will be granted a nonstatutory stock option
to purchase 15,000 shares of Common Stock (the "First Option") on the date on
which the optionee first becomes a nonemployee director of the Company or, for
current directors, on the date of this offering. After the first option grant,
on the date of each annual meeting, each nonemployee director shall be granted
an additional option to purchase 5,000 shares of Common Stock (a "Subsequent
Option") if, on such date, he or she has served on the Company's Board of
Directors for at least six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method of
making a grant. No option granted under the Directors' Plan is transferable by
the optionee other than by will or the laws of descent or distribution, and each
option is exercisable, during the lifetime of the optionee, only by such
optionee. The Directors' Plan provides that the First Option shall become
exercisable in installments as to 33 1/3% of the total number of shares subject
to the First Option on each of the first, second and third anniversaries of the
date of grant of the First Option, and each Subsequent Option shall become
exercisable in full on the third anniversary of the date of grant of such
Subsequent Option. If a nonemployee director ceases to serve as a director for
any reason, he or she may, but only within 60 days after the date he or she
ceases to be a director of the Company, exercise options granted under the
Directors' Plan to the extent that he or she was entitled to exercise such
options at the date of such termination. To the extent he or she was not
entitled to exercise any such option at the date of such termination, or if he
or she does not exercise such option (which he or she was entitled to exercise),
within such 60 day period, such option will terminate. The exercise price of all
stock options granted under the Directors' Plan will equal the fair market value
of a share of the Common Stock on the date of grant of the option. Options
granted under the Directors' Plan have a term of ten years.
In the event of a merger of the Company with or into another corporation or
a sale of substantially all of the Company's assets, the unvested portion of
each option will be accelerated. The Board of Directors may amend or terminate
the Directors' Plan; provided, however, that no such action may adversely affect
any outstanding option, and the provisions regarding the grant of options under
the Directors' Plan may be amended only once in any six-month period, other than
to conform with changes in the Code. If not terminated earlier, the Directors'
Plan will have a term of ten years.
401(k) Savings & Retirement Plan. The Company's tax deferred savings plan
(the "401(k) Plan") was adopted by the Board of Directors in December 1994. The
401(k) Plan is intended to qualify under Section 401 of the Code, so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on contributions, are generally not taxable to employees until withdrawn
from the 401(k) Plan. The 401(k) Plan covers all employees of the Company.
Employees may elect to defer, in the form of
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<PAGE> 47
contributions to the 401(k) Plan, between 1% and 20% of their pre-tax
compensation; however, the amount deferred may not exceed the statutorily
prescribed annual limit. The 401(k) Plan permits matching contributions to be
made to the 401(k) Plan by the Company on behalf of employees. Contributions are
allocated to each employee's individual account, which is invested in selected
mutual funds or a guaranteed income fund according to the directions of the
employee.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Section 145 ("Section 145") of the Delaware General Corporation Law
("DGCL") provides a detailed statutory framework covering indemnification of
officers and directors against liabilities and expenses arising out of legal
proceedings brought against them by reason of their being or having been
directors or officers. Section 145 generally provides that a director or officer
of a corporation (i) shall be indemnified by the corporation for all expenses of
such legal proceedings when he is successful on the merits, (ii) may be
indemnified by the corporation for the expenses, judgments, fines and amounts
paid in settlement of such proceedings (other than a derivative suit), even if
he is not successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, and (iii) may be
indemnified by the corporation for the expenses of a derivative suit (a suit by
a stockholder alleging a breach by a director or officer of a duty owed to the
corporation), even if he is not successful on the merits, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. No indemnification may be made under clause (iii)
above, however, if the director or officer is adjudged liable for negligence or
misconduct in the performance of his duties to the corporation, unless a
corporation determines that, despite such adjudication, but in view of all the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of disinterested
directors, independent legal counsel, the stockholders or a court of competent
jurisdiction.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. The Company's Restated Certificate of Incorporation will provide for
the elimination of personal liability of a director for breach of fiduciary
duty, as permitted by Section 102(b)(7) of the DGCL.
The Company's Certificate of Incorporation and Bylaws require the Company
to indemnify its directors and officers against any damages arising from their
actions as an agent of the Company to the fullest extent permitted by Delaware
law. The Bylaws further provide that the Company may similarly indemnify its
other employees and agents. In addition, each director has entered into an
indemnification agreement with the Company, pursuant to which the Company has
agreed to indemnify such director to the fullest extent permitted by Delaware
law. Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the provisions referenced
in Item 24 of this Registration Statement, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification would
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which might result in a claim for such indemnification.
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<PAGE> 48
CERTAIN TRANSACTIONS
The Company entered into an Asset Purchase Agreement dated as of December
9, 1994 with Kubota Graphics pursuant to which the Company purchased certain
assets of Kubota Graphics (the "Asset Acquisition"). In connection with the
Asset Acquisition, the Company entered into a Convertible Note Purchase
Agreement dated as of December 22, 1994, with Kubota, the parent corporation of
Kubota Graphics, pursuant to which the Company issued Kubota a subordinated
convertible promissory note carrying an initial principal amount of $3.3 million
(the "Convertible Note"). The Company used $1.2 million of the proceeds from the
Convertible Note to purchase certain assets pursuant to the Asset Acquisition
and the remaining proceeds were used for working capital. By its terms, the
original note was due December 22, 1996 and bore interest at a rate of 6%.
One-half of the Convertible Note was convertible into Preferred Stock upon the
Company achieving a revenue milestone and the entire Convertible Note was
convertible into Preferred Stock at the same rate upon the closing of an equity
offering with proceeds in excess of $2.0 million. Upon the occurrence of the
closing of the Series A Preferred Stock equity offering, Kubota and the Company
renegotiated the Convertible Note such that Kubota converted one-half, or $1.65
million of principal into a new note which is due June 20, 1998, bears interest
at the prime rate and is convertible only in the case of certain dilution
events, and the other one-half of principal, or $1.65 million, was converted
into 90,000 shares of Series A Preferred Stock. Mr. Miyamoto, a director of the
Company, is an affiliate of Kubota. Mr. Dunn was formerly Vice President of
Marketing at Kubota Graphics.
In June and July 1995, the Company issued an aggregate of 3,446,997 shares
of Series A Preferred Stock at a price per share of $1.67 to investors that
included, among others, Advanced Technology Ventures IV (750,000 shares), AVI
Capital, L.P. and its affiliated entities (749,997 shares), STF II, L.P.
(600,000 shares) and Woodside Fund III, L.P. (300,000 shares). In connection
with this financing, Kubota converted $1,650,000 of the outstanding principal on
the Convertible Note into 990,000 shares of Series A Preferred Stock.
In March 1996, the Company issued an aggregate of 1,061,660 shares of
Series B Preferred Stock at a per share price of $3.00 to investors that
included, among others, Asset Management Associates (333,333 shares), Kubota
(162,750 shares), Woodside Fund III, L.P. (132,652 shares), Advanced
Technologies Ventures IV, L.P. (123,295 shares), AVI Capital, L.P. and
affiliated entities (123,295 shares) and STF II, L.P. (98,636 shares).
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested directors on the Board of Directors, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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<PAGE> 49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of December 31, 1996, and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered by this
Prospectus, (i) by each person who is known by the Company to beneficially own
5% or more of the Common Stock, (ii) by each of the Company's directors and
Named Officers, (iii) by all current executive officers and directors as a group
and (iv) by the Selling Stockholders. Unless otherwise indicated below, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OWNED AFTER THE
THE OFFERING OF SHARES OFFERING(1)(2)
EXECUTIVE OFFICERS, DIRECTORS --------------------- BEING ---------------------
AND 5% STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Kubota Corporation....................... 1,152,750 20.0% 113,464 1,039,286 13.2%
2372-A Qume Drive
San Jose, CA 95131
Advanced Technology Ventures IV, L.P..... 873,295 15.2 85,958 787,337 10.0
485 Ramona Street, Suite 200
Palo Alto, CA 94301
AVI Capital L.P. (and related
entities)(3)........................... 873,292 15.2 85,958 787,334 10.0
One First Street, Suite 12
Los Altos, CA 94022
STF II, L.P.............................. 698,636 12.1 69,864 628,772 8.0
c/o Indosuez Ventures
2180 Sand Hill Road, Suite 450
Menlo Park, CA 94025
Woodside Fund III, L.P................... 432,652 7.5 -- 432,652 5.5
850 Woodside Drive
Woodside, CA 94062
Asset Management Associates 1996, L.P.... 333,333 5.8 33,333 300,000 3.8
2275 East Bayshore Road, Suite 150
Palo Alto, CA 94303
Shintaro Miyamoto(4)..................... 1,152,750 20.0 113,464 1,039,286 13.2
Jos C. Henkens(5)........................ 873,295 15.2 85,958 787,337 10.0
Peter L. Wolken(6)....................... 873,292 15.2 85,958 787,334 10.0
David E. Gold(7)......................... 698,636 12.1 69,864 629,772 8.0
David W. Pidwell(8)...................... 24,166 * -- 24,166 *
50628 Vickery Lane
Saratoga, CA 95070
Jeffrey W. Dunn(9)....................... 478,989 8.3 23,064 455,925 5.8
Gregory C. Milliken(10).................. 220,312 3.8 11,015 209,297 2.7
Nancy E. Bush(11)........................ 148,458 2.6 7,125 141,333 1.8
Lew S. Epstein(12)....................... 43,639 * 5,622 38,017 *
Niraj Swarup(13)......................... 16,046 * 3,000 13,046 *
Stephen L. Bartlett(14).................. 12,395 * -- 12,395 *
Keith H. Uhlin........................... -- * -- -- *
All executive officers and directors as a
group (12 persons)(15)................. 4,541,978 77.6 405,070 4,136,908 51.7
OTHER SELLING STOCKHOLDERS
John O. Burness.......................... 67,500 1.2 3,375 64,125 *
John J. Caravello........................ 86,250 1.5 4,312 81,938 1.1
Other Selling Stockholders each
beneficially owning less than 1% of the
Company's Common Stock (14
persons)(16)........................... 69,335 1.2 8,910 60,425 *
</TABLE>
- ---------------
* Less than 1%.
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<PAGE> 50
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of shares, the
Common Stock options held by that person that are currently exercisable, or
become exercisable within 60 days following December 31, 1996, are deemed
outstanding. However, such shares are not deemed outstanding for purposes
of computing the percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
390,000 shares from the Company is not exercised.
(3) Includes 127,936 shares held by Associated Ventures Investors II, L.P.,
24,911 shares held by AVI Partners Growth Fund, L.P. and 9,119 shares held
by AVI Silicon Valley Partners, L.P.
(4) Represents 1,152,750 shares held by Kubota Corporation, which Mr. Miyamoto
may be deemed to beneficially own by virtue of his status as Manager of
Kubota Corporation. Mr. Miyamoto disclaims beneficial ownership of the
shares held by such entity. Mr. Miyamoto is a director of the Company.
(5) Represents 873,295 shares held by Advanced Technology Ventures IV, L.P.,
which Mr. Henkens may be deemed to beneficially own by virtue of his status
as a General Partner of Advanced Technology Ventures, a General Partner of
Advanced Technology Ventures IV, L.P. Mr. Henkens disclaims beneficial
ownership of the shares held by such entity except to the extent of his
proportionate partnership interest therein. Mr. Henkens is a director of
the Company.
(6) Represents 711,326 shares held by AVI Capital, L.P., 127,936 shares held by
Associated Ventures Investors II, L.P., 24,911 shares held by AVI Partners
Growth Fund, L.P. and 9,119 shares held by AVI Silicon Valley Partners,
L.P., which Mr. Wolken may be deemed to beneficially own by virtue of his
status as General Partner of AVI Management Partners, General Partner of
each of the listed AVI funds. Mr. Wolken disclaims beneficial ownership of
the shares held by such entities except to the extent of his proportionate
partnership interests therein. Mr. Wolken is a director of the Company.
(7) Represents 698,636 shares held by STF II, L.P., which Mr. Gold may be
deemed to beneficially own by virtue of his status as a General Partner of
STF II, L.P. Mr. Gold disclaims beneficial ownership of the shares held by
such entity except to the extent of his proportionate partnership interest
therein. Mr. Gold is a director of the Company.
(8) Includes 16,666 shares held by both the Pidwell Family Living Trust Dated
6/25/87 and 7,500 shares issuable upon exercise of options exercisable
within 60 days of December 31, 1996. Mr. Pidwell is a director of the
Company.
(9) Includes 423,334 shares held by both Jeffrey W. Dunn and Susan M. Dunn, as
trustees of the Jeffrey W. Dunn and Susan M. Dunn Trust Agreement dated
August 30, 1996. Also includes 11,250 shares held by Mr. Dunn's minor
children and 17,739 shares issuable upon exercise of options exercisable
within 60 days of December 31, 1996. Also includes 26,666 shares held by
the Leo Dunn -- Family Share, John J. Yagjian et. al. Trustees, Agreement
dated 3/28/91 (the "Trust") which Mr. Dunn may be deemed to beneficially
own by virtue of his interest in the trust. Mr. Dunn disclaims beneficial
ownership of the shares held by such trust except to the extent of his
proportionate interest therein. Mr. Dunn is Chairman, President and Chief
Executive Officer of the Company.
(10) Mr. Milliken is Vice President, Business Development of the Company.
(11) Includes 5,958 shares issuable upon exercise of options exercisable within
60 days of December 31, 1996. Ms. Bush is Vice President, Finance and
Administration, Chief Financial Officer, Assistant Secretary and Director
of the Company.
(12) Includes 35,306 shares issuable upon exercise of options exercisable within
60 days of December 31, 1996. Mr. Epstein is Vice President, Sales of the
Company.
(13) Represents 16,046 shares issuable upon exercise of options exercisable
within 60 days of December 31, 1996. Mr. Swarup is Director, Marketing of
the Company.
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<PAGE> 51
(14) Represents 12,395 shares issuable upon exercise of options exercisable
within 60 days of December 31, 1996.
(15) Includes 3,597,973 shares beneficially owned by entities affiliated with
Messrs. Gold, Henkens, Miyamoto, Pidwell and Wolken for which they disclaim
beneficial ownership of the shares held by such entities except to the
extent of their proportionate partnership interests therein. Also includes
94,944 shares issuable upon exercise of options exercisable within 60 days
of December 31, 1996.
(16) Includes an aggregate of 16,352 shares issuable pursuant to currently
exercisable options.
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, par value $0.001 per
share, and 2,000,000 shares of undesignated Preferred Stock, par value $0.001
per share, after giving effect to the amendment and restatement of the Company's
Certificate of Incorporation to delete references to the Series A Preferred
Stock and Series B Preferred Stock and increase the authorized number of shares
of Common Stock, which will occur upon conversion of such Preferred Stock into
Common Stock upon the closing of this offering.
COMMON STOCK
As of December 31, 1996, there were 5,761,307 shares of Common Stock
outstanding that were held of record by approximately 52 stockholders (as
adjusted to reflect the conversion of all outstanding shares of the Company's
Series A Preferred Stock and Series B Preferred Stock into Common Stock at a
one-to-one ratio upon the completion of this offering). Stock options to
purchase an aggregate of 1,006,867 shares of Common Stock were outstanding as of
December 31, 1996. Warrants to purchase an aggregate of 63,250 shares of
Preferred and Common Stock were also outstanding (as adjusted to reflect the
conversion of all outstanding shares of Preferred Stock). There will be
7,906,307 shares of Common Stock outstanding (assuming no exercise outstanding
warrants or the Underwriters' over-allotment option or exercise of outstanding
options under the Company's stock and option plans after December 31, 1996)
after giving effect to the sale of the shares of Common Stock to the public
offered hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Until the Company
has at least 800 stockholders of record and its stock is listed on the Nasdaq
National Market (a "Listed Corporation"), the Company's stockholders have the
right to cumulate their votes with respect to the election of directors. Subject
to preferential rights with respect to any outstanding Preferred Stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and satisfaction of preferential
rights of any outstanding Preferred Stock. The Common Stock has no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking fund provisions available to the Common Stock. The outstanding shares of
Common Stock are, and the shares of Common Stock to be issued upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon completion of this offering, the Board of Directors will be authorized
to issue 2,000,000 shares of undesignated Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock may
have the effect of delaying, deterring or preventing a change in control of the
Company without further action by the stockholders. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power of
the holders of Common Stock, including the loss of voting control to others. At
present, the
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<PAGE> 52
Company has no plans to issue any shares of Preferred Stock. See "Risk
Factors -- Blank Check Preferred Stock; Anti-Takeover Provisions."
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 4,177,708 shares of Common Stock or warrants exercisable for
Common Stock (the "Registrable Securities") or their transferees are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an investors'
rights agreement (the "Rights Agreement") between the Company and the holders of
Registrable Securities. The holders of at least 40% of the Registrable
Securities may require, on two occasions at any time after six months following
the effective date of this offering, that the Company use its best efforts to
register the Registrable Securities for public resale; provided, among other
limitations, that the proposed aggregate selling price, prior to deductions for
underwriting discounts and commissions, is at least $7.5 million. The Company
may delay such registration by up to 90 days if the Company's Board of Directors
determines that it would be seriously detrimental to the Company and its
stockholders to file such registration statement. If the Company registers any
of its Common Stock either for its own account or for the account of other
security holders, the holders of Registrable Securities are entitled to include
their shares of Common Stock in the registration. A holder's right to include
shares is subject to certain conditions and limitations, including lock-up
agreements restricting the sale of such shares for 180 days after the effective
date of the registration statement filed in connection with this offering and
the right of the underwriters to limit the number of shares included in such
registration. Holders of Registrable Securities may also require the Company, on
no more than one occasion over any 12-month period, to register all or a portion
of their Registrable Securities on Form S-3 when use of such form becomes
available to the Company, provided, among other limitations, that the proposed
aggregate selling price for shares offered thereby is at least $500,000. The
right of holders of Registrable Securities to have such shares registered on
Form S-3 is subject to the right of the underwriters participating therein to
limit the number of shares included in such registration. The Company may delay
such registration on Form S-3 by up to 90 days if the Company's Board of
Directors determines that it would be seriously detrimental to the Company and
its stockholders to file such registration statement. Subject to certain
limitations contained in the Rights Agreement, all fees, costs and expenses of
registrations effected pursuant to the Rights Agreement must be borne by the
Company and all selling expenses (including underwriting discounts and selling
commissions) relating to Registrable Securities must be borne by the holders of
the securities being registered.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company's Certificate of Incorporation provides that any action
required or permitted to be taken by the stockholders of the Company may be
taken only at a duly called annual or special meeting of the stockholders and
eliminates cumulative voting in the election of directors upon qualification of
the Company as a Listed Corporation. The Certificate of Incorporation and Bylaws
also restrict the right of stockholders to change the size of the Board of
Directors and to fill vacancies on the Board of Directors. Generally, the
Certificate of Incorporation and Bylaws require that newly created directorships
be filled by a majority vote of the Board of Directors then in office. The
Bylaws also establish procedures, including advance notice procedures, with
regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors or for stockholder proposals
to be submitted at stockholder meetings. In addition, the Company's Certificate
of Incorporation provides that the Board of Directors is divided into three
classes of directors, with each class serving a staggered three-year term, as of
the record date of the Company's first annual stockholders' meeting when the
Company is exempt from Section 2115 of the California Corporations Code. A
classified board may maintain the incumbency of the Board of Directors, as it
generally makes it more difficult for stockholders to replace a majority of the
directors. The amendment of any of these provisions requires approval by holders
of 66.67% or more of the outstanding Common Stock. The Certificate of
Incorporation also authorizes the issuance of up to 2,000,000 shares of
Preferred Stock. The rights of the holders of the Common Stock will be subject
to, and may be subordinated to, the rights of the holders of any Preferred Stock
that may be issued in the future and, as a result, the issuance of such
Preferred Stock could have a material adverse effect on the market value of the
Common Stock. The Company has no present plan to issue shares of Preferred
Stock.
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<PAGE> 53
These provisions of the Company's charter documents could have the effect
of making it more difficult for a third party to effect a change in the control
of the Board of Directors and therefore may discourage another person or entity
from making a tender offer for the Company's Common Stock, including offers at a
premium over the market price of the Common Stock, and might result in a delay
in changes in control of management. In addition, these provisions could have
the effect of making it more difficult for proposals favored by the stockholders
to be presented for stockholder consideration.
The Company has also included in its Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the Delaware Law and to indemnify its directors and officers to the fullest
extent permitted by Section 145 of the Delaware Law.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporate Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale or other transaction
resulting in a financial benefit to the stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. In addition, upon completion of this offering, certain provisions
of the Company's charter documents, including a provision eliminating the
ability of stockholders to take actions by written consent, may have the effect
of delaying or preventing changes in control or management of the Company, which
could have an adverse effect on the market price of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust
Company of California. Its address is 601 South Figueroa Street, Suite 4900, Los
Angeles, CA 90017, and its telephone number is (213) 239-0600.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
7,906,307 shares of Common Stock, assuming no exercise of options or warrants
after December 31, 1996. Of these shares, 2,600,000 shares (assuming no exercise
of the underwriters' over-allotment option) will be freely tradable without
restriction or further registration under the Securities Act unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 of the
Securities Act. The remaining 5,306,307 shares will be "restricted securities"
as that term is defined under Rule 144 (the "Restricted Shares"). Sales of
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock.
5,672,027 shares of Common Stock (including approximately 353,811 shares
issuable upon exercise of vested options) will be eligible for sale after
expiration of a contractual lock-up beginning 181 days after the effective date
of the Registration Statement containing this Prospectus, unless earlier
released, in whole or in part, by Cowen & Company.
On February 20, 1997, the Securities and Exchange Commission announced the
adoption of certain changes to Rule 144 to reduce the holding period
requirements contained in Rule 144 to permit the resale of limited amounts of
restricted securities by any person after a one-year, rather than a two-year,
holding period. Such amendment also permits unlimited resales of restricted
securities held by non-affiliates of an issuer after a holding period of two
years, rather than three years. Such changes shall become effective on a date
which is 60 days following official publication of the changes to Rule 144.
52
<PAGE> 54
In general, under the new Rule 144, beginning 90 days after the date of
this Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year, including persons
who may be deemed to be "affiliates" of the Company, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 79,063 shares immediately after this
offering) or (ii) the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the Restricted Shares proposed to be
sold (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule 144.
The Company intends to register on a Form S-8 registration statement under the
Securities Act, during the 180-day lockup period, (i) assuming no exercise of
options after December 31, 1996, a total of 1,006,867 shares of Common Stock
issuable upon exercise of outstanding options under the 1995 Stock Plan, (ii)
1,909,536 shares reserved for issuance under the 1995 Stock Plan, (iii) 200,000
shares of Common Stock reserved for issuance under the 1997 Directors' Plan and
(iv) 400,000 shares of Common Stock reserved for issuance under the 1997
Employee Purchase Plan. Such registration will permit the resale of shares so
registered by non-affiliates in the public market without restriction under the
Securities Act.
After this offering, the holders of 4,177,708 shares of Common Stock
(assuming exercise of outstanding warrants for 63,250 shares of Common Stock)
are entitled to certain demand and piggyback rights with respect to registration
of such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights of Certain Holders." Registration of such shares
under the Securities Act would result in such shares becoming freely tradable
without restriction under the Securities Act (except for shares purchased by
affiliates of the Company) immediately upon the effectiveness of such
registration. If such holders, by exercising their demand registration rights,
cause securities to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were to include in a Company initiated registration any
Registrable Securities pursuant to the exercise of piggyback registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital or the cost thereof.
53
<PAGE> 55
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Cowen &
Company, Robertson, Stephens & Company LLC and SoundView Financial Group, Inc.
are acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company and the Selling Stockholders the respective number of
shares of Common Stock set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Cowen & Company...........................................................
Robertson, Stephens & Company LLC.........................................
SoundView Financial Group, Inc............................................
---------
Total........................................................... 2,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of the shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below),
if any such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page of
this Prospectus and in part to certain dealers at such price less a concession
not in excess of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the Representatives. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken.
The Company has granted to the Underwriters an option, exercisable for up
to 30 days after the date of this Prospectus, to purchase up to an aggregate of
390,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them as shown in the foregoing table bears to the 2,600,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
The Company, the Selling Stockholders, the Company's officers and directors
and certain of the Company's stockholders and optionholders have agreed, subject
to certain limited exceptions, not directly or indirectly, to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
any right to acquire Common Stock for
54
<PAGE> 56
a period of 180 days after the date of this Prospectus without the prior written
consent (which consent may be given, without notice to the Company's
stockholders or other public announcement) of Cowen & Company. Cowen & Company
has advised the Company that it has no present intention of releasing any of the
Company's stockholders or optionholders from such lock-up agreements until the
expiration of such 180-day period. See "Shares Eligible for Future Sale."
