UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended October 31, 1997 OR
- - TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from --------- to -----------
Commission file number 333-20031
NEOMAGIC CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0344424
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
3260 Jay Street
Santa Clara, California 95054
[Address of principal executive offices] [Zip Code]
(408) 988- 7020
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months ( or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at
November 23, 1997 was 24,172,000
<page 1>
NEOMAGIC CORPORATION
FORM 10-Q
INDEX
PAGE
PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets
October 31, 1997 and January 31, 1997 3
Consolidated Condensed Statements of Operations
Three and nine months ended October 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
Nine months ended October 31, 1997 and 1996 5
Notes to Unaudited Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
<page 2>
Part I. Financial Information
Item I. Financial Statements
NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
October 31, January 31,
1997 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 24,145 $ 13,458
Restricted cash equivalents - 2,224
Short-term investments 38,265 -
Accounts receivable, net 10,159 2,205
Inventory 4,148 5,237
Other current assets 530 344
-------- --------
Total current assets 77,247 23,468
Property, plant and equipment, net 5,250 3,395
Other assets 704 601
-------- --------
Total assets $ 83,201 $ 27,464
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit $ 12,477 $ 14,224
Accounts payable 7,407 5,175
Accrued expenses 6,088 1,617
Current obligations under capital leases 660 1,054
-------- --------
Total current liabilities 26,632 22,070
Long-term obligations under capital leases 739 1,194
-------- --------
Total liabilities 27,371 23,264
Commitments and contingencies
Stockholders' equity:
Noncumulative convertible preferred stock - 12
Common stock 24 8
Additional paid-in-capital 60,387 20,471
Notes receivable from stockholders (559) (822)
Deferred compensation (3,037) (1,889)
Accumulated deficit (985) (13,580)
-------- --------
Total stockholders' equity 55,830 4,200
-------- --------
Total liabilities and
stockholders' equity $ 83,201 $ 27,464
======== ========
See accompanying notes to consolidated condensed financial statements.
<page 3>
NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Nine Months
Ended Ended
------------ ------------
October 31, October 31,
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $ 37,146 $ 15,035 $ 79,997 $ 24,509
Cost of sales 21,568 9,994 47,261 18,297
-------- -------- -------- ---------
Gross margin 15,578 5,041 32,736 6,212
Operating expenses:
Research and development 4,924 2,250 10,729 5,926
Sales, general and administrative 3,452 1,950 8,111 4,499
Legal costs - - - (1,503)
-------- -------- -------- ---------
Total operating expenses 8,376 4,200 18,840 8,922
-------- -------- -------- ---------
Income (loss) from operations 7,202 841 13,896 (2,710)
Other income (expense), net:
Interest income and other 823 42 1,785 1,193
Interest expense (325) (316) (863) (686)
-------- -------- -------- ---------
Income (loss) before income taxes 7,700 567 14,818 (2,203)
Provision for income taxes 1,155 - 2,223 -
-------- -------- -------- ---------
Net income (loss) $ 6,545 $ 567 $ 12,595 $ (2,203)
======== ======== ======== =========
Pro forma net income (loss) per
share $.25 $.03 $ .50 $ (.10)
======== ======== ======== =========
Common and common equivalent
shares used in computing pro
forma net income (loss) per share 26,272 22,219 25,387 21,936
======== ======== ======== =========
See accompanying notes to consolidated condensed financial statements.
<page 4>
NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
------------------------
October 31, October 31,
1997 1996
----------- ----------
Operating activities:
Net income (loss) $12,595 $ (2,203)
Adjustments to reconcile net income (loss)to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,148 608
Amortization of deferred compensation 540 250
Changes in operating assets and liabilities:
Accounts receivable, net (7,954) (5,140)
Inventory 1,089 (2,981)
Other current assets (186) (123)
Other assets (103) (37)
Accounts payable 2,232 2,608
Accrued expenses 4,471 (697)
-------- --------
Net cash provided by (used for) operating activities 13,832 (7,715)
======== ========
Investing activities
Purchases of property, plant and equipment (3,003) (1,310)
Purchases of short term investments (47,265) -
Maturities of short term investments 9,000 -
-------- --------
Net cash used for investing activities (41,268) (1,310)
======== ========
Financing activities
Proceeds from sale leaseback liability - 1,337
Payments on lease obligations (849) (693)
Proceeds from working capital line of credit 36,695 18,017
Payments on working capital line of credit (38,442) (4,981)
Net proceeds from issuance of common stock 38,495 308
Release of amounts held as restricted cash equivalents 2,224 -
-------- --------
Net cash provided by financing activities 38,123 13,988
======== ========
Net increase in cash and cash equivalents 10,687 4,963
Cash and cash equivalents at beginning of period 13,458 6,877
-------- --------
Cash and cash equivalents at end of period $ 24,145 $ 11,840
======== ========
Supplemental schedules of cash flow information
Cash paid during the year for:
Interest $ 863 $ 686
Taxes $ 2,822
Deferred compensation $ 1,688 $ 250
See accompanying notes to consolidated condensed financial statements
<page 5>
NEOMAGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation:
The unaudited consolidated condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and include the accounts of NeoMagic Corporation and its wholly
owned subsidiaries (collectively "NeoMagic" or the "Company"). Certain
information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial position at October 31, 1997 and
January 31, 1997, and the operating results for the three and nine months
ended October 31, 1997 and 1996 and cash flows for the nine months ended
October 31, 1997 and 1996. These financial statements and notes should be
read in conjunction with the Company's audited financial statements and notes
thereto for the year ended January 31, 1997, included in the Company's
Registration Statement on Form S-1 as filed with the Securities and Exchange
Commission on March 13, 1997.
The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for any other period or for the
fiscal year which ends January 31, 1998.
The third quarters of fiscal 1998 and 1997 ended on October 26, 1997 and
October 27, 1996, respectively. For ease of presentation, the accompanying
financial statements have been shown as ending on the last day of the calendar
month.
2. Inventory:
Inventory is stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method.
Inventory consists of: October 31, January 31,
1997 1997
-----------------------------
(in thousands)
Raw materials $ 1,805 $ 464
Work in process 1,169 948
Finished goods 1,174 3,825
------- -------
Total $ 4,148 $ 5,237
======= =======
3. Net Income (Loss) Per Share and Pro forma Net Income (Loss) Per Share
Except as noted below, net income (loss) per share is computed using
the weighted average number of common shares and dilutive common equivalent
shares outstanding. Common equivalent shares from convertible preferred stock
(using the as if-converted method) and from stock options and warrants (using
the treasury stock method) have been included in the computation when
dilutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin, common and common equivalent shares issued by the
Company at prices below the initial public offering price during the twelve-
month period prior to the initial public offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the initial public offering price) through January
31, 1997. Per share information calculated on this basis is as follows (in
thousands except per share information):
<page 6>
Three Months Nine Months
Ended Ended
------------ -----------
October 31, October 31,
1997 1996 1997 1996
------ ------ ------ ------
Net income (loss) per share $ .25 $ .03 $.50 $ (.23)
Shares used in computing net
income (loss) per share 26,272 22,219 25,387 9,676
The pro forma calculation of net income (loss) per share presented in
the consolidated condensed statements of operations is computed as described
above and also gives retroactive effect to the conversion of all outstanding
shares of convertible preferred stock into common stock, even if anti-
dilutive, which took place upon the closing of the Company's initial public
offering using the as-if-converted method.
4. Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which the Company is required to
adopt on January 31, 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating basic net
income per share, the dilutive effect of stock options and warrants will be
excluded. Basic net income per share computed in accordance with Statement
No. 128 would have been $.02 greater than the net income per share as reported
for the three months ended October 31, 1997. Basic net income per share
computed in accordance with Statement No. 128 would have been $.04 greater
than the net income per share as reported for the nine month period ended
October 31, 1997. The impact of Statement No. 128 on the calculation of fully
diluted net income per share for the three and nine month periods ended
October 31, 1997 and 1996 is not expected to be material. Assuming the
retroactive conversion of all outstanding shares of convertible preferred
stock into common stock, there is no impact on the implementation of Statement
No. 128 to the pro forma net loss per share as reported for the quarter and
nine month periods ended October 31, 1996.
5. Working Capital Line of Credit
The Company maintains a revolving credit agreement ("Credit
Agreement") with Mitsubishi International Corporation. The Credit Agreement
is used to provide 60 day extended credit terms to finance wafer inventory
purchases. The terms include, but are not limited to, permitted borrowings of
$18 million and the agreement has an expiration date of January 31, 1998.
6. Contingencies
In February 1997, Cirrus Logic sent the Company written notice
asserting that the Company's MagicGraph128TM, MagicGraph128VTM and
MagicGraph128ZVTM products infringe three United States patents held by Cirrus
Logic. Since receiving the notice of alleged infringement, the Company has
advised Cirrus Logic that the Company does not believe that any of its
products infringes any claims of the patents. The Company also has undergone
a confidential external infringement review and has conducted its own internal
infringement review, and the Company continues to believe that the Cirrus
Logic infringement allegations are unfounded. However, there can be no
assurances that Cirrus Logic will not file a lawsuit against the Company or
that the Company would prevail in any such litigation. Any protracted
litigation by Cirrus Logic or the success of Cirrus Logic in any such
litigation could have a material and adverse effect on the Company's financial
position or results of operations.
In October 1996 the Company was notified by two of its customers that
they had received a letter from the holder of a United States patent asserting
that the video/graphics subsystem in such customers'
<page 7>
notebook PCs, which use
the Company's MagicGraph128 and MagicGraph128V products, infringe certain
claims of the patent. The Company has been informed by one of these customers
that the patentholder has filed suit in Italy, Germany and the United States.
The Company may have certain indemnification obligations to customers with
respect to the infringement of third-party intellectual property rights by
its products. There can be no assurance that the Company's
potential obligations to indemnify such customers will not have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes that the Company's MagicGraph128 and
MagicGraph128V products do not infringe any of the claims of such patent. The
Company's belief is based upon a legal opinion from its patent counsel,
Townsend and Townsend and Crew. In addition to the litigation risks discussed
below, in Italy, one available preliminary remedy is seizure of infringing
goods. There can be no assurances that the Company or such customers would
prevail in any patent litigation, or that such customers will continue to
purchase the Company's products under the threat of litigation.
<page 8>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
When used in this discussion, the words "expects," "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements, which include statements concerning the timing of availability and
functionality of products under development, product mix, trends in average
selling prices, the growth rate of the market for PCs, competition, the
percentage of export sales and sales to strategic customers, the adoption or
retention of industry standards, and the availability and cost of products
from the Company's suppliers, are subject to risks and uncertainties,
including those set forth below under "Factors that May Affect Results," that
could cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any changes in the Company's expectations with regard thereto or any
changes in events, conditions or circumstances on which any such statement is
based.
Overview
The Company designs, develops and markets multimedia accelerators for
sale to notebook computer manufacturers. The Company has developed the first
commercially available high performance silicon technology that integrates
large DRAM memory with analog and logic circuitry to provide a high
performance multimedia solution on a single chip. The Company's MagicGraph128
family of pin-compatible multimedia accelerators incorporates a 128-bit memory
bus. The Company believes these products enable notebook PC manufacturers to
deliver state-of-the-art multimedia capabilities while decreasing power
consumption, size, system design complexity and cost.
The following information should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 19-25 of the Company's Prospectus dated March 13, 1997.
Results of Operations
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales:
Three Months Ended Nine Months Ended
------------------ -----------------
October 31, October 31,
1997 1996 1997 1996
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.1 66.5 59.1 74.7
------ ------ ------ ------
Gross margin 41.9 33.5 40.9 25.3
Operating expenses:
Research and development 13.2 15.0 13.4 24.2
Sales, general and administrative 9.3 13.0 10.1 18.3
Legal costs - - - (6.1)
------ ------ ------ ------
Total operating expenses 22.5 28.0 23.5 36.4
------ ------ ------ ------
Income (loss) from operations 19.4 5.5 17.4 (11.1)
Other income (expense), net:
Interest income and other 2.2 .3 2.2 4.9
Interest expense (.9) (2.1) (1.1) (2.8)
------ ------ ------ ------
Income (loss) before income taxes 20.7 (3.7) 18.5 (9.0)
Provision for income taxes 3.1 - 2.8 -
------ ------ ------ ------
Net income (loss) 17.6 (3.7) 15.7 (9.0)
====== ====== ====== ======
<page 9>
Net sales
The Company's net sales to date have been generated from the sale of
its multimedia accelerators. The Company's products are used in, and its
business is dependent on, the personal computer industry with sales primarily
in Asia, Japan, and the United States. Net sales were $37.1 million for the
three months ended October 31, 1997, compared to $15.0 million for the three
months ended October 31, 1996. Net sales were $80.0 million for the nine
months ended October 31, 1997, compared to $24.5 million for the nine months
ended October 31, 1996. Net sales increased primarily as a result of increased
market acceptance of the Company's products, introduction by the Company of
additional products in its MagicGraph128 product family which expanded the
portion of the market addressed by NeoMagic products, and the Company's
investment in sales and marketing activities. The Company expects that the
percentage of its net sales represented by any one product or type of product
may change significantly from period to period as new products are introduced
and existing products reach the end of their product life cycles. Due to
competition, the Company's products experience declining unit average selling
prices over time, which at times can be substantial.
Export sales accounted for 83.1% and 95.4% of net sales in the three
months ended October 31, 1997 and 1996, respectively. Export sales accounted
for 82.8% and 94.8% of net sales in the nine months ended October 31, 1997 and
1996, respectively. Approximately 71.7% and 69.8% of export sales for the
three and nine months ended October 31, 1997, respectively were to affiliates
of United States customers. The Company expects that export sales will
continue to represent a significant portion of net sales, although there can
be no assurance that export sales as a percentage of net sales will remain at
current levels. All sales transactions were denominated in U.S. dollars.
Five customers accounted for 16.0%, 15.4%, 14.1%, 12.8% and 10.5% of net
sales for the three months ended October 31, 1997. Four customers accounted
for 26.6%, 20.8%, 13.2% and 10.4% of net sales for the three months ended
October 31, 1996. Five customers accounted for 16.7%, 15.8%, 14.7%, 12.3% and
11.0% of net sales for the nine months ended October 31, 1997. Two customers
accounted for 35.3% and 18.9% of net sales for the nine months ended October
31, 1996. The Company expects a significant portion of its future sales to
remain concentrated with a limited number of strategic customers. There can
be no assurance that the Company will be able to retain its strategic
customers or that such customers will not cancel or reschedule orders or, in
the event orders are canceled, that such orders will be replaced by other
orders. In addition, sales to any particular customer may fluctuate
significantly from quarter to quarter. The occurrence of any such events or
the loss of a strategic customer could have a material adverse effect on the
Company's operating results.