The Representative have advised the Company that the Underwriters do not
intend to confirm sales in excess of 5% of the shares offered hereby to any
account over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price will be
determined by negotiation between the Company and the Representatives. Among the
factors to be considered in such negotiations will be the prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalizations and stages of development of other companies that the
Company and the Representatives believe to be comparable to the Company, the
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
the Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in the offering, if the Underwriters repurchase previously distributed
Common Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the Underwriters may bid for, and purchase,
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the Common
Stock above market levels that may otherwise prevail. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Venture Law Group, A Professional Corporation, Menlo Park,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Morrison & Foerster LLP, San Francisco,
California. As of the date of this Prospectus, certain attorneys at Venture Law
Group, including Michael W. Hall, the Company's Secretary and a Director of
Venture Law Group, and certain affiliated partnerships beneficially own an
aggregate of 20,798 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of AccelGraphics, Inc. as of December
31, 1995 and 1996 and for the years then ended included in this Prospectus have
been so included in reliance upon the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
55
<PAGE> 57
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Certain items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and, in each instance, if such contract or
document is filed as an exhibit, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, NY 10048, and copies of all or any part thereof
may be obtained from such office after payment of fees prescribed by the
Commission. The Registration Statement is also available through the
Commission's Website on the World Wide Web at the following address:
http://www.sec.gov.
56
<PAGE> 58
ACCELGRAPHICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheet as of December 31, 1995 and 1996........................... F-3
Consolidated Statement of Operations for the years ended December 31, 1995 and 1996... F-4
Consolidated Statement of Stockholders' Deficit for the years ended December 31, 1995
and 1996............................................................................ F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1995 and 1996... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of AccelGraphics, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
AccelGraphics, Inc. and its subsidiary at December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
January 30, 1997, except as to Note 1
(reincorporation and reverse stock split),
which is as of March 13, 1997
F-2
<PAGE> 60
ACCELGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------- DECEMBER 31,
1995 1996 1996
------ ------ ------------
(UNAUDITED)
(NOTE 1)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $1,373 $2,979
Accounts receivable, net of allowances of $45 and $495..... 1,084 4,392
Inventories................................................ 1,011 507
Prepaid expenses........................................... 48 49
------ ------
Total current assets............................... 3,516 7,927
Property and equipment, net.................................. 435 512
------ ------
$3,951 $8,439
====== ======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligation................ $ -- $ 16
Accounts payable........................................... 502 1,466
Accrued liabilities........................................ 426 1,123
Customer advances.......................................... 58 292
------ ------
Total current liabilities.......................... 986 2,897
------ ------
Capital lease obligation, net of current portion............. -- 34
------ ------
Subordinated convertible note payable to related party....... 1,748 1,748
------ ------
Mandatorily redeemable convertible preferred stock........... 5,745 8,930 $ --
------ ------ ------
Commitments (Note 8)
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 10,000 shares authorized
actual; 2,000 shares authorized, none issued and
outstanding pro forma................................... -- -- --
Common Stock, $0.001 par value, 50,000 shares authorized;
1,071 and 1,253 shares issued and outstanding actual;
5,761 shares issued and outstanding pro forma........... 1 1 6
Additional paid-in capital................................. 80 785 9,710
Notes receivable from stockholders......................... (75) (89) (89)
Deferred stock compensation................................ -- (396) (396)
Cumulative translation adjustment.......................... -- (5) (5)
Accumulated deficit........................................ (4,534) (5,466) (5,466)
------ ------ ------
Total stockholders' equity (deficit)............... (4,528) (5,170) $3,760
======
------ ------
$3,951 $8,439
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 61
ACCELGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Revenues................................................................. $ 3,911 $18,671
Cost of revenues......................................................... 2,501 12,077
------- -------
Gross profit........................................................... 1,410 6,594
------- -------
Operating expenses:
Research and development............................................... 2,618 2,663
Sales and marketing.................................................... 2,154 3,635
General and administrative............................................. 1,039 1,131
------- -------
Total operating expenses............................................ 5,811 7,429
------- -------
Loss from operations..................................................... (4,401) (835)
Interest expense......................................................... (183) (145)
Other income, net........................................................ 119 48
------- -------
Net loss................................................................. $(4,465) $ (932)
======= =======
Pro forma net loss per share (unaudited) (Note 1)........................ $ (0.15)
=======
6,272
Shares used in pro forma per share calculation (unaudited) (Note 1)...... =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 62
ACCELGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED CUMULATIVE ACCUM- STOCK-
----------------- PAID-IN FROM STOCK TRANSLATION ULATED HOLDERS'
SHARES AMOUNTS CAPITAL STOCKHOLDERS COMPENSATION ADJUSTMENT DEFICIT DEFICIT
------ ------- ---------- ------------ ------------ ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994.................... 910 $ 1 $ 60 $(55) $ - $ - $ (69) $ (63)
Common Stock options
exercised............... 202 - 31 (20) - - - 11
Repurchase of Common
Stock................... (41) - (11) - - - - (11)
Net loss.................. - - - - - - (4,465) (4,465)
--
----- ---- ---- ----- --- ------- -------
Balance at December 31,
1995.................... 1,071 1 80 (75) - - (4,534) (4,528)
Common stock options
exercised............... 129 - 23 (13) - - - 10
Repayment of stockholder
loan.................... - - - 2 - - - 2
Interest on notes
receivable.............. - - - (3) - - - (3)
Deferred compensation
related to stock
options................. - - 608 - (608) - - -
Stock issued in exchange
for services............ 53 - 74 - - - - 74
Amortization of deferred
compensation............ - - - - 212 - - 212
Translation adjustment.... - - - - - (5) - (5)
Net loss.................. - - - - - - (932) (932)
--
----- ---- ---- ----- --- ------- -------
Balance at December 31,
1996.................... 1,253 $ 1 $785 $(89) $ (396) $(5) $(5,466) $(5,170)
===== == ==== ==== ===== === ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 63
ACCELERGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
-------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(4,465) $ (932)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 158 228
Stock compensation expense and other.......................... 98 283
Changes in assets and liabilities:
Accounts receivable......................................... (1,084) (3,308)
Inventories................................................. (130) 504
Prepaid expenses............................................ 20 (1)
Accounts payable............................................ 340 964
Accrued liabilities......................................... 426 697
Customer advances........................................... 58 234
------- -------
Net cash used in operating activities.................... (4,579) (1,331)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment............................ (245) (251)
------- -------
Net cash used in investing activities.................... (245) (251)
------- -------
Cash flows from financing activities:
Principal repayment of note payable/capital lease obligation..... (470) (4)
Proceeds from issuance of notes payable.......................... 470 -
Proceeds from repayment of stockholder notes..................... - 2
Net proceeds from issuance of Common Stock....................... - 10
Proceeds from issuance of Preferred Stock........................ 4,095 3,185
------- -------
Net cash provided by financing activities................ 4,095 3,193
------- -------
Effect of exchange rate on cash.................................... - (5)
------- -------
Net increase (decrease) in cash and cash equivalents............... (729) 1,606
Cash and cash equivalents at beginning of year..................... 2,102 1,373
------- -------
Cash and cash equivalents at end of year........................... $ 1,373 $ 2,979
======= =======
Supplemental cash flow disclosures:
Interest paid.................................................... $ 47 $ 135
Supplemental disclosure of noncash financing activities:
Property and equipment acquired under capital leases............. $ - $ 54
Conversion of note payable to Preferred Stock.................... $ 1,650 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 64
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
AccelGraphics, Inc. (the "Company") designs, develops and markets
high-performance, cost-effective, 3-dimensional graphics subsystems, software
accelerators and application utility software products for the professional
Windows NT and Windows 95 market. The Company was incorporated in April 1994 in
the State of California and commenced operations in late 1994.
Reincorporation and reverse stock split
Upon the completion of the offering, the Board of Directors will be
authorized to issue 2,000,000 shares of undesignated preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences, and
number of shares constituting any series or the designation of such series,
without further action or vote by the stockholders.
In March 1997, the Company was reincorporated in Delaware, effected a
one-for-two reverse split of its common and preferred stock and increased its
authorized common stock to 50,000,000 shares.
All references to share and per share amounts of Common and Preferred stock
and other data in these consolidated financial statements have been
retroactively restated to reflect the reincorporation and reverse stock split.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, AccelGraphics Deutschland, which was
incorporated in December 1995. All significant intercompany accounts and
transactions have been eliminated.
Fiscal year end
The Company operates under a 52-53 week fiscal year which ends on the
Friday closest to December 31. Fiscal 1995 and 1996 were 52 week years. For
convenience of presentation, the accompanying consolidated financial statements
have been shown as ending on December 31 of each year.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Translation of foreign currencies
The functional currency of the Company's wholly owned subsidiary is the
local currency. Accordingly, all assets and liabilities are translated into
United States dollars at current exchange rates as of the respective balance
sheet date. Revenue and expense items are translated using the average exchange
rates prevailing during the period. Gains and losses resulting from translation
are accumulated as a component of stockholders' deficit. The Company's sales are
denominated in United States dollars. Net gains and losses resulting from
foreign exchange transactions were not significant during the periods presented.
F-7
<PAGE> 65
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue recognition
Revenues from product sales are generally recognized upon product shipment,
less an allowance for estimated future returns and exchanges. Provision for the
cost of technical support services claims and estimated future warranty for the
company's hardware products are recorded as a cost of revenues upon recognition
of related revenues.
Revenues from software products are recognized in accordance with the
provisions of Statement of Position 91-1, "Software Revenue Recognition."
Revenues from software products have not been significant to date.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market.
Research and development costs
Expenditures for research and development are charged to expense as
incurred. Certain software development costs are capitalized after technological
feasibility has been established. Development costs incurred in the period
between achievement of technological feasibility, which the Company defines as
the establishment of a working model, until the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs. Non-recurring engineering fees are
reflected as a reduction of research and development expense in the period
earned. During 1996, the Company recognized $190,000 of such fees based upon
milestones, and the Company has no further obligations under this agreement.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from three to five years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the remaining lease term.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of bank deposits and trade
accounts receivable. The Company places its cash and cash equivalents in
checking and market rate accounts in high credit quality financial institutions.
The Company's trade accounts receivable are derived from sales to dealers,
original equipment manufacturers and distributors located primarily in the U.S.
and Europe. The Company performs ongoing credit evaluations of its customers and
maintains an allowance for potential credit losses.
Revenues from the Company's former customer, NeTpower, Inc., comprised
16.6% of revenues in 1995. Revenues from Digital Equipment Corporation and
Hewlett-Packard Company were 27.9% and 22.8%, respectively, of revenue in 1996.
Revenues from export sales, primarily Europe, were approximately $850,000
and $5,780,000 during 1995 and 1996, respectively.
F-8
<PAGE> 66
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three customers accounted for 46.5%, 13.4% and 12.6% of the accounts
receivable balance at December 31, 1996.
Accounting for stock-based compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation" (see Note 7).
Pro forma balance sheet (unaudited)
If the offering contemplated by this prospectus (the "Offering") is
consummated, all shares of mandatorily redeemable convertible preferred stock
outstanding at the closing date will automatically convert into an aggregate of
approximately 4,509,000 shares of common stock. The pro forma effect of this
transaction has been reflected in the accompanying unaudited pro forma
stockholders' equity as of December 31, 1996.
Pro forma net loss per share (unaudited)
Pro forma net loss per share is computed using the weighted-average number
of common and common equivalent shares outstanding during the periods. Common
equivalent shares consist of mandatorily redeemable convertible preferred stock
(using the if-converted method) and stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded from the
computation if their effect is antidilutive, except that, pursuant to the rules
of the Securities and Exchange Commission, common equivalent shares (using the
treasury stock method and assumed public offering price) issued subsequent to
February 7, 1996 have been included in the computation as if they were
outstanding for all periods presented. Prior period earnings per share data have
not been presented since such amounts are not deemed meaningful. The effect on
net loss per share of the anticipated repayment of the subordinated convertible
related party note payable using proceeds from the public offering is
antidilutive, consequently no supplemental loss per share have been presented.
NOTE 2 -- RELATED-PARTY TRANSACTIONS:
The Company has a subordinated convertible note payable to a related party.
(see Note 5).
The Company has made loans to certain employees totaling $82,000 for the
purchase of common stock. These loans accrue interest at fixed rates ranging
between 5.26% and 7.32% per annum and are due on the earlier of November 9, 1998
or termination of employment with the Company. Upon termination of employment,
the Company has the option to repurchase the unvested shares by canceling the
related portion of the loan.
The Company purchased marketing services from a distributor who is also a
common stockholder for $108,000 and $12,000 in 1995 and 1996, respectively.
These amounts have been recorded in the 1995 and 1996 consolidated statement of
operations as sales and marketing expense. The Company recognized revenue from
this distributor of $109,000 and $1,195,000 in 1995 and 1996, respectively.
The Company's outside legal counsel are Series A and Series B stockholders.
The Company incurred legal expenses to this stockholder of $89,000 and $121,000
during 1995 and 1996, respectively.
F-9
<PAGE> 67
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials............................................ $ 455 $ 144
Work-in-process.......................................... 493 41
Finished goods........................................... 63 322
------ ----
$1,011 $ 507
====== ====
Property and equipment:
Office furniture and equipment........................... $ 587 $ 871
Leasehold improvements................................... 6 27
------ ----
593 898
Less: accumulated depreciation and amortization.......... (158) (386)
------ ----
$ 435 $ 512
====== ====
</TABLE>
At December 31, 1996 the Company had $54,000 of capitalized
lease equipment and related accumulated amortization of $5,000.
<TABLE>
<S> <C> <C>
Accrued liabilities:
Accrued employee compensation............................ $ 240 $ 616
Warranty reserve, customer support and other............. 186 507
---- ----
$ 426 $1,123
==== ====
</TABLE>
NOTE 4 -- LINE OF CREDIT:
The Company has a revolving line of credit agreement with a bank, which,
through October 1997, provides for maximum borrowings in an amount up to the
lower of 80% of eligible accounts receivable or $3,000,000. Borrowings under the
line are secured by all of the Company's assets and bear interest at the bank's
prime rate plus 0.25% per annum (8.5% at December 31, 1996). The agreement
requires that the Company maintain certain financial ratios and levels of
tangible net worth and profitability and also restricts the Company's ability to
pay cash dividends. At December 31, 1996, there were no borrowings and
$1,109,000 of standby letters of credit to vendors outstanding under the line of
credit.
NOTE 5 -- SUBORDINATED CONVERTIBLE NOTE PAYABLE TO A RELATED PARTY:
In December 1994, the Company issued a subordinated convertible note
payable in the amount of $3,300,000 to Kubota Corporation ("Kubota"). In
connection with the issuance of its Series A Preferred Stock in June 1995,
Kubota converted $1,650,000 of the note into 990,000 shares Series of A
Preferred Stock. The outstanding balance of $1,650,000, together with accrued
interest of $98,000, was replaced with a new subordinated convertible note
payable of $1,748,000 which is due on June 20, 1998. Interest at the prime rate
(8.25% at December 31, 1996) is payable on a quarterly basis. Interest expense
under the note payable was $178,000 and $144,000 during the years ended December
31, 1995 and 1996, respectively. In the event the Company undertakes a dilutive
issuance of stock, the note is convertible into Kubota's pro rata share of the
new stock being issued as such new stock's issuance price.
NOTE 6 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company has authorized 10,000,000 shares of Preferred Stock -- $0.001
par value, of which 3,477,000, 3,477,000, 1,100,000 and 1,100,000 shares have
been designated Series A, Series A-1, Series B and
F-10
<PAGE> 68
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Series B-1 Mandatorily Redeemable Convertible Preferred Stock, respectively
(collectively referred to as "Preferred Stock").
A summary of Preferred Stock activity is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
SHARES AMOUNT
------- -------
<S> <C> <C>
Balance at December 31, 1994....................................... -- $ --
Issuance of Series A Preferred Stock (June 1995)
at $1.67 per share for cash...................................... 1,707 2,845
Issuance of Series A Preferred Stock (June 1995)
at $1.67 per share upon conversion of note with Kubota
Corporation...................................................... 990 1,650
Issuance of Series A Preferred Stock (July 1995)
at $1.67 per share for cash...................................... 750 1,250
------ ------
Balance at December 31, 1995....................................... 3,447 5,745
Issuance of Series B Preferred Stock (March 1996)
at $3.00 per share for cash...................................... 1,062 3,185
------ ------
Balance at December 31, 1996....................................... 4,509 $ 8,930
====== ======
</TABLE>
At December 31, 1996, no Series A-l or Series B-1 Preferred Stock has been
issued.
Holders of Preferred Stock have certain rights, preferences and
restrictions with respect to dividends, redemption, conversion, liquidation,
antidilution and voting as set forth in the amended and restated Articles of
Incorporation, which are summarized below:
Dividends
Holders of Series A and Series B Preferred Stock are entitled to receive
noncumulative, preferential annual dividends when declared of $0.167 and $0.30,
respectively, per share. Under the California Corporations Code, the Company is
legally restricted from distributing dividends because of its accumulated
deficit.
Redemption
With consent of the holders of no less than 60% of the respective series of
the then outstanding Preferred Stock, on or after June 20, 2001 (for Series A)
and on or after March 7, 2002 (for Series B), the Company must redeem one-third
of the outstanding shares of the respective series of Preferred Stock that are
requested to be redeemed (by such holders) per year until all such shares of
Preferred Stock are redeemed. The Redemption price for Series A and Series B
will be the original issue price plus declared and unpaid dividends.
Conversion
Each share of Preferred Stock is convertible at the option of the holder
into one share of Common Stock. Such Conversion Price is subject to adjustment
to give effect to certain dilutive events that may occur. Conversion occurs
automatically for each share of Preferred Stock upon closing of an underwritten
public offering with a minimum price per share of $7.00 and aggregate proceeds
to the Company of at least $7,500,000.
Liquidation
In the event of liquidation, acquisition, merger or sale of substantially
all of the assets of the Company, holders of Series A and Series B Preferred
Stock are entitled to a per share distribution in preference to holders of
Common Stock equal to $1.67 and $3.00, respectively, plus any declared but
unpaid dividends. Thereafter, any excess, up to specified levels, will be
distributed pro rata to all stockholders on an if converted basis. In the event
funds are insufficient to make a complete distribution to the holders of
Preferred Stock, as
F-11
<PAGE> 69
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
described above, the remaining assets of the Company will be distributed to the
holders of Preferred Stock in proportion to the aggregate preferential amounts
owed to such holders upon a liquidation, dissolution or winding up of the
Company.
Antidilution
In the event the Company issues any shares of stock for a price per share
that is less than the conversion price for the Preferred Stock, then the
conversion price is adjusted in proportion to the dilutive effect of the new
shares issued.
Voting
The holders of each share of Preferred Stock shall have the right to one
vote for each share of Common Stock into which the Preferred Shares could then
be converted. The holders of Preferred Stock have full voting rights and powers
equal to the voting rights and powers of the holders of Common Stock.
NOTE 7 -- COMMON STOCK AND STOCK OPTION PLAN:
Common Stock
At December 31, 1996, there were approximately 1,152,000 shares of Common
Stock which were sold to certain employees and consultants as restricted stock.
These shares may be repurchased at the Company's option if the employee or
consultant terminates services prior to vesting, generally over four years.
372,000 shares of such restricted stock were not vested and thus subject to thus
such repurchase at December 31, 1996.
Stock Plan
The 1995 Stock Plan (the "Plan"), authorizes the Board of Directors to
grant incentive stock options, nonstatutory stock options and stock purchase
rights to employees and consultants. Under the Plan, incentive stock options are
granted at a price not less than 100% of the fair market value of the Company's
Common Stock and at a price not less than 110% of the fair market value for
grants to employees who owned more than 10% of the voting power of all classes
of stock on the date of grant, as determined by the Company's Board of
Directors. Nonqualified stock options may be granted at a price not less than
85% of the fair market value of the Common Stock and at a price not less than
110% of the fair market value for grants to a person who owned more than 10% of
voting power of all classes of stock on the date of grant, as determined by the
Board of Directors. Stock purchase rights may be granted at a price not less
than 85% of the fair market value of the Common Stock and at a price of 100% of
the fair market value of the Common Stock for grants to a stockholder owning 10%
or more of the Company's outstanding stock. Stock purchase rights expire 30 days
after the date of grant. Options generally become exercisable at a rate of not
less than 25% per year over a four year vesting period. At December 31, 1996,
options authorized under the Plan were 2,000,000 (see Note 10) and options for
approximately 610,000 shares were available for future grant.
F-12
<PAGE> 70
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transactions under the 1995 Stock Plan are summarized as follows (in
thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period............ -- 457 $ 0.17
Granted..................................... 670 $ 0.16 723 $ 1.74
Exercised................................... (202) $ 0.13 (129) $ 0.17
Canceled.................................... (11) $ 0.15 (44) $ 0.15
------ ------
Outstanding at period end..................... 457 $ 0.17 1,007 $ 1.30
====== ======
Options exercisable at period end............. 120 $ 0.17 155 $ 0.22
====== ======
Weighted average grant date fair value of
options granted during the year............. $ 0.16 $ 2.59
====== ======
Weighted average grant date fair value of
options granted during the year at exercise
prices below market prices.................. $ -- $ 1.53
====== ======
</TABLE>
During the year ended December 31, 1996, the Company granted options for
the purchase of approximately 776,000 shares of Common Stock to employees at
exercise prices ranging from $0.30 to $6.90 per share. Based in part on an
independent valuation of the fair value of the Company's common stock as of July
1996 and December 1996, management has calculated deferred compensation of
approximately $608,000 related to options granted during 1996. Such deferred
compensation will be amortized over the vesting period relating to these
options, of which $212,000 has been recorded during the year ended December 31,
1996.
During 1996, the Company issued 53,000 shares to consultants for services
rendered. Such issuances were recorded at fair market value.
The following table summarizes information about employee stock options
outstanding at December 31, 1996 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ----------------------------
------------------------------------------------------ WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER REMAINING AVERAGE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- ----------------------------- ------------------ ---------------- -------------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$0.12 - $0.70................ 815 9.10 $ 0.26 155 $ 0.22
$5.30 - $6.90................ 192 9.88 $ 5.72 -- --
----- ---- ----- --- -----
1,007 9.25 $ 1.30 155 $ 0.22
===== ==== ===== === =====
</TABLE>
F-13
<PAGE> 71
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value Disclosures
Had compensation expense for options granted in 1995 and 1996 been
determined based on the fair value at the grant dates, as prescribed in FAS 123,
the Company's net loss and pro forma net loss per share would have been as
follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
-------- -------
<S> <C> <C>
Net loss:
As reported............................................. $(4,465) $ (932)
Pro forma............................................... (4,468) (948)
Pro forma net loss per share (unaudited):
As reported............................................. $(0.15)
Pro forma............................................... (0.15)
</TABLE>
The fair value of each option grant is estimated as of the date of grant
using the minimum value method with the following assumptions used for grants
during the applicable period: no dividend yield for both periods; risk-free
interest rates of 5.3% to 7.4% for options granted during the year ended
December 31, 1995 and 5.1% to 6.7% for options granted during the year ended
December 31, 1996; and a weighted average expected option term of 3.5 years for
both periods.
Because the determination of the fair value of all options granted after
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding paragraph and, because
additional option grants are expected to be made each year, the above pro forma
disclosures are not representative of pro forma effects on results for future
years.
Warrants
In conjunction with its line of credit agreement, the Company granted the
bank warrants to purchase 30,000 shares of its Series A Preferred Stock at an
exercise price of $1.67 per share. The warrants expire on October 10, 2000. The
warrants had a nominal value at date of grant.
In December 1995, in connection with a development agreement with a
strategic partner, the Company granted a strategic partner warrants to purchase
26,250 shares of the Company's common stock at $3.00 per share. The warrants
expire on the earlier of December 29, 1998 or an initial public offering of the
Company's common stock. The warrants had a nominal value at date of grant.
In conjunction with a lease line of credit, in July 1996 the Company
granted the lessor warrants to purchase 7,000 shares of its Series B preferred
stock at an exercise price of $3.00 per share. The warrants expire on the
earlier of July 1, 2006 or an initial public offering of the Company's common
stock. The warrants had a nominal value at date of grant.
NOTE 8 -- LEASES AND COMMITMENTS:
The Company is obligated under a non-cancelable operating lease for office
space and a non-cancelable capital lease for equipment. The leases expire at
various times through 2000. The office lease agreement provides for rent
abatement and scheduled rent increases and also contains an option to extend the
lease for three years. Rent expense is recognized ratably over the lease term.
Rent expense was $129,000 and $156,000 for the years ended December 31, 1995 and
1996, respectively.
F-14
<PAGE> 72
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease commitments under these leases at December 31, 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASE LEASE
--------- -------
<S> <C> <C>
Year ending December 31,
1997.................................................... $ 144 $ 18
1998.................................................... 37 18
1999.................................................... -- 18
2000.................................................... -- 3
---- ----
Total........................................... $ 181 57
====
Less amount representing interest....................... (7)
----
Present value of capital lease obligation............... 50
Less current portion.................................... (16)
----
Long term capital lease obligation................... $ 34
====
</TABLE>
NOTE 9 -- INCOME TAXES:
No provision for federal and state income taxes was recorded in 1995 or
1996 as the Company incurred net operating losses.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 1,365 $ 1,365
Tax credit carryforwards................................... 100 200
Nondeductible reserves and accruals........................ 370 630
------- -------
Total deferred tax assets................................ 1,835 2,195
Deferred tax asset valuation allowance................... (1,835) (2,195)
------- -------
$ -- $ --
======= =======
</TABLE>
The Company has incurred losses since its inception through December 31,
1996. Management believes that based on the currently available evidence,
including the Company's history of annual losses, the lack of carryback capacity
to realize deferred tax assets, the annual limitation on the utilization of net
operating loss carryforwards, the uncertainty of the development of the market
in which the Company competes and the fact that the market in which the Company
competes is intensely competitive and characterized by rapidly changing
technology, it is more likely than not that the Company will not generate
sufficient taxable income to realize the deferred tax asset. Accordingly, a full
valuation allowance has been recorded.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $3,500,000 and $1,500,000, respectively,
available to offset future taxable income. Such carryforwards expire beginning
in 2010. The Company also has $100,000 each of federal and state research and
development credit carryforwards. Utilization of approximately $2,500,000 of the
Company's net operating loss and research and development credit carryforwards
is subject to an annual limitation due to ownership change limitations
prescribed by the Internal Revenue Code of 1986 and similar state provisions and
may be further limited should another ownership change occur. The annual
limitation may result in the expiration of the net operating loss and credit
carryforwards before their utilization.