Gross Margin
Gross margin was $15.6 million and $5.0 for the three months ended
October 31, 1997 and 1996, respectively. Gross margin increased to 41.9% of
net sales for the three months ended October 31, 1997 from 33.5% of net sales
in the three months ended October 31, 1996. Gross margin was $32.7 million and
$6.2 million for the nine months ended October 31, 1997 and 1996,
respectively. Gross margin percentages increased to 40.9% for the nine months
ended October 31, 1997 from 25.3% in the nine months ended October 31, 1996.
The increase in gross margin between the three months ended October 31, 1997
and October 31, 1996 was due in part to a charge of $750,000 for excess
inventory taken in the third quarter of fiscal 1997. The gross margin in the
nine months ended October 31, 1996 was negatively impacted by costs stemming
from a design error for which the Company recorded a $1.2 million reserve in
the second quarter and an excess inventory charge of $750,000 taken in the
third quarter. The additional increases in gross margin percentage for the
three and nine month periods ended October 31, 1997 were due primarily to
lower wafer pricing and improved yields on higher production volumes.
In the future, the Company's gross margin percentages may be affected
by increased competition and related decreases in unit average selling prices
(particularly with respect to older generation
<page 10>
products), changes in the mix
of products sold, timing of volume shipments of new products, the availability
and cost of products from the Company's suppliers, manufacturing yields, and
foreign currency exchange rate fluctuations.
Research and Development Expenses
Research and development expenses were $4.9 million and $2.3 for the
three months ended October 31, 1997 and 1996, respectively. Research and
development expenses were $10.7 million and $5.9 for the nine months ended
October 31, 1997 and 1996, respectively. The Company has made and intends to
continue to make significant investments in research and development to remain
competitive by developing new and enhanced products to serve its identified
markets. Research and development expenses increased primarily due to
increased employee related expenses largely related to additional personnel
and to a lesser extent consulting, engineering and equipment related expenses.
Research and development expenses are expected to increase in absolute dollars
in fiscal 1999.
Sales, General and Administrative Expenses
Sales, general and administrative expenses were $3.5 and $2.0 million
for the three months ending October 31, 1997 and 1996, respectively. Sales,
general and administrative expenses were $8.1 and $4.5 million for the nine
months ending October 31, 1997 and 1996, respectively. Sales, general and
administrative expenses increased as a result of increased employee related
expenses largely related to additional personnel, increased commissions
associated with higher sales levels and higher administrative expenses
associated with being a public company. The Company anticipates that sales,
general and administrative expenses will increase in absolute dollars in
fiscal 1999.
Legal Costs
The benefit in legal costs of $1.5 million in the nine months ended
October 31, 1996 was due to the reversal of a reserve balance of previously
estimated legal costs.
Other Income (Expense), Net.
Other income (expense), net increased to $498,000 in the three months
ended October 31, 1997 from ($274,000) in the three months ended October 31,
1996. The $772,000 increase in other income (expense), net was primarily due
to additional interest income resulting from higher average amounts of cash
and short-term investments in the three months ended October 31, 1997 compared
to the same period in 1996, offset partially by higher interest expense from
higher balances on the working capital line of credit with Mitsubishi
International Corporation. These higher balances resulted from an increase in
wafer purchases over the previous period.
Other income (expense), net increased to $922,000 in the nine months
ended October 31, 1997 from $507,000 in the nine months ended October 31,
1996. The increase in interest income and (expense) net, of $415,000 in the
nine month period ending October 31, 1997 as compared to the same period in
1996 was primarily due to higher interest income caused by larger average
amounts of cash and cash equivalents and short term investments offset in part
by additional interest expense from higher balances on the working capital
line of credit with Mitsubishi International Corporation which resulted from
an increase in wafer purchases over the previous period and $975,000 of non-
recurring engineering services income in the first nine months of fiscal 1997.
The non-recurring engineering services performed in fiscal 1997 consisted
primarily of consulting services and allowing a customer access to certain
technology, previously developed by the Company for its own use, to construct
complex logic. The Company does not expect such engineering services to be
provided on a regular basis, if at all, in future periods. Therefore, the
Company has classified such revenues in other income.
<page 11>
Income Taxes
The Company's effective tax rate for the three and nine months ended
October 31, 1997 was 15%, compared to an effective tax rate for the three and
nine months ended October 31, 1996 of 0% The difference between the
Company's effective tax rate and the statutory rate for the three months ended
October 31, 1997 is primarily due to the utilization of the Company's net
operating loss carryforwards.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short term investments
increased $46.7 million during the first nine months ended October 31, 1997 to
$62.4 million from $15.7 million at the end of fiscal 1997. The increase is
due to net proceeds from the issuance of common stock related to the initial
public offering in the first quarter of fiscal 1998 and net cash provided from
operations. Working capital increased $49.2 million to $50.6 million at
October 31, 1997 from $1.4 million at January 31, 1997.
During the first nine months ended October 31, 1997 the Company
generated $13.8 million of cash and cash equivalents from its operating
activities, compared to $7.7 million of cash and cash equivalents used in
operating activities during the nine months ended October 31, 1996. The
increase in cash generated from operations is primarily attributable to $12.6
million in net income for the nine month period ended October 31, 1997
compared to a net loss of $2.2 million for the corresponding period ended
October 31, 1996. The increase also relates to changes in accrued expenses,
accounts payable and inventory offset by increases in accounts receivable.
Net cash used for investing activities for the nine months ended
October 31, 1997 and 1996 was $41.3 million and $1.3 million, respectively.
The increase was primarily due to $38.3 million of net purchases of short-term
investments in the period ended October 31, 1997 and $3.0 million of
investments in plant, property and equipment. Continued expansion of the
Company's business may require higher levels of capital equipment purchases,
technology investments, foundry investments and other payments to secure
manufacturing capacity. The timing and amount of future investments will
depend primarily on the growth of the Company's future revenues.
Net cash provided by financing activities for the nine months ended
October 31, 1997 and 1996 was $38.1 million and $14.0 million, respectively.
The increase primarily represents the net proceeds from the initial public
offering of $37.8 in the first quarter of fiscal 1998, and the release of
amounts previously held as restricted cash offset in part by a decrease in the
net proceeds related to the working capital line of credit.
At October 31, 1997 the Company's principal sources of liquidity
included cash and cash equivalents and short-term investments of $62.4 million
and borrowings from Mitsubishi International Corporation, under a working
capital revolving credit agreement. The Company believes these available
funds and anticipated funds from operations will satisfy the Company's
projected working capital, and capital expenditure requirements through the
next 12 months, although the Company could be required, or could elect, to
seek to raise additional capital during such period. Investments will
continue in product development in new and existing areas of technology. Cash
may also be used to acquire technology through purchases and strategic
acquisitions. The Company's future capital requirements will depend on many
factors, including the rate of net sales growth, the timing and extent of
spending to support research and development programs, expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of the Company's products. The
Company expects that it may need to raise additional equity or debt financing
in the future. There can be no assurance that additional equity or debt
financing, if required, will be available on acceptable terms or at all.
<page 12>
Impact of Currency Exchange Rates
Because the Company currently purchases wafers under purchase
contracts denominated in yen, significant appreciation in the value of yen
relative to the value of the U.S. dollar would make the wafers relatively more
expensive to the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operation. The Company
from time to time enters into foreign currency forward contracts to minimize
foreign currency fluctuation exposures related to these firm purchase
commitments. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company's accounting policies for these
instruments are based on the Company's designation of such instruments as
hedging transactions. The criteria the Company uses for designating an
instrument as a hedge include its effectiveness in risk reduction and one-to-
one matching of derivative instruments to underlying transactions.
Notwithstanding the measures the Company has adopted, due to the
unpredictability and volatility of currency exchanges rates and currency
controls, there can be no assurance that the Company will not experience
currency losses in the future, not can the Company predict the effect of
exchange rate fluctuations upon future operating results.
Factors that May Affect Results
Fluctuations in Quarterly Operating Results
NeoMagic's quarterly and annual results of operations are affected by
a variety of factors that could materially adversely affect net sales, gross
margin and income from operations. These factors include, among others,
demand for the Company's products; changes in product or customer mix, (i.e.,
the portion of the Company's revenues represented by the Company's various
products and customers); fluctuations in manufacturing yields; incorrect
forecasting of future revenues; availability and cost of manufacturing
capacity; unanticipated delays or problems in the introduction or performance
of the Company's next generation of products; the Company's ability to
introduce new products in accordance with OEM design requirements and design
cycles; market acceptance of the products of the Company's customers; changes
in the timing of product orders due to unexpected delays in the introduction
of products of the Company's customers or due to the life cycles of such
customers' products ending earlier than anticipated; new product announcements
or product introductions by NeoMagic's competitors; competitive pressures
resulting in lower selling prices; the volume of orders that are received and
can be fulfilled in a quarter; the rescheduling or cancellation of orders by
customers which cannot be replaced with orders from other customers; supply
constraints for the other components incorporated into its customers' notebook
PC products; foreign exchange rate fluctuations; the unanticipated loss of any
strategic relationship; seasonality associated with the tendency of PC sales
to increase in the second half of each calendar year; the level of
expenditures for research and development and sales, general and
administrative functions of the Company; costs associated with future
litigation; and costs associated with protecting the Company's intellectual
property. Any one or more of these factors could result in the Company
failing to achieve its expectations as to future revenues. The Company may be
unable to adjust spending sufficiently in a timely manner to compensate for
any unexpected sales shortfall, which could materially adversely affect
quarterly operating results. Accordingly, the Company believes that period-
to-period comparisons of its operating results should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year.
In certain future quarters, the Company's operating results may be below the
expectations of public market analysts or investors. In such event, the
market price of the Common Stock would be materially adversely affected.
Risks Associated with Dependence on the Notebook PC Market
The Company's products are used only in notebook PCs. The notebook PC
market is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and significant price
competition, resulting in short product life cycles and regular reductions of
average selling prices over the life of a specific product. Although the
notebook PC market has grown
<page 13>
substantially in recent years, there is no
assurance that such growth will continue. A reduction in sales of notebook
PCs, or a reduction in the growth rate of such sales, would likely reduce
demand for the Company's products. Moreover, such changes in demand could be
large and sudden. Since PC manufacturers often build inventories during
periods of anticipated growth, they may be left with excess inventories if
growth slows or if they have incorrectly forecast product transitions. In
such cases, the PC manufacturers may abruptly suspend substantially all
purchases of additional inventory from suppliers such as the Company until the
excess inventory has been absorbed. Any reduction in the demand for notebook
PCs in general, or for a particular product that incorporates the Company's
multimedia accelerators, could have a material adverse impact on the Company's
business, financial condition and results of operations.
The Company's ability to compete in the future will depend on its
ability to identify and ensure compliance with evolving industry standards.
Unanticipated changes in industry standards could render the Company's
products incompatible with products developed by major hardware manufacturers
and software developers, including Intel Corporation and Microsoft
Corporation. The Company could be required, as a result, to invest
significant time and effort to redesign it's products to ensure compliance
with relevant standards. If the Company's products are not in compliance with
prevailing industry standards for a significant period of time, the Company
could miss opportunities to achieve crucial design wins, which could result in
a material adverse change in the Company's business, financial condition and
results of operations. In addition, the Company's products are designed to
afford the notebook PC manufacturer significant advantages with respect to
product performance, power consumption and size. To the extent that future
developments in other notebook PC components or subassemblies incorporate one
or more of the advantages offered by the Company's products, the market demand
for the Company's products may be negatively impacted, which could result in a
material adverse change in the Company's business, financial condition and
results of operations.
Product Concentration; Risks Associated with Multimedia Products
The Company's revenues are entirely dependent on the market for
multimedia accelerators for notebook PCs, and on the Company's ability to
compete in that market. Since the Company has no other product line, the
Company's revenues and results of operations would be materially adversely
affected if for any reason it were unsuccessful in selling multimedia
accelerators. The notebook PC market frequently undergoes transitions in
which products rapidly incorporate new features and performance standards on
an industry-wide basis. If the Company's products are unable at the beginning
of each such transition to support the new feature sets or performance levels
being required by notebook PC manufacturers, the Company would likely lose
design wins and moreover, not have the opportunity to compete for new design
wins until it was able to incorporate changes resulting from market
transitions or to take advantage of future product transitions. Thus, a
failure to develop products with required feature sets or performance
standards or a delay as short as a few months in bringing a new product to
market could significantly reduce the Company's net sales for a substantial
period, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
The notebook PC multimedia market is characterized by extreme price
competition. Leading-edge products may command higher average selling prices
but prices decline throughout the product life cycle as comparable and more
advanced products are introduced into the market. As a result, the Company's
ability to maintain average selling prices and gross margins depends
substantially on its ability to continue introducing new products. Its
ability to maintain gross margins is also dependent, but to a lesser extent,
upon its ability to reduce product costs throughout a product life cycle by
instituting cost reduction design changes and yield improvements, persuading
customers to adopt cost-reduced versions of its products and successfully
managing its manufacturing and subcontract relationships. The failure of the
Company to continue designing and introducing advanced products in a timely
manner or to continue reducing product costs would have a material adverse
effect on the Company's net sales, gross margins and results of operations.
<page 14>
Customer Concentration
The Company's sales are concentrated within a limited customer base.
The Company expects that a small number of customers will continue to account
for a substantial portion of its net sales for the foreseeable future.
Furthermore, all of the Company's sales are made on the basis of purchase
orders rather than pursuant to long-term agreements. As a result, the
Company's business, financial condition and results of operations could be
materially adversely affected by the decision of a single customer to cease
using the Company's products or by a decline in the number of notebook PCs
sold by a single customer or by a small number of customers.
Effects of Changes in DRAM Pricing
The Company's MagicGraph128 products feature large DRAM memory
integrated with analog and logic circuitry on a single chip, while its
competitors provide only the graphics/video analog and logic circuitry on a
separate chip to be used in conjunction with DRAMs supplied by others. The
prices of the Company's products reflect many factors, including the prices
of DRAM chips. As a result, the Company's business, financial condition and
results of operations may be materially and adversely affected by
unanticipated changes in the price of DRAMs. Such changes are typically
sudden and dramatic and can extend over a significant period of time. For
example, the average price of 4-Mbit DRAMs declined by more than 43% in the
first nine months of 1997, and this decline affected the average selling
prices of the Company's products. A significant reduction in the price of
DRAMs could cause the Company's products to be less competitively priced,
potentially affecting ongoing product pricing as well as resulting in the loss
of design wins for new notebook PCs. In this circumstance, competitors
without embedded DRAM could be potentially benefited by DRAM price reductions,
and the Company could be forced to respond to pricing pressures precipitated
by changes in the DRAM market by reducing the average selling prices of its
products to current and prospective system manufacturer customers. Because
the Company's product costs cannot be adjusted as rapidly as changes in
average selling prices to system manufacturers, the Company's net sales and
gross margin would be materially and adversely impacted.
Dependence on Manufacturing Relationships
The Company's products require wafers manufactured with state-of-the-
art fabrication equipment and techniques. The Company's products are
primarily manufactured by Mitsubishi Electric Corporation ("Mitsubishi
Electric") in Japan. Mitsubishi Electric is currently producing six and
eight-inch wafers for the Company. The Company has also begun manufacturing
eight-inch wafers with Toshiba Corporation ("Toshiba") in Japan. A significant
portion of the Company's wafer requirements will not be met by Toshiba before
calendar 1998. Each of these manufacturing relationships are covered under
the terms of a five-year wafer supply agreement. The Company expects that,
for the foreseeable future, some of its products will be single source
manufactured. Because the lead time needed to establish a strategic
relationship with a new DRAM partner is at least 12 months and the estimated
time for a foundry to switch to a new product line is four to nine months,
there is no readily available alternative source of supply for any specific
product. A manufacturing disruption experienced by either of the Company's
manufacturing partners would impact the production of the Company's business,
financial condition and result of operations. Furthermore, in the event that
the transition to the next generation of manufacturing technologies at
Mitsubishi Electric or Toshiba is unsuccessful the Company's business,
financial condition and results of operations would be materially and
adversely affected.
There are many other risks associated with the Company's dependence
upon third party manufacturers, including: reduced control over delivery
schedules, quality assurance, manufacturing yields and cost; the potential
lack of adequate capacity during periods of excess demand; limited warranties
on wafers supplied to the Company; and potential misappropriation of NeoMagic
intellectual
<page 15>
property. The Company is dependent on Mitsubishi Electric and
Toshiba to produce wafers of acceptable quality and with acceptable
manufacturing yields, to deliver those wafers to the Company and its
independent assembly and testing subcontractors on a timely basis and to
allocate to the Company a portion of their manufacturing capacity sufficient
to meet the Company's needs. On occasion, the Company has experienced some of
these situations. Although the Company's products are designed using the
process design rules of the particular manufacturer, there can be no assurance
that either Mitsubishi Electric or Toshiba will be able to achieve or maintain
acceptable yields or deliver sufficient quantities of wafers on a timely basis
or at an acceptable cost. Additionally, there can be no assurance that either
Mitsubishi Electric or Toshiba will continue to devote resources to the
production of the Company's products or continue to advance the process design
technologies on which the manufacturing of the Company's products are based.
Any such difficulties would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's products are assembled and tested by third party
subcontractors. The Company does not have long term agreements with any of
these subcontractors. Such assembly and testing is conducted on a purchase
order basis. As a result of its reliance on third party subcontractors to
assemble and test its products, the Company cannot directly control product
delivery schedules, which could lead to product shortages or quality assurance
problems that could increase the costs of manufacturing or assembly of the
Company's products. Due to the amount of time normally required to qualify
assembly and test subcontractors, product shipments could be delayed
significantly if the Company is required to find alternative subcontractors.
Any problems associated with the delivery, quality or cost of the assembly and
test of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.
Inventory Risk
Under its wafer supply agreements with Mitsubishi Electric and
Toshiba, the Company is obligated to provide rolling 12-month forecasts of
anticipated purchases and to place binding purchase orders four months prior
to shipment. If the Company cancels a purchase order, it must pay
cancellation penalties based on the status of work in process or the proximity
of the cancellation to the delivery date. Forecasts of monthly purchases may
not increase or decrease by more than a certain percentage from the previous
month's forecast without the manufacturer's consent. Thus, the Company must
make forecasts and place purchase orders for wafers long before it receives
purchase orders from its own customers. This limits the Company's ability to
react to fluctuations in demand for its products, which can be unexpected and
dramatic, and from time-to-time will cause the Company to have an excess or a
shortage of wafers for a particular product. As a result of the long lead
time for manufacturing wafers, semiconductor companies such as the Company
from time-to-time must take charges for excess inventory. For example, the
Company booked charges totaling $1.5 million for excess inventory in fiscal
1997. Significant write-offs of excess inventory could materially adversely
affect the Company's financial condition and results of operations.
Conversely, failure to order sufficient wafers would cause the Company to miss
revenue opportunities and, if significant, could impact sales by the Company's
customers, which could adversely affect the Company's customer relationships
and thereby materially adversely affect the Company's business, financial
condition and results of operations.
Manufacturing Yields
The fabrication of semiconductors is a complex and precise process.
Because NeoMagic's products feature the integration of large DRAM memory with
analog and logic circuitry on a single chip, a manufacturer must obtain
acceptable yields of both the memory and logic portions of such products,
compounding the complexity of the manufacturing process. As a result, the
Company may face greater manufacturing challenges than its competitors.
Minute levels of contaminants in the manufacturing environment, defects in
masks used to print circuits on a wafer, difficulties in the fabrication
process or other factors can cause a substantial percentage of wafers to be
rejected or a significant number of die on
<page 16>
each wafer to be nonfunctional.
Many of these problems are difficult to diagnose and time consuming or
expensive to remedy. As a result, semiconductor companies often experience
problems in achieving acceptable wafer manufacturing yields, which are
represented by the number of good die as a proportion of the total number of
die on any particular wafer. The Company purchases wafers, not die, and pays
an agreed price for wafers meeting certain acceptance criteria. Accordingly,
the Company bears the risk of final yield of good die. Poor yields would
materially adversely affect the Company's net sales, gross margins and results
of operations.
Semiconductor manufacturing yields are a function both of product
design, which is developed largely by the Company, and process technology,
which is typically proprietary to the manufacturer. Since low yields may
result from either design or process technology failures, yield problems may
not be effectively determined or resolved until an actual product exists that
can be analyzed and tested to identify process sensitivities relating to the
design rules that are used. As a result, yield problems may not be identified
until well into the production process, and resolution of yield problems would
require cooperation by and communication between the Company and the
manufacturer. For example, a design error that resulted in lower than
expected yields of finished products caused the Company to take a $1.2 million
charge for the three months ended July 31, 1996. This risk is compounded by
the offshore location of the Company's manufacturers, increasing the effort
and time required to identify, communicate and resolve manufacturing yield
problems. As the Company's relationships with Toshiba and any additional
manufacturing partners develop, yields could be adversely affected due to
difficulties associated with adopting the Company's technology and product
design to the proprietary process technology and design rules of each
manufacturer. Because of the Company's limited access to wafer fabrication
capacity from its manufacturers, any decrease in manufacturing yields could
result in an increase in the Company's per unit costs and force the Company to
allocate its available product supply among its customers, thus potentially
adversely impacting customer relationships as well as revenues and gross
margin. There can be no assurance that the Company's manufacturers will
achieve or maintain acceptable manufacturing yields in the future. The
inability of the Company to achieve planned yields from its manufacturers
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the Company also faces the
risk of product recalls resulting from design or manufacturing defects which
are not discovered during the manufacturing and testing process. In the event
of a significant number of product returns, the Company's net sales and gross
margin could be materially adversely affected.
Dependence on New Product Development; Rapid Technological Change
The Company's business, financial condition and results of operations
will depend to a significant extent on its ability to maintain its position in
the market for multimedia accelerator products that integrate large DRAM with
analog and logic circuitry on a single chip. As a result, the Company
believes that significant expenditures for research and development will
continue to be required in the future. The notebook PC market for which the
Company's initial products are designed is intensely competitive and is
characterized by rapidly changing technology, evolving industry standards and
declining average selling prices. Notebook PC manufacturers demand products
incorporating rich features and functionality in order to achieve product
differentiation. The Company must anticipate the features and functionality
that the consumer of notebook PCs will demand, incorporate those features and
functionality into products that meet the exacting design requirements of the
notebook PC manufacturers, price its products competitively, and introduce the
products to the market within the limited window of market demand. The
success of new product introductions is dependent on several factors,
including proper new product definition, timely completion and introduction of
new product designs, the ability of Mitsubishi Electric, Toshiba and any
additional strategic manufacturing partners to effectively design and
implement the manufacture of new products, quality of new products,
differentiation of new products from those of the Company's competitors and
market acceptance of NeoMagic's and its customers' products. There can be no
assurance that the products the Company expects to introduce will incorporate
the features and functionality demanded by system manufacturers and consumers
of notebook PCs will be
<page 17>
successfully developed, or will be introduced within
the appropriate window of market demand. The failure of the Company to
successfully introduce new products and achieve market acceptance for such
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
The integration of large DRAM memory with analog and logic circuitry
on a single chip is highly complex and is critical to the Company's success.
Because of the complexity of its products, however, NeoMagic has experienced
delays from time to time in completing development and introduction of new
products. In the event that there are delays in the completion of development
of future products, including the products currently expected to be announced
over the next year, the Company's business, financial condition and results of
operations would be materially adversely affected. Although the development
cycles for the memory and logic portions of the Company's products have been
relatively synchronized to date, there can be no assurance that this
synchronization will continue in the future. In addition, there can be no
assurance that fundamental advances in either the memory or logic components
of the Company's products will not significantly increase the complexity
inherent in the design and manufacture of MagicGraph128 products, rendering
the Company's product technologically infeasible or uncompetitive. The
multiple chip solutions offered by the Company's competitors are less complex
to design and manufacture than the Company's integrated MagicGraph128
products. As a result, these competitive solutions may be less expensive,
particularly during periods of depressed DRAM prices. The time required for
competitors to develop and introduce competing products may be shorter and
manufacturing yields may be better than those experienced by the Company.
As the markets for the Company's products continue to develop and
competition increases, NeoMagic anticipates that product life cycles will
shorten and average selling prices will decline. In particular, average
selling prices and, in some cases, gross margin for each of the Company's
products will decline as such products mature. Thus, the Company will need to
introduce new products to maintain average selling prices. There can be no
assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely manner,
that products or technologies developed by others will not render NeoMagic's
products or technologies obsolete or uncompetitive, or that the Company's
products will be selected for design into the products of its targeted
customers. The failure of the Company's new product development efforts would
have a material adverse effect on NeoMagic's business, financial condition and
results of operations.
Competition
The market for multimedia accelerators for notebook PCs in which the
Company competes is intensely competitive and is characterized by rapid
technological change, evolving industry standards and declining average
selling prices. NeoMagic believes that the principal factors of competition
in this market are performance, price, features, power consumption, size and
software support. The ability of the Company to compete successfully in the
rapidly evolving notebook PC market depends on a number of factors, including
success in designing and subcontracting the manufacture of new products that
implement new technologies, product quality, reliability, price, the
efficiency of production, design wins for NeoMagic's integrated circuits, ramp
up of production of the Company's products for particular system
manufacturers, end-user acceptance of the system manufacturers' products,
market acceptance of competitors' products and general economic conditions.
There can be no assurance that the Company will be able to compete
successfully in the future.
NeoMagic competes with major domestic and international companies,
most of which have substantially greater financial and other resources than
the Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. The Company's principal competitors include
Chips & Technologies, Inc. ("Chips & Technologies"), Cirrus Logic, Inc.
("Cirrus Logic"), S3 Incorporated ("S3"), and Trident Microsystems, Inc.
("Trident"). On July 28 1997, Intel Corporation announced its intention to
purchase Chips and Technologies. NeoMagic may also face increased
<page 18>
competition
from new entrants into the notebook PC multimedia accelerator market including
companies currently selling products designed for desktop PCs. Furthermore,
the Company expects that many of its competitors will seek to develop and
introduce products that integrate large DRAM with analog and logic circuitry
on a single chip. For example, Chips & Technologies, Trident and S3 have
publicly disclosed that they have or will begin sampling an integrated
multimedia accelerator solution for the notebook PC market that would directly
compete with the Company's products. Potential competition also could come
from manufacturers that integrate a microprocessor with a multimedia
controller. Although Intel has not announced any such product independently,
its relationship with Chips and Technologies could yield some type of
commercial product in the future. The successful commercial introduction of
such a product that eliminates the need for a separate multimedia accelerator
in notebook PCs could have a material adverse effect on the Company's
business, financial condition and results of operations.
Some of the Company's current and potential competitors operate their
own manufacturing facilities. Since the Company does not operate its own
manufacturing facility and must make binding commitments to purchase products,
it may not be able to reduce its costs and cycle time or adjust its production
to meet demand as rapidly as companies that operate their own facilities,
which could have a material adverse effect on its business, financial
condition and results of operations. In addition, the prices of the Company's
products reflect many factors, including the prices of DRAM chips and non-
integrated graphics chips. Therefore, in some cases, the Company's products
may be more expensive than competitive multiple chip solutions. The Company
in the past has lost and in the future may lose design wins due to this price
difference. Furthermore, a significant reduction in the price of DRAMs could
cause the Company's products to be less competitively priced, potentially
affecting ongoing product pricing as well as resulting in the loss of design
wins for new notebook PCs. Uncompetitive pricing and loss of design wins
could have a material and adverse effect on the Company's business, financial
condition, and results of operations.
Uncertainty Regarding Patents and Protection of Proprietary Rights
The Company relies in part on patents to protect its intellectual
property. In the United States, the Company has been issued four patents,
each covering certain aspects of the design and architecture of the Company's
multimedia accelerators. In addition, the Company has patent applications
pending in the United States Patent and Trademark Office (the "PTO"). There
can be no assurance that the Company's pending patent applications or any
future applications will be approved, or that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. Furthermore, there can be no assurance that
others will not independently develop similar products, duplicate the
Company's products or design around any patents that may be issued to the
Company.
The Company also relies on a combination of mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its
intellectual property. Despite these efforts, there can be no assurance that
others will not independently develop substantially equivalent intellectual
property or otherwise gain access to the Company's trade secrets or
intellectual property, or disclose such intellectual property or trade
secrets, or that the Company can meaningfully protect its intellectual
property. A failure by the Company to meaningfully protect its intellectual
property could have a material adverse effect on the Company's business,
financial condition and results of operations.
In October 1996 the Company was notified by two of its customers that
they had received a letter from the holder of a United States patent asserting
that the video/graphics subsystem in such customers' notebook PCs, which use
the Company's MagicGraph128 and MagicGraph128V products, infringe certain
claims of the patent. The Company has been informed by one of these
customers that the patentholder has filed suit in Italy, Germany and the
United States. The Company may have certain indemnification obligations to
customers with respect to the infringement of third-party intellectual
property rights by its products. There can be no assurance that the Company's
potential obligations to indemnify such customers will not have a material
<page 19>
adverse effect on the Company's business, financial condition and results of
operations. The Company believes that the Company's MagicGraph128 and
MagicGraph128V products do not infringe any of the claims of such patent. The
Company's belief is based upon a legal opinion from its patent counsel,
Townsend and Townsend and Crew LLP. In addition to the litigation risks
discussed below, in Italy, one available preliminary remedy is seizure of
infringing goods. There can be no assurances that the
Company or such customers would prevail in any patent litigation, or that
such customers will continue to purchase the Company's products under the
threat of litigation.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. The Company in the past has been, and in the future may be, notified
that it may be infringing the intellectual property rights of third parties.