F-15
<PAGE> 73
ACCELGRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- SUBSEQUENT EVENTS:
In January 1997, the Board of Directors, subject to stockholder approval,
approved an increase in the number of shares reserved for issuance under the
Company's 1995 Stock Option Plan by 1,300,000 to 3,300,000 shares.
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in January 1997 and will be approved by the
stockholders in March 1997. A total of 400,000 shares of Common Stock has been
reserved for issuance under the Purchase Plan. The Purchase Plan, which is
intended to qualify under Section 423 of the Code, will be implemented by a
series of twelve month offering periods other than the first offering period
commencing on or about February 1, and August 1, of each year. The first
offering period is expected to commence on the effective date of this offering.
The Purchase Plan will be administered by the Board of Directors or by a
committee appointed by the Board of Directors. Employees including officers and
employee directors of the Company, or of any majority owned subsidiary
designated by the Board of Directors, are eligible to participate in the
Purchase Plan if they are employed by the Company or any such subsidiary for at
least 20 hours per week and more than five months per year. The Purchase Plan
permits eligible employees to purchase Common Stock through payroll deductions,
which may not exceed 10% of an employee's compensation at a price equal to the
lower of 85% of the fair market value of the Company's Common Stock at the
beginning or end of the offering period.
The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors in January 1997 and will be approved by the
stockholders in March 1997. A total of 200,000 shares of Common Stock has been
reserved for issuance under the Directors' Plan.
F-16
<PAGE> 74
APPENDIX
DESCRIPTION OF GRAPHICS AND ART
INSIDE COVER:
An NT workstation with 3D overlapping graphics showing scientific
visualization, mechanical CAD, entertainment and business graphics. The caption
is "Accelerating Professional 3D Graphics for Windows NT."
GATEFOLD:
Center of gatefold has six interlocked gears with a different picture on
each gear. The pictures represent the hardware, graphics pipeline, value added
software, ISV partners and AccelGraphics. Each corner of the gatefold has a copy
of one or two of the gears. The following text is included throughout the
gatefold:
Hardware Design and System Engineering
AccelGraphics' in-depth understanding of the importance of layout, trace
lines, memory interaction, 3D and 2D chip characteristics, software
implementation, BIOS technologies and bus technology all contribute to building
products and systems that deliver reliable performance. By focusing on system
level design, the Company's 3D graphics subsystems integrate easily into
Professional Workstations.
OpenGL 3D Expertise
AccelGraphics enhances its products through a proprietary high-performance
3D software implementation of OpenGL and is a direct OpenGL licensee. The
Company optimizes the performance of its OpenGL software library by eliminating
much of the testing and branching required to process data and instruction
streams, while adding routines optimized for various application profiles. This
effort has resulted in what the Company believes is the fastest and most stable
version of OpenGL available for Windows NT.
Focus on Value Added Software
AccelGraphics provides value added 3D software applications to 3D graphics
professionals. The Company has successfully developed and introduced its
AccelVIEW 3D software product for AutoCAD and its Flying Carpet plug-in to
Netscape Navigator and Microsoft Internet Explorer. The Company believes this
offers an additional market opportunity for graphics subsystem upgrades as users
look for increased productivity and performance.
Cultivate Relationships with ISVs
AccelGraphics maintains engineering and marketing relationships with
leading ISVs. For example, the Company successfully supported the migration to
NT of UNIX software applications from EDS's Unigraphics division, Microsoft's
Softimage and SDRC. The Company enhances the performance of its graphics
subsystems with these applications and often becomes an ISV's initial preferred
3D graphics solution.
GRAPHIC IMAGE PAGE 26:
The title is "3D Graphics Pipeline." Diagram of 4 small boxes in a top row
connected by arrows pointing to the right. This row of boxes is separated by a
second row of five boxes also connected by arrows pointing to the right. The
rows of boxes are separated by a double row of dotted lines. The row of boxes
above the line are labeled on the right as "Host CPU," the area between the
dotted lines is labeled "Bus Interface" and the bottom row of boxes is labeled
on the right as "Graphics Accelerator." The top right hand box is connected
through the area identified as the "Bus Interface" to the bottom left hand box
in the second row, with an arrow pointing toward the bottom box. The boxes are
labeled as follows: along the top row from left to right "Application,"
"Application Programming Interface," "Geometry Transforms," "Lighting
Calculations,"
<PAGE> 75
along the second row of boxes from left to right "Polygon Processing," "Texture
Mapping," "Z-buffer (depth) Calculations," "Pixel Processing," "Display Update."
INSIDE BACK COVER:
The inside back cover is titled "Providing AccelGraphics' 3D Solutions for
Windows NT Professionals." A copy of the six interlocked gears from the gatefold
with the names of the Companies in AccelGraphics distribution channels above the
drawing. In addition the following chart appears on the table.
<TABLE>
<CAPTION>
Distributors OEMs Value Added Resellers
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
- - C2000 - Digital Equipment - Advanced Data Graphics
- - Flexi Interactive Corporation - Avcom Technologies
- - Forefront Graphics - Epson Direct Corporation - CAD Research
- - InterCAD - Hewlett-Packard - JAR Associates
- - Kubota Graphics - Hitachi - MicroCAD Solutions
- - Macrosun - Samsung Electronics Company - New Technology Solutions
- - Memorex Telex Japan - Tri-Star Computer - Rand Technologies
- - MicroSouth Corporation
- - Pedensia
- - Performance Graphics
- - Pioneer Standard
Electronics
- - Scitech International
- - TechnoGraphy
- - Wyle Electronics
</TABLE>
<PAGE> 76
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 77
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 78
===============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDERS, ANY OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 5
Use of Proceeds............................... 16
Dividend Policy............................... 16
Capitalization................................ 17
Dilution...................................... 18
Selected Consolidated Financial Data.......... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 20
Business...................................... 27
Management.................................... 40
Certain Transactions.......................... 47
Principal and Selling Stockholders............ 48
Description of Capital Stock.................. 50
Shares Eligible for Future Sale............... 52
Underwriting.................................. 54
Legal Matters................................. 55
Experts....................................... 55
Additional Information........................ 56
Index to Financial Statements................. F-1
</TABLE>
------------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================
===============================================================
2,600,000 Shares
LOGO
Common Stock
------------------------------
PROSPECTUS
------------------------------
COWEN & COMPANY
ROBERTSON, STEPHENS & COMPANY
SOUNDVIEW FINANCIAL
GROUP, INC.
, 1997
===============================================================
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. The Company's Bylaws require the
Company to indemnify its directors and officers to the fullest extent permitted
by Delaware law, including circumstances in which indemnification is otherwise
discretionary under Delaware law. The Company has entered into indemnification
agreements with its directors containing provisions which are in some respects
broader than the specific indemnification provisions contained in the Delaware
law. The indemnification agreements may require the Company, among other things,
to indemnify its directors against certain liabilities that may arise by reason
of their status or service as directors (other than liabilities arising from
willful misconduct of a culpable nature), to advance their expenses incurred as
a result of any proceeding against them as to which they could be indemnified,
and to obtain directors' and officers' insurance, if available on reasonable
terms. The Company's Certificate of Incorporation provides for indemnification
of its directors and officers to the maximum extent permitted by the Delaware
law, and the Company's Bylaws provide for indemnification of its directors,
officers, employees and other agents to the maximum extent permitted by Delaware
law. In addition, the Company has entered into Indemnification Agreements with
its directors and officers. Reference is also made to the Underwriting Agreement
indemnifying officers and directors of the Company against certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
-----------
<S> <C>
SEC registration fee.................................... $ 10,873
NASD filing fee......................................... 4,088
Nasdaq National Market listing fee...................... 45,000
Printing and engraving expenses......................... 150,000
Legal fees and expenses................................. 300,000
Accounting fees and expenses............................ 175,000
Blue Sky qualification fees and expenses................ 10,000
Transfer Agent and Registrar fees....................... 12,000
Miscellaneous fees and expenses......................... 43,039
------
Total................................................. $ 750,000
======
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since April 8, 1994 (the date of incorporation of the Company), the Company
has issued and sold the following securities:
1. In November 1994, pursuant to Section 4(2) of the Act, the Company
issued and sold an aggregate of 910,312 shares of Common Stock to four
founders at a purchase price of $0.06666 per share.
2. On December 22, 1994, pursuant to Section 4(2) of the Act, the
Company entered into a Convertible Note Purchase Agreement with Kubota
Corporation, pursuant to which the Company issued Kubota Corporation a
subordinated convertible promissory note carrying an initial principal
amount of $3,300,000.
II-1
<PAGE> 80
3. In June and July 1995, pursuant to Rule 506 of Regulation D, the
Company issued and sold, pursuant to a Series A Preferred Stock Purchase
Agreement, an aggregate of 3,446,997 shares of Series A Preferred Stock to
twelve investors at a purchase price of $1.66666 per share. In connection
with this financing, Kubota Corporation converted $1,650,000 of the
outstanding principal on the Convertible Note into 990,000 shares of Series
A Preferred Stock.
4. On October 11, 1995, pursuant to Rule 506 of Regulation D, the
Company issued to Silicon Valley Bank a warrant for the purchase of up to
30,000 shares of Series A Preferred Stock at an exercise price of $1.66666
per share.
5. On December 29, 1995, pursuant to Section 4(2) of the Act, the
Company issued to Intel Corporation a warrant for the purchase of up to
26,250 shares of Common Stock at an exercise price of $3.00 per share.
6. In March 1996, pursuant to Rule 506 of Regulation D, the Company
issued and sold, pursuant to a Series B Preferred Stock Purchase Agreement,
an aggregate of 1,061,660 shares of Series B Preferred Stock to 20
investors at a per share price of $3.00.
7. On July 1, 1996, pursuant to Rule 506 of Regulation D, the Company
issued to Phoenix Leasing Incorporated a warrant for the purchase of up to
7,000 shares of Series B Preferred Stock at an exercise price of $3.00 per
share.
8. From February 1995 through December 1996, pursuant to Rule 701 of
Regulation D, the Company granted options under the 1995 Stock Plan to
purchase an aggregate of 1,270,078 shares of Common Stock at exercise
prices ranging from $0.12 to $6.90 per share to 62 employees, directors and
consultants.
9. From February 1995 through December 1996, pursuant to Rule 701 of
Regulation D, the Company sold 175,749 shares of Common Stock at purchase
prices ranging from $0.12 to $5.30 per share to 14 employees, directors and
consultants, pursuant to restricted stock purchase agreements under the
1995 Stock Plan.
10. From February 1995 through December 1996, pursuant to Rule 701 of
Regulation D, the Company issued and sold 166,600 shares of Common Stock
pursuant to the exercise of options granted under the 1995 Stock Plan at
exercise prices ranging from $0.12 per share to $0.30 to 12 officers,
employees and consultants.
The issuance of the above securities was deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Act, Regulation D
promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Act as
transactions by an issuer not involving a public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under such Rule 701. The above securities deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the Act
were issued to "sophisticated" purchasers within the meaning of that exemption.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the share certificates, options and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement
2.1* Form of Agreement and Plan of Merger between Registrant and AccelGraphics,
Inc. (a California Corporation)
2.2* Asset Acquisition Agreement dated December 9, 1994 between the Company and
Kubota Graphics Corporation
3.1* Amended and Restated Articles of Incorporation of Registrant (California)
3.2* Certificate of Amendment to Articles of Incorporation of Registrant
(California)
3.3* Certificate of Incorporation of Registrant (Delaware)
</TABLE>
II-2
<PAGE> 81
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
<S> <C>
3.4* Amended and Restated Certificate of Incorporation of Registrant (Delaware)
3.5* Amended and Restated Certificate of Incorporation of Registrant (Delaware)
3.6* Bylaws of Registrant (California)
3.7* Bylaws of Registrant (Delaware)
3.8* Amended and Restated Bylaws of Registrant (Delaware)
4.1* Specimen Common Stock Certificate
4.2* Warrant to Purchase shares of Common Stock
4.3* Warrant to Purchase shares of Series A Preferred Stock
4.4* Warrant to Purchase shares of Series B Preferred Stock
4.5* Convertible Note Purchase Agreement dated December 22, 1994 between the
Company and Kubota Corporation
5.1* Opinion of Venture Law Group, A Professional Corporation
9.1* Amended and Restated Voting Agreement dated March 7, 1996 between the
Company and certain holders of the Company's securities
10.1* 1995 Stock Plan, as amended and forms of stock purchase and stock option
agreement
10.2* 1997 Directors' Stock Option Plan and form of stock option agreement
10.3* 1997 Employee Stock Purchase Plan and form of subscription agreement
10.4* AccelGraphics, Inc. 401(k) Savings & Retirement Plan
10.5* Form of Indemnification Agreement (California)
10.6* Form of Indemnification Agreement (Delaware)
10.7* Amended and Restated Registration Rights Agreement dated as of July 1,
1996, between Registrant and holders of its Preferred Stock and warrant
holders
10.8* Lease Agreement dated December 16, 1994 between the Company and John
Arrillaga, Trustee and Richard T. Perry, Trustee
10.9*+ Digital Equipment Corporation OEM Agreement dated February 21, 1996
between the Company and Digital Equipment Corporation
10.10*+ Product Purchase Agreement dated as of July 1, 1996 between the Company
and Hewlett-Packard France
10.11*+ Turnkey Agreement dated as of February 5, 1996 between the Company and MAT
Technologies Ltd.
10.12*+ Software License Agreements dated August 8, 1995, January 23, 1996 and
July 5, 1996, respectively between the Company and 3D Labs Inc.
10.13*+ Open GL License Agreement dated June 30, 1992, as amended, between the
Company and Kubota Pacific Computer
10.14* Silicon Valley Bank Loan Business Loan Agreement dated October 11, 1995,
between the Company and Silicon Valley Bank
10.15 Sublease Agreement dated as of March 31, 1997 between Registrant and
C-Cube Microsystems, Inc. and the related Sublease Agreement dated as of
December 8, 1996 between C-Cube Microsystems, Inc. and LSI Logic
Corporation and the Lease dated as of August 25, 1995 between Oak Creek
Delaware, Inc. and LSI Logic Corporation
11.1* Statement of Computation of Pro Forma Net Loss Per Share
21.1* Subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP, Independent Accountants (included in
II-6)
23.2* Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney (included in II-5)
27* Financial Data Schedule
</TABLE>
- ---------------
*Previously filed.
+Confidential treatment requested.
II-3
<PAGE> 82
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the provisions referenced
in Item 24 of this Registration Statement, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant will:
(1) For determining any liability under the Act, treat the information
omitted from the form of Prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1), or (4) or 497(h) under
the Act as part of this Registration Statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-4
<PAGE> 83
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this amendment to
the registration statement to be signed on its behalf by the undersigned, in the
City of San Jose, State of California, on this 9th day of April 1997.
ACCELGRAPHICS, INC.
By: /s/ JEFFREY W. DUNN
Jeffrey W. Dunn
President, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- -------------------
<S> <C> <C>
/s/ JEFFREY W. DUNN President, Chief April 9, 1997
- ----------------------------------------------- Executive Officer and
(Jeffrey W. Dunn) Director (Principal
Executive Officer)
/s/ NANCY E. BUSH* Vice President, Finance April 9, 1997
- ----------------------------------------------- and Administration; Chief
(Nancy E. Bush) Financial Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ DAVID E. GOLD* Director April 9, 1997
- -----------------------------------------------
(David E. Gold)
/s/ JOS HENKENS* Director April 9, 1997
- -----------------------------------------------
(Jos Henkens)
/s/ SHINTARO MIYAMOTO* Director April 9, 1997
- -----------------------------------------------
(Shintaro Miyamoto)
/s/ DAVID PIDWELL* Director April 9, 1997
- -----------------------------------------------
(David Pidwell)
/s/ PETER WOLKEN* Director April 9, 1997
- -----------------------------------------------
(Peter Wolken)
*By: /s/ JEFFREY W. DUNN April 9, 1997
- -----------------------------------------------
(Jeffrey W. Dunn)
(Attorney-in-fact)
</TABLE>
II-5
<PAGE> 84
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated January 30, 1997, except
as to Note 1 (reincorporation and reverse stock split), which is as of March 13,
1997, relating to the consolidated financial statements of AccelGraphics, Inc.,
which appears in such Prospectus. We also consent to the reference to us under
the headings "Selected Consolidated Financial Data" and "Experts" in such
Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial Data."
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
April 9, 1997
II-6
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1* Form of Underwriting Agreement
2.1* Form of Agreement and Plan of Merger between Registrant and AccelGraphics,
Inc. (a California Corporation)
2.2* Asset Acquisition Agreement dated December 9, 1994 between the Company and
Kubota Graphics Corporation
3.1* Amended and Restated Articles of Incorporation of Registrant (California)
3.2* Certificate of Amendment to Articles of Incorporation of Registrant
(California)
3.3* Certificate of Incorporation of Registrant (Delaware)
3.4* Amended and Restated Certificate of Incorporation of Registrant (Delaware)
3.5* Amended and Restated Certificate of Incorporation of Registrant (Delaware)
3.6* Bylaws of Registrant (California)
3.7* Bylaws of Registrant (Delaware)
3.8* Amended and Restated Bylaws of Registrant (Delaware)
4.1* Specimen Common Stock Certificate
4.2* Warrant to Purchase shares of Common Stock
4.3* Warrant to Purchase shares of Series A Preferred Stock
4.4* Warrant to Purchase shares of Series B Preferred Stock
4.5* Convertible Note Purchase Agreement dated December 22, 1994 between the
Company and Kubota Corporation
5.1* Opinion of Venture Law Group, A Professional Corporation
9.1* Amended and Restated Voting Agreement dated March 7, 1996 between the
Company and certain holders of the Company's securities
10.1* 1995 Stock Plan, as amended and forms of stock purchase and stock option
agreement
10.2* 1997 Directors' Stock Option Plan and form of stock option agreement
10.3* 1997 Employee Stock Purchase Plan and form of subscription agreement
10.4* AccelGraphics, Inc. 401(k) Savings & Retirement Plan
10.5* Form of Indemnification Agreement (California)
10.6* Form of Indemnification Agreement (Delaware)
10.7* Amended and Restated Registration Rights Agreement dated as of July 1,
1996, between Registrant and holders of its Preferred Stock and warrant
holders
10.8* Lease Agreement dated December 16, 1994 between the Company and John
Arrillaga, Trustee and Richard T. Perry, Trustee
10.9*+ Digital Equipment Corporation OEM Agreement dated February 21, 1996
between the Company and Digital Equipment Corporation
10.10*+ Product Purchase Agreement dated as of July 1, 1996 between the Company
and Hewlett-Packard France
10.11*+ Turnkey Agreement dated as of February 5, 1996 between the Company and MAT
Technologies Ltd.
10.12*+ Software License Agreements dated August 8, 1995, January 23, 1996 and
July 5, 1996, respectively between the Company and 3D Labs Inc.
10.13*+ Open GL License Agreement dated June 30, 1992, as amended, between the
Company and Kubota Pacific Computer
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------------
<S> <C> <C>
10.14* Silicon Valley Bank Loan Business Loan Agreement dated October 11, 1995,
between the Company and Silicon Valley Bank
10.15 Sublease Agreement dated as of March 31, 1997 between Registrant and
C-Cube Microsystems, Inc. and the related Sublease Agreement dated as of
December 8, 1996 between C-Cube Microsystems, Inc. and LSI Logic
Corporation and the Lease dated as of August 25, 1995 between Oak Creek
Delaware, Inc. and LSI Logic Corporation
11.1* Statement of Computation of Pro Forma Net Loss Per Share
21.1* Subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP, Independent Accountants (included in
II-6)
23.2* Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney (included in II-5)
27* Financial Data Schedule
</TABLE>
- ---------------
*Previously filed.
+Confidential treatment requested.
<PAGE> 1
EXHIBIT 10.15
LEASE
THIS LEASE, dated as of August 25, 1995, is made by and between Oak
Creek Delaware, Inc., a Delaware Corporation ("Landlord"), and LSI LOGIC
CORPORATION, a Delaware corporation ("Tenant"), upon the following terms and
conditions.
1. Lease of Premises. Landlord hereby leases to Tenant, and Tenant
hereby leases from Landlord, that certain real property commonly known as 1855
Barber Lane, Milpitas, California and more particularly described on Exhibit A,
together with the building thereon (the "Building"), subject, however, to any
and all existing encumbrances, easements, conditions, covenants, and
restrictions, rights-of-way, any other matters of record, and such matters as
may be disclosed by inspection or survey. The above-described real property,
together with the Building, is hereinafter referred to as the "Premises."
2. Term; Option; Fair Market.
(a) The term of this Lease shall be for five (5) years commencing on
January 1, 1996 ("Commencement Date") and ending on December 31, 2000, unless
sooner terminated pursuant to the provisions hereof.
(b) Tenant shall have one option to extend the term of this Lease
(the "Extension Option") for a period of five (5) years commencing on January 1,
2001, and ending on December 31, 2005 (the "Renewal Term") provided that:
(i) Tenant gives Landlord written notice of Tenant's
election to exercise the Extension Option no later than twelve (12) months
before the date specified in subparagraph (a) above for the expiration of the
term of this Lease; and
(ii) At the time the Extension Option is exercised and at the
commencement of the Renewal Term, this Lease must be in full force and effect,
Tenant must not then be in default under this Lease, Tenant's interest under
this Lease must not have been assigned by operation of law or otherwise (except
pursuant to an assignment with respect to which Landlord has agreed in this
Lease to give its consent), Tenant must be in occupancy of the entire Premises,
and Tenant must not have sublet any portion thereof, unless with Landlord's
prior written consent; and
(iii) All of the terms, covenants and conditions of this Lease
shall remain in effect during the Renewal Term, except that the Basic Rent shall
be an amount equal to the Fair Market Rental Value of the Premises for the
Renewal Term. Landlord and Tenant shall meet, negotiate and attempt to agree
upon the Fair
-1-
<PAGE> 2
Market Rental Value for the Premises for the entirety of the Renewal Term. If
Landlord and Tenant have not agreed in writing on such Fair Market Rental Value
within thirty (30) days after Landlord's receipt of Tenant's written notice of
exercise of the Extension Option pursuant to subparagraph (i) above, then,
upon written notice of either party to the other requesting a determination of
such Fair Market Rental Value, such Fair Market Rental Value shall be
determined in accordance with the terms of subparagraph (c) below.
(c) For purposes hereof, the "Fair Market Rental Value" shall mean
the monthly rent payable by a renewal tenant of comparable space taking into
account size, quality, location, and condition in the "Silicon Valley" R&D
market taking into consideration any tenant inducements then given to renewal
tenants in comparable buildings, but in no event shall the Fair Market Rental
Value for the first year or any subsequent years of the Renewal Term be less
than the previous year's Basic Rent.
Within thirty (30) days after receipt of Tenant's notice of
exercise, Landlord shall notify Tenant in writing of Landlord's estimate of the
Basic Rent for the entirety of the Renewal Term. Within thirty (30) days after
receipt of such notice from Landlord, Tenant shall have the right either to (i)
elect to cancel the notice of exercise by written notice to Landlord; (ii)
accept Landlord's statement of Basic Rent as the Basic Rent for the Renewal
Term; or (iii) elect to determine the Basic Rent for the Renewal Term pursuant
to the "Negotiation/Appraisal Method" set forth below. Failure on the part of
Tenant to cancel the notice of exercise or to require determination of the
Basic Rent for the Renewal Term within said thirty (30) day period shall
constitute acceptance of the Basic Rent for the Renewal Term as calculated by
Landlord. To the extent that the determination of Basic Rent for the Renewal
Term has not been completed prior to the commencement of the Renewal Term,
Tenant shall pay Basic Rent at the rate calculated by Landlord, with the
potential for an adjustment to be made once the Fair Market Rental Value is
ultimately determined pursuant to the provisions hereof.
(d) The "Negotiation/Appraisal Method" of determining the Basic
Rent for the Renewal Term shall consist of the following:
(i) During the period commencing with Tenant's election to
use the Negotiation/Appraisal Method and ending ten (10) days thereafter (the
"First Negotiation Period"), Landlord and Tenant may, but shall not be
obligated to, negotiate the subject Basic Rent. If the parties agree on such a
Basic Rent and have executed a written agreement establishing the same prior to
the expiration of the First Negotiation Period, then said Basic Rent shall be
binding upon the parties. If the parties have not executed such an agreement
prior to the expiration of the First Negotiation Period, then Tenant shall,
within fifteen (15) days after the expiration of
-2-
<PAGE> 3
the First Negotiation Period, (1) engage an appraiser ("Tenant's Appraiser"),
who shall be a member of the American Institute of Real estate Appraisers and
familiar with the Fair Market Rental Value of first-class commercial R&D space
in the Silicon Valley, and (2) notify Landlord thereof. If Tenant does not
engage such appraiser within such fifteen (15) day period, then the Basic Rent
initially proposed by Landlord pursuant to Section 2(c) above shall be deemed
the Basic Rent for the entirety of the Renewal Term and shall be binding upon
the parties. If Tenant engages such an appraiser within such fifteen (15) day
period, then Tenant shall, within thirty (30) days after the expiration of the
First Negotiation Period, deliver to Landlord a copy of Tenant's Appraiser's
determination of Fair Market Rental Value. If Tenant fails to so deliver a copy
of Tenant's Appraiser's determination within such thirty (30) day period, then
the Basic Rent initially proposed by Landlord pursuant to Section 2(c) above
shall be deemed the Basic Rent for the entirety of the Renewal Term and shall
be binding upon the parties.
(ii) If the Basic Rent for the Renewal Term has not been determined by
the date which is thirty (30) days after the expiration of the First
Negotiation Period, then during the following ten (10) days (the "Second
Negotiation Period") Landlord and Tenant may, but shall not be obligated to,
negotiate the subject Basic Rent. If the parties agree on such a Basic Rent and
have executed a written agreement establishing the same prior to the expiration
of the Second Negotiation Period, then said Basic Rent shall be binding upon
the parties. If the parties have not executed such an agreement prior to the
expiration of the Second Negotiation Period, then Landlord shall, within
fifteen (15) days after the expiration of the Second Negotiation Period, (1)
engage an appraiser ("Landlord's Appraiser") who shall have qualifications
which satisfy the requirements set forth above for Tenant's Appraiser, and (2)
notify Tenant thereof. If Landlord does not engage such an appraiser within
such fifteen (15) day period, then the Fair Market Rental Value proposed by
Tenant's Appraiser shall be deemed the Basic Rent for the entirety of the
Renewal Term and shall be binding upon the parties. If Landlord engages such an
appraiser within such fifteen (15) day period, then Landlord shall, within
thirty (30) days after the expiration of the Second Negotiation Period, deliver
to Tenant a copy of Landlord's Appraiser's determination of Fair Market Rental
Value. If Landlord fails to so deliver a copy of Landlord's Appraiser's
determination within such thirty (30) day period, then the Fair Market Rental
Value proposed by Tenant's Appraiser shall be deemed the Basic Rent for the
entirety of the Renewal Term and shall be binding upon the parties.
(iii) If the Basic Rent for the entirety of the Renewal Term has not
been determined by the date which is thirty (30) days after the expiration of
the Second Negotiation Period, then during the following ten (10) days (the
"Third Negotiation
-3-
<PAGE> 4
Period") Landlord and Tenant may, but shall not be obligated to, negotiate the
subject Basic Rent. If the parties agree on such a Basic Rent and have executed
a written agreement establishing the same prior to the expiration of the Third
Negotiation Period, then said Basic Rent shall be binding upon the parties. If
the parties have not executed such an agreement prior to the expiration of the
Third Negotiation Period, then Tenant's Appraiser and Landlord's Appraiser
shall, within fifteen (15) days after the expiration of the Third Negotiation
Period, (1) appoint a third appraiser (the "Third Appraiser") who shall have
qualifications which satisfy the requirements set forth above for Tenant's
Appraiser, and (2) notify Landlord and Tenant of their appointment. If Tenant's
Appraiser and Landlord's Appraiser shall be unable to timely agree on the
appointment of the Third Appraiser, then either Landlord or Tenant, on behalf
of both, may request such an appointment by the American Arbitration
Association. Within twenty (20) days after the appointment of the Third
Appraiser, the Third Appraiser shall determine the Fair Market Rental Value by
selecting either (A) the Fair Market Rental Value determined by Tenant's
Appraiser pursuant to clause (i) above, or (B) the Fair Market Rental Value
determined by Landlord's Appraiser pursuant to clause (ii) above, whichever most
closely approximates the Third Appraiser's determination of Fair Market Rental
Value.
(e) Tenant shall be permitted to occupy the Premises prior to the
Commencement Date for the purpose of constructing its Tenant Improvements
pursuant to the terms of Exhibit B attached hereto, and installing its Tenant
Fixtures (as hereinafter defined), telephone systems, computer cabling and
furniture. Such occupancy shall be subject to each and every provision of this
Lease, except that Tenant shall not be obligated to pay Basic Rent or any
additional rent until the Commencement Date. Further, Tenant shall be obligated
to pay for all utilities serving the Premises commencing September 1, 1995 in
accordance with the provisions of paragraph 10 hereof. Tenant shall defend,
indemnify and hold Landlord harmless from any claims, costs and liabilities,
including attorney's fees and costs, arising out of or in connection with any
such early entry of the Premises by Tenant.
3. Rent.
(a) Tenant shall pay to Landlord at P.O. Box 60000, San Francisco,
California 94161-1571 or at such other address as Landlord may provide to
Landlord, in advance, on the 1st day of each month during the term, without
deduction or offset, net monthly rental ("Basic Rent"), over and above the
other and additional payments to be made by Tenant as hereinafter provided, as
set forth below. The first month's rent shall be due and payable upon complete
execution of this Lease. It is understood and agreed that the Basic Rent
payable during the Lease Term as set forth below may be adjusted upward
pursuant to the terms and provisions of paragraph 10 of Exhibit B attached
hereto.
-4-
<PAGE> 5
<TABLE>
<CAPTION>
Basic Rent to
Periods of the Term be paid per month
<S> <C>
January 1, 1996 through December 31, 1997 $69,275.00
January 1, 1998 through December 31, 1998 $70,905.00
January 1, 1999 through December 31, 2000 $81,500.00
</TABLE>
(b) The term "rent" as used in this Lease shall refer collectively to
the Basic Rent and to all additional rent, charges and other sums payable
hereunder. Tenant hereby acknowledges that late payment by Tenant to Landlord
of rent and other sums due hereunder will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which will be difficult to
ascertain. Such costs include, but are not limited to, processing and
accounting charges, and late charges which may be imposed on Landlord by the
terms of any trust deed covering the Premises. Accordingly, if any installment
of rent or any other sums due from Tenant shall not be received by Landlord
within ten (10) days after its due date, Tenant shall pay to Landlord a late
charge equal to 4% of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Landlord
will incur by reason of late payment by Tenant based upon the circumstances
existing as of the date of this Lease. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of the other
rights and remedies granted to it by law or this Lease.
Initials: /s/ B (Landlord) /s/ VAM (Tenant)
4. Net Lease. Landlord shall receive the rent free and clear of any
and all taxes, liens, charges, or expenses of any nature whatsoever in
connection with the ownership and operation of the Premises, except as herein
expressly provided. In addition to the rent reserved above and except as may be
expressly provided herein, Tenant shall pay to the parties respectively
entitled thereto all Impositions (as hereinafter defined), insurance premiums,
maintenance charges, construction costs, and any other charges, costs, and
expenses that arise or may be contemplated under any provisions of this Lease
during the term hereof including a management fee payable to Landlord's
property manager, Tower Realty Management Corporation (the "Manager") equal to
2% of the Basic Rent. It is the intention of the parties that this Lease shall
not be terminable for any reason by Tenant, and that Tenant shall in no event
be entitled to any set-off against, abatement of, or reduction in rent payable
under this Lease, except as herein expressly provided.
5. Use. The Premises shall be used and occupied only for general
offices and engineering and for no other use or purpose without the prior
written consent of Landlord which consent may be
-5-
<PAGE> 6
withheld in Landlord's sole discretion. Tenant shall use the Premises in
conformance with the terms of those certain covenants, conditions and
restrictions encumbering the Premises, a copy of which has been provided to
Tenant by Landlord.
6. Quiet Enjoyment. Provided Tenant performs its obligations
hereunder, Tenant shall lawfully and quietly occupy the Premises during the term
of this Lease without hinderance or molestation by Landlord, subject, however,
to the matters herein set forth.
7. Tenant's Obligation to Reimburse. As additional rent, Tenant shall
pay to Landlord all real estate taxes, special assessments and other
governmental charges that at any time during, or with respect to the term hereof
may be assessed or imposed on or with respect to, or become a lien upon, the
Premises or any part thereof or that may be assessed or imposed on or with
respect to any occupancy, use, or possession of, or activity conducted on, the
Premises or any part thereof (collectively, "Impositions"). Tenant shall pay the
Impositions within ten (10) business days after being billed for the same by
Landlord. If requested by Tenant in writing within thirty (30) days of receipt
of a bill for such Impositions, Landlord shall furnish Tenant with such evidence
as is reasonably available to Landlord with respect to the amount of any
Impositions. Tenant may not withhold payment of such bill pending receipt and/or
review of such evidence. If any lender requires Landlord to impound Impositions
on a periodic basis during the Term, then Tenant, on notice from Landlord
indicating this requirement, shall pay a sum of money toward its liability under
this paragraph 7 to Landlord on the same periodic basis as required by such
lender. Landlord shall impound such payments received from Tenant in accordance
with the requirements of such lender.
8. Definition of "Real Estate Taxes." As used herein, the term "real
estate taxes" shall include any form of real estate tax, assessment, license
fee, commercial rental tax, improvement bond or bonds, levy, or other tax
(other than inheritance, personal income, or estate taxes), general and
special, ordinary and extraordinary, foreseen as well as unforeseen, of any
kind or nature whatsoever, imposed on the Premises by any authority having the
power to tax (including any city, state, or federal government, or any school,
agricultural, sanitary, water, fire, street, drainage, or other improvement
district thereof) against any legal or equitable interest of Landlord in the
Premises, against Landlord's right to rent or other income from the Premises,
and against Landlord's business of leasing the Premises. The term "real estate
taxes" shall also include any tax, fee, levy, assessment, or charge: (a) in
substitution of, partially or totally, any "real estate taxes", or (b) that is
imposed by reason of this transaction, any modifications or changes hereto, or
any transfers hereof. Notwithstanding the above or anything contained elsewhere
in this Lease, Real Property Taxes shall not include 1) any interest or
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penalties unless incurred or assessed beyond the control of Landlord; 2) any
succession, sales, use or franchise taxes, or any income profits, or revenue
tax, assessment or charge imposed upon the rent received as such by Landlord
under this Lease. Tenant shall have the right to contest any tax increase.
9. Personal Property Taxes. Tenant shall pay prior to delinquency all
taxes assessed against and levied upon Trade Fixtures, furnishings, equipment,
and all other personal property of Tenant contained in the Premises or
elsewhere.
10. Utilities. Tenant shall pay for all gas, electricity, heat,
cooling, energy, telephone, janitorial service, water, waste disposal, refuse
collection and other utility-type services furnished to Tenant or the Premises,
together with all related sprinkler alarm monitoring installation or connection
charges or deposits. Landlord shall not be liable in damages, consequential or
otherwise, nor shall there be any rent reduction, rent abatement or right on
the part of Tenant to terminate this Lease, arising out of any interruption
whatsoever in utility services which is due to insurrection, war, rioting,
earthquakes, fire, accident, strike, governmental authority, acts of public
enemy, acts of God or other causes beyond the reasonable control of Landlord,
or any temporary interruption in such services which is necessary to the making
of alterations, repairs, or improvements to the Premises or the Building or any
part thereof. Landlord and Tenant agree to cooperate with one another to
transfer all utility accounts and the fire sprinkler monitoring system to
Tenant's account effective September 1, 1995.
11. Landlord's Insurance. Landlord shall procure and maintain
throughout the term of this Lease, property, liability and other insurance
insuring the full replacement cost of the Building and the Premises and all
other improvements thereto including rental abatement insurance covering rental
loss for a period of one year, and all alterations and improvements on or in
the Premises including without limitation the "Tenant Improvements" (as defined
in Exhibit "B"), but excluding coverage of all Tenant's personal property,
equipment, machinery, inventory or Trade Fixtures on or in the Premises and,
against risk of direct physical loss (including, at Landlord's option, loss
caused by the perils of earthquake and flood). Landlord retains the right, in
its sole discretion, to reasonably adjust coverage limits and perils insured
against provided such adjustment is upon terms and conditions which are
commercially reasonable. Tenant agrees not to do, or fail to do, anything which
will violate the terms of any such insurance to the extent such terms are set
forth in policies, copies of which are delivered to Tenant, or otherwise
disclosed to Tenant, increase the cost of such insurance or prevent Landlord
from procuring policies satisfactory to Landlord. Within ten (10) business days
of billing by Landlord, Tenant will reimburse Landlord for all costs of such
insurance carried by Landlord with respect to the
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Premises. Tenant will also pay, within ten (10) business days of billing by
Landlord, any increase in insurance premiums resulting from the nature of
Tenant's occupancy or any act or omission of Tenant.
12. Tenant's Insurance. Tenant agrees to maintain in full force and
effect at all times during the term of this Lease, at no expense to Landlord,
for the protection of Tenant and Landlord, as their interest may appear,
policies of insurance issued by a responsible carrier or carriers reasonably
acceptable to Landlord which afford the following coverages:
(a) Worker's Compensation - Statutory limits;
(b) Employer's liability - Not less than:
Bodily Injury by Accident - $250,000 each accident
Bodily Injury by Disease - $250,000 policy limit
Bodily Injury by Disease - $250,000 each employee;
(c) Property Insurance insuring the Tenant's improvements, Trade
Fixtures and personal property against direct risk of loss. Coverage shall
be provided on coverage forms at least as broad as the standard Building and
Personal Property Coverage Form (CP0010), Business Income Coverage Form
(CP0030), Boiler and Machinery Coverage Form (BM0025), Causes of Loss Special
Form (CP1030), and Sprinkler Leakage - Earthquake Extension-(CP1039), all as
published by ISO Commercial Risk Services, Inc. Replacement cost valuation must
apply. The limit of coverage required for business personal property shall be
equal to 100% of the current replacement cost value of such business personal
property; and
(d) Commercial General Liability Insurance with limits not less than
the following: $3,000,000 for the occurrence limit, general aggregate limit,
product/completed operations aggregate limit, personal injury and advertising
aggregate limit, $50,000 fire damage (any one fire) and $5,000 medical expense
(any one person), covering Bodily Injury, Personal Injury and Property Damage
liability occasioned by or arising out of or in connection with the use,
operation and occupancy of the Premises. The Landlord retains the right to
require reasonable increases in these limits from time to time. Such insurance
shall be provided on a coverage form at least as broad as the most recent
edition of the standard Commercial General Liability Coverage Form (CG0001)
published by ISO Commercial Risk Services, Inc. Such policy must cover events
that occur during the policy period regardless of when the claim is made. The
policy must name the Landlord and Manager as an additional insured using an
endorsement form at least as broad as the most recent addition of the
Additional Insured - Managers or Lessors of Premises Endorsement (CG2011) as
published
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by ISO Commercial Risk Services, Inc. Such insurance shall be primary insurance
to any other insurance that may be available to Landlord. Any other insurance
available to Landlord shall be noncontributing with and in excess to such
insurance.
(e) Tenant shall have the right to self-insure its Worker's
Compensation obligation in an amount at least equal to the minimum requirements
imposed by the State of California. Tenant shall deliver to Landlord within
five (5) business days after Tenant makes its election to self-insure, a
certificate from the State of California allowing Tenant to so self-insure.
Tenant shall deliver to Landlord, concurrent with execution of this
Lease, certificates of insurance, and, with respect to the insurance policy
described in subparagraph (d) above, a copy of the Additional Insured --
Managers or Lessors of Premises Endorsement (CG2011). Such certificates shall
provide an obligation by the insurer to notify the Landlord in writing at least
thirty (30) days prior to cancellation or non-renewal of any such insurance.
Tenant shall endeavor to deliver to Landlord renewal certificates at least
seven (7) days prior to the expiration of any insurance policy required
hereunder. Notwithstanding the foregoing, Tenant represents and warrants that
in no event shall Tenant allow the insurance required under this Lease to lapse.
13. Loss Payable Requirements. All such insurance shall be in a
form satisfactory to Landlord and shall be carried with companies that have a
general policy holder's rating of not less than "A" and a financial rating of
not less than Class "X" in the most current edition of Best's Insurance
Reports; shall provide that such policies shall not be subject to material
alteration or cancellation except after at least thirty (30) days' prior
written notice to Landlord; and shall be primary as to Landlord. If Tenant
fails to procure and maintain the insurance required hereunder, Landlord may,
but shall not be required to, order such insurance at Tenant's expense and
Tenant's reimbursement to Landlord for such amounts shall be deemed additional
rent. Such reimbursement shall include all sums disbursed, incurred or
deposited by Landlord including Landlord's costs, expenses and reasonable
attorney's fees with interest thereon at the Default Interest Rate as defined
in paragraph 54.
14. Waiver of Subrogation. Each party to this Lease hereby releases
the other from any and all claims, and waives its entire right of recovery
against the other, for loss or damage arising out of or incident to the perils
insured against under the policies specified in paragraphs 11 and 12 above to
the extent such loss or damage is insured against under such policies, whether
due to the negligence of such parties or the agents, employees, contractors, or
invitees of either of them.
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15. Landlord's Right to Perform Tenant's Covenants. Tenant agrees
that, if Tenant shall at any time fail to make any payment or perform any other
act to be made or performed by it under this Lease, Landlord may, but shall not
be obligated to, make such payment or perform such other act to the extent
Landlord may deem desirable, with full rights of offset, and without waiving or
releasing Tenant from any obligation under this Lease. All sums so paid by
Landlord and all expenses paid in connection therewith, including without
limitation attorneys' fees, together with interest thereon at the Default
Interest Rate from the date of such payment, shall be paid by Tenant to
Landlord on demand.
16.1 Tenant's Obligation to Maintain: Except as otherwise provided in
paragraph 16.2 regarding Landlord's obligations and paragraph 26.1 regarding the
restoration of damage caused by fire and other perils, Tenant shall, at all
times during the Lease term, clean, keep, and maintain in good order, condition,
and repair the Premises and every part thereof, through regular and annual
inspections and servicing, including but not limited to (i) all plumbing within
the Premises (including all sinks, toilets, faucets and drains), and all ducts,
pipes, vents, or other parts of the HVAC or plumbing system, (ii) all fixtures,
interior walls, floors, carpets, and ceilings, (iii) the roof (including routine
roof maintenance and repair of the roof membrane, parapet, walls and all parts
constituting the roof system and maintenance and repair of all roof leaks
through the roof membrane over the Premises but excluding replacement of the
roof), (iv) all windows, doors, entrances, plate glass, showcase, and skylights
(including cleaning both interior and exterior surfaces), (v) all electrical
facilities, wiring and equipment, including lighting fixtures, lamps, bulbs and
tubes, fans, vents, exhaust equipment in the Premises, (vi) any automatic fire
extinguisher equipment and systems (including full sprinkler testing) in the
Premises, (vii) interior and exterior surfaces repainting, (viii) any
intra-building telephone and network cabling installed to exclusively serve all
or any portion of the Premises, whether or not fully contained within the
Premises, including all distribution throughout the Premises from Tenant's
telephone closet and (ix) maintenance and repair of the parking lot including
slurry sealing and striping. Tenant shall replace any damaged or broken glass in
the Premises (including all interior and exterior doors, windows, and showcases)
with glass of the same kind, size, and quality. Tenant shall repair any damage
to the Premises (including exterior doors and windows) caused by vandalism or
any unauthorized entry. Tenant shall be responsible for and shall maintain,
repair and replace when necessary HVAC equipment which serves the Premises and
shall keep the same in good condition through regular inspection and servicing,
throughout the Lease term utilizing competent service personnel and in
accordance with the manufacturers specifications for such equipment. Tenant
shall, at Tenant's sole cost and expense, maintain continuously throughout the
Lease term a service contract for HVAC equipment, such service
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contract shall be in form and content reasonably satisfactory to Landlord.
Tenant shall furnish Landlord with a copy of the HVAC service contract which
shall provide that the service contract may not be canceled or changed without
at least thirty (30) days prior written notice to Landlord. All repairs and
replacements required of Tenant shall be promptly made with materials of like
kind and quality. If the work affects the structural parts of the Premises
and/or the Building, then Tenant shall first obtain Landlord's written approval
of the scope of work, plans therefor, materials to be used, and the contractor
prior to the commencement of such work.
16.2 Landlord's Obligation to Maintain: Landlord shall repair and
maintain only the structural parts of the Building, which structural parts
include only the foundations, exterior walls, columns, roof structure
(excluding ordinary maintenance and repair of the roof membrane including any
leaks) and floors (provided Tenant does not exceed the load capacity of the
floor and excluding any floor coverings) located on the Premises so that the
same are kept in good order and repair. Landlord shall not be responsible for
repairs required by any accident, fire or other peril, except as otherwise
required by paragraph 26.1 or for damage caused to any part of the Premises by
any act, negligence or omission of Tenant or its agents, contractors, employees
or invitees to the extent not covered by insurance required to be carried
herein; or for damage caused by Tenant's construction of the Tenant
Improvements or subsequent Alterations (defined in paragraph 25), including,
but not limited to damage to the exterior walls or the roof of the Building.
Landlord may engage contractors of its choice to perform the obligations
required of it by this paragraph, and the necessity of any expenditure made to
perform such obligations shall be at the reasonable discretion of Landlord. It
is an express condition precedent to all obligations of Landlord to repair and
maintain that Tenant shall have notified Landlord of the need for such repairs
and maintenance.
17. Surrender of Premises. Upon expiration or any sooner termination of
this Lease, Tenant shall surrender to Landlord the entire Premises, together
with all Alterations in the same condition as when received or installed,
ordinary wear and tear excepted, and clean and free of debris and free of any
liens created or suffered to be created by Tenant. Tenant may, and upon
Landlord's request shall, remove any Trade Fixtures or personal property
belonging to Tenant, provided that Tenant shall perform prior to expiration of
the term of this Lease all restoration made necessary by such removal. Landlord
may, at Tenant's expense, retain or dispose of in any manner and Trade Fixtures
or personal property of Tenant that Tenant does not remove from the Premises
upon expiration or termination of the Lease term, in which case title thereto
shall vest in Landlord. The term "Trade Fixtures" as used in this Lease shall
mean all fixtures, equipment, and personal property owned by Tenant and used in
connection with the operation
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of any business on the Premises, whether or not affixed to the Building.
18. Landscaping Maintenance. Tenant shall at Tenant's sole cost and
expense, enter into a regularly scheduled landscape maintenance contract (which
shall include by way of illustration maintaining the irrigation system and
pruning all trees) with a competent landscape contractor. The landscape
contractor and the contract shall be subject to the approval of Landlord which
shall not be unreasonably withheld. Tenant shall have the right to request
in writing that Landlord maintain the exterior landscaping of the Premises in
which event Tenant shall pay to Landlord, as additional rent, all costs
incurred by Landlord in maintaining the exterior landscaping. In the event
Landlord assumes the maintenance of the exterior landscaping, Landlord may,
from time to time, estimate the amount of the exterior landscaping costs and
Tenant shall pay to Landlord each month in advance an amount equal to
one-twelfth of such estimate and, upon determination of the actual amount of
the exterior landscape maintenance costs, appropriate adjustments will be made
to the next month's Basic Rent to reflect over or under payment thereof.
19. Waste. Tenant shall not do or suffer any waste or damage,
disfigurement, or injury to the Premises or permit or suffer any overloading of
the floors or any of the structural elements of the Building.
20. Tenant Improvements. Pursuant to the terms and conditions of
Exhibit B, Landlord will provide Tenant with a Total Tenant Improvement
Allowance and Tenant will cause approved Tenant Improvements to be constructed.
21. Waiver of Repair and Deduct. Tenant hereby waives any and all
rights it may have to make repairs at Landlord's expense or in lieu thereof to
vacate the Premises as provided in California Civil Code Section 1942 or any
other law, statute, or ordinance now or hereafter in effect.
22. Compliance With Laws. Tenant shall, at Tenant's sole cost and
expense, comply promptly with all laws, ordinances, orders, regulations, and
requirements of all federal, state, and local governmental agencies and any
covenants, conditions and restrictions covering the Premises (collectively,
"Laws"), and with the recommendations of any insurer under any policies
required under this Lease, that may be applicable to the Premises or the use
thereof.
Tenant shall have no obligation to comply with any such Laws: (a) to
the extent such compliance was the legal obligation of Landlord prior to the
date of this Lease; or (b) if the obligation relates to Hazardous Materials not
introduced into the Premises prior to the date of this Lease by Tenant or
Tenant's employees,
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contractors, agents, or invitees; or (c) if the necessity to comply with such
Laws is triggered by items of deferred maintenance to be performed by Landlord
under the term of this Lease.