In November 1994, Cirrus Logic filed suit against the Company and certain of
its employees claiming, among other things, breach of fiduciary duty, breach
of and interference with contract and misappropriation of trade secrets. The
Company and Cirrus Logic settled the lawsuit in June 1996, but the Company
incurred an aggregate of $703,000 in expenses in connection with such
litigation during fiscal 1995 and fiscal 1996. This settlement did not
involve cash payments but did include a non-solicitation provision and certain
contingent cross-licensing provisions. In February 1997, Cirrus Logic sent
the Company written notice asserting that the Company's MagicGraph128TM,
MagicGraph128VTM and MagicGraph128ZVTM products infringe three United States
patents held by Cirrus Logic. Since receiving the notice of alleged
infringement, the Company has advised Cirrus Logic that the Company does not
believe that any of its products infringes any claims of the patents. The
Company also has undergone a confidential external infringement review and has
conducted its own internal infringement review, and the Company continues to
believe that the Cirrus Logic infringement allegations are unfounded.
However, there can be no assurances that Cirrus Logic will not file a lawsuit
against the Company or that the Company would prevail in any such litigation.
Any protracted litigation by Cirrus Logic or the success of Cirrus Logic in
any such litigation could have a material and adverse effect on the Company's
financial position or results of operations.
Any patent litigation, whether or not determined in the Company's
favor or settled by the Company, would at a minimum be costly and could divert
the efforts and attention of the Company's management and technical personnel
from productive tasks, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that current or future infringement claims by third parties or
claims for indemnification by other customers or end users of the Company's
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect the Company's business, financial condition and results of operations.
In the event of any adverse ruling in any such matter, the Company could be
required to pay substantial damages, which could include treble damages, cease
the manufacturing, use and sale of infringing products, discontinue the use of
certain processes or to obtain a license under the intellectual property
rights of the third party claiming infringement. There can be no assurance,
however, that a license would be available on reasonable terms or at all Any
limitations on the Company's ability to market its products, or delays and
costs associated with redesigning its products or payments of license fees to
third parties, or any failure by the Company to develop or license a
substitute technology on commercially reasonable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on International Sales and Suppliers
Export sales are a critical part of the Company's business. Sales to
customers located outside the United States (including sales to foreign
operations of customers headquartered in the United States and foreign system
manufacturers that sell to United States-based OEMs) accounted for 82.8% and
94.8% of the Company's net sales for the first nine months of fiscal 1996 and
fiscal 1997, respectively. The Company expects that net sales derived from
international sales will continue to represent a significant portion of its
total net sales. Some of the Company's international sales are supported by
letters of credit
<page 20>
issued by its customers. Because the Company's
international sales have to date been denominated in United States dollars,
increases in the value of the United States dollar could increase the price in
local currencies of the Company's products in foreign markets and make the
Company's products relatively more expensive than competitors products that
are denominated in local currencies. All of the Company's wafers are and for
the foreseeable future will be produced by foreign manufacturers. In
addition, many of the assembly and test services used by the Company are
procured from international sources. Under the Company's wafer supply
agreements with Mitsubishi Electric and Toshiba, products are priced in
Japanese yen. As a result, the Company's cost of goods sold are subject to
fluctuations in the yen-dollar exchange rates. The Company has in the past
hedged its exposure to fluctuations in such foreign currency exchange rate by
purchasing foreign exchange contracts and will continue to do so in the
future. However, there can be no assurance that such hedging will be
adequate. Significant wafer or assembly and test service price increases,
fluctuations in currency exchange rates or the Company's hedging against
currency exchange rate fluctuations could have a material adverse effect on
the Company's business, financial condition and results of operations.
International sales and manufacturing operations are subject to a
variety of risks, including fluctuations in currency exchange rates, tariffs,
import restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles, potentially adverse
tax consequences and export license requirements. In addition, the Company is
subject to the risks inherent in conducting business internationally including
foreign government regulation, political and economic instability, and
unexpected changes in diplomatic and trade relationships. Moreover, the laws
of certain foreign countries in which the Company's products may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's intellectual property rights to the same extent as do the laws of
the United States, thus increasing the possibility of piracy of the Company's
products. There can be no assurance that one or more of these risks will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
Need for Additional Capital
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company believes that its existing capital resources, will
be sufficient to meet the Company's capital requirements through the next 12
months, although the Company could be required, or could elect, to seek to
raise additional capital during such period. The Company's future capital
requirements will depend on many factors, including the rate of net sales
growth, the timing and extent of spending to support research and development
programs and expansion of sales and marketing, the timing of introductions of
new products and enhancements to existing products, and market acceptance of
the Company's products. The Company may raise additional equity or debt
financing in the future. There can be no assurance that additional equity or
debt financing, if required, will be available on acceptable terms or at all.
Management of Expanded Operations
The Company has experienced, and may continue to experience, periods
of rapid growth and expansion, which have placed, and could continue to place,
a significant strain on the Company's limited personnel and other resources.
To manage these expanded operations effectively, the Company will be required
to continue to improve its operational, financial and management systems.
Given its relatively early stage of development, the Company is dependent upon
its ability to successfully hire, train, motivate and manage its employees,
especially its management and development personnel. If the Company's
management is unable to manage its expanded operations effectively, the
Company's business, financial condition and results of operations could be
materially adversely affected.
<page 21>
Dependence on Qualified Personnel
The Company's future success depends in part on the continued service
of its key engineering, sales, marketing, manufacturing, finance and executive
personnel, and its ability to identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor
industry, and there can be no assurance that the Company will be able to
continue to attract and train qualified personnel necessary for the
development of its business. The Company's anticipated growth is expected to
place increased demands on the Company's resources and will likely require the
addition of new management personnel and the development of additional
expertise by existing management personnel. Loss of the services of, or
failure to recruit in a timely manner, key technical and management personnel
could be significantly detrimental to the Company's product development
programs or otherwise have a material adverse effect on the Company's
business, financial condition and results of operations.
Volatility of Stock Price
The market price of the shares of Common Stock, like that of the common
stock of many other semiconductor companies, has been and is likely to be
highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance
of particular companies. The market price of the Common Stock could be
subject to significant fluctuations in response to quarter-to-quarter
variations in the Company's anticipated or actual operating results,
announcements of new products, technological innovations or setbacks by the
Company or its competitors, conditions in the semiconductor and PC industries,
unanticipated shifts in the Notebook PC market or industry standards, loss of
customers, changes in DRAM pricing, the commencement of, developments in or
outcome of litigation, changes in or the failure by the Company to meet
estimates of the Company's performance by securities analysts, market
conditions for high technology stocks in general, and other events or factors.
<page 22>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
The Company completed its initial public offering pursuant to a
Registration Statement on Form S-1 in March 1997 and issued 3,000,000
shares of its Common Stock to the public at a price of $12.00 per share.
The managing underwriters for the initial public offering were Morgan
Stanley & Co., Montgomery Securities and Robertson, Stephens & Company.
The offering has been terminated and all the shares were sold. The
Company received approximately $32.4 million of cash from the initial
public offering, net of underwriting discounts, commissions, and other
offering costs (approximately $1.1 million).
The Company also received $1.5 million in proceeds from Direct Sales of
125,000 shares of the Company's stock at a price of $12 per share. In
April 1997 the underwriters exercised their over-allotment option and
purchased an additional 450,000 shares (of which 100,000 shares were
sold by selling shareholders) at $12.00 per share with net proceeds to
the Company of approximately $ 3.9 million (net proceeds to the selling
shareholders was approximately $1.2 million). The principal purpose of
this offering was to obtain additional capital, create a public market
for the Company's Common Stock and facilitate future access by the
Company to public equity markets. Pending the use of proceeds from this
offering the Company invested such proceeds in short-term, interest
bearing, investment grade obligations. During the three and nine months
ended October 26, 1997, the Company continued to invest the net proceeds
from the Company's initial public offering in short-term, interest
bearing, investment grade obligations.
None of the expenses incurred in connection with the offering
constituted direct or indirect payments to directors, officers, general
partners of the issuer or their associates, or to persons owning ten
percent or more of any class of equity securities or the issuer or to
affiliates of the issuer.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<page 23>
Exhibit
Number Description
10.1 Lease Agreement, dated as of October 9,1997, between
Registrant and A&P Family Investments, as landlord for the
leased premises located at 3250 Jay Street.
10.2 Amendment 1, dated as of October 15, 1997, between
Registrant and A&P Family Investments, as landlord for the
leased premises located at 3260 Jay Street.
10.3 Amendment to Agreement dated as of November 20, 1995,
between Registrant and Mitsubishi International Corporation,
as amended.
11.1 Computation of Pro Forma Net Income (Loss) Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three months ended October 31, 1997.
<page 24>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEOMAGIC CORPORATION
(Registrant)
/S/ MERLE MC CLENDON
--------------------
MERLE MC CLENDON
Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
December 3, 1997
<page 25>
EXHIBIT INDEX
Exhibit Page
Numbers Description Number
- ------- ----------- ------
10.1 Lease Agreement, dated as of October 9,1997, between Registrant
and A&P Family Investments, as landlord for the leased premises
located at 3250 Jay Street.
10.2 Amendment 1, dated as of October 15, 1997, between Registrant and
A&P Family Investments, as landlord for the leased premises
located at 3260 Jay Street.
10.3 Amendment to Agreement dated as of November 20, 1995, between
Registrant and Mitsubishi International Corporation, as amended.
11.1 Computation of Pro Forma Net Income (Loss) Per Share
27.1 Financial Data Schedule
<page 26>
Exhibit 10.1
============
LEASE AGREEMENT OWNER: 60
PROP: 605
UNIT: 1
TENANT: 60503
THIS LEASE, made this 9th day of October 1997 between
BOYD C. SMITH, Trustee, or his Successor Trustee, UTA dated 12/27/76
RICHARD T. PEERY 1976 CHILDREN TRUSTS) and LOUIS B.
SULLIVAN, Trustee, or his Successor Trustee, UTA dated 12/27/76 (JOHN
ARRILLAGA 1976 CHILDREN TRUSTS) as amended, hereinafter called Landlord,
and NEOMAGIC CORPORATION, a California corporation, hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit
"A" attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
All of that certain 45,000+ square foot, two-story building located at 3250
Jay Street, Santa Clara, California 95054. Said Premises is more particularly
shown within the area outlined in Red on Exhibit A attached hereto. The entire
parcel, of which the Premises is a part, is shown within the area outlined in
Green on Exhibit A attached. The Premises is leased on an "as-is" basis, in
its present condition, and in the configuration as shown in Red on Exhibit B
attached hereto.
As used herein the Complex shall mean and include all of the land outlined in
Green and described in Exhibit A attached hereto and all of the buildings,
improvements, fixtures and equipment now or hereafter situated on said land.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of
the consideration for this Lease to perform and observe each and all of said
terms, covenants and conditions. This Lease is made upon the conditions of
such performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of
general office, light manufacturing, research and development, and storage and
other uses necessary for Tenant to conduct Tenant's business, provided that
such uses shall be in accordance with all applicable governmental laws and
ordinances, and for no other purpose. Tenant shall not do or permit to be
done in or about the Premises or the Complex nor bring or keep or permit to be
brought or kept in or about the Premises or the Complex anything which is
prohibited by or will in any way increase the existing rate of (or otherwise
affect) fire or any insurance covering the Complex or any part thereof, or any
of its contents, or will cause a cancellation of any insurance covering the
Complex or any part thereof, or any of its contents. Tenant shall not do or
permit to be done anything in, on or about the Premises or the Complex which
will in any way obstruct or interfere with the rights of other tenants or
occupants of the Complex or injure or annoy them, or use or allow the Premises
to be used for any improper, immoral, unlawful or objectionable purpose, nor
shall Tenant cause, maintain or permit any nuisance in, on or about the
Premises or the Complex. No sale by auction shall be permitted on the
Premises. Tenant shall not place any loads upon the floors, walls, or ceiling,
which endanger the structure, or place any harmful fluids or other materials
in the drainage system of the building, or overload existing electrical or
other mechanical systems. No waste materials or refuse shall be dumped upon
or permitted to remain upon any part of the Premises or outside of the
building in which the Premises are a part, except in trash containers placed
inside exterior enclosures designated by Landlord for that purpose or inside
of the building proper where designated by Landlord. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain outside the
Premises or on any portion of common area of the Complex. No loudspeaker or
other speaker or other device, system or apparatus which can be heard outside
the Premises shall be used in or at the Premises without the prior written
consent of Landlord. Tenant shall not commit or suffer to be committed any
waste in or upon the Premises. Tenant shall indemnify, defend and hold
Landlord harmless against any loss, expense, damage, attorneys' fees or
liability arising out of failure of Tenant to comply with any applicable law.
Tenant shall comply with any covenant, condition or restriction ("CC&Rs")
affecting the Premises. The provisions of this paragraph are for the benefit
of Landlord only and shall not be construed to be for the benefit of any
tenant or occupant of the Complex.
2. TERM*
A. The term of this Lease shall be for a period of FIVE, (5) years FOUR
(4) months (unless sooner terminated as hereinafter provided) and, subject to
Paragraphs 55, shall commence on the 1st day of January 1998 and end on the
30th day April of 2003.
B. Possession of the Premises shall be deemed tendered and the term of
this Lease shall commence on January 1, 1998, or:
(a) One day after a Certificate of Occupancy is granted by the proper
governmental agency, or, if the governmental agency having jurisdiction
over the area in which the Premises are situated does not issue
certificates of occupancy, then the same number of days after
certification by Landlord's architect or contractor that Landlord's
construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's operating
personnel; or
(c) When the Tenant Improvements have been substantially completed for
Tenant's use and occupancy
(d) As otherwise agreed in writing.
3. POSSESSION. If Landlord, for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of the said term, as
herein before specified, this Lease shall not be void or voidable: no
obligation of Tenant shall be affected thereby, nor shall Landlord or
Landlord's agents be liable to Tenant for any loss or damage resulting
therefrom: but in that event the commencement and termination dates of the
Lease, and all other dates affected thereby shall be revised to conform to the
date of Landlord's delivery of possession, as specified in Paragraph 2(b),
above. The above is however subject to the provision that the period of delay,
of delivery of the premises shall not exceed 60 days from the commencement
date herein (except those delays caused by Acts of God, strikes, war,
utilities, governmental bodies, weather, unavailable materials, and delays
beyond Landlord's control up to a maximum of 180 days shall be excluded in
calculating such period) in which instance Tenant, at its option, may by
written notice to Landlord, terminate this Lease.