23. Hazardous Materials. (a) Tenant agrees (subject to the provisions
of subparagraph (b) below) not to cause or permit the presence, use,
generation, release, discharge, storage, disposal, or transportation of any
Hazardous Materials on, under, in, above, to, or from the Premises. For the
purposes of this Lease the term "Hazardous Materials" shall refer to any
substances, materials, and wastes that are or become regulated as hazardous or
toxic substances under any applicable local, state, or federal law, regulation,
or order. Tenant shall indemnify, defend, and hold Landlord harmless from and
reimburse Landlord for any breach of the foregoing obligations and all of the
following which may result from such a breach, (i) any loss, cost, expense,
claim, or liability arising out of any investigation, reporting, monitoring,
clean-up, containment, removal, storage, or restoration work ("Remedial Work")
required by any applicable federal, state, or local law, governmental agency,
or political subdivision or prudent standards of real estate ownership and
management, and (ii) any claims of third parties for loss, injury, expense, or
damage arising out of the presence, release, or discharge of any Hazardous
Materials on, under, in, above, to, or from the Premises during the term of
this Lease. In the event any Remedial Work is so required under any applicable
federal, state, or local law during the term of this Lease, Tenant shall
perform or cause to be performed the Remedial Work in compliance with such law,
regulation, or order. All Remedial Work shall be performed by one or more
contractors selected by Tenant and approved in advance in writing by Landlord
and under the supervision of a consulting engineer designated by Landlord. In
the event Tenant shall fail to commence the Remedial Work in timely fashion or
fail to prosecute diligently the Remedial Work to completion, Landlord may, but
shall not be required to, cause the Remedial Work to be performed, subject
fully to the indemnification provisions of this Lease. Tenant shall deliver to
Landlord copies of all notices, licenses, permits, studies, plans, and reports
received from or submitted to governmental authorities relating to the storage,
use, release, or transport of Hazardous Materials on the Premises. Landlord,
however, shall have no responsibility whatsoever for the review or content of
such materials and shall not assume any duty or obligation based upon receipt
of such materials. Upon closure of any Hazardous Materials storage facility
located on the Premises, whether during the term or upon the expiration or
earlier termination of this Lease, Tenant shall conduct all Remedial Work and
secure all permits and approvals relating to such events required by law.
Tenant specifically acknowledges that Landlord, in addition to all other
remedies available at law or in equity, may apply and retain Tenant's security
deposit, if any (and the proceeds of any and all other forms of security
provided by or for Tenant), or any portion thereof necessary to reimburse
Landlord for all costs and expenses
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incurred in connection with any Remedial Work conducted prior to, at or
following Tenant's vacation of the Premises.
(b) Tenant represents to Landlord that the substances set forth on the
attached Exhibit C are required for Tenant's use and operation of the Premises.
Landlord hereby consents to the presence, use, storage and transportation of
said substances to and from the Premises upon condition that such presence,
use, storage and transportation is in strict compliance with all applicable
federal, state and local laws, rules, regulations and orders and with the
understanding that all of the provisions of subparagraph (a) above (except the
prohibition against presence, use, storage and transportation) shall be
applicable with respect to such substances.
(c) Landlord represents that it has received no notices as of the date
of this Lease of any violation or claimed violation of any Laws regulating the
use, storage, generation, disposal or transportation of any Hazardous Materials
on, under, in, above, to or from the Premises.
(d) The representations and agreements contained in this paragraph 23
shall survive the expiration or earlier termination of this Lease.
24.1 Alterations. Except for non-structural alterations costing
less than $25,000 for any one alteration or in the aggregate, Tenant shall not
alter the Premises without the prior written consent of Landlord, which consent
shall not be unreasonably withheld or delayed and which consent may be granted
based upon, but not limited to, Tenant's removal of alterations and the
restoration of the Premises to their original condition, at the expiration or
sooner termination of this Lease, all at Tenant's expense. At the time Landlord
consents to such alterations, Landlord shall advise Tenant as to whether such
alterations shall be removed at the expiration or sooner termination of this
Lease.
24.2 All work done by or for Tenant in or about the Premises including
any alterations (hereinafter called the "Work") shall be done in all cases
subject to the following conditions, each of which Tenant covenants to observe
and perform:
24.3 No Work involving any structural change and no Work involving any
alteration, restoration, or rebuilding costing more than $25,000 shall be
undertaken until detailed plans and specifications have first been submitted to
and approved in writing by Landlord.
24.5 No Work involving a cost, as reasonably estimated by Tenant,
of more than $25,000 shall be undertaken except under the supervision of an
architect or engineer approved in writing by
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Landlord (unless such requirement is waived by Landlord in writing), which
approval shall not be unreasonably withheld.
24.5 All construction done by Tenant shall be done in accordance with
all laws and regulations and in a good and workmanlike manner using material of
good quality. Tenant shall not commence construction of any Work until (i)
Landlord has approved the plans and specifications for such improvements, (ii)
all required governmental approvals and permits shall have been obtained, (iii)
all requirements regarding insurance imposed by this Lease have been satisfied,
(iv) Tenant has given Landlord at least ten (10) business days prior written
notice of its intention to commence such construction, (v) Tenant has notified
Landlord of the commencement of construction on the day it commences, and (vi)
if requested by Landlord, Tenant shall have obtained a lien and completion bond
reasonably satisfactory to Landlord and contingent liability and broad form
builders risk insurance in an amount satisfactory to Landlord. Landlord shall
have the right at anytime to post notices of non-responsibility or similar
notices on the Premises in connection therewith. Upon completion of
construction of Work, Tenant shall submit "as-built" plans to Landlord. All
Work shall immediately become the property of Landlord and, at the end of the
term hereof, shall remain on the Premises, without compensation to Tenant.
25. Property of Landlord. All repairs, improvements, changes,
alterations, equipment, and machinery (other than Trade Fixtures) made or
installed by Tenant shall immediately upon completion or installation thereof
be and become the property of Landlord without payment therefor by Landlord.
Tenant will deliver to and have approved by Landlord, before commencing any
alterations, no matter the cost of such alterations, a separate plan depicting
all Tenant's Trade Fixtures, if any, which Tenant contends are a part of or
associated with such alterations.
26.1 Landlord's Duty to Restore: If the Premises or Building is damaged
by any peril, or by any risk covered by insurance, Landlord shall restore the
Premises unless the Lease is terminated by Landlord pursuant to paragraph 26.2
or by Tenant pursuant to paragraph 26.3. All insurance proceeds available from
the fire and property damage insurance required to be carried pursuant to
paragraph 12 shall be paid to and become the property of Landlord and Tenant
shall reimburse Landlord for the amount of the deductible thereunder. If this
Lease is terminated pursuant to either paragraph 26.2 or 26.3, then all
insurance proceeds available from insurance carried by Tenant which covers loss
to property that is Landlord's property or would become Landlord's property on
the termination of this Lease shall be paid to and become the property of
Landlord. If this Lease is not so terminated, then upon receipt of the
insurance proceeds (if the loss is covered by insurance) and the issuance of
all necessary governmental permits, (which Landlord shall use best efforts to
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obtain with all due diligence) Landlord shall promptly commence and diligently
prosecute to completion the restoration of the Premises, to the extent then
allowed by law, to substantially the same condition in which the Premises were
immediately prior to such damage. Landlord's obligation to restore shall be
limited to the structural portion of the Premises and interior improvements
constructed by Landlord as they existed as of the Commencement Date, and any
Tenant Improvements (defined in Exhibit B attached hereto), but not Trade
Fixtures and/or personal property constructed or installed by Tenant in the
Premises.
26.2 Landlord's Right to Terminate: Landlord shall have the option to
terminate this Lease in the event any of the following occurs, which option may
be exercised only by delivery to Tenant of a written notice of election to
terminate within forty-five (45) days after the date of such damage:
26.2.1 The Premises or the Building is damaged by any peril and such
damage is fully covered (other than any policy deductible amount) by available
insurance proceeds, to such an extent that the estimated cost to restore such
damage exceeds fifty percent (50%) of the then actual replacement costs of the
Building.
26.2.2 The Building or the Premises is damaged by any peril and such
damage is not fully covered by available insurance proceeds, to such an extent
that the estimated cost to restore such damage exceeds ten percent (10%) of the
then actual replacement cost thereof; provided, however, that Tenant can elect
to pay for the restoration and, in that event, Landlord's option is nullified.
26.3 Tenant's Right to Terminate:
26.3.1 If the Premises or any portion of the Building is damaged by any
peril and Landlord does not elect to terminate this Lease pursuant to paragraph
26.2, then within forty-five (45) days of the date of damage (except as
otherwise provided in subparagraph 26.3.1(a) below), Landlord shall furnish
Tenant with the written opinion of Landlord's architect or construction
consultant as to when the restoration work required of Landlord may be completed
with all due diligence. Tenant shall have the following option to terminate this
Lease either in whole or in part in the event any of the following occurs, which
option may be exercised only by delivery to Landlord of a written notice of
election to terminate within seven (7) days after Tenant receives from Landlord
the estimate of the time needed to complete such restoration:
a. Tenant may terminate this Lease if the damage is caused by any
peril and Landlord is unable to obtain within one (1) year following the date of
the damage an adjustment of insurance claims and a building permit and all other
governmental approvals necessary to repair the damage and in the reasonable
opinion of Landlord's architect or construction consultant the
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restoration of the Premises cannot be completed within one hundred eighty (180)
days after such adjustment, permits and other governmental approvals have been
completed; or
b. Tenant may terminate this Lease if (a) the Premises or any
portion of the Building necessary to Tenant's occupancy of the Premises is
damaged by any peril during the last fifteen (15) months of the Lease term and
such damage affects more than fifty percent (50%) of the rentable area within
the Premises that would be affected by Tenant's exercise of its option to
terminate, and (b) such damage cannot be substantially restored within ninety
(90) days following the date of such damage.
26.4 Abatement of Rent: In the event of damage to the Premises which
does not result in the termination of this Lease, and provided that such damage
was not caused by the negligence of Tenant, its employees, agents, or
contractors, the Basic Rent shall be temporarily abated from the date of damage
and during the period of restoration in proportion to the degree to which
Tenant's use of the Premises is impaired by such damage, provided however, the
amount of rent abated shall not exceed the amount of rent loss insurance paid
to Landlord. Tenant shall not be entitled to any compensation from Landlord for
loss of Tenant's property or to Tenant's business caused by such damage or
restoration. Tenant hereby waives the provisions of Section 1932, Subdivision
2, and Section 1933, Subdivision 4, of the California Civil Code, and the
provisions of any similar law hereinafter enacted.
27. Damage Near End of Term. If the Premises are damaged or destroyed,
either partially or totally, during the last 12 months of the term of this
Lease, Landlord may at its option cancel and terminate this Lease as of the date
of occurrence of such damage by giving written notice to tenant of Landlord's
election to do so within 30 days after the date of occurrence of such damage or
destruction, in which event Landlord shall make a proportionate refund to Tenant
of such rent as may have been paid in advance.
28. Waiver. Tenant hereby waives California Civil Code Sections 1932,
1933, 1941 and 1942, and the provisions of any other law now or hereafter in
effect that would relieve Tenant from any obligation to pay rent under this
Lease except to the extent expressly provided in this Lease.
29. Condemnation. If the Premises or any portion thereof are
permanently taken under the power of eminent domain, or sold under the threat
of the exercise of such power (all of which are hereinafter referred to as
"Condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever occurs
first. If more than 50% of the floor area of the Building is taken by
condemnation or more than 50% of the land which is part of the Premises
(exclusive of the land under the Building) is taken by
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<PAGE> 18
Condemnation, then Landlord may, at its option, terminate this Lease and
provided Tenant is not in default under this Lease, Tenant may also, at its
option, terminate this Lease. Such options shall be exercisable only by written
notice given to the other party within ten (10) days after Landlord shall have
given Tenant Written notice of such taking (or, in the absence of such notice,
then on the day the condemning authority shall have taken possession). Such
termination shall be effective on the date the condemning authority takes
possession. If this Lease is not terminated in accordance with the foregoing,
this Lease shall remain in full force and effect as to the portion of the
Premises remaining, except that the rent shall be equitably apportioned between
the Building and the land which is part of the Premises (exclusive of the land
under the Building) and then reduced (a) if a portion of the Building is taken,
in the proportion that the floor area of the portion of the Building taken bears
to the total floor area of the Building or (b) if a portion of such land is
taken, in the proportion that the number of parking spaces eliminated by such
taking bears to the number of parking spaces on such land prior to such taking.
30. Condemnation Award. In the event any portion of the Premises is
taken by Condemnation, Landlord shall be entitled to and shall receive the
total award made in such Condemnation, which award Tenant hereby assigns to
Landlord, except that Tenant shall be entitled to receive such portion of the
award as may be specifically allocated in such proceedings according to
California law.
31. Restoration. If less than the entire Premises shall be taken by
Condemnation, and this Lease is not terminated pursuant to paragraph 29, with
the net amount of any award received by Landlord in any proceeding for physical
damage to the Building after deducting all of Landlord's costs and expenses of
collection, including without limitation attorneys' fees, Landlord shall
promptly restore that portion of the Building not so taken to a complete
architectural unit.
32. Landlord's Option to Terminate. If, during the last year of the
term of this Lease, as the same may be extended, a portion of the Building is
taken by Condemnation, Landlord shall have the option of (a) restoring the
Building to a complete architectural unit in accordance with paragraph 31, or
(b) terminating this Lease as of the date the condemning authority takes title
or possession, whichever first occurs, by written notice to Tenant given within
thirty (30) days after such vesting of title or taking of possession, in which
event Landlord shall make a proportionate refund to Tenant of such rent as may
have been paid in advance.
33. Mechanic's Liens. Tenant shall not suffer or permit any mechanics'
or other liens (or claims thereof) to be filed against the Premises or Tenant's
leasehold interest therein or hereunder by
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<PAGE> 19
reason of work, labor,services, or materials supplied or claimed to have been
supplied to Tenant or anyone holding the Premises or any part thereof through or
under Tenant. Landlord shall have the right at all reasonable times to post and
keep posted on the Premises any notices that Landlord may deem necessary or
advisable for the protection of Landlord and the Premises from mechanics' liens.
If any such liens (or claims thereof) shall at any time be filed against the
Premises, Tenant shall cause the same to be discharged of record within
forty-five (45) days after the date of filing.
34. Financial Statements. Upon the request of Landlord, but not more
frequently than once each calendar quarter, Tenant shall provide to Landlord
from time to time, at no expense to Landlord, copies of such unaudited
financial statements with respect to Tenant as may have been prepared by or for
Tenant. Upon the request of Landlord, Tenant shall also furnish to Landlord,
copies of Tenant's 10-K, 10-Q and annual report SEC filings and financial
statements on a quarterly or annual basis.
35. Landlord's Entry. Tenant agrees to permit Landlord and any
authorized representatives of Landlord to enter the Premises with reasonable
frequency and upon twenty-four (24) hours prior notice during usual business
hours, and without prior notice in case of emergency, (a) to inspect the
Premises and, if Landlord so desires, but without implying any obligation of
Landlord to do so, to make any repairs reasonably deemed necessary or desirable
by Landlord and to perform any work in the Premises deemed necessary by
Landlord to comply with any Laws or the recommendations of any insurer, and (b)
during the final twelve (12) months of the term of this Lease, as the same may
be extended, for the purpose of leasing the Premises, during which twelve (12)
month period Landlord may display on the Premises, in such manner as not to
interfere unreasonably with Tenant's business, usual "For Sale" or "To Let"
signs; provided, however, such signs shall not exceed 3' x 5' for the first six
(6) months and 4' x 8' for the last six (6) months of such twelve (12) month
period.
36. Assignment and Subletting.
(a) Tenant shall not (i) mortgage or otherwise encumber all or any
of its interest in this Lease or the Premises, or (ii) permit the use of the
Premises by any party other than Tenant. Tenant shall not assign this Lease or
sublet the Premises or any part thereof without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed. This
Lease shall not, nor shall any interest herein, be assignable as to the
interest of Tenant by operation of law.
(b) If the Tenant is a privately held corporation, or is an
unincorporated association or partnership, the transfer (except pursuant to a
public offering), assignment, or hypothecation of
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<PAGE> 20
any stock or interest in such corporation, association, or partnership in excess
of fifty percent (50%) in the aggregate shall be deemed an assignment or
transfer within the meaning and provisions of this paragraph. If Tenant is a
publicly held corporation, the public offering or trading of stock in Tenant
shall not be deemed an assignment or transfer within the meaning of this
paragraph.
(c) Notwithstanding the provisions of subparagraphs (a) and (b) above,
Tenant may assign this Lease or sublet the Premises or any portion thereof, with
prior notice to Landlord but without the necessity of Landlord's consent, to any
corporation which controls, is controlled by or is under common control with
Tenant, or to any corporation resulting from the merger or consolidation with
Tenant.
(d) The acceptance of rent by Landlord from any other person shall not
be deemed to be a waiver by Landlord of any provision of this paragraph 36.
37. Subordination. At Landlord's option, this Lease shall be
subordinate to any ground lease, mortgage, deed of trust, or any other
hypothecation or security now or hereafter placed upon the Premises and to any
and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements, and extensions thereof provided
that Landlord shall deliver to Tenant a Subordination, Non-Disturbance and
Attornment Agreement in the form attached hereto as Exhibit D (the "SNDA")
executed by the holder of any mortgage covering the Premises ("holder"). Tenant
shall be entitled to rely upon any notice requesting that Tenant make all
future rent payments to a holder and Tenant shall not be liable to Landlord for
any payment made to a holder in accordance with such notice provided Landlord
receives a copy of such notice. Notwithstanding such subordination, Tenant's
right to a quiet possession of the Premises shall not be disturbed if Tenant is
not in default and so long as Tenant shall pay the rent and observe and perform
all of the provisions of this Lease, unless this Lease is otherwise terminated
pursuant to its terms. If any mortgagee, trustee, or ground lessor shall elect
to have his Lease prior to the lien of its mortgage, deed of trust, or ground
lease, and shall give written notice thereof to Tenant, this Lease shall be
deemed prior to such mortgage, deed of trust, or ground lease, whether this
Lease is dated prior or subsequent to the date of such mortgage, deed of trust,
or ground lease or the date of the recording thereof.
38. Attornment. In the event any proceedings are brought for the
foreclosure of, or in the event of exercise of the power of sale under, any
mortgage or deed of trust now or hereafter on the Premises or any part thereof,
Tenant shall, if so requested by the purchaser upon such foreclosure or sale
or the grantee under a deed in lieu of foreclosure, attorn to such purchaser or
grantee and
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<PAGE> 21
recognize such purchaser or grantee as the Landlord under this Lease.
39. Indemnification. Tenant agrees to indemnify, defend, and save
Landlord harmless from and to reimburse Landlord for any and all claims arising
from (a) the conduct or management of, or any work or thing whatsoever done in
or about, the Premises during the term of this Lease including the Tenant
Improvements, Tenant's Work (defined in paragraph 7 of Exhibit B attached
hereto) and all Alterations, (b) any condition existing during the term of this
Lease of (i) the Premises, (ii) any street, curb, or sidewalk adjoining the
Premises, or (iii) any vaults, passageways, or spaces therein or appurtenant
thereto, (c) any breach or default on the part of Tenant in the performance of
any covenant or agreement on the part of Tenant to be performed pursuant to the
terms of this Lease, (d) any act or negligence of Tenant or any of its agents,
contractors, servants, employees, or licensees (e) any accident, injury, or
damage whatsoever caused to any person, firm, or corporation occurring during
the term of this Lease in or about the Premises or upon or under the sidewalks
or the land adjacent thereto, and (f) any and all costs, counsel fees, expenses,
and liabilities incurred in connection with the such claim or action or
proceeding brought thereon, except to the extent that any of the above-described
claims arise out of the negligence or willful misconduct of Landlord. In case
any action or proceeding be brought against Landlord by reason of any such
claim, Tenant, upon notice from Landlord, covenants to resist or defend such
action or proceeding by counsel satisfactory to Landlord. The obligations of
Tenant under this paragraph shall survive the expiration or earlier termination
of this Lease.
40. Attorneys' Fees. If as a result of any breach or default in the
performance of any of the provisions of this Lease, or in order to enforce
either party's rights hereunder, either party uses the services of any attorney
for the purpose of (a) securing compliance with this Lease or recovering
damages for any breach hereof, (b) exercising either party's rights hereunder,
or (c) terminating this Lease or, in Landlord's case, evicting Tenant, the
non-breaching or non-defaulting party shall reimburse the enforcing party upon
demand for any and all attorneys' fees and expenses so incurred. If either
party brings an action or proceeding to enforce, interpret, protect or
establish any right or remedy pursuant to this Lease, the prevailing party
shall be entitled to recover all costs and reasonable attorneys' fees as the
Court may allow.
41. No Representations. Tenant is fully familiar with the physical
condition of the Premises and every part thereof and accepts the same in its
"as is" condition. Landlord has made no representations of any nature
whatsoever in connection with the condition of the Premises or any part
thereof, and Landlord shall not be liable for any latent or patent defects
therein, except as
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<PAGE> 22
herein expressly provided. Notwithstanding the foregoing and subject to any
alterations or modifications of the Premises as shown on the Final Plans as
defined in Exhibit 3, Landlord represents that the following items shall be in
good condition and working order upon the Commencement Date: existing heating,
ventilation and air conditioning system for the Building, existing lighting
fixtures in the Building, existing bulbs and ballasts in the lighting fixtures
in the Building, existing overhead roll-up doors, existing structural elements
of the Building and the existing roof membrane. Landlord shall not be
responsible for repairing or replacing any of the foregoing items damaged by
Tenant's construction of the Tenant Improvements or after Tenant's occupancy of
the Premises or in the event such items are subject to any alteration or
modification as shown on the Final Plans. The foregoing represents the sole
obligation of Landlord regarding delivery of the Premises, all other
improvements shall be paid from the Total Tenant Improvement Allowance or
directly by Tenant.
42. Events Of Default. The following events shall be deemed to be
events of default by Tenant under this Lease:
(a) Failure of Tenant to occupy the Premises upon substantial
completion of the Tenant Improvements and also failure to pay rent as it
becomes due.
(b) The failure of Tenant to pay any installments of Basic Rent or
additional rent when due, or any other payment or reimbursement to Landlord
required herein when due.
(c) (i) The application by Tenant for consent to the appointment of
a receiver, trustee, or liquidator of Tenant or of all or a substantial part of
Tenant's assets, (ii) Tenant's insolvency or admission in writing of its
inability to pay its debts as they come due, (iii) the making by Tenant of any
general arrangement or assignment for the benefit of creditors, (iv) Tenant
becomes a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute
thereto (unless, in the case of a petition filed against Tenant, the same is
dismissed within 60 days), (v) the appointment of a trustee or receiver to take
possession of all or substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease (unless possession is restored
to Tenant within 30 days), (vi) the attachment, execution, or other judicial
seizure of all or substantially all of Tenant's assets located at the Premises
or of Tenant's interest in this Lease (unless such seizure is discharged within
30 days), or (vii) any transfer of Tenant's assets in fraud of its creditors.
(d) Tenant shall fail to comply with any other term, provision, or
covenant of this Lease, where such failure shall continue for a period of ten
(10) days after written notice thereof to Tenant, provided, however, that if
such failure cannot reasonably be cured within ten (10) days, Tenant shall not
be
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<PAGE> 23
deemed in default with respect to such failure if Tenant commences to cure such
default within said ten (10) day period and thereafter diligently and
continuously prosecutes such cure to a prompt completion. In the event Landlord
serves Tenant with a "Notice to Perform or Quit" pursuant to applicable
unlawful detainer statutes, such notice shall also constitute the notice
required by this subsection, provided that such notice gives Tenant at least
three (3) days in which to perform or quit.
43. Landlord's Default. In the event that (i) Landlord, for any
reason, other than by reason of any default by Tenant, fails to fulfill any
covenant or provision of this Lease on its part to be performed, and (ii) such
failure materially and adversely interferes with the conduct of Tenant's
business within the Premises, as reasonably determined by Tenant; and (iii)
Landlord fails to commence remediation of such failure within five (5) business
days after Landlord receives actual notice of such failure or, in the event
such failure cannot be cured within such five (5) business day period, or fails
to diligently pursue such remediation, then Tenant shall have the right, but
not the obligation, to remedy Landlord's failure and charge Landlord for the
reasonable cost of such remedy, which charges shall be payable by Landlord
within ten (10) business days of Tenant's demand therefor.
44. Landlord's Remedies. Upon the occurrence of any event of
default by Tenant, Landlord may, at its option and without any further notice
or demand (in addition to any other rights and remedies under this Lease, at
law or in equity) do any of the following:
(a) Landlord shall have the right, so long as such default
continues, to give notice of termination to Tenant. On the date specified in
such notice (which shall not be less than three (3) days after the giving of
such notice) this Lease shall terminate.
(b) In the event of any such termination of this Lease, Landlord
may then or at any time thereafter re-enter the Premises and remove therefrom
all persons and property and again repossess and enjoy the Premises, without
prejudice to any other remedies that Landlord may have by reason of Tenant's
default or of such termination.
(c) The amount of damages that Landlord may recover in the event of
such termination shall include, without limitation: (1) the amount at the time
of award (computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent) of
(A) unpaid rent earned at the time of termination, (B) the amount by which the
unpaid rent that would have been earned during the period from termination
until the award exceeds the amount of such rent loss that Tenant proves could
have been reasonably avoided, and (C) the amount by which the unpaid rent for
the balance of the term after
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<PAGE> 24
the time of award exceeds the amount of such rent loss that Tenant proves could
be reasonably avoided; (2) all reasonable legal expenses and other related
costs incurred by Landlord following Tenant's default; (3) all reasonable costs
incurred by Landlord in restoring the Premises to good order and condition; (4)
all other costs (including without limitation any brokerage commissions) for
the remaining term of this Lease, as the same may be extended, incurred by
Landlord in reletting the Premises; and (5) all actual costs expended by
Landlord to accomplish any remodeling, renovation, or otherwise preparing the
Premises for reletting other than (3) above not to exceed the then remaining
unamortized portion of the Total Tenant Improvement Allowance at eight percent
(8%) per annum.
(d) Following the termination of this Lease (or upon Tenant's failure
to remove its personal property from the Premises after the expiration of the
term of this Lease), Landlord may remove any and all personal property located
in the Premises and place such property in a public or private warehouse or
elsewhere at the sole cost and expense of Tenant; such warehousing shall have
all rights and remedies provided by law against Tenant as the owner of such
property. In addition, in the event that Tenant shall not immediately pay the
cost of storage of such property after the same has been stored for a period
of thirty (30) days or more, Landlord may sell any or all thereof at a public
or private sale in such manner and at such times and places as Landlord in its
sole discretion may deem proper, without notice to or demand upon Tenant.
Tenant waives all claims for damages that may be caused by Landlord's removing,
storing, or selling the property as herein provided, and Tenant shall indemnify
and hold Landlord free and harmless from and reimburse Landlord for any and all
losses, costs, and damages, including without limitation all costs of court and
attorney's fees.
(e) Landlord shall have the right to cause a receiver to be appointed
in any action against Tenant to take possession of the Premises and to collect
the rents or profits derived therefrom. The appointment of such receiver shall
not constitute an election on the part of Landlord to terminate this Lease
unless notice of such intention is given to Tenant.
(f) Landlord shall have the remedy described in California Civil Code
Section 1951.4, as amended. Even though Tenant has breached this Lease and
abandoned the Premises, this Lease shall continue in effect for so long as
Landlord does not terminate Tenant's right to possession, and Landlord may
enforce all its rights and remedies under this Lease, including the right to
recover rent in periodic actions as it becomes due under this Lease. In such
event, Landlord may re-enter the Premises and remove all persons and property
if the Premises have not been vacated, using any available summary proceedings,
without such re-entry or removal being deemed a termination or acceptance of
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<PAGE> 25
surrender of this Lease. Landlord may then elect to relet the Premises for the
account of Tenant for a period that may extend beyond the term hereof, and upon
such other terms as Landlord may reasonably deem appropriate. Tenant shall
reimburse Landlord upon demand for all costs incurred by Landlord enumerated in
subparagraph (c) and (d) above. The proceeds of such reletting shall be applied
first to any sums then due and payable to Landlord from Tenant, including the
reimbursement described above. The balance, if any, shall be applied to the
payment of future rent as it becomes due hereunder.
45. Cumulative Remedies. The specified remedies to which Landlord may
resort under the terms of this Lease are cumulative and are not intended to be
exclusive of any other remedies or means of redress to which Landlord may be
entitled, either at law or in equity, in case of any breach or threatened
breach by Tenant of any covenant, agreement, or condition of this Lease.
46. No Waivers. The failure of either party to insist in any one or
more instances upon the strict performance or observance of any of the
covenants, agreements, or conditions of this Lease or to exercise any option
herein contained shall not be construed as a waiver or a relinquishment of
future performance or observance of such covenant, agreement, or condition or
exercise of such option.
47. Application of Tenant Deposits. In the event of any default by
Tenant under this Lease, Landlord may, at its option, apply on account of such
default any monies (and the proceeds of any and all other security) deposited
by or for the account of Tenant under any provision of this Lease.
48. Holding Over. Tenant covenants that it will vacate the Premises
immediately upon the expiration or sooner termination of this Lease. If, with
Landlord's consent, Tenant retains possession of the premises or any part
thereof after the expiration or termination hereof, (a) Tenant shall pay
Landlord monthly rent at one hundred twenty-five percent (125%) of the then
applicable monthly rate specified in paragraph 3 for the time Tenant thus
remains in possession, and (b) such holding over shall be as a month-to-month
tenancy only. The provisions of this paragraph do not exclude Landlord's rights
of re-entry or any other right hereunder, including without limitation the right
to refuse one hundred twenty-five percent (125%) of the aforesaid monthly rent
and instead to remove Tenant through summary proceedings for holding over beyond
the expiration of the term of this Lease.
49. Notices. All notices, demands, and requests that may or are
required to be given by either party to the other shall be in writing and shall
be deemed given when sent by United States Certified Mail, postage prepaid,
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<PAGE> 26
(a) If to Tenant:
addressed to LSI Logic Corporation
1551 McCarthy Boulevard
Milpitas, CA 95035
Attn: General Counsel
(b) If to Landlord:
addressed to Oak Creek Delaware, Inc.
255 Shoreline Drive, Suite 600
Redwood City, California 94065
Any addresses may be changed from time to time by written notice to the
other party.
50. Limitation of Landlord's Liability. In the event of a sale or
transfer by Landlord of its interest in this Lease or its interest in the
Premises (which sale or transfer shall be subject to this Lease), such sale or
transfer shall operate to release the transferor from all liability for the
performance of the obligations of Landlord hereunder, expressed or implied,
from and after the date of such sale or transfer, and Tenant agrees thereafter
to look solely to the successor in interest of Landlord in and to this Lease
for the performance thereafter of Landlord's obligations hereunder. Landlord
shall transfer to its successor in interest any security deposit (and all other
forms of security) given by or for Tenant to Landlord and thereupon Landlord
shall be discharged from any further liability with respect thereto.
51. Estoppel Certificates. At any time and from time to time upon
not less than ten (10) business days' prior request by Landlord, Tenant agrees
to execute, acknowledge, and deliver to Landlord a statement in writing
certifying (a) that this Lease is unmodified and in full force and effect (or
if there have been modifications, that the same is in full force and effect as
modified and identifying the modifications), (b) the dates to which Basic Rent,
additional rent, and other charges have been paid, and (c) whether there is
then existing any claim by Tenant of default hereunder by Landlord and, if so,
specifying the nature thereof. It is intended that any such statement may be
relied upon by any person proposing to acquire Landlord's interest in this
Lease or any prospective mortgagee of, or assignee of any mortgage upon, such
interest. If Tenant fails to deliver the estoppel certificate within the ten
(10) business day period, Landlord shall have the right to execute and deliver
the certificate to any third party on behalf of Tenant.
52. Brokerage. Tenant represents and warrants that it has dealt
with no broker, agent, or other person in connection with this transaction
other than Julien J. Studley, Inc. and Colliers Parrish International, Inc.
and Tenant agrees to indemnify and hold
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<PAGE> 27
Landlord harmless from and to reimburse Landlord for any and all claims by any
other broker, agent, or person claiming a commission or other form of
compensation by virtue of having dealt with Tenant with respect to this leasing
transaction. The provisions of this paragraph shall survive the termination of
this Lease.
53. Signage. Tenant shall not place or permit on the exterior or roof
of the Building or on the balance of the real property constituting the
Premises, any sign, advertisement, illumination, projection, or similar thing
("Signs"), unless (a) Landlord has given its prior written consent thereto as
to the type, size and placement of such signs, which shall not be unreasonably
withheld or delayed, and (b) such Signs comply in all respects with the
restrictions set forth in all laws, covenants, conditions, and restrictions
applicable to the Premises.
54. Miscellaneous. This Lease cannot be changed orally, but only by
agreement in writing signed by the party against whom, or against whose
successors and assigns, enforcement of the change is sought. The voluntary or
other surrender of this Lease by Tenant, or a mutual cancellation thereof,
shall not work a merger as to any existing subtenancies and shall, at the
option of Landlord, terminate any and all such existing subtenancies or, at
Landlord's option, operate as an assignment to it of any and all such
subtenancies. The words "Landlord" and "Tenant" as used herein shall include
the plural as well as the singular. If there is more than one tenant, the
obligations hereunder imposed upon the Tenant shall be joint and several. All
of the covenants of Tenant hereunder shall be deemed and construed to be
"conditions" as well as "covenants" as though the words specifically expressing
or importing covenants and conditions were used in each separate instance. This
Lease shall be construed and enforced in accordance with the laws of the State
in which the Premises are situated. The term "Default Interest Rate" shall mean
an annual rate equal to 2% over the annual prime rate of interest announced
publicly by Bank of America, in San Francisco, California from time to time or
the maximum interest rate permitted by law, whichever is less. Any amount due
from Tenant, if not paid when first due, shall bear interest at the Default
Interest Rate from the date due until paid. Landlord may, from time to time,
reasonably estimate the amount of any Impositions and the premium for any
insurance to be provided by Landlord pursuant to this Lease whereupon Tenant
shall pay to Landlord each month in advance an amount equal to one-twelfth of
such estimate and, upon determination of the actual amount of the Impositions
and premium, appropriate adjustments will be made to the next month(s) Basic
Rent to reflect any over or under payment thereof. If any covenant, agreement,
or condition of this Lease or the application thereof to any person, firm,
corporation, or circumstance is or becomes to any extent invalid or
unenforceable, the remainder of this Lease, or the application of such
covenant, agreement, or condition to persons, firms, corporations, or
circumstances other than those as to which it is invalid or
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<PAGE> 28
unenforceable, shall not be affected thereby, and in lieu of each clause or
provision of this Lease that is illegal, invalid, or unenforceable, there shall
be added as a part of this Lease a clause or provision as similar in terms to
such clause or provision as is possible and as may be legal, valid, and
enforceable. Landlord's acceptance of a partial rent payment shall not
constitute a waiver of any rights of Tenant or Landlord, including, without
limitation, any right Landlord may have to recover possession of the Premises,
in unlawful detainer, or otherwise. The parties agree that the covenants and
agreements herein contained shall bind and inure to the benefit of Landlord and
its successors and assigns, and shall bind and inure to the benefit of Tenant
and its successors and assigns, subject to the provisions of paragraph 36, and
provided that any consent required to any assignment hereof shall be had and
obtained as specified in this Lease. Landlord and Tenant agree that in
fulfilling all terms and conditions of this Lease, time is of the essence.
55. Corporate Authority. If Tenant is a corporation (or a
partnership), each individual executing this Lease on behalf of said
corporation (or partnership) represents and warrants that he or she is duly
authorized to execute and deliver this lease on behalf of said corporation (or
partnership in accordance with the partnership agreement of said partnership)
and that this Lease is binding upon said corporation (or partnership) in
accordance with its terms. If Tenant is a corporation, Tenant shall,
concurrently with execution of this Lease, deliver to Landlord a certificate of
authorization signed by the Secretary of the corporation indicating that the
person executing this Lease on behalf of Tenant has the authority and capacity
to execute this Lease on behalf of Tenant. This Lease is subject to the approval
of Landlord's board of directors.
Exhibits A, B, C, and D attached hereto are hereby made a part of this
Lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the
25th day of August, 1995.
LANDLORD:
Oak Creek Delaware, Inc.
a Delaware corporation
By /s/ [ILLEGIBLE]
------------------------------------
Its
--------------------------------
By /s/ S. Bradford Child
------------------------------------
Its
--------------------------------
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<PAGE> 29
TENANT:
LSI Logic Corporation
a Delaware corporation
By /s/ Vincent A. McCord
------------------------------
Its Vice President, Controller
--------------------------
R1512.RDW
8/25/95
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<PAGE> 30
SUBLEASE AGREEMENT
This Sublease is entered into as of January 8, 1996 by and between LSI
Logic Corporation, a Delaware corporation ("Sublessor") and C-Cube Microsystems,
Inc., a Delaware corporation ("Sublessee"), as a Sublease under that Single
Tenant Net Lease dated as of August 25, 1995 between Oak Creek Delaware, Inc., a
Delaware corporation, ("Landlord"), and Sublessor, as tenant (the "Lease"). A
copy of the Lease is attached hereto as Exhibit A.
1. SUBLEASE
1.1 Sublessor leases to Sublessee and Sublessee leases from Sublessor
real property commonly known as 1855 Barber Lane, Milpitas, California, and more
particularly described in Exhibit A to the Lease, together with the building
thereon (the "Building"), subject, however, to any and all existing
encumbrances, easements, conditions, covenants, and restriction, rights-of-way,
any other matters of record, and such matters as may be disclosed by inspection
or survey. The real property and the Building shall be referred to herein as the
"Premises."
1.2 Sublessee accepts the Premises as being in good and sanitary
order, condition and repair, and accepts the improvements included in the
Premises in their present condition, "as is," and without representation or
warranty by Sublessor as to the condition of the Premises or as to the use or
occupancy which may be made thereof. Upon the expiration or sooner termination
of this Sublease, Sublessee shall surrender the Premises, together with all
Alterations (as defined in Paragraph 24 of the Lease), to Sublessor in the same
condition as when received or installed, ordinary wear and tear excepted, and
clean and free of debris and free of any liens created or suffered to be created
by Sublessee. Sublessee shall not, however, be required to remove any tenant
improvements to the Premises installed or constructed by, on behalf of or for
the benefit of Sublessor, nor shall Sublessor require Sublessee to remove any
tenant improvements to the Premises installed or constructed by Sublessee
pursuant to the Tenant Improvements Agreement except to the extent Landlord
requires the removal of any tenant improvements installed by Sublessee.
2. TERM
2.1 The term of this Sublease shall be for a period of approximately
forty-eight (48) months commencing on the date on which all of the following has
occurred: (i) this Sublease has been fully executed by both Sublessor and
Sublessee, (ii) this Sublease has been consented to in writing by Landlord
("Consent of Landlord to Sublease") and (iii) Sublessor has delivered possession
of the Premises to Sublessee. The term shall end on December 31, 2000, unless
sooner terminated pursuant to any provision hereof.
2.2 Sublessor shall deliver possession of the Premises to Sublessee
when this Sublease and the Consent of Landlord to Sublease have both been fully
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executed (the "Commencement Date"). If the Commencement Date has not occurred
for any reason whatsoever on or before April 1, 1997 then, in addition to
Sublessee's other rights, Sublessee may terminate this Sublease by written
notice to Sublessor, whereupon any monies previously paid by Sublessee to
Sublessor shall be immediately reimbursed to Sublessee.
3. RENT
3.1 Sublessee shall pay to Sublessor as net monthly rent
for the Premises the amounts set forth below, in advance, on the first day of
each month of the term hereof:
<TABLE>
<CAPTION>
Months of Term Monthly Rent
-------------- ------------
<S> <C>
Until February 28, 1997 $0/month
March 1, 1997 - Dec. 31, 1998 $93,725.00/month
Jan. 1, 1999 - Dec. 31, 2000 $101,875.00/month
</TABLE>
Sublessee shall pay Sublessor upon the execution hereof the sum of Ninety-three
Thousand Seven Hundred and Twenty Five Dollars ($93,725.00) as rent in advance
for the first month due. Rent for any period during the term hereof which is
for less than one month shall be prorated. Rent shall be payable in advance on
the 1st day of each month during the term, without notice or demand without any
deduction, offset, or abatement (except to the extent expressly permitted by
this Sublease) in lawful money of the United States of America to Sublessor at
the address stated herein or to such other persons or at such other places as
Sublessor may designate in writing.
3.2 Notwithstanding anything to the contrary in this
Sublease, Sublessee shall not be required to pay any Impositions, maintenance
charges or any other charges, costs or expenses that may be required to be paid
by Sublessee under the terms of this Sublease (except utilities for the
Premises) until rent commencement or March 1, 1997, whichever comes first.
Sublessee recognizes its obligations to pay Sublessee's liability insurance
premiums as required after the Commencement Date.
3.3 Sublessee hereby acknowledges that late payment by
Sublessee to Sublessor of rent and other sums due hereunder will cause
Sublessor to incur costs not contemplated by this Sublease, the exact amount of
which will be difficult to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges which may be imposed on
Sublessor by the terms of the Lease. Accordingly, if any installment of rent or
other sums due from Sublessee is not received by Sublessor within five (5)
business days after its due date, Sublessee shall pay to Sublessor a late
charge equal to five percent (5%) of such overdue amount. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs Sublessor will incur by reason of late payment by Sublessee based upon
the circumstances existing as of the date of this Sublease. Acceptance of such
late charge by Sublessor shall in no event constitute a waiver of Sublessee's
default with respect to such overdue amount, nor prevent Sublessor from
exercising any of its other rights or remedies granted to it by law or
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<PAGE> 32
this Sublease.
Initials: RDN (Sublessor) MKA (Sublessee)
--- ---
4. SECURITY DEPOSIT
4.1 Sublessee shall deposit with Sublessor upon the execution hereof the
sum of One Hundred One Thousand Eight Hundred Seventy-five Dollars ($101,875)
as security for Sublessee's faithful performance of Sublessee's obligations
hereunder. If Sublessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Sublease, Sublessor
may use, apply or retain all or any portion of said deposit for the payment of
any rent or other charge in default or for the payment of any other sum to
which Sublessor may become obligated by reason of Sublessee's default, or to
compensate Sublessor for any loss or damage which Sublessor may suffer thereby.
If Sublessor so uses or applies all or any portion of said deposit, Sublessee
shall within fifteen (15) days after written demand therefor deposit cash with
Sublessor in an amount sufficient to restore said deposit to the full amount
herein above stated and Sublessee's failure to do so shall be a breach of this
Sublease, and Sublessor may at his option terminate this Sublease. Sublessor
shall not be required to keep said deposit separate from its general accounts.
Said deposit or so much thereof as had not theretofore been applied by
Sublessor shall be returned without payment of interest for its use, to
Sublessee within ten (10) days after the expiration of the term hereof (or
earlier termination of the Sublease if Sublessee does not have any remaining
contractual obligations to Sublessor), or after Sublessee has vacated the
Premises, whichever is later.
5. PROVISIONS CONSTITUTING SUBLEASE
5.1 This Sublease is and at all times shall be subject and subordinate
to the Lease. Sublessee shall take no action which would cause Sublessor to be
in default of its obligations under the Lease, and Sublessee shall perform all
of its obligations under this Sublease, and Sublessee shall indemnify and hold
Sublessor harmless from and against all liability, costs, damages, claims,
demands and expenses, including reasonable attorney's fees and costs, arising
out of Sublessee's failure to do so. Sublessor shall fully perform all of its
obligations under the Lease (except to the extent any of the same are the
obligation of Sublessee hereunder) and shall indemnify and hold Sublessee
harmless from and against all liability, costs, damages, claims, demands and
expenses, including reasonable attorneys' fees and costs, arising out of
Sublessor's failure to do so. Upon any termination of the Lease, this Sublease
shall terminate concurrently therewith except as otherwise provided in the
Consent of Landlord to Sublease and without any liability of Sublessor to
Sublessee; provided, however, that a Lease termination due to Sublessor's
default of its obligations under the Lease or this Sublease, shall be subject
to the indemnification set forth above. Sublessor shall not enter into any
amendment or modification of the Lease without the consent of Sublessee, nor
shall Sublessor consent to a termination of the Lease or exercise any option to
terminate the Lease that it may have, or surrender the Lease, without the prior
written consent of Sublessee which will not unreasonably be withheld (and
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<PAGE> 33
except as may be specifically permitted by this Sublease).
5.2 Except for paragraphs 1, 2, 3, 49, and 52 of the Lease; and the
second sentence of paragraph 9 of Exhibit B to the Lease (the "Tenant
Improvement Agreement"); all of the terms and conditions contained in the Lease
in the form attached hereto as Exhibit A are incorporated herein as terms and
conditions of this Sublease. All references in the Lease to the "Lease" or the
"lease" shall be deemed to refer to this Sublease and all references in the
Lease to "Landlord" and "Tenant" shall be deemed to refer to Sublessor and
Sublessee, respectively, except that any reference to "Landlord" in Paragraph
12, 13, 23, 24, 27, 33, 34, 36, 39, 40, and 41 of the Lease shall be deemed to
refer to both Landlord and Sublessor and any reference in Paragraphs 11 (except
that Sublessee's reimbursement of insurance premiums paid by Landlord for the
Premises shall be paid to Sublessor), 16, 20, 25, 26, 29, 30, 31, 32, 35, 37,
and 53 of the Lease shall be deemed to refer to Landlord only; provided,
however, that Sublessor shall use reasonable efforts to enforce the obligations
of Landlord pursuant to Paragraphs 11, 16, 20, 25, 26, 29, 30, 31, and 32 of
the Lease for the benefit of Sublessee. Such efforts shall include the
following: (i) upon Sublessee's written request, promptly notifying Landlord of
any nonperformance under the Lease and requesting that Landlord perform its
obligations thereunder; and (ii) after the time by which Landlord must cure a
breach has expired, cooperating with Sublessee to institute, in the name of
Sublessor, such legal proceedings as may be appropriate, with legal counsel
selected by Sublessee and approved by Sublessor, to enforce the obligations of
Landlord under the Lease (including the execution of such documents as may be
reasonably required by such legal counsel). Sublessor and Sublessee shall be
entitled to jointly control the conduct of the litigation; provided, however,
that in the conduct of any litigation brought against Landlord to enforce its
obligations under the Lease for the benefit of Sublessee, both Sublessor and
Sublessee shall have an obligation to act in a commercially reasonable manner
and with the goal of employing a strategy which is designed to ensure that
Landlord will fully perform its obligations under the Lease, and no action may
be taken which may materially and adversely affect the other party's rights or
obligations under the Lease or Sublease without such other party's consent,
including settlement. All reasonable costs incurred in connection with any
enforcement undertaken by Sublessor at the request of Sublessee shall be paid
by Sublessee. Sublessor agrees, however, that if Sublessor is the prevailing
party in any action instituted against Landlord at Sublessee's request to
enforce the obligations of Landlord under the Lease, and, Sublessor recovers
any attorneys' fees and costs from Landlord in connection therewith, Sublessor
shall apply the amount recovered by Sublessor to any attorneys' fees and costs
incurred by Sublessor in connection with such action (to the extent such fees
and costs have not yet been paid or reimbursed by Sublessee) and, to the extent
that Sublessee has incurred and paid legal fees in connection with such action,
the balance, if any, of the amount recovered by Sublessor shall be paid to
Sublessee.
5.3 Except as otherwise expressly provided in this Sublease, all
references to "Landlord" in paragraphs 2, 4, and 5 and Appendix 1 of the Tenant
Improvements Agreement shall refer to Landlord only.
5.4 The following portions of the incorporated provisions of the Lease
are
<PAGE> 34
hereby expressly deleted or modified as follows:
a. Paragraph 10: the date "September 1, 1995" in the last sentence is hereby
deleted and replaced with ____________________ , 1997.
b. Paragraph 5: the words "light manufacturing with the written consent of
Landlord" shall be inserted after the word "offices" in the second line.
c. Paragraph 26.1: the number "12" in the second sentence is deleted and
replaced with the number "11".
d. The Tenant Improvements Agreement: the date "September 1, 1995" in
paragraph 1 is hereby deleted and replaced with ____________________ , 1997.
6. TENANT IMPROVEMENTS
6.1 Except as expressly provided herein, any tenant improvements to
the Premises shall be constructed by Sublessee in accordance with the terms of
Exhibit 8 to the Lease (the "Tenant Improvement Agreement"). Sublessee shall
submit to Landlord complete, finished drawings and specifications (the "Plans")
for the tenant improvements to be constructed by Sublessee (the "Tenant
Improvements") together with a proposed schedule for completion. The Plans
shall reflect and be in accordance with (i) a space plan approved by Landlord,
and (ii) that certain list of Landlord's Required Specifications attached as
Appendix 1 of the Tenant Improvement Agreement. Sublessee intends to submit a
space plan depicting tenant improvements to the Premises substantially as shown
and/or described on Exhibit B to this Sublease. Notwithstanding anything set
forth herein, provided that Landlord approves the Plans, the Final Plans,
Sublessee's architect, engineers and contractors, Sublessee's insurance and
payment and performance bonds, and Tenant's Work, Sublessee will indemnify
Sublessor and hold Sublessor harmless from and against all liability, costs,
damages, claims, demands and expenses, including reasonable attorney's fees and
costs, arising out of or in any way connected with the immediately preceding
Sublease provision and the Tenant Improvement Agreement. So long as Landlord
approves any disbursements of the Tenant Improvement Allowance, Sublessor shall
deem all conditions to such disbursements to have been satisfied.
6.2 No construction management fee shall be payable to Sublessor, nor
shall any fees be payable to Sublessor's architects, engineers or consultants
in connection with the Tenant Improvements.
6.3 Landlord shall provide Sublessee with an allowance of up to One
Million Four Hundred Sixty Seven Thousand Dollars ($1,467,000.00) to be applied
to the Tenant Improvement Costs (the "Tenant Improvement Allowance"). Sublessee
shall NOT have the right to utilize the Additional Tenant Improvement Allowance
as described in paragraph 9 of the Tenant Improvements Agreement. The Tenant
Improvement Allowance shall be paid to Sublessee as provided in the Tenant
Improvements Agreement. Upon Sublessor's receipt of written notice from
<PAGE> 35
Sublessee that the Tenant Improvements have been completed in accordance with
the requirements of the Tenant Improvements Agreement, Sublessor shall submit to
Landlord a written request that reimbursement of the Tenant Improvement Costs,
up to an amount equal to the Tenant Improvement Allowance, be paid directly to
Sublessee upon Sublessee's satisfaction of the requirements set forth in
paragraph 9 of the Tenant Improvements Agreement (as modified, if applicable,
by the terms of Landlord's consent).