*It is agreed in the event said Lease commences on a date other than the first
day of the month the term of the Lease will be extended to account for the
number of days in the partial month. The Basic Rent during the resulting
partial month will be pro-rated (for the number of days in the partial month)
at the Basic Rent scheduled for the projected commencement date as shown in
Paragraph 43.
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord
may designate without deduction, offset, prior notice, or demand, and Landlord
agrees to accept as Basic Rent for the leased Premises the total sum of FIVE
MILLION SIX HUNDRED FORTY THREE THOUSAND AND NO/100 ($5,643,000.00) Dollars in
lawful money of the United States of America, payable as follows:
See Paragraph 43 for Basic Rent Schedule
B. Time for Payment. In the event that the term of this Lease commences on
a date other than the first day of a calendar month, on the date of
commencement of the term hereof Tenant shall pay to Landlord as rent for the
period from such date of commencement to the first day of the next succeeding
calendar month that proportion of the monthly rent hereunder which the number
of days between such date of commencement and the first day of the next
succeeding calendar month bears to thirty (30). In the event that the term of
this Lease for any reason ends on a date other than the last day of a calendar
month, on the first day of the last calendar month, of the term hereof Tenant
shall pay to Landlord as rent for the period from said first day of said last
calendar month to and including the last day of the term hereof that
proportion of the monthly rent hereunder which the number of days between said
first day of said last calendar month and the last day of the term hereof
bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as set forth in this Paragraph 4
when due, or any part thereof. Tenant agrees to pay Landlord, in addition to
the delinquent rental due, a late charge for each rental payment in default
ten (10) days. Said late charge shall equal ten (10%) percent of each rental
payment so in default.
D. Additional Rent. Beginning with the commencement date of the term of
this Lease. Tenant shall pay to Landlord in addition to the Basic Rent and as
Additional Rent the following:
(a) Tenant's proportionate share of all Taxes relating to the Complete
as set forth in Paragraph 12, and
(b) Tenant's proportionate share of all insurance premiums relating to
the Complex, as set forth in Paragraph 15, and
(c) Tenant's proportionate share of expenses for the operation,
management, maintenance and repair of the Building (including common
areas of the Building) and Common Areas of the Complex in which the
Premises are located as set forth in Paragraph 7, and
(d) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and
expenses including attorney's fees and legal expenses, that may accrue
thereto in the event of Tenant's failure to pay such amounts, and all
damages, reasonable costs and expenses which Landlord may incur by
reason of default of Tenant or failure on Tenant's part to comply with
the terms of this Lease. In the event of nonpayment by Tenant of
Additional Rent Landlord shall have all the rights and remedies with
respect thereto as Landlord has for nonpayment of rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's
agent (i) within five days for taxes and insurance and within thirty (30) days
for all other Additional Rent Items after presentation of invoice from
Landlord or Landlord's agent selling forth such Additional Rent and/or (ii) at
the option of Landlord, Tenant shall pay to Landlord monthly, in advance,
Tenant's prorata share of an amount estimated by Landlord to be Landlord's
approximate average monthly expenditure for such Additional Rent items, which
estimated amount shall be reconciled within 120 days of the end of each
calendar year or more frequently if Landlord so elects to do so at Landlord's
sole and absolute discretion, as compared to Landlord's actual expenditure for
said Additional Rent items, with Tenant paying to Landlord, upon demand, any
amount of actual expenses expended by Landlord in excess of said estimated
amount, or Landlord refunding to Tenant (providing Tenant is not in default in
the performance of any of the terms, covenants and conditions of this Lease)
any amount of estimated payments made by Tenant in excess of Landlord's actual
expenditures for said Additional Rent items. Within thirty (30) days after
receipt of Landlord's reconciliation, Tenant shall have the right, at Tenant's
sole expense, to audit, at a mutually convenient time at Landlord's office,
Landlord's records relating to the foregoing expenses. Such audit must be
conducted by Tenant or an independent nationally recognized accounting firm
that is not being compensated by Tenant or other third party on a contingency
fee basis. Landlord shall be provided a complete copy of said audit at no
expense to Landlord. If such audit reveals that Landlord has overcharged
Tenant, the amount overcharged shall be credited to Tenant's account within
thirty (30) days after the audit is concluded.
The respective obligations of Landlord and Tenant under this paragraph shall
survive the expiration or other termination of the term of this Lease, and if
the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall
be determined and settled on the basis of the statement of actual Additional
Rent for such calendar year and shall be prorated in the proportion which the
number of days in such calendar year preceding such expiration or termination
bears to 365.
E. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder
and all payments hereunder for Additional Rent shall be paid to Landlord at
the office of Landlord at A&P Family Investments, c/o Peery/Arrillaga, 2560
Mission College Blvd., #101, Santa Clara, CA 95054 or to such other person or
to such other place as Landlord may from time to time designate in writing.
F. Security Deposit. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of ONE HUNDRED SEVENTY SIX THOUSAND
FIVE HUNDRED AND NO/100 ($ 176,500.00) Dollars. Said sum shall be held by
Landlord as a Security Deposit for the faithful performance by Tenant of all
of the terms, covenants, and conditions of this Lease to be kept and performed
by Tenant during the term hereof. If Tenant defaults with respect to any
provision of this Lease, including, but not limited to, the provisions
relating to the payment of rent and any of the monetary sums due herewith.
Landlord may (but shall not be required to) use, apply or retain all or any
part of this Security Deposit for the payment of any other amount which
Landlord may spend by reason of Tenant's default or to compensate Landlord for
any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of said Deposit is so used or applied, Tenant shall,
within ten (10) days after written demand therefor, deposit cash with Landlord
in the amount sufficient to restore the Security Deposit to its original
amount. Tenant's failure to do so shall be a material breach of this Lease.
Landlord shall not be required to keep this Security Deposit separate from its
general funds, and Tenant shall not be entitled to interest on such Deposit.
If Tenant fully and faithfully performs every provision of this Lease to be
performed by it, the Security Deposit or any balance thereof shall be returned
to Tenant (or at Landlord's option, to the last assignee of Tenant's interest
hereunder at the expiration of the Lease term and after Tenant has vacated the
Premises. In the event of termination of Landlord's interest in this Lease,
Landlord shall transfer said Deposit to Landlord's successor in interest
whereupon Tenant agrees to release Landlord from liability for the return of
such Deposit or the accounting therefor.
5. RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions
of this Lease and such Rules and Regulations at Landlord may from time to time
prescribe, Tenant and Tenant's employees, invitees and customers shall, in
common with other occupants of the Complex in which the Premises are located,
and their respective employees, invitees and customers, and others entitled to
the use thereof, have the non-exclusive right to use the access roads, parking
areas, and facilities provided and designated by Landlord for the general use
and convenience of the occupants of the Complex in which the Premises are
located, which areas and facilities are referred to herein as "Common Area."
This right shall terminate upon the termination of this Lease. Landlord
reserves the right from time to time to make changes in the shape, size,
location, amount and extent of Common Area. Landlord further reserves the
right to promulgate such reasonable rules and regulations relating to the use
of the Common Area, and any part or parts thereof, as Landlord may deem
appropriate for the best interests of the occupants of the Complex. The Rules
and Regulations shall be binding upon Tenant upon delivery of a copy of them
to Tenant, and Tenant shall abide by them and cooperate in their observance.
Such Rules and Regulations may be amended by Landlord from time to time, with
or without advance notice, and all amendments shall be effective upon delivery
of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-
performance by any other tenant or occupant of the Complex of any of said
Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner in
which the Common Area shall be maintained and the expenditures for such
maintenance shall be at the discretion of Landlord.
* $88,250.00 Cash due upon Lease execution
$88,250.00 Promissory Note due January 1, 1999
6. PARKING Tenant shall have the right to use with other tenants or occupants
of the Complex 150 parking spaces in the common parking areas of the Complex.
Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or
invitees shall not use parking spaces in excess of said 150 spaces allocated
to Tenant hereunder. Landlord shall have the right, at Landlord's sole
discretion, to specifically designate the location of Tenant's parking spaces
within the common parking areas of the Complex in the event of a dispute among
the tenants occupying the building and/or Complex referred to herein, in which
event Tenant agrees that Tenant, Tenant's employees, agents, representatives
and/or invitees shall not use any parking spaces other than those parking
spaces specifically designated by Landlord for Tenant's use. Said parking
spaces, if specifically designated by Landlord to Tenant, may be relocated by
Landlord at any time, and from time to time. Landlord reserves the right, at
Landlord's sole discretion, to rescind any specific designation of parking
spaces, thereby returning Tenant's parking spaces to the common parking area.
Landlord shall give Tenant written notice of any change in Tenant's parking
spaces. Tenant shall not, at any time, park, or permit to be parked, any
trucks or vehicles adjacent to the loading areas so as to interfere in any way
with the use of such areas, nor shall Tenant at any time park, or permit the
parking of Tenant's trucks or other vehicles or the trucks and vehicles of
Tenant's suppliers or others, in any portion of the common area not designated
by Landlord for such use by Tenant. Tenant shall not park not permit to be
parked, any inoperative vehicles or equipment on any portion of the common
parking area or other common areas of the Complex. Tenant agrees to assume
responsibility for compliance by its employees with the parking provision
contained herein. If Tenant or its employees park in other than such
designated parking areas, then Landlord may charge Tenant, as an additional
charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or
partial day each such vehicle is parked in any area other than that
designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow
away from the Complex any vehicle belonging to Tenant or Tenant's employees
parked in violation of these provisions, or to attach violation stickers or
notices to such vehicles. Tenant shall use the parking areas for vehicle
parking only, and shall not use the parking areas for storage.
7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF
THE COMPLEX. As Additional Rent and in accordance with Paragraph 4D of this
Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated
on a square footage or other equitable basis as calculated by Landlord) of all
expenses of operation, management, maintenance and repair of the Common Areas
of the Complex including, but not limited to, license, permit, and inspection
fees; security; utility charges associated with exterior landscaping and
lighting (including water and sewer charges); all charges incurred in the
maintenance and replacement of landscaped areas, lakes, parking lots, and
paved areas (including repairs, replacement, resealing and restriping)
sidewalks, driveways; maintenance, repair and replacement of all fixtures and
electrical, mechanical, and plumbing systems; structural elements and exterior
surfaces of the buildings; salaries and employee benefits of personnel and
payroll taxes applicable thereto; supplies, materials, equipment and tools;
the cost of capital expenditures which have the effect of reducing operating
expenses, provided, however, that in the event Landlord makes such capital
improvements, Landlord may amortize its investment in said improvements
(together with interest at the rate of fifteen (15%) percent per annum on the
unamortized balance) as an operating expense in accordance with standard
accounting practices, provided, that such amortization is not at a rate
greater than the anticipated savings in the operating expenses.
"Additional Rent" as used herein shall not include Landlord's debt repayments;
interest on charges; expenses directly or indirectly incurred by Landlord for
the benefit of any other tenant; cost for the installation of partitioning or
any other tenant improvements; cost of attracting tenants; depreciation;
interest, or executive salaries.
8. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder. Tenant accepts the
Premises as being in good and sanitary order, condition and repair and accepts
the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the
condition of such building or as to the use or occupancy which may be made
thereof. Any exceptions to the foregoing must be by written agreement executed
by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on
the sooner termination of this Lease, to surrender the Premises promptly and
peaceably to Landlord in good condition and repair (damage by Acts of God,
fire, normal wear and tear excepted), with all interior walls painted, or
cleaned so that they appear freshly painted, and repaired and replaced, if
damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the
airconditioning and heating equipment serviced by a reputable and licensed
service firm and in good operating condition (provided the maintenance of such
equipment has been Tenant's responsibility during the term of this Lease)
together with all alterations, additions, and improvements which may have been
made in, to, or on the Premises (except movable trade fixtures installed at
the expense of Tenant) except that Tenant shall ascertain from Landlord within
thirty (30) days before the end of the term of this Lease whether Landlord
desires to have the Premises or any part or parts thereof restored to their
condition and configuration as when the Premises were delivered to Tenant and
if Landlord shall so desire, then Tenant shall restore said Premises or such
part or parts thereof before the end of this Lease at Tenant's sole cost and
expense. Tenant, on or before the end of the term or sooner termination of
this Lease, shall remove all of Tenant's personal property and trade fixtures
from the Premises, and all property not so removed on or before the end of the
term or sooner termination of this Lease shall be deemed abandoned by Tenant
and title to same shall thereupon pass to Landlord without compensation to
Tenant. Landlord may, upon termination of this Lease, remove all moveable
furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and
repair any damage caused by such removal at Tenant's sole cost. If the
Premises be not surrendered at the end of the term or sooner termination of
this Lease, Tenant shall indemnify Landlord against loss or liability
resulting from the delay by Tenant in so surrendering the Premises including,
without limitation, any claims made by any succeeding tenant founded on such
delay. Nothing contained herein shall be construed as an extension of the term
hereof or as a consent of Landlord to any holding over by Tenant. The
voluntary or other surrender of this Lease or the Premises by Tenant or a
mutual cancellation of this Lease shall not work as a merger and, at the
option of Landlord, shall either terminate all or any existing subleases or
subtenancies or operate as an assignment to Landlord of all or any such
subleases or subtenancies.
9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the
written consent of Landlord first had and obtained by Tenant, but at the cost
of Tenant, and any addition to, or alteration of, the Premises, except
moveable furniture and trade fixtures, shall at once become a part of the
Premises and belong to Landlord. Landlord reserves the right to approve all
contractors and mechanics proposed by Tenant to make such alterations and
additions. Tenant shall retain title to all moveable furniture and trade
fixtures placed in the Premises. All heating, lighting, electrical,
airconditioning, floor to ceiling partitioning, drapery, carpeting, and floor
installations made by Tenant, together with all property that has become an
integral part of the Premises, shall not be deemed trade fixtures. Tenant
agrees that it will not proceed to make such alteration or additions, without
having obtained consent from Landlord to do so, and until five (5) days from
the receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material suppliers for
payment for Tenant's improvements. Tenant will at all times permit such
notices to be posted and to remain posted until the completion of work. Tenant
shall, if required by Landlord, secure at Tenant's own cost and expense, a
completion and lien indemnity bond, satisfactory to Landlord, for such work.
Tenant further covenants and agrees that any mechanic's lien filed against the
Premises or against the Complex for work claimed to have been done for, or
materials claimed to have been furnished to Tenant, will be discharged by
Tenant, by bond or otherwise, within ten (10) days after the filing thereof,
at the cost and expense of Tenant. Any exceptions to the foregoing must be
made in writing and executed by both Landlord and Tenant.
10. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a
high standard of maintenance and repair, and in good and sanitary condition.
Tenant's maintenance and repair responsibilities herein referred to include,
but are not limited to, all windows, window frames, plate glass, glazing,
truck doors, plumbing systems (such as water and drain lines, sinks, toilets,
faucets, drains, showers and water fountains), electrical systems (such as
panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts),
heating and air-conditioning systems (such as compressors, fans, air handlers,
ducts, mixing boxes, thermostats, time clocks, boilers, heaters, supply and
return grills), store fronts, roofs, downspouts, all interior improvements
within the premises including but not limited to wall coverings, window
coverings, carpet, floor coverings, partitioning, ceilings, doors (both
interior and exterior, including closing mechanisms, latches, locks, skylights
(if any), automatic fire extinguishing systems, and elevators and all other
interior improvements of any nature whatsoever. Tenant agrees to provide
carpet shields under all rolling chairs or to otherwise be responsible for
wear and tear of the carpet caused by such rolling chairs if such wear and
tear exceeds that caused by normal foot traffic in surrounding areas. Areas of
excessive wear shall be replaced at Tenant's sole expense upon Lease
termination. Tenant hereby waives all rights under, and benefits of,
subsection 1 of Section 1932 and Section 1941 and 1942 of the California Civil
Code and under any similar law, statute or ordinance now or hereafter in
effect.
11. UTILITIES Tenant shall pay promptly, as the same become due, all charges
for water, gas, electricity, telephone, telex and other electronic
communications service, sewer service, waste pick-up and any other utilities,
materials or services furnished directly to or used by Tenant on or about the
Premises during the term of this Lease, including, without limitation, any
temporary or permanent utility surcharge or other exactions whether or not
hereinafter imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused
by accident, breakage, repair, strikes, lockouts, or other labor disturbances
or labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
12. TAXES Tenant shall not be responsible for any Real Estate tax increase
related to tenant improvements constructed for another tenant's use outside
the Premises leased hereunder.
A. As Additional Rent and in accordance with Paragraph 4 D of this Lease,
Tenant shall pay to Landlord Tenant's proportionate share of all Real Property
Taxes, which prorata share shall be allocated to the leased premises by square
footage or other equitable basis, as calculated by Landlord. The term "Real
Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies
and other charges of any kind or nature whatsoever, general and special,
foreseen and unforeseen (including all installments of principal and interest
required to pay any general or special assessments for public improvements and
any increases resulting from reassessments caused by
any change in ownership
of the Complex) now or hereafter imposed by any governmental or quasi-
governmental authority or special district having the direct or indirect power
to tax or levy assessments, which are levied or assessed against, or with
respect to the value, occupancy or use of, all or any portion of the Complex
(as now constructed or as may at any time hereafter be constructed, altered,
or otherwise changed) or Landlord's interest therein; any improvements located
within the Complex (regardless of ownership); the fixtures, equipment and
other property of Landlord, real or personal, that are an integral part of and
located in the Complex; or parking areas, public utilities, or energy within
the Complex; (ii) all charges, levies or fees imposed by reason of
environmental regulation or other governmental control of the Complex; and
(iii) all costs and fees (including attorneys' fees) incurred by Landlord in
contesting any Real Property Tax and in negotiating with public authorities as
to any Real Property Tax. If at any time during the term of this Lease the
taxation or assessment of the Complex prevailing as of the commencement date
of this Lease shall be altered so that in lieu of or in addition to any Real
Property Tax described above there shall be levied, assessed or imposed
(whether by reason of a change in the method of taxation or assessment,
creation of a new tax or charge, or any other cause) an alternate or
additional tax or charge (i) on the value, use or occupancy of the Complex or
Landlord's interest therein or (ii) on or measured by the gross receipts,
income or rentals from the Complex, on Landlord's business of leasing the
Complex, or computed in any manner with respect to the operation of the
Complex, then any such tax or charge, however designated, shall be included
within the meaning of the term "Real Property Taxes" for purposes of this
Lease, and if Landlord has the option to either pay the entire assessment in
cash or go to bond, and if Landlord elects to pay the entire assessment in
cash in lieu of going to bond, the entire portion of the assessment assigned
to Tenant's Leased Premises will be prorated over the same period that the
assessment would have been prorated had the assessment gone to bond. If any
Real Property Tax is based upon property or rents unrelated to the Complex,
then only that part of such real Property Tax that is fairly allocable to the
Complex shall be included within the meaning of the term "Real Property
Taxes." Notwithstanding the foregoing, the term "Real Property Taxes" shall
not include estate, inheritance, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all sources.
Notwithstanding the above, it is agreed that if any special assessments for
capital improvements are assessed, and if Landlord has the option to either
pay the entire assessment in cast or got to bond, and if Landlord elects to
pay the entire assessment in cash in lieu of going to bond, the entire portion
of the assessment assigned to Tenant's Leased Premises will be prorated over
the same period that the assessment would have been prorated had gone to bond.
B. Taxes on Tenant's Property
(a) Tenant shall be liable for and shall pay ten days before
delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes
on Tenant's personal property or trade fixtures are levied against
Landlord or Landlord's property or if the assessed value of the
Premises is increased by the inclusion therein of a value placed upon
such personal property or trade fixtures of Tenant and if Landlord,
after written notice to Tenant, pays the taxes based on such increased
assessment, which Landlord shall have the right to do regardless of
the validity thereof, but only under proper protest if requested by
Tenant, Tenant shall upon demand, as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of
such taxes resulting from such increase in the assessment; provided
that in any such event Tenant shall have the right, in the name of
Landlord and with Landlord's full cooperation, to bring suit in any
court of competent jurisdiction to recover the amount of any such
taxes so paid under protest, and any amount so recovered shall belong
to Tenant.
(b) if the Tenant improvements in the Premises, whether installed,
and/or paid for by Landlord or Tenant and whether or not affixed to
the real property so as to become a part thereof, are assessed for
real property tax purposes at a valuation higher than the valuation at
which standard office improvements inn other space in the Complex are
assessed, then the real property taxes and assessments levied against
Landlord or the Complex by reason of such excess assessed valuation
shall be deemed to be taxes levied against personal property of Tenant
and shall be governed by the provisions of 12Ba above. If the records
of the County Assessor are available and sufficiently detailed to
serve as a basis for determining whether said Tenant improvements are
assessed at a higher valuation than standard office improvements in
other space in the Complex, such records shall be binding on both the
Landlord and the Tenant. If the records of the County Assessor are
not available or sufficiently detailed to serve as a basis for making
said determination, the actual cost of construction shall be used.
13. LIABILITY INSURANCE. Tenant at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability
insurance with a combined single limit coverage of not less than Two Million
Dollars ($2,000,000) per occurrence for injuries to or death of persons
occurring in, on or about the Premises or the Complex, and property damage
insurance with limits of $500,000. The policy or policies affecting such
insurance, certificates of insurance of which shall be furnished to Landlord,
shall name Landlord as additional insureds, and shall insure any liability of
Landlord, contingent or otherwise, as respects to insurable acts or omissions
of Tenant, its agents, employees or invitees or otherwise by any conduct or
transactions of any of said persons in or about or concerning the Premises,
including any failure of Tenant to observe or perform any of its obligations
hereunder; shall be issued by an insurance company admitted to transact
business in the State of California; and shall provide that the insurance
effected thereby shall not be canceled, except upon thirty (30) days' prior
written notice to Landlord. If, during the term of this Lease, in the
considered opinion of Landlord's Lender, insurance advisor, or counsel, the
amount of insurance described in this paragraph 13 is not adequate, Tenant
agrees to increase said coverage to such reasonable amount as Landlord's
Lender, insurance advisor or counsel shall deem adequate.
14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE.
Tenant shall maintain a policy or policies of fire and property damage
insurance in "all risk" form with a sprinkler leakage endorsement insuring the
personal property, inventory, trade fixtures, and leasehold improvements
within the leased Premises for the full replacement value thereof. The
proceeds from any of such policies shall be used for the repair or replacement
of such items so insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with
all laws.
15. PROPERTY INSURANCE Landlord shall purchase and keep in force and as
Additional Rent and in accordance with Paragraph 4D of this Lease. Tenant
shall pay to Landlord (or Landlord's agent if so directed by Landlord)
Tenant's proportionate share (calculated on a square footage or other
equitable basis as calculated by Landlord) of the deductibles on insurance
claims and the cost of policy or policies of insurance covering loss or damage
to the Premises and Complex in the amount of the full replacement value
thereof, providing protection against those perils included within the
classification of "all risks" insurance and flood and/or earthquake
insurance, if available, plus a policy of rental income insurance in the
amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus
sums paid as Additional Rent and any deductibles related thereto. If such
insurance cost is increased due to Tenant's use of the Premises or the
Complex, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any
insurance procured by Landlord for the Complex.
Landlord and Tenant do each hereby respectively release the other, to the
extent of insurance coverage of the releasing party, from any liability for
loss or damage caused by fire or any of the extended coverage casualties
included in the releasing party's insurance policies, irrespective of the
cause of such fire or casualty; provided, however, that if the insurance
policy of either releasing party prohibits such waiver, then this waiver shall
not take effect until consent to such waiver is obtained. If such waiver is so
prohibited, the insured party affected shall promptly notify the other party
thereof.
16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises or the Complex
by or from any cause whatsoever, including, without limitation, gas, fire,
oil, electricity or leakage of any character from the roof, walls, basement or
other portion of the Premises or the Complex but excluding, however, the
willful misconduct or negligence of Landlord, its agents, servants, employees,
invitees, or contractors of which negligence Landlord has knowledge and
reasonable time to correct. Except as to injury to persons or damage to
property to the extent arising from the willful misconduct or the negligence
of Landlord, its agents, servants, employees, invitees, or contractors. Tenant
shall hold Landlord harmless from and defend Landlord against any and all
expenses, including reasonable attorneys' fees, in connection therewith,
arising out of any injury to or death of any person or damage to or
destruction of property occurring in, on or about the Premises, or any part
thereof, from any cause whatsoever.
17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of
the provisions if Tenant, immediately upon notification, commences to remedy
or rectify said failure. The judgment of any court of competent jurisdiction
or the admission of Tenant in any action against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such law, statute,
ordinance or governmental rule, regulation, requirement, direction or
provision, shall be conclusive of that fact as between Landlord and Tenant.
This paragraph shall not be interpreted as requiring Tenant to make structural
changes or improvements, except to the extent such changes or improvements are
required as a result of Tenant's use of the Premises. Tenant shall, at its
sole cost and expense, comply with any and all requirements pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering the
Premises.
18. LIENS Tenant shall keep the Premises and the Complex free from any liens
arising out of any work performed, materials furnished or obligation incurred
by Tenant. In the event that Tenant shall not, within ten (10) days following
the imposition of such lien, cause the same to be released of record. Landlord
shall have, in addition to all other remedies provided herein and by law, the
right but no obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien.
All sums paid by Landlord for such purpose, and all expenses incurred by it in
connection therewith, shall be payable to Landlord by Tenant on demand with
interest at the prime rate of interest as quoted by the Bank of America.
19. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest herein, and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent will not be unreasonably withheld. As a
condition for granting this consent to any assignment, transfer, or
subletting, Landlord shall require Tenant to pay to Landlord, as Additional
Rent, all rents and/or additional consideration due Tenant from its assignees,
transferees, or subtenants in excess of the rent payable by Tenant to Landlord
hereunder for the assigned, transferred and/or subleased space; provided,
however, that before sharing such excess rent, Tenant shall first be entitled
to recover from such excess rent the amount of any reasonable leasing
commissions paid by Tenant to third parties not affiliated with Tenant.
Tenant shall first be entitled to recover from such excess rent the amount of
reasonable leasing commissions paid by Tenant to third parties not affiliated
with Tenant. Tenant shall, by thirty (30) days written notice, advise Landlord
of its intent to assign or transfer Tenant's interest in the Lease or sublet
the Premises or any portion thereof for any part of the term hereof. Within
thirty (30) days after receipt of said written notice, Landlord may, in its
sole discretion, elect to terminate this Lease as to the portion of the
Premises described in Tenant's notice on the date specified in Tenant's notice
by giving written notice of such election to terminate. If no such notice to
terminate is given to Tenant with said thirty (30) day period, Tenant may
proceed to locate an acceptable sublessee, assignee, or other transferee for
presentment to Landlord for Landlord's approval, all in accordance with the
terms, covenants, and conditions of this paragraph 19. If Tenant intends to
sublet the entire Premises and Landlord elects to terminate this Lease, this
Lease shall be terminated on the date specified in Tenant's notice. If,
however, this Lease shall terminate pursuant to the foregoing with respect to
less than all the Premises, the rent, as defined and reserved hereinabove
shall be adjusted on a pro rata basis to the number of square feet retained by
Tenant, and this Lease as so amended shall continue in full force and effect.
In the event Tenant is allowed to assign, transfer or sublet the whole or any
part of the Premises, with the prior written consent of Landlord, no assignee,
transferee or subtenant shall assign or transfer this Lease, either in whole
or in part, or sublet the whole or any part of the Premises, without also
having obtained the prior written consent of Landlord which consent shall not
be unreasonably withheld. A consent of Landlord to one assignment, transfer,
hypothecation, subletting, occupation or use by any other person shall not
release Tenant from any of Tenant's obligations hereunder or be deemed to be a
consent to any subsequent similar or dissimilar assignment, transfer,
hypothecation, subletting, occupation or use by any other person. Any such
assignment, transfer, hypothecation, subletting, occupation or use without
such consent shall be void and shall constitute a breach of this Lease by
Tenant and shall, at the option of Landlord exercised by written notice to
Tenant, terminate this Lease. The leasehold estate under this Lease shall
not, nor shall any interest therein, be assignable for any purpose by
operation of law without the written consent of Landlord which consent shall
not be unreasonably withheld. As a condition of its consent, Landlord shall
require Tenant to pay all expenses in connection with the assignment, and
Landlord shall require Tenant's assignee or transferee (or other assignees or
transferees) to assume in writing all of the obligations under this Lease and
for Tenant to remain liable to Landlord under the Lease. Notwithstanding the
above, in no event will Landlord consent to a sub-sublease.
20. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest
of Landlord in the land and buildings in which the demised Premises are
located, to secure a loan from a lender hereinafter referred to as ("Lender")
to Landlord, Tenant shall, at the request of Landlord or Lender, execute in
writing an agreement subordinating its rights under this Lease to the lien of
such deed of trust, or, if so requested, agreeing that the lien of Lender's
deed of trust shall be or remain subject and subordinate to the rights of
Tenant under this Lease. Notwithstanding any such subordination, Tenant's
possession under this Lease shall not be disturbed if Tenant is not in default
and so long as Tenant shall pay all rent and observe and perform all of the
provisions set forth in this Lease.