7. BROKERS
7.1 Sublessee warrants and represents that it has had no dealings with
any real estate broker or agent in connection with the negotiation of this
Sublease other than Colliers Parrish International and CPS, The Commercial
Property Services Company, whose commission shall be paid by Sublessor, and
that it knows of no other real estate broker or agent (other than the brokers
described above) who is or might be entitled to a commission in connection with
this Sublease. Sublessee shall indemnify, defend and hold Sublessor harmless
from and against any and all liabilities or expenses, including reasonable
attorneys' fees and costs, arising from any claims made by any broker or
individual (other than the brokers described above) for commissions or fees
who claims to have represented Sublessee in connection with this Sublease.
8. RECOGNITION & ATTORNMENT AGREEMENT
8.1 Sublessor shall use its reasonable best efforts to obtain from
Landlord a recognition and attornment agreement which provides that, if the
Lease is terminated as a result of any default by Sublessor, (a)(i) the
Sublease will not be terminated; (ii) Landlord will recognize all of
Sublessee's right to possession of the Premises pursuant to the terms of this
Sublease; and (iii) Landlord will assume all of Sublessor's obligations under
the Sublease arising on and after the date of the event of default by Sublessor,
and (b) Sublessee will attorn to Landlord and perform all of Sublessee's
obligations under the Sublease directly to Landlord as if Landlord were the
Sublessor under the Sublease.
9. CONSENTS AND APPROVALS
9.1 Whenever the consent or approval of either party is required under
this Sublease, such consent or approval shall not be unreasonably withheld or
delayed.
10. LANDLORD'S CONSENT
10.1 Sublessee acknowledges that this Sublease is subject to the
consent of the Landlord under the Lease. Accordingly, this Sublease shall not
be effective unless and until Landlord's consent has been executed by Landlord.
Sublessor shall use diligent efforts to obtain such consent as soon as
reasonably possible following execution of this Sublease by Sublessor and
Sublessee. Either party shall have the right to terminate this Sublease if
Landlord's consent hereto, in form and content reasonably acceptable to
Sublessor and Sublessee, cannot be obtained within
-6-
<PAGE> 36
fifteen (15) business days after this Sublease has been fully executed.
Sublessor shall have no liability whatsoever to Sublessee, however, if
Sublessor is unable to obtain such consent from Landlord.
11. SUBLESSOR'S OPTION TO EXTEND LEASE
11.1 Sublessor agrees that it will not exercise its option to extend
the Lease past December 31, 2000, pursuant to paragraph 2 of the Lease.
12. NOTICES
12.1 All notices, unless otherwise provided herein, will be in writing
and deemed given on the date the notice is hand delivered, mailed, or
electronically transmitted (with a confirmation or acknowledgement of receipt)
to the receiving party at such party's address. Either party may change its
address upon notice to the other party as set forth herein.
For Sublessor: For Sublessee:
LSI Logic Corporation C-Cube Microsystems, Inc.
M/S D-106, 1551 McCarthy Blvd. 1778 McCarthy Boulevard
Milpitas, CA 95035 Milpitas, CA 95035
Attn: General Counsel Attn: Manager, Corp. Facilities
Telephone: (408) 433-7189 Telephone: (408) 944-8606
Fax: (408) 433-6896 Fax: (408) 944-6762
13. CONFLICT
13.1 If any terms of the Master Lease contradict the terms of this
Sublease, the terms of this Sublease shall control over the Master Lease as
between Sublessor and Sublessee.
14. ASSIGNMENT OF WARRANTIES
14.1 Sublessor hereby assigns to Sublessee all warranties given and
indemnities made by Landlord to Sublessor under the Lease subject to Landlord's
written consent to such assignment. Sublessor shall cooperate with Sublessee to
enforce all warranties and indemnities.
15. ADDITIONAL PROVISIONS
15.1 Without limiting any other right or remedy of Sublessee under this
Sublease, if Landlord seeks to terminate the Lease because of a default or
alleged default by Sublessor, Sublessor shall use its reasonable good faith
efforts to maintain the Lease in full force and effect for the benefit of
Sublessee, and Sublessor shall take reasonable actions required to reinstate the
Lease and/or to claim and pursue any right of redemption or relief from
forfeiture of the Lease (and as a consequence thereof any forfeiture of this
Sublease) to which Sublessor may be entitled at law or in equity.
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<PAGE> 37
15.2 As an inducement to Sublessee to enter this Sublease, to the best
of Sublessor's knowledge, Sublessor represents and warrants with respect to the
Premises that: (a) the Lease is in full force and effect, and there exists
under the Lease no default or event of default by either Landlord or Sublessor,
nor has there occurred any event which, with the giving of notice or passage of
time or both, could constitute such a default or event of default; (b) there
are no pending or threatened actions, suits or proceedings before any court or
administrative agency against Sublessor or Landlord or third parties which
could, in the aggregate, adversely affect the Premises or any part thereof or
the ability of either party to perform its obligations under the Lease, and
Sublessor is not aware of any facts which might result in such actions, suits
or proceedings; (c) there is no pending or threatened condemnation or similar
proceeding affecting the Premises or any portion thereof, and Sublessor has no
knowledge that any such action currently is contemplated; and (d) Sublessor has
not received any notice from any insurance company of any defects or
inadequacies in the Premises or any part thereof which could adversely affect
the insurability of the Premises or the premiums for the insurance thereof.
SUBLESSOR
LSI Logic Corporation,
a Delaware corporation
By: /s/ R. Douglas Norby
-----------------------
Its: EVP & CFO
-----------------------
SUBLESSEE
C-Cube Microsystems, Inc.,
a Delaware corporation
By: [ILLEGIBLE]
-----------------------
Its: V.P.
-----------------------
LSI Logic Legal Department
Date 1-8-96
---------------------
Approved as to form
By /s/ D. Gloom
-----------------------
8
<PAGE> 38
CONSENT OF LANDLORD TO SUBLEASE
Oak Creek Delaware, Inc., a Delaware corporation ("Landlord") executed a lease
("Lease") with LSI Logic Corporation, a Delaware corporation ("Tenant") dated
August 25, 1995 for the premises located at 1855 Barber Lane, Milpitas,
California (the "Premises). Tenant now desires to sublease the Premises to
C-Cube Microsystems, Inc., a Delaware corporation ("Subtenant") and Tenant seeks
to obtain Landlord's consent to the sublease, a copy of which Sublease is
attached hereto ("Sublease") (but not including the copy of the Lease attached
to the executed Sublease), marked Exhibit "A" and by this reference made a part
hereof.
Landlord hereby consents to the execution by the Tenant and Subtenant of the
Sublease upon the following terms, covenants, and conditions to which all
parties, by the execution of this Consent of Landlord to Sublease (this
"Consent"), hereby agree to be bound:
1. Tenant shall remain fully responsible for the performance of all of the
terms, covenants and conditions of the Lease. The parties hereto intend
and agree that the Sublease is subject to and subordinate in all
respects to all provisions of the Lease. Tenant and Subtenant hereby
agree not to modify or amend the Sublease in any manner whatsoever
without the prior written consent of Landlord. Upon the execution by
Tenant and Subtenant of any amendment or modification to the Sublease,
Tenant shall deliver to Landlord a true copy of such amendment or
modification.
2. Nothing in the Sublease shall supersede any of the terms, covenants or
conditions of the Lease. In the event of any conflict between the Lease
and the Sublease, the Lease shall control, and nothing herein shall be
deemed a waiver of any of the terms or conditions of the Lease.
3. Nothing in the Sublease shall in any way whatsoever expand liability or
obligations of the Landlord, whether to Tenant, Subtenant or any other
person or entity. The Tenant and Subtenant hereby expressly disapprove
anything in the Sublease that does so expand the liability or
obligations of the Landlord.
4. Any termination of the Lease for any cause whatever, shall at
Landlord's option, either (a) immediately terminate the Sublease or
(b) operate as an assignment to Landlord of any sublease (including the
Sublease) then existing between Tenant and Subtenant affecting all or
a portion of the Premises. Landlord shall not be liable for any prepaid
rents nor any security deposits paid by Subtenant. Landlord shall not
be subject to any offsets or defenses that the Subtenant might have
against the Tenant, and Landlord shall not be liable for any
concessions or allowances that the Tenant has agreed to grant or give.
Landlord shall not be liable for any other defaults of the Tenant
under the Sublease. Subtenant shall attorn to Landlord upon Landlord's
request.
5. Subtenant shall have no rights against Landlord by reason of this
Consent, and all of Subtenant's rights and liabilities shall derive from
terms of the Sublease. Landlord may in its sole discretion provide
services directly to Subtenant under the terms of the Lease at the
Subtenant's request, and Tenant and Subtenant shall be jointly and
severally liable for the cost of such services on the terms and
conditions set forth in the Lease.
6. This Consent shall not be deemed an expressed or implied affirmation or
representation of any factual statements or recitations contained in the
Sublease, whether relating to the Lease, the Premises or otherwise;
it being understood and agreed that Subtenant is fully responsible for
reviewing and familiarizing itself with all of the terms and
conditions of the Lease and of the condition of the Premises.
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<PAGE> 39
7. The Sublease may not be assigned or amended nor may the Premises be
further subleased without the prior written consent of the Landlord,
which consent shall not be unreasonably withheld. This Consent shall not
constitute a waiver of the provisions of the Lease regarding assignment
and subletting without the prior written consent of the Landlord, and
the Landlord reserves the right to withhold its consent to any further
sublease or assignment in accordance with such provisions.
Notwithstanding the foregoing, it shall be reasonable for Landlord to
deny such consent if the use to be made of the Premises by the proposed
assignee or sublessee (i) is not consistent with paragraph 5 of the
Lease, entitled "Use", or (ii) would materially and adversely affect the
condition or value of the Premises. If approved in writing by Landlord,
the Premises may be used for lawful light manufacturing and
warehousing.
8. (a) Under no circumstances may Tenant require Subtenant, or may
Subtenant on its own, perform its obligations under the Sublease
directly to the Landlord, without the prior written consent of
the Landlord, which consent may be withheld in the Landlord's
sole and absolute discretion.
(b) Notwithstanding the foregoing to the contrary, if Tenant
violates the Lease at any time during the period from the
Commencement Dated under the Sublease through the date on which
Landlord disburses the Tenant Improvement Allowance as described
in Paragraph 19(b) below (the "Subtenant Direct Cure Period"):
(i) Landlord shall simultaneously send Subtenant a copy of
any default notice that Landlord sends to Tenant under
the Lease, and
(ii) Landlord agrees to accept a proper and timely cure of
such violation tendered by Subtenant in compliance with
the Lease.
(c) Following disbursement of the Tenant Improvement Allowance,
Landlord may at Landlord's sole option:
(i) extend the Subtenant Direct Cure Period by written
notice to Tenant and subtenant, at any time and from
time to time, or
(ii) terminate the Subtenant Direct Cure Period with at least
ninety (90) days advance written notice to Tenant and
Subtenant, at any time.
(d) During the Subtenant Direct Cure Period, as it may be extended:
(i) Subtenant shall pay all rent and other amounts required
under the Sublease directly to Landlord,
(ii) Landlord shall be entitled to retain the entire amount
of each such direct payment during the Subtenant Direct
Cure Period, but shall provide a credit to Tenant from
each such payment in the amount of Tenant's obligations
for the same item or period required under the Lease,
and
(iii) Tenant shall at all times remain fully liable as the
prime Tenant under the Lease in the event the Subtenant
does not make such direct payments, or for any
deficiency in such payments, and for any other
violations of the Lease.
(e) The foregoing provisions, and the parties' actions in connection
therewith, shall under no circumstances be construed as an
attornment or the acceptance thereof.
2
<PAGE> 40
9. (a) Landlord by executing this Consent agrees that, until a default shall
occur in the performance of Tenant's obligations under the Lease, the
Tenant may receive, collect and enjoy the rents accruing under the
Sublease, except as provided in Paragraph 8 above and except to the
extent Landlord is entitled to a portion thereof as set forth under
the terms of the Lease. However, if Tenant shall default in the
performance of its obligations to Landlord as set forth under the
Lease, then Landlord may, at its option, receive and collect, directly
from Subtenant, all rent owing and to be owed under the Sublease.
Landlord shall not, by reason of this assignment of the Sublease nor
by reason of the collection of the rents from the Subtenant, be deemed
liable to Subtenant for any failure of the Tenant to perform and
comply with any obligations of Tenant under the Sublease, or shall the
same constitute an attornment or the acceptance thereof.
(b) Tenant hereby irrevocably authorizes and directs Subtenant, upon
receipt of any written notice from the Landlord stating that a default
exists in the performance of Tenant's obligations under the Lease, to
pay to Landlord the rents due and to become due under the Sublease.
Tenant agrees that Subtenant shall have the right to rely upon any
such statement and request from Landlord, and that Subtenant shall pay
such rents to Landlord without any obligation or rights to inquire as
to whether such default exists and notwithstanding any notice from or
claim from Tenant to the contrary and Tenant shall have no right or
claim against Subtenant for any such rents so paid by Subtenant.
10. The acceptance of rent by Landlord from Subtenant or anyone else liable
under the Lease shall not be deemed a waiver by Landlord of any provisions
of the Lease.
11. Landlord may consent to subsequent sublettings and assignments of the Lease
or the Sublease or any amendments or modifications thereto without
notifying Tenant or anyone else liable under the Lease and without
obtaining their consent and such action shall not relieve such persons from
liability under the Lease or the Sublease, as appropriate.
12. Tenant's obligation to indemnify and hold Landlord harmless as set forth in
the Lease shall include indemnification from any claims arising from the
use of the Premises, or any portion thereof, by Subtenant, its agents,
employees or contractors.
13. To the extent there are any conflicts between the terms of the Sublease and
this Consent, the terms of this Consent shall control.
14. The Tenant shall be liable for all costs and expenses incurred by the
Landlord in connection with the Sublease including, without limitation,
reasonable attorney's fees.
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<PAGE> 41
15. Copies of all notices to be given by Tenant and/or Subtenant under the
Sublease shall be provided to Landlord via mail, fax (provided, if a
notice is faxed, a copy is also deposited in the mail) or delivered via
nationally recognized overnight courier (such as Federal Express) as
follows:
(a) To Landlord: Oak Creek Delaware, Inc.
c/o GSIC Realty Corporation
255 Shoreline Drive, Suite 600
Redwood City, California 94065
Attention: TRMC General Manager
Facsimile No.: (415) 802-1212
With copies to: Tower Realty Management Corporation
255 Shoreline Drive, Suite 600
Redwood City, California 94065
Attention: TRMC General Manager
Facsimile No.: (415) 802-1212
or to such other person at such other address designated by notice sent
to Tenant. Notices delivered by overnight courier or sent by facsimile
shall be deemed given upon receipt. Mailed notices shall be sent by
United States Certified or Registered Mail, postage prepaid. Such notice
shall be deemed to have been given upon receipt.
16. This Consent shall be construed and enforced under the laws of the State
of California.
17. Time is of the essence of this Consent.
18. In the event of any litigation arising out of this Consent, including,
without limitation, trial, appellate, bankruptcy and administrative
proceedings, Tenant shall reimburse Landlord for its reasonable
attorneys' fees, paralegals' fees and costs. However, in the event
Landlord initiates such litigation against Tenant, the prevailing party
shall be entitled to recover its reasonable attorneys' fees, paralegals'
fees and costs.
19. The parties to this Consent acknowledge the following with respect to
the obligations of Landlord, Tenant and Subtenant with respect to the
provisions of the Lease (including Exhibit B thereto, which is referred
to herein as the "Tenant Improvement Agreement") which governs the
subject of construction of Tenant Improvements, as follows:
(a) Landlord acknowledges that it remains obligated to disburse the
Tenant Improvement Allowance pursuant to the Tenant Improvement
Agreement.
(b) With respect to Paragraph 3 of the Tenant Improvement Agreement,
Landlord and Tenant agree that so long as all obligations of Tenant
under the Tenant Improvement Agreement are performed either by
Tenant or by Subtenant, and there is no event of default by Tenant
under the Lease or the Subtenant under the Sublease, that Landlord
shall, upon the complete satisfaction of the terms of Paragraph 9
of the Tenant Improvement Agreement, reimburse directly to
Subtenant an amount up to $1,467,000.00 of the Tenant Improvement
Allowance.
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<PAGE> 42
20. Each party to this Consent hereby releases the other from any and all
claims, and waives its right of recovery against the other, for loss or
damage arising out of or incident to the perils insured against under
the policies of insurance specified in Paragraphs 11 and 12 of the Lease
to the extent such loss or damage is insured against under any such
policy, whether due to the negligence of such parties or the agents,
employees, contractors, or invitees of any of them. Each party to this
Consent hereby waives its right to terminate the Sublease as provided in
Paragraph 10 of the Sublease Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Consent this 21st day
of February, 1997.
Landlord: OAK CREEK DELAWARE, INC.,
a Delaware corporation
By: /s/ S. Bradford Child
---------------------------------
Its:
---------------------------------
By: /s/ [ILLEGIBLE]
---------------------------------
Its:
---------------------------------
Tenant: LSI LOGIC CORPORATION,
a Delaware corporation
By: /s/ [ILLEGIBLE]
---------------------------------
Its: V.P. Corporate Controller
---------------------------------
Subtenant: C-CUBE MICROSYSTEMS, INC.,
a Delaware corporation
By: /s/ [ILLEGIBLE]
---------------------------------
Its: V.P. of Operations
---------------------------------
LSI Logic Legal Department
Date 2/21/97
-----------------------------
Approved as-to form
By /s/ D. Gloom
------------------------------
5
<PAGE> 43
SUBLEASE AGREEMENT
This Sublease is entered into as of March 31, 1997 by and between
C-Cube Microsystems, Inc., a Delaware corporation (Sublessor) and AccelGraphics,
Inc., a Delaware corporation (Sublessee), as a sublease under that Sublease
Agreement dated December 8, 1996 (the LSI Sublease) between LSI Logic
Corporation, a Delaware corporation, as sublessor, (LSI Logic) and Sublessor, as
sublessee. A copy of the LSI Sublease is attached hereto as Exhibit A. The LSI
Sublease is subject and subordinate to the terms and conditions of that certain
Single Tenant Net Lease dated as of August 25, 1995 between Oak Creek Delaware,
Inc., a Delaware corporation (Landlord) and LSI Logic, as tenant (the Master
Lease).
1. SUBLEASE
1.1 Sublessor hereby leases to Sublessee and Sublessee hereby leases
from Sublessor the premises consisting of approximately twenty-four thousand
five hundred (24,500) square feet, as more particularly shown on Exhibit B
attached hereto (the Premises), in the building located at 1855 Barber Lane,
Milpitas, California (the Building), subject, however, to any and all existing
encumbrances, easements, conditions, covenants, and restrictions, rights-of-way,
any other matters of records, and such matters as may be disclosed by inspection
or survey. The Building consists of a total area of approximately eighty-one
thousand five hundred (81,500) square feet. Sublessee shall also have the
non-exclusive right to use in common with Sublessor and any other occupants of
the Building the common areas of the, property on which the Building is
situated, which common areas shall include all driveways, sidewalks, parking
areas, landscaped areas, and any other areas designated by Sublessor for the
general use and convenience of all occupants of the Building (collectively, the
Common Areas).
1.2 By taking possession of the Premises, Sublessee accepts the
Premises as being in good and sanitary order, condition and repair, and accepts
the improvements included in the Premises in their present condition, "as is,"
subject only to completion of any punch-list items, and without representation
or warranty by Sublessor as to the condition of the Premises or as to the use or
occupancy which may be made thereof. Upon the expiration or sooner termination
of this Sublease, Sublessee shall surrender the Premises, together with all
Alterations (as defined in Paragraph 24 of the Lease), to Sublessor in the same
condition as when received or installed, ordinary wear and tear excepted, and
clean and free of debris and free of any liens created or suffered to be created
by Sublessee. Sublessee shall not, however, be required to remove any tenant
improvements to the Premises installed or constructed by, for the benefit of
Sublessor, nor shall Sublessor require Sublessee to remove any tenant
improvements to the Premises installed or constructed by Sublessor at
Sublessee's request unless Sublessor notifies Sublessee at least thirty (30)
days prior to the expiration of the term that Sublessor will require Sublessee
to remove such improvements at its expense.
2. TERM
2.1 The term of this Sublease shall be for a period of twenty-four
(24) months commencing on the date (the "Commencement Date") on which all of
the following has occurred: (i) this Sublease has been fully executed by both
Sublessor and Sublessee, and (ii) Sublessor has delivered possession of the
Premises to Sublessee with the tenant improvements substantially completed, but
no earlier than May 1, 1997. The term shall end on the earlier of
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<PAGE> 44
twenty-four (24) months from the Commencement Date, unless sooner terminated
pursuant to any provision hereof.
For purposes of this Sublease, the tenant improvements shall be deemed
"substantially completed" when (i) the tenant improvements have been completed
in accordance with the Plans such that there remains no incomplete or defective
item of the tenant improvements which would materially impair Sublessee's use of
the Premises as permitted herein, and (ii) Sublessor has obtained all approvals
and permits from the appropriate governmental authorities required for the legal
occupancy of the Premises for the use permitted herein.
2.2 If for any reason whatsoever the tenant improvements are not
substantially completed by May 15, 1997 (the estimated commencement date), this
Sublease shall not be void or voidable, no obligation of Sublessee shall be
affected thereby, nor shall Sublessor or Sublessor's agents be liable to
Sublessee for any loss or damage resulting therefrom. If, however, the tenant
improvements are not substantially completed by June 15, 1997, for any reason
other than delays caused by Sublessee or force majeure, as its sole and
exclusive remedy Sublessee may terminate this Sublease by written notice to
Sublessor no later than June 30, 1997.
3. RENT
3.1 Sublessee shall pay to Sublessor as base monthly rent for the
Premises the amounts set forth below, in advance, on the first day of each month
of the term hereof:
<TABLE>
<CAPTION>
Months of Term Base Monthly Rent Expense Base Monthly Rent
- -------------- ----------------- ------------ ------------
<S> <C> <C> <C>
1 through 12 $30,625 + 11,025 = $41,650.00/month
13 through 24 $31,850 + 11,025 = $42,875.00/month
</TABLE>
Sublessee shall pay Sublessor upon the execution hereof the sum Forty-one
Thousand Six Hundred Fifty Dollars ($41,650.00) as monthly rent for the
first month of the term. Rent for any period during the term hereof which is for
less than one month shall be prorated, based on the actual number of days
elapsed. Rent shall be payable in advance on the 1st day of each month during
the term, without notice or demand without any deduction, offset, or abatement
(except to the extent expressly permitted by this Sublease) in lawful money of
the United States of America to Sublessor at the address stated herein or to
such other persons or at such other places as Sublessor may designate in
writing. The term "rent" as used in this Sublease shall refer collectively to
the base monthly rent and to all additional rent, charges and other sums payable
hereunder.
3.2 Sublessee hereby acknowledges that late payment by Sublessee of
rent and other sums due hereunder will cause Sublessor to incur costs not
contemplated by this Sublease, the exact amount of which will be difficult to
ascertain. Such costs include, but are not limited to, processing and accounting
charges, and late charges which may be imposed on Sublessor by the terms of the
Master Lease or the LSI Sublease. Accordingly, if any installment of rent or
other sums due from Sublessee is not received by Sublessor within five (5)
business days after its due date, Sublessee shall pay to Sublessor a late charge
equal to five percent (5%) of such overdue amount. The parties hereby agree that
such late charge represents a fair and
Page 2 of 11
<PAGE> 45
reasonable estimate of the costs Sublessor will incur by reason of late payment
by Sublessee based upon the circumstances existing as of the date of this
Sublease. Acceptance of such late charge by Sublessor shall in no event
constitute a waiver of Sublessee's default with respect to such. overdue amount,
nor prevent Sublessor from exercising any of its other rights or remedies
granted to it by law or this Sublease.
Initials: ______________ (Sublessor) __________ (Sublessee)
3.3 Operating Expenses.
(a) Expense Base. The term "Expense Base" shall mean the amount of monthly
Operating Expenses which is included in the base monthly rent, which amount is
Eleven Thousand Twenty-Five and no/100ths Dollars ($11,025.00) per month.
(b) Sublessee's Percentage. The term "Sublessee's Percentage" shall mean the
percentage determined by dividing the area of the Premises by the total area of
the Building and multiplying the result by 100. For the purposes of this
Sublease, Sublessee's Percentage is agreed to be thirty and 6/100ths percent
(30.06%).
(c) Operating Expenses. The term "Operating Expenses" shall mean all reasonable
expenses, costs and disbursements of every kind and nature which Sublessor shall
pay or become obligated to pay in connection with the maintenance, repair and
operation of the Building and the Common Areas, including but not limited to,
the following:
(i) The cost of all labor, materials, supplies and services used in the
operation, repair, replacement and maintenance of the Building and the Common
Areas, provided that the cost of any replacements which constitute capital
expenditures, together with interest at a rate equal to the cost of funds
borrowed by Sublessor, shall be amortized over the useful life of the
replacement, as reasonably determined by Sublessor, and only the monthly
amortized cost shall be included in Operating Expenses monthly;
(ii) The cost of all utilities, including surcharges, for the Building
and the Common Areas, including the cost of water, sewer, gas, and electricity;
(iii) The cost of all maintenance and service agreements for the
Building and the Common Areas and the equipment thereon, including but not
limited to, security and energy management services, window cleaning, floor
waxing, elevator maintenance, pest control, sweeping services, and engineer,
gardener, and trash removal services which Sublessor may elect to provide (but
excluding janitorial services to the Premises which shall be contracted and paid
for separately by Sublessee).
(iv) The cost of repairs and maintenance of the Building and the
Common Areas (excluding repairs and general maintenance paid by proceeds of
insurance or by Sublessee or other third parties);
(v) The cost of any additional services not provided to the Building
and/or the Common Areas at the Commencement Date but thereafter provided by
Sublessor in its operation and management of the same;
Page 3 of 11
<PAGE> 46
(vi) Subject to the provisions of Paragraph 22 of the Master Lease, the
cost of any capital improvements made to the Building and/or the Common Areas
after the Commencement Date if such improvements are required by any laws,
statutes, ordinances, governmental rules or regulations, or if such improvements
are made by Sublessor to reduce other operating expenses; provided that the cost
of such improvements, together with interest at a rate equal to the cost of
funds borrowed by Sublessor, shall be amortized over the useful life of such
improvements, as reasonably determined by Sublessor, and only the monthly
amortized cost shall be included in Operating Expense monthly;
(vii) The cost of all insurance which Landlord deems necessary for the
Building, such as the cost of All-Risk property insurance and, if required under
the Master Lease, earthquake and flood coverage; insurance against loss of rents
on an All-Risk basis; and casualty and liability insurance applicable to the
Building and Landlord's personal property used in connection therewith;
(viii) Real Estate Taxes and, if applicable, any CC&R assessments or
dues; and
(ix) a management fee equal $918.75 per month for the first 12 months
of the term, and $955.50 per month for the balance of the term.
Notwithstanding the foregoing provisions of this Paragraph 3.3(c) to the
contrary, Operating Expenses shall not include any of the following: (i)
accounting expenses related to the operation of Sublessor's business; (ii) costs
covered by warranties; (iii) penalties and fines not occasioned by the acts or
omissions of Sublessee; (iv) general corporate overhead and general
administrative expenses; (v) depreciation; (vi) leasing commissions or
advertising expenses; (vii) tenant improvements costs; (viii) expenses which are
directly reimbursed to Sublessor from another sublessee or otherwise; (ix)
increases in insurance costs caused by the activities of Sublessor or any other
occupant of the Building other than Sublessee; (x) costs to correct any
construction defects in the Building; (xi) debt service payments; or (xii) costs
incurred to investigate or remediate any Hazardous Materials on the Property
which were not introduced by Sublessee, it agents, employees, contractors or
invitees.
(d) Adjustment. If Sublessee's Percentage of the Operating Expenses paid or
incurred by Sublessor for any calendar year of this Sublease exceeds the Expense
Base, then Sublessee shall pay such excess as additional rent as follows. Within
ninety (90) days following the end of each calendar year, Sublessor shall
furnish Sublessee a statement of the actual Operating Expenses for the calendar
year and the payments made by Sublessee during such period. If the statement
furnished by Sublessor shows that the amount paid by Sublessee as Operating
Expenses was less than the actual Operating Expenses, then Sublessee shall pay
to Sublessor the deficiency within ten (10) days after delivery of such
statement. If the statement shows that the amount paid by Sublessee as Operating
Expenses exceeded the actual Operating Expenses, then Sublessor shall either
offset the excess against the payments of Operating Expenses next thereafter due
to Sublessor, or shall refund the amount of the overpayment to Sublessee, in
cash, as Sublessor shall elect, except that any overpayment due to Sublessee for
the last year of the term shall be paid to Sublessee in cash. In no event,
however, will Sublessee be entitled to a reduction in, or an adjustment of, the
base monthly rent if Sublessee's Percentage of the actual Operating Expenses is
less than the Expense Base. Sublessor's statement of the actual Operating
Expenses for the prior calendar year shall also include an estimate of any
increases in Operating Expenses over the Expense Base for the ensuing calendar
year and, Sublessee shall pay Sublessor monthly the amount by which
Page 4 of 11
<PAGE> 47
Sublessee's Percentage of the estimated Operating Expenses for that year exceed
the Expense Base. Sublessee shall pay to Sublessor, concurrently with the
regular base monthly rent payment next due following receipt of such statement,
an amount equal to one monthly installment multiplied by the number of months
from January in the calendar year in which the statement is submitted to the
month of such payment, both months inclusive. Subsequent installments shall be
payable concurrently with the regular base monthly rent payments for the balance
of that calendar year and shall continue until the next calendar year statement
is rendered.
(e) Sublessee shall have the right to inspect Sublessor's records of Operating
Expenses at any time during the term upon not less than two (2) business days'
prior notice to Sublessor. Sublessee shall conduct its inspection of Sublessor's
records during normal business hours at the office of Sublessor's facilities
manager. If Sublessee questions or disputes any Operating Expenses billed to
Sublessee, Sublessee shall notify Sublessor in writing and Sublessor and
Sublessee shall attempt in good faith to resolve any dispute regarding such
Operating Expenses. If Sublessor and Sublessee fail to resolve such dispute
within thirty (30) days after Sublessee has notified Sublessor of the Operating
Expenses questioned, Sublessee shall be permitted to conduct, at Sublessee's
sole expense, an audit of Sublessor's Operating Expense records, using an
independent, licensed and reputable accounting firm. If the audit discloses any
overpayment by Sublessee, Sublessor shall promptly refund to Sublessee the full
amount of any overpayment made by Sublessee. Sublessee shall in any event
continue to pay to Sublessor when due Sublessee's Percentage of Operating
Expenses, as determined by Sublessor, until any such dispute has been resolved.
4. SECURITY DEPOSIT
Sublessee shall deposit with Sublessor upon the execution hereof the sum
Sixty-one Thousand Two Hundred Fifty and No/100ths Dollars ($61,250.00) as
security for Sublessee's faithful performance of Sublessee's obligations
hereunder. If Sublessee completes a public offering of the stock of Sublessee
within the first twelve (12) months of the term, then within thirty (30) days
after Sublessee provides Sublessor with reasonable evidence that such public
offering has been completed, Sublessor shall refund Thirty Thousand Six Hundred
Twenty-five and No/100ths Dollars ($30,625.00) of the security deposit to
Sublessee. If Sublessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Sublease, Sublessor
may, after the expiration of any applicable cure period provided to Sublessee
pursuant to Paragraph 42 of the Master Lease, use, apply or retain all or any
portion of said deposit for the Payment of any rent or other charge in default
or for the payment of any other sum to which Sublessor may become obligated by
reason of Sublessee's default, or to compensate Sublessor for any loss or damage
which Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within fifteen (15) days after written
demand therefor deposit cash with Sublessor in an amount sufficient to restore
said deposit to the full amount herein above stated and Sublessee's failure to
do so shall be a breach of this Sublease, and Sublessor may at his option
terminate this Sublease. Sublessor shall not be required to keep said deposit
separate from its general accounts. Said deposit or so much thereof as had not
theretofore been applied by Sublessor shall be returned without payment of
interest for its use, to Sublessee within ten (10) days after the expiration of
the term hereof (or earlier termination of the Sublease if Sublessee does not
have any remaining contractual obligations to Sublessor), or after Sublessee has
vacated the Premises, whichever is later.
Page 5 of 11
<PAGE> 48
5. PROVISIONS CONSTITUTING SUBLEASE
5.1 This Sublease is and at all times shall be subject and subordinate
to the Master Lease and the LSI Sublease. Sublessee shall take no action which
would cause Sublessor to be in default of its obligations under the LSI
Sublease, and Sublessee shall perform all of its obligations under this
Sublease, and Sublessee shall indemnify and hold Sublessor harmless from and
against all liability, costs, damages, claims, demands and expenses, including
reasonable attorney's fees and costs, arising out of Sublessee's failure to do
so. Sublessor shall fully perform all of its obligations under the LSI Sublease
(except to the extent any of the same are the obligation of Sublessee hereunder)
and shall indemnify and hold Sublessee harmless from and against all liability,
costs, damages, claims, demands and expense, including reasonable attorneys'
fees and costs, arising out of Sublessor's failure to do so. Upon any
termination of the Master Lease or the LSI Sublease, this Sublease shall
terminate concurrently therewith except as otherwise provided in the Consent of
Landlord to Sublease and without any liability of Sublessor to Sublessee;
provided, however, that a termination due to Sublessor's default of its
obligations under the LSI Sublease or this Sublease, shall be subject to the
indemnification set forth above. Sublessor shall not enter into any amendment or
modification of the LSI Sublease without the consent of Sublessee, nor shall
Sublessor consent to a termination of the LSI Sublease or exercise any option to
terminate the LSI Sublease that it may have, or surrender the LSI Sublease,
without the prior written consent of Sublessee which will not unreasonably be
withheld (and except as may be specifically permitted by this Sublease).
5.2 Except for paragraphs 1, 2, 3, 4, 7, 10, 16.1, 18, 20, 23(b), 24.1,
24.3, 24.4, 49, and 52 of the Master Lease; and Exhibit B to the Lease (except
that Appendix I to Exhibit B is incorporated); all of the terms, and conditions
contained in the Master Lease in the form attached hereto as Exhibit A are
incorporated herein as terms and conditions of this Sublease. All references in
the Master Lease to the "Lease" or the "lease" shall be deemed to refer to this
Sublease, all references in the Master Lease to the "Premises" shall be deemed
to refer only to the Premises subleased to Sublessee hereunder, and all
references in the Master Lease to "Landlord" and "Tenant" shall be deemed to
refer to Sublessor and Sublessee, respectively, except that any reference to
"Landlord" in Paragraph 12, 13, 23, 24, 27, 33, 34, 35, 36, 39, 40, and 41 of
the Master Lease shall be deemed to refer to both Landlord and Sublessor and any
reference in Paragraphs 11 (except that Sublessee's reimbursement of insurance
premium paid by Landlord for the Premises shall be paid to Sublessor), 16.2, 25,
26, 29, 30, 31, 32, 35, 37, and 53 of the Master Lease shall be deemed to refer
to Landlord only; provided, however, that Sublessor shall use reasonable efforts
to enforce the obligations of Landlord pursuant to Paragraphs 11, 16, 25, 26,
29, 30, 31, and 32 of the Master Lease for the benefit of Sublessee. All
reasonable costs incurred in connection with any enforcement undertaken by
Sublessor at the request of Sublessee shall be paid by Sublessee.
5.3 The following portions of the incorporated provisions of the Master
Lease are hereby expressly deleted or modified as follows:
a. Paragraph 5: the words "light manufacturing with the written
consent of Landlord" shall be inserted after the word "offices" in
the second line.
b. Paragraph 26.1: the number "12" in the second sentence is deleted
and replaced with the number "11".
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<PAGE> 49
6. TENANT IMPROVEMENTS
6.1 Except as expressly provided herein, any tenant improvements to the
Premises shall be constructed by Sublessor in accordance with the space plan
attached as Exhibit C to this Sublease. Sublessor shall submit to Landlord
complete, finished drawings and specifications (the "Plans") for the tenant
improvements to be constructed by Sublessor (the "Tenant Improvements"). The
Plans shall reflect and be in accordance with (i) a space plan approved by
Landlord, and (ii) that certain list of Landlord's Required Specifications as
described in the Master Lease. The tenant improvements shall be completed by
Sublessor in a good and workmanlike manner, using materials and equipment of
good quality, and in compliance with all applicable laws.
6.2 That portion of the tenant improvements to be constructed by
Sublessor at Sublessor's expense shall be referred to herein as "Sublessor's
Work" and that portion of the tenant improvements to be constructed by Sublessor
at Sublessee's expense shall be referred to herein as "Sublessee's Work."
Sublessee's Work includes three (3) private offices, two (2) showers, two (2)
toilets, one (1) lab area, and a "breakout" room and is more particularly shown
on the space plan attached as Exhibit C to this Sublease. Sublessee shall pay
one-half (1/2) of the cost of Sublessee's Work to Sublessor upon execution of
this Sublease; such payment shall be calculated based upon the cost estimate
provided by Sublessor's general contractor for Sublessee's Work. The balance of
the cost of Sublessee's Work, including any increased costs resulting from any
changes to Sublessee's Work requested by Sublessee after the plans for such
improvements have been approved by Sublessor and Sublessee, shall be paid to
Sublessor by Sublessee following completion of the tenant improvements and
within ten (10) days after Sublessee's receipt of an invoice itemizing the costs
to be paid by Sublessee.
6.3 Within ten (10) days after completion of the tenant improvement,
Sublessee shall conduct a walk-through inspection of the Premises with Sublessor
and complete a punch-list of any tenant improvements needing additional work.
Sublessor shall complete all items on the punch-list as soon as reasonably
possible. Upon completion of such punch-list items, Sublessee shall notify
Sublessor in writing of Sublessee's approval or disapproval of such completed
items, such approval not to be unreasonably withheld. If Sublessee fails to
disapprove such items within seven (7) days of completion, such items shall be
deemed approved by Sublessee. If Sublessee fails to submit a punch-list to
Sublessor within such ten (10) day period, it shall be deemed that there are no
tenant improvements needing additional work or repair.
6.4 Sublessee acknowledges that, due to the change in the scope of
Sublessee's Work since Sublessor first determined the construction schedule for
the tenant improvements, the estimated commencement date is now two (2) weeks
later than the date originally anticipated. Accordingly, if the Commencement
Date occurs at any time after May 1, 1997 but on or before May 15, 1997,
Sublessee shall pay to Sublessor, an amount equal to Fifteen Thousand Three
Hundred Twelve and 50/100ths Dollars ($15,312.50) (which amount is based upon
the net monthly rent of $1.25 per square foot for the period from May 1, 1997
through May 15, 1997) multiplied by a fraction, the numerator of which shall be
the number of days, during such two-week period, from May 1, 1997 until the
Commencement Date occurs, and the denominator of which shall be 15 (days). If
the Commencement Date occurs at any time after May 15, 1997, Sublessee shall
pay the full $15,312.50 to Sublessor. Sublessee shall pay such sum to
Sublessor within five (5) days after the Commencement Date.
Page 7 of 11
<PAGE> 50
Furthermore, if the tenant improvements are not substantially completed by May
15, 1997 due to delays caused by Sublessee, commencing May 15, 1997 Sublessee
shall pay to Sublessor base monthly rent at the rate of $1,388.33 per day for
each day after May 15, 1997 that substantial completion of the tenant
improvements is delayed by Sublessee. Delays caused by Sublessee shall include
the following: (i) Sublessee's failure to furnish information to Sublessor for
the preparation of plans and drawings for the tenant improvements; (ii)
Sublessee's request for special materials, finishes or installations which are
not readily available; (iii) Sublessee's failure to approve or disapprove any
plans and/or working drawings submitted for Sublessee's approval within five
(5) business days after Sublessee's receipt thereof; (iv) Sublessee's changes
to any plans and/or working drawings after their approval by Sublessor and
Sublessee; (v) Sublessee's failure to complete any of its own improvement work
to the extent Sublessee delays completion by the City of its final inspection
and approval of the tenant improvements by the appropriate governmental
authorities; and (vi) interference with completion of the tenant improvements
caused by Sublessee, its agents or employees.
7. UTILITIES.
Sublessor shall furnish or cause to be furnished to the Premises heating,
ventilating and air conditioning, electricity, and water for drinking and
lavatory purposes. Sublessee shall be responsible for arranging any telephone or
other telecommunications services to the Premises. Neither Landlord, LSI Logic
nor Sublessor shall be liable in damages, consequential or otherwise, nor shall
there be any rent reduction, rent abatement or right on the part of Sublessee to
terminate this Sublease, arising out of any interruption whatsoever in utility
services which is due to insurrection, war, rioting, earthquakes, fire,
accident, strike governmental authority, acts of public enemy, acts of God or
other causes beyond the reasonable control of Landlord, LSI Logic or Sublessor,
or any temporary interruption in such services which is necessary to the making
of alterations, repairs, or improvements to the Premises or the Building or any
part thereof.
8. REPAIRS AND MAINTENANCE.
8.1 Except as otherwise provided in paragraph 16.2 of the Master Lease
regarding Landlord's obligations and paragraph 26.1 of the Master Lease
regarding restoration of damage caused by fire and other perils, Sublessor shall
clean, keep, and maintain in good order, condition and repair the Premises and
the Common Areas, including, but not limited to, all plumbing within the
Premises; the HVAC system; all fixtures, interior walls, floors, carpets and
ceilings; the roof; all windows and doors; all electrical facilities, wiring
and equipment; and maintenance and repair of the parking lot. Sublessor shall
not be responsible for damage caused to any part of the Premises by any act,
negligence or omission of Sublessee or its agents, contractor, employees or
invitees to the extent not covered by insurance, or for damage caused by
Sublessee's construction of any Alterations to the Premises. It is an express
condition precedent to all obligations of Sublessor to repair that Sublessee
shall have notified Sublessor of the need for such repairs. Upon receipt of
written notice from Sublessor of the need for any repairs to the Premises,
Sublessor shall promptly commence such repairs and diligently prosecute such
repairs to completion. Sublessee waives the provisions of Sections 1941 and 1942
of the California Civil Code and any similar or successor law regarding a
tenant's right to make repairs and deduct the expenses of such repairs from the
rent due under this Sublease.
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<PAGE> 51
8.2 Sublessee shall at all times keep and preserve the Premises in good
order, condition and repair and shall provide, at Sublessee's expense, all
janitorial services to the Premises. Sublessee shall not litter or store any
materials in the Common Areas Sublessee shall not be responsible for any damage
to the Premises caused by any act, negligence, or omission of Sublessor, its
agents, contractors, employees or invitees.
9. ALTERATIONS.
9.1 Sublessee shall not alter the Premises without the prior written
consent of Sublessor and, if applicable, Landlord, which consent shall not be
unreasonably withheld or delayed and which consent may be granted based upon,
but not limited to, Sublessee's removal of alterations and the restoration of
the Premises to their original condition, at the expiration or sooner
termination of this Sublease, all at Sublessee's expense. At the time that
Sublessor and, if applicable, Landlord, consent to such alterations, Sublessor
shall advise Sublessee as to whether such alterations shall be removed at the
expiration or sooner termination of this Sublease. Notwithstanding the foregoing
provisions to the contrary, Sublessor's consent shall not be required for minor,
non-structural alterations to the Premises if (i) the cost of such alterations
does not exceed $5,000.00, (ii) such alterations do not affect the Building
systems, and (iii) Sublessee provides Sublessor with copies of plans for such
alterations prior to commencing construction or installation and "as-built"
plans for such alterations upon completion. Upon written request by Sublessee,
Sublessor shall advise Sublessee at the time of installation whether Sublessee
shall be required to remove such alterations from the Premises at the
expiration or sooner termination of this Sublease.
9.2 No alteration, restoration or rebuilding of the Premises shall be
undertaken until detailed plans and specifications have first been submitted to
and approved in writing by Sublessor and Landlord.
9.3 No work shall be undertaken except under the supervision of an
architect or engineer approved in writing by Sublessor and Landlord (unless such
requirement is waived by Landlord in writing), which approval shall not be
unreasonably withheld.
10. PARKING.
Sublessee shall have the right to use 98 parking spaces in the parking area of
the Building, 10 of which shall be reserved spaces, designated for the exclusive
use of Sublessee's visitors and located as shown on Exhibit D to this Sublease,
and the balance of which shall be unreserved spaces. Sublessee's right to use
the parking area shall be in common with Sublessor and other occupants of the
Building upon terms and conditions, as may from time to time be established by
Landlord and Sublessor. Sublessor agrees not to use more 98 total parking spaces
and agrees to cooperate with Sublessor and other occupants in the use of the
parking facilities. Sublessor reserves the right in its discretion to determine
whether the parking facilities are becoming crowded and to allocate and assign
parking spaces among Sublessee and the other occupants. Sublessee shall be
responsible for the cost of marking Sublessee's visitor parking spaces to
designate them as such and shall be solely responsible for enforcing its
exclusive rights to such spaces. Sublessor shall have no obligation whatsoever
to monitor, police or enforce Sublessee's exclusive rights to use these 10
visitor spaces.
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<PAGE> 52
11. SIGNAGE
Sublessee shall have the right to use, in common with Sublessor and any other
occupants of the Building, Sublessee's pro rata share of the monument sign
structure located in the Common Areas. The type, size and placement of
Sublessee's signage shall be subject to the prior approval of Landlord and
Sublessor and any approvals required by the City of Milpitas or under any
covenants, conditions and restrictions applicable to the Premises. The cost of
Sublessee's signage, including any installation costs and permit fees, shall be
paid by Sublessee. Sublessee shall remove its signage from the monument sign
structure at the expiration or sooner termination of this Sublease and if
Sublessee fails to remove its signage, Sublessor may do so and in such event the
removal costs shall be paid by Sublessee as additional rent.
12. BROKERS
Sublessee warrants and represents that it has had no dealings with any real
estate broker or agent in connection with the negotiation of this Sublease other
than Cornish & Carey Commercial Real Estate and CPS, The Commercial Property
Services Company, whose commission shall be paid by Sublessor, and that it knows
of no other real estate broker or agent (other than the brokers described above)
who is or might be entitled to a commission in connection with this Sublease.
Sublessee shall indemnify, defend and hold Sublessor harmless from and against
any and all liabilities or expenses, including reasonable attorney' fees and
costs, arising from any claims made by any broker or individual (other than the
brokers described above) for commissions or fees who claims to have
represented Sublessee in connection with this Sublease.
13. CONSENTS AND APPROVALS
Whenever the consent or approval of either party is required under this
Sublease, such consent or approval shall not be unreasonably withheld or
delayed.
14. LANDLORD'S CONSENT
Sublessee acknowledges that this Sublease is subject to the consent of the
Landlord under the Master Lease and LSI Logic under the LSI Sublease.
Accordingly, this Sublease shall not be effective unless and until Landlord's
consent has been executed by Landlord and LSI Logic. Sublessor shall use
diligent efforts to obtain such consent as soon as reasonably possible following
execution of this Sublease by Sublessor and Sublessee. Either party shall have
the right to terminate this Sublease if either Landlord's or LSI Logic's consent
hereto, in form and content reasonably acceptable to Sublessor and Sublessee,
cannot be obtained within thirty (30) business days after this Sublease has been
fully executed. Sublessor shall have no liability whatsoever to Sublessee,
however, if Sublessor is unable to obtain such consent from Landlord.
15. NOTICES
All notices, unless otherwise provided herein, will be in writing and deemed
given on the date the notice is hand delivered, mailed, or electronically
transmitted (with a confirmation or acknowledgment of receipt) to the receiving
party at such Party's address. Either party may change its address upon notice
to the other party as set forth herein.
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<PAGE> 53
For Sublessee: For Sublessor:
Accel Graphics, Inc. C-Cube Microsystems, Inc.
1855 Barber Lane 1778 McCarthy Boulevard
Milpitas, CA 95035 Milpitas, CA 95035
Attn: General Counsel Attn: Manager, Corp. Facilities
Telephone: Telephone: (408) 944-8606
Fax: Fax: (408) 944-6762
16. CONFLICT
If any terms of the Master Lease or the LSI Sublease contradict the terms of
this Sublease, the terms of this Sublease shall control over the Master Lease or
the LSI Sublease, as applicable, as between Sublessor and Sublessee.
17. ASSIGNMENT OF WARRANTS
Sublessor hereby assigns to Sublessee all warranties given and indemnities made
by LSI Logic to Sublessor under the LSI Sublease subject to LSI Logic's written
consent to such assignment. Sublessor shall cooperate with Sublessee to enforce
all such warranties and indemnities.
18. ADDITIONAL PROVISIONS
18.1 Without limiting any other right or remedy of Sublessee under this
Sublease, if LSI Logic seeks to terminate the LSI Sublease because of a default
or alleged default by Sublessor, Sublessor shall use its reasonable good faith
efforts to maintain the LSI Sublease in full force and effect for the benefit of
Sublessee, and Sublessor shall take reasonable actions required to reinstate the
LSI Sublease and/or to claim and pursue any right of redemption or relief from
forfeiture of the LSI Sublease (and as a consequence thereof any forfeiture of
this Sublease) to which Sublessor may be entitled at law or in equity.
18.2 As an inducement to Sublessee to enter this Sublease, to the best
of Sublessor's knowledge, Sublessor represents and warrants with respect to
the Premises that the LSI Sublease is in full force and effect, and there
exists under the LSI Sublease no default or event of default by either LSI Logic
or Sublessor, nor has there occurred any event which, with the giving of notice
or passage of time or both, could constitute such a default or event of default.
SUBLESSOR SUBLESSEE
C-Cube Microsystems Accel Graphics, Inc.,
a Delaware corporation
By: By: /s/ Stephen Bartlett
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Its: Its: V.P. OPERATIONS
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