21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times
after at least 24 hours notice (except in emergencies) have, the right to
enter the Premises to inspect them; to perform any services to be provided by
Landlord hereunder; to submit the Premises to prospective purchasers,
mortgagers or tenants; to post notices of nonresponsibility; and to alter,
improve or repair the Premises and any portion of the Complex, all without
abatement of rent, and may erect scaffolding and other necessary structures in
or through the Premises where reasonably required by the character of the work
to be performed; provided, however that the business of Tenant shall be
interfered with to the least extent that is reasonably practical. For each of
the foregoing purposes, Landlord shall at all times have and retain a key with
which to unlock all of the doors in an emergency in order to obtain entry to
the Premises, and any entry to the Premises obtained by Landlord by any of
said means, or otherwise, shall not under any circumstances be construed or
deemed to be a forcible or unlawful entry into or a detainer of the Premises
or an eviction, actual or constructive, of Tenant from the Premises or any
portion thereof. Landlord shall also have the right at any time to change the
arrangement or location of entrances or passageways, doors and doorways, and
corridors, elevators, stairs, toilets or other public parts of the Complex and
to change the name, number or designation by which the Complex is commonly
known, and none of the foregoing shall be deemed an actual or constructive
eviction of Tenant, or shall entitle Tenant to any reduction of rent
hereunder.
22. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's
option, constitute a breach of this Lease by Tenant. If the trustee or
receiver appointed to serve during a bankruptcy, liquidation, reorganization,
insolvency or similar action elects to reject Tenant's unexpired Lease, the
trustee or receiver shall notify Landlord in writing of its election within
thirty (30) days after an order for relief in a liquidation action or within
thirty (30) days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this Lease,
the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure)
any and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of
Landlord. Adequate assurance of future performance, as used herein, includes,
but shall not be limited to; (i) assurance of source and payment of rent, and
other consideration due under this Lease; (ii) assurance that the assumption
or assignment of the Lease will not breach substantially any provision, such
as radius, location, use, or exclusivity provision, in any agreement relating
to the above described Premises.
Nothing contained in this section shall affect the existing right of Landlord
to refuse to accept an assignment upon commencement of or in connection with a
bankruptcy, liquidation, reorganization or insolvency action or an assignment
of Tenant for the benefit of creditors or other similar act. Nothing
contained in this Lease shall be construed as giving or granting or creating
an equity in the demised Premises to Tenant. In no event shall the leasehold
estate under this Lease, or any interest therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of
Landlord. In no event shall this Lease or any rights or privileges hereunder
be an asset of Tenant under any bankruptcy, insolvency or reorganization
proceedings.
The failure to perform or honor any covenant, condition or representation made
under this Lease shall constitute a default hereunder by Tenant upon
expiration of the appropriate grace period hereinafter provided, Tenant shall
have a period of five (5) days from the date of written notice from Landlord
within which to cure any default in the payment of rental or adjustment
thereto. Tenant shall have a period of thirty (30) days from the date of
written notice from Landlord within which to cure any other default under this
Lease; provided, however, that if the nature of Tenant's failure is such that
more than thirty (30) days is reasonably required to cure the same, Tenant
shall not be in default so long as Tenant commences performance within such
thirty (30) day period and thereafter prosecutes the same to completion. Upon
an uncured default of this Lease by Tenant. Landlord shall have the following
rights and remedies in addition to any other rights or remedies available to
Landlord at law or in equity:
(a) The rights and remedies provided for by California Civil Code
Section 1951.2, including but not limited to, recovery of the worth at
the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of
rental loss for the same period that Tenant proves could be reasonably
avoided, as computed pursuant to subsection (b) of said Section
1951.2. Any proof by Tenant under subparagraph (2) and (3) of Section
1951.2 of the California Civil Code of the amount of rental loss that
could be reasonably avoided shall be made in the following manner:
Landlord and Tenant shall each select a licensed real estate broker in
the business of renting property of the same type and use as the
Premises and in the same geographic vicinity. Such two real estate
brokers shall select a third licensed real estate broker, and the
three licensed real estate brokers so selected shall determine the
amount of the rental loss that could be reasonably avoided from the
balance of the term of this Lease after the time of award. The
decision of the majority of said licensed real estate brokers shall be
final and binding upon the parties hereto.
(b) The rights and remedies provided by California Civil Code Section
which allows Landlord to continue the Lease in effect and to enforce
all of its rights and remedies under this Lease, including the right
to recover rent as it becomes due, for so long as Landlord does not
terminate Tenant's right to possession; acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a
receiver upon Landlord's initiative to protect its interest under this
Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent permitted by law, the right and power to enter the
Premises and remove therefrom all persons and property, to store such
property in a public warehouse or elsewhere at the cost of and for the
account of Tenant, and to sell such property and apply such proceeds
therefrom pursuant to applicable California law, Landlord, may from
time to time sublet the Premises or any part thereof for such term or
terms (which may extend beyond the term of this Lease) and at such
rent and such other terms as Landlord in its sole discretion, may deem
advisable, with the right to make alterations and repairs to the
Premises. Upon such subletting, (i) Tenant shall be immediately liable
to pay Landlord, in addition to indebtedness other than rent due
hereunder, the cost of such subletting, including, but not limited to
reasonable attorneys' fees, and any real estate commissions actually
paid, and the cost of such alterations and repairs incurred by
Landlord and the amount, if any, by which the rent hereunder for the
period of such subletting (to the extent such period does not exceed
the term hereof) exceeds the amount to be paid as rent for the
Premises for such period or (ii)at the option of Landlord, rents
received from such subletting shall be applied first to payment of
indebtedness other than rent due hereunder from Tenant to Landlord;
second, to the payment of any costs of such subletting and of such
alterations and repairs; third to payment of rent due and unpaid
hereunder; and the residue, if any, shall be held by Landlord and
applied in payment of future rent as the same becomes due hereunder.
If Tenant has been credited with any rent to be received by such
subletting under option (i) and such rent shall not be promptly paid
to Landlord by the subtenant(s), or if such rentals received from such
subletting under option (ii) during any month be less than that to be
paid during that month by Tenant hereunder. Tenant shall pay any such
deficiency to Landlord. Such deficiency shall be calculated and paid
monthly. No taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this Lease unless a
written notice of such
intention be given to Tenant. Notwithstanding
any such subletting without termination. Landlord may at any time
hereafter elect to terminate this Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon application
by Landlord, to take possession of the Premises and to apply any
rental collected from the Premises and to exercise all other rights
and remedies granted to Landlord pursuant to subparagraph d. above
(except that Tenant may vacate so long as it pays rent, provides an
on-site security guard during normal business hours from Monday
through Friday, and otherwise performs its obligations hereunder).
23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease (except that Tenant may vacate so long as it
pays rent, provides an on-site security guard during normal business hours
from Monday through Friday, and otherwise performs its obligations hereunder)
and if Tenant shall abandon, vacate or surrender said Premises, or be
dispossessed by the process of law, or otherwise, any personal property
belonging to Tenant and left on the Premises shall be deemed to be abandoned,
at the option of Landlord, except such property as may be mortgaged to
Landlord.
24. DESTRUCTION In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental
damage and destruction caused from vandalism and accidents for which Tenant is
responsible for under Paragraph 10. Landlord may, as its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or
destruction, or
(b) Terminate this Lease, (providing that the Premises is damaged to the
extent of 33 1/3% of the replacement cost).
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, promptly to rebuild or restore the Premises to their condition prior
to the damage or destruction. Tenant shall be entitled to a reduction in rent
while such repair is being made in the proportion that the area of the
Premises rendered untenantable by such damage bears to the total area of the
Premise. If Landlord initially estimates that the rebuilding or restoration
will exceed 180 days or if Landlord does not complete the rebuilding or
restoration within one hundred eighty (180) days following the date of
destruction (such period of time to be extended for delays caused by the fault
or neglect of Tenant or because of Acts of God, acts of public agencies, labor
disputes, strikes, fires, freight embargoes, rainy or stormy weather,
inability to obtain materials, supplies or fuels, acts of contractors or
subcontractors, or delay of the contractors or subcontractors due to such
causes or other contingencies beyond the control of Landlord), then Tenant
shall have the right to terminate this Lease by giving fifteen (15) days prior
written notice to Landlord. Notwithstanding anything herein to the contrary,
Landlord's obligation to rebuild or restore shall be limited to the building
and interior improvements constructed by Landlord as they existed as of the
commencement date of the Lease and shall not include restoration of Tenant's
trade fixtures, equipment, merchandise, or any improvements, alterations or
additions made by Tenant to the Premises, which Tenant shall forthwith replace
or fully repair at Tenant's sole cost and expense provided this Lease is not
canceled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives
the provisions of Section 1932. Subdivision 2. in Section 1933. Subdivision 4
of the California Civil Code.
In the event that the building in which the Premises are situated is damaged
or destroyed to the extent of not less than 33 1/3% of the replacement cost
thereof. Landlord may elect to terminate this Lease, whether the Premises be
injured or not. Notwithstanding anything to the contrary herein, Landlord may
terminate this Lease in the event of an uninsured event or if insurance
proceeds are insufficient to cover one hundred percent of the rebuilding costs
net of the deductible. See Paragraph 56.
25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, this Lease shall terminate as to any portion of
the Premises so taken or conveyed on the date when title vests in the
condemnor, and Landlord shall be entitled to any and all payment, income,
rent, award, or any interest therein whatsoever which may be paid or made in
connection with such taking or conveyance, and Tenant shall have no claim
against Landlord or otherwise for the value of any unexpired term of this
Lease. Notwithstanding the foregoing paragraph, any compensation specifically
awarded Tenant for loss of business.
Tenant's personal property, moving cost or loss of goodwill, shall be and
remain the property of Tenant.
If (i) any action or proceeding is commenced for such taking of the Premises
or any part thereof, or if Landlord is advised in writing by any entity or
body having the right or power of condemnation of its intention to condemn the
premises or any portion thereof, or (ii) any of the foregoing events occur
with respect to the taking of any space in the Complex not leased hereby, or
if any such spaces so taken or conveyed in lieu of such taking and Landlord
shall decide to discontinue the use and operation of the Complex, or decide to
demolish, alter or rebuild the Complex, then, in any of such events Landlord
shall have the right to terminate this Lease by giving Tenant written notice
thereof within sixty (60) days of the date of receipt of said written advice,
or commencement of said action or proceeding, or taking conveyance, which
termination shall take place as of the first to occur of the last day of the
calendar month next following the month in which such notice is given or the
date on which title to the Premises shall vest in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant
can no longer reasonably conduct its business, Tenant shall have the privilege
of terminating this Lease within sixty (60) days from the date of such taking
or conveyance, upon written notice to Landlord of its intention so to do, and
upon giving of such notice this Lease shall terminate on the last day of the
calendar month next following the month in which such notice is given, upon
payment by Tenant of the rent from the date of such taking or conveyance to
the date of termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
herein, this Lease shall continue in full force and effect as to the part of
the Premises not so taken or conveyed, and the rent herein shall be
apportioned as of the date of such taking or conveyance so that thereafter the
rent to be paid by Tenant shall be in the ratio that the area of the portion
of the Premises not so taken or conveyed bears to the total area of the
Premises prior to such taking.
26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of
the Complex or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any
further liability upon any of the terms, covenants or conditions (express or
implied) herein contained in favor of Tenant provided that the transferee
assumes in writing all obligations hereunder, and in such event, insofar as
such transfer is concerned, Tenant agrees to look solely to the responsibility
of the successor in interest of such transferor in and to the Complex and this
Lease. This Lease shall not be affected by any such sale or conveyance, and
Tenant agrees to attorn to the successor in interest of such transferor.
27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of
Landlord in the land and buildings in which the leased Premises are located
(whether such interest of Landlord is a fee title interest or a leasehold
interest) is encumbered by deed of trust, and such interest is acquired by the
lender or any third party through judicial foreclosure or by exercise of power
of sale at private trustee's foreclosure sale. Tenant hereby agrees to attorn
to the purchaser at any such foreclosure sale and to recognize such purchaser
as the Landlord under this Lease. In the event the lien of the deed of trust
securing the loan from a Lender to Landlord is prior and paramount to Lease,
this Lease shall nonetheless continue in full force and effect for the
remainder of the unexpired term hereof, at the same rental herein reserved and
upon all the other
terms, conditions and covenants herein contained.
28. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease
or give Tenant any rights in or to the leased Premises (except as expressly
provided in this Lease. Any holding over after the expiration or other
termination of the term of this Lease, with the consent of Landlord, shall be
construed to be a tenancy from month to month, on the same terms and
conditions herein specified insofar as applicable except that the monthly
Basic Rent shall be increased to an amount equal to one hundred fifty (150%)
percent of the monthly Basic Rent required during the last month of the Lease
term.
29. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten
(10) days' prior written notice to Landlord execute, acknowledge and deliver
to Landlord a statement in writing (i) certifying that this Lease is
unmodified and in full force and effect for, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in
full force and effect and the date to which the rent and other charges are
paid in advance, if any, and (ii) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or
specifying such defaults, if any, are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of the
Premises. Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant that this Lease is in full force and effect, without
modification except as may be represented by Landlord, that there are no
uncured defaults in Landlord's performance, and that not more than one month's
rent has been paid in advance.
30. CONSTRUCTION CHANGES It is understood that the description of the
Premises and the location of ductwork, plumbing and other facilities therein
are subject to such minor changes as Landlord or Landlord's architect
determines to be desirable in the course of construction of the Premises, and
no such changes, or any changes in plans for any other portions of the Complex
shall affect this Lease or entitle Tenant to any reduction of rent hereunder
or result in any liability of Landlord to Tenant. Landlord does not Guarantee
the accuracy of any drawings supplied to Tenant and verification of the
accuracy of such drawings rests with Tenant.
31. RIGHT OF LANDLORD TO PERFORM All items, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid
by it hereunder and such failure shall continue for five (5) days after
written notice thereof by Landlord, or shall fail to perform any other term or
covenant hereunder on its part to be performed, and such failure shall
continue for thirty (30) days after written notice thereof by Landlord,
Landlord, without waiving or releasing Tenant from any obligation of Tenant
hereunder, may, but shall not be obligated to, make any such payment or
perform
any such other term or covenant on Tenant's part to be performed. All
sums so paid by Landlord and all necessary costs of such performance by
Landlord together with interest thereon at the rate of the prime rate of
interest per annum as quoted by the Bank of America from the date of such
payment or performance by Landlord, shall be paid (and Tenant covenants to
make such payment) to Landlord on demand by Landlord, and Landlord shall have
(in addition to any other right or remedy of Landlord) the same rights and
remedies in the event of nonpayment by Tenant as in the case of failure by
Tenant in the payment of rent hereunder.
32. ATTORNEYS' FEES.
(A) In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this
Lease, or because of the breach of any provision of this Lease, or for any
other relied against the other party hereunder, then all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing
party therein shall be paid by the other party, which obligation on the
part of the other party shall be deemed to have accrued on the date of the
commencement of such action and shall be enforceable whether or not the
action is prosecuted to judgment.
(B) Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder,
Tenant shall pay to Landlord its costs and expenses incurred in such suit,
including a reasonable attorney's fee.
33. WAIVER The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such
item, covenant or condition or any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any
way affect, the right of either party to insist upon performance and
observance by the other party in strict accordance with the terms hereof.
34. NOTICES All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demands, requests, advices or designations by
Landlord to Tenant shall be sufficiently given, made or delivered if
personally served on Tenant by leaving the same at the Premises or if sent by
United States certified or registered mail, postage prepaid, addressed to
Tenant at the Premises. All notices, demands, requests, advices or
designations by Tenant to Landlord shall be sent by United States certified or
registered mail, postage prepaid, addressed to Landlord at its offices at A&P
Family Investments, c/o Peery/Arrillaga, 2560 Mission College Blvd., #101,
Santa Clara, CA, 95054. Each notice, request, demand, advice or designation
referred to in this paragraph shall be deemed received on the date of the
personal service or mailing thereof in the manner herein provided, as the case
may be.
35. EXAMINATION OF LEASE Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a
lease, and this instrument is not effective as a lease or otherwise until its
execution and delivery by both Landlord and Tenant.
36. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord within a reasonable time,
but in no event earlier than thirty (30) days after written notice by Tenant
to Landlord and to the holder of any first mortgage or deed of trust covering
the Premises whose name and address shall have heretofore been furnished to
Tenant in writing, specifying wherein Landlord has failed to perform such
obligations; provided, however, that if the nature of Landlord's obligations
is such that more than thirty (30) days are required for performance, then
Landlord shall not be in default if Landlord commences performance within such
thirty (30) day period and thereafter diligently prosecutes the same to
completion.
37. CORPORATE AUTHORITY If Tenant is a corporation, for a partnership each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (for partnership) in accordance with the
by-laws of said corporation for partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation for
partnership) in accordance with its terms. If Tenant is a corporation, Tenant
shall, within thirty (30) days after execution of this Lease, deliver to
Landlord a certified copy of the resolution of the Board of Directors of said
corporation authorizing or ratifying the execution of this Lease.
38. Deleted
39. LIMITATION OF LIABILITY In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in
the event of any actual or alleged failure, breach or default hereunder by
Landlord:
(i) the sole and exclusive remedy shall be against Landlord's interest
in the Premises leased herein;
(ii) no partner of Landlord shall be sued or named as a party in any
suit or action (except as may be necessary to secure jurisdiction of
the partnership);
(iii) no service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the
partnership);
(iv) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(v) no judgment will be taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the assets of
any partner of Landlord;
(viii) these covenants and agreements are enforceable both by Landlord
and also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or at common law.
40. MISCELLANEOUS AND GENERAL PROVISIONS
a. Tenant shall not, without the written consent of Landlord, use the
name of the building for any purpose other than as the address of the
business conducted by Tenant in the Premises.
b. This Lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision
of the Lease shall be invalid, unenforceable or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in
full force and effect.
c. The term "Premises" includes the space leased hereby and any
improvements now or hereafter installed therein or attached thereto.
The term "Landlord" or any pronoun used in place thereof includes the
plural as well as the singular and the successors and assigns of
Landlord. The term "Tenant" or any pronoun used in place thereof
includes the plural as well as the singular and individuals, firms,
associations, partnerships and corporations, and their and each of
their respective heirs, executors, administrators, successors and
permitted assigns, according to the context hereof, and the provisions
of this Lease shall inure to the benefit of and bind such heirs,
executors, administrators, successors and permitted assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words
used in any gender include other genders. If there be more than on
Tenant the obligations of Tenant hereunder are joint and several. The
paragraph headings of this Lease are for convenience of reference only
and shall have no effect upon the construction or interpretation of
any provision hereof.
d. Time is of the essence of this Lease and of each and all of its
provisions.
e. At the expiration or earlier termination of this Lease, Tenant shall
execute, acknowledge and deliver to Landlord, within ten (10) days
after written demand from Landlord to Tenant, any quitclaim deed or
other document required by any reputable title company, licensed to
operate in the State of California, to remove the cloud or encumbrance
created by this Lease from the real property of which Tenant's
Premises are a part.
f. This instrument along with any exhibits and attachments hereto
constitutes the entire agreement between Landlord and Tenant relative
to the Premises and this agreement and the exhibits and attachments
may be altered, amended or revoked only by an instrument in writing
signed by both Landlord and Tenant. Landlord and Tenant agree hereby
that all prior or contemporaneous oral agreements between and among
themselves and their agents or representatives relative to the leasing
of the Premises are merged in or revoked by this agreement.
g. Neither Landlord nor Tenant shall record this Lease or a short form
memorandum hereof without the consent of the other.
h. Tenant further agrees to execute any amendments required by a lender
to enable Landlord to obtain financing, so long as Tenant's rights
hereunder are not substantially affected.
i. Paragraphs 42 through 55 are added hereto and are included as a part
of this lease.
j. Clauses, plats and riders, if any, signed by Landlord and Tenant and
endorsed on or affixed to this Lease are a part hereof.
k. Tenant covenants and agrees that no diminution or shutting off of
light, air or view by any structure which may be hereafter erected
(whether or not by Landlord) shall in any way affect his Lease,
entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
41. BROKERS Tenant warrants that it had dealings with only the following
real estate brokers or agents in connection with the negotiation of this
Lease: none and that it knows of no other real estate broker or agent who is
entitled to a commission in connection with this Lease.
42. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written
consent of Landlord first had and obtained and Landlord shall have the right
to remove any such sign, placard, picture, advertisement, name or notice
without notice to and at the expense of Tenant. If Tenant is allowed to print
or affix or in any way place a sign in, on, or about the Premises, upon
expiration or other sooner termination of this Lease. Tenant at Tenant's sole
cost and expense shall both remove such sign and repair all damage in such a
manner as to restore all aspects of the appearance of the Premises to the
condition prior to the placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord.
Tenant shall not place anything or allow anything to be placed near the glass
of any window, door partition or wall which may appear unsightly from outside
the Premises.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
RICHARD T. PEERY 1976 CHILDREN TRUSTS NEOMAGIC CORPORATION,
a California corporation
By /s/ Boyd C. Smith By /s/ Ibrahim Korgav
----------------------------------- ------------------------------
Boyd C. Smith, Trustee Title VP, Manufacturing Operations
Dated: October 31, 1997 Date: October 22, 1997
JOHN ARRILLAGA 1976 CHILDREN TRUSTS
By /s/ Louis B. Sullivan
-----------------------------------
Louis B. Sullivan, Trustee
Dated: October 31, 1997
Paragraphs 43 through 56 to Lease Agreement Dated October 9, 1997, By and
Between the John Arrillaga 1976 Children Trusts and Richard T. Peery 1976
Children Trusts (d.b.a. A&P Family Investments), as Landlord, and NeoMagic
Corporation, a California corporation, as Tenant for 45,000+- Square Feet of
Space Located at 3250 Jay Street, Santa Clara, California.
43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate
sum of FIVE MILLION SIX HUNDRED FORTY THREE THOUSAND AND
NO/l00 DOLLARS ($5,643,000.00), shall be payable as follows:
On January 1, 1998, the sum of EIGHTY THREE THOUSAND TWO HUNDRED FIFTY
AND NO/100 DOLLARS ($83,250.00) shall be due, and a like sum due on the first
day of each month thereafter, through and including December 1, 1998.
On January 1, 1999, the sum of EIGHTY FIVE THOUSAND FIVE HUNDRED AND
NO/100 DOLLARS ($85,500.00) shall be due, and a like sum due on the first day
of
each month thereafter, through and including December 1, 1999.
On January 1, 2000, the sum of EIGHTY SEVEN THOUSAND SEVEN HUNDRED FIFTY
AND NO/l00 DOLLARS ($87,750.00) shall be due, and a like sum due on the
first day of each month thereafter, through and including December 1, 2000.
On January 1, 2001, the sum of NINETY THOUSAND AND NO/100 DOLLARS
($90,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including December 1, 2001.
On January 1, 2002, the sum of NINETY TWO THOUSAND TWO HUNDRED FIFTY AND
NO /l00 DOLLARS ($92,250.00) shall be due, and a like sum due on the first day
of each month thereafter, through and including December 1, 2002.
On January 1, 2003, the sum of NINETY FOUR THOUSAND FIVE HUNDRED AND
NO/100 DOLLARS ($94,500.00) shall be due, and a like sum due on the first day
of each month thereafter, through and including April 1, 2003; or until the
entire aggregate sum of FIVE MILLION SIX HUNDRED FORTY THREE THOUSAND AND
NO/100 DOLLARS ($5,643,000.00) has been paid.
44. "AS-IS" BASIS: It is hereby agreed that the Premises leased hereunder is
leased strictly on an "as-is" basis and in its present condition, and in the
configuration as shown on Exhibit B to be attached hereto, and by reference
made a part hereof. It is specifically agreed between the parties that
Landlord shall not be required to make, nor be responsible for any cost, in
connection with any repair, restoration, and/or improvement to the Premises in
order for this Lease to commence, or thereafter, throughout the Term of this
Lease. Landlord makes no warranty or representation of any kind or nature
whatsoever as to the condition or repair of the Premises, nor as to the use or
occupancy which may be made thereof.
45. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
46. CHOICE OF LAW; SEVERABILITY. This Lease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any provisions of this Lease shall be invalid, unenforceable,
or ineffective for any reason whatsoever, all other provisions hereof shall be
and remain in full force and effect.
47. AUTHORITY TO EXECUTE. The parties executing this lease Agreement hereby
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
48 ASSESSMENT CREDITS: The demised property herein may be subject to a special
assessment levied by the City of Santa Clara as part of an Improvement
District. As a part of said special assessment proceedings (if any),
additional bonds were or may be sold and assessments were or may be levied to
provide for construction contingencies and reserve funds. Interest shall be
earned on such funds created for contingencies and on reserve funds which will
be credited for the benefit of said assessment district. To the extent
surpluses are created in said district through unused contingency funds,
interest earnings or reserve funds, such surpluses shall be deemed the
property of Landlord. Notwithstanding that such surpluses may be credited on
assessments otherwise due against the Leased Premises, Tenant shall pay to
Landlord, as additional rent if, and at the time of any such credit of
surpluses, an amount equal to all such surpluses so credited. For example: if
(i) the property is subject to an annual assessment of $1,000.00, and (ii) a
surplus of $200.00 is credited towards the current year's assessment which
reduces the assessment amount shown on the property tax bill from $1,000.00 to
$800.00, Tenant shall upon receipt of notice from Landlord, pay to Landlord
said $200.00 credit as Additional Rent.
49. ASSIGNMENT AND SUBLETTING (CONTINUED) Any and all sublease agreement(s)
between Tenant and any and all subtenant(s) (which agreements must be
consented to by Landlord, pursuant to the requirements of this Lease) shall
contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master Lease
termination date, then this Sublease (if then still in effect) shall terminate
concurrently with the termination of the Master Lease. Subtenant expressly
acknowledges and agrees that (1) the voluntary termination of the Master Lease
by Landlord and Tenant and the resulting termination of this Sublease shall
not give Subtenant any right or power to make any legal or equitable claim
against Landlord, including without limitation any claim for interference with
contract or interference with prospective economic advantage, and (2)
Subtenant hereby waives any and all rights it may have under law or at equity
against Landlord to challenge such an early termination of the Sublease, and
unconditionally releases and relieves Landlord, and its officers, directors,
employees and agents, from any and all claims, demands, and/or causes of
action whatsoever (collectively, "Claims"), whether such matters are known or
unknown, latent or apparent, suspected or unsuspected, foreseeable or
unforeseeable, which Subtenant may have arising out of or in connection with
any such early termination of this Sublease. Subtenant knowingly and
intentionally waives any and all protection which is or may be given by
Section 1542 of the California Civil Code which provides as follows: "A
general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with debtor.
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of and
agreement to this early termination provision, (b) Subtenant's acknowledgment
that, in determining the net benefits to be derived by Subtenant under the
terms of this Sublease, Subtenant has anticipated the potential for early
termination, and (c) Subtenant's agreement to the general waiver and release
of Claims above.
Initials: ___________ Initials: __________
Subtenant Tenant
50. BANKRUPTCY AND DEFAULT. Paragraph 22 is modified to provide that with
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such non-
monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such
cure to completion.
51. ABANDONMENT: Paragraph 23 is modified to provide that Tenant shall not be
in default under the Lease if it leaves all or any part of Premises vacant so
long as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left vacant, (iii) such vacancy does not materially and adversely
affect the
validity or coverage of any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and
ventilation system are operated and maintained to the extent necessary to
prevent damage to the Premises or its systems.
52. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
the existence or use of "Hazardous Materials" (as defined herein) on, in,
under or about the Premises and real property located beneath said Premises
and the common areas of the Complex (hereinafter collectively referred to as
the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean any
material, waste, chemical, mixture or byproduct which is or hereafter is
defined, listed, or designated under Environmental Laws (defined below) as a
pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or
material, or any other unwholesome, hazardous toxic, biohazardous, or
radioactive material, waste, chemical, mixture or byproduct, or which is
listed, regulated or restricted by any Environmental Law (including, without
limitation, petroleum hydrocarbons or any distillates or derivatives or
fractions thereof, polychlorinated biphenyls, or asbestos). As used herein,
the term "Environmental Laws" shall mean any applicable Federal, State of
California or local government law (including common law), statute,
regulation, rule, ordinance, permit, license, order, requirement, agreement,
or approval, or any determination, judgment, directive, or order of any
executive or judicial authority at any level of Federal, State of California
or local government (whether now existing or subsequently adopted or
promulgated) relating to pollution or the protection of the environment,
ecology, natural resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld in
Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Material Activities (defined below); provided, however, that Landlord's
consent shall not be required for normal use in compliance with applicable
Environmental Laws of customary household and office supplies (Tenant shall
first provide Landlord with a list of said materials use), such as mild
cleaners, lubricants and copier toner. As used herein, the term "Tenant's
Hazardous Materials Activities" shall mean any and all use, handling,
generation, storage, disposal, treatment, transportation, release, discharge,
or emission of any Hazardous Materials on, in , beneath, to, from, at or about
the Property, in connection with Tenant's use of the Property, or by Tenant or
by any of Tenant's agents, employees, contractors, vendors, invitees, visitors
or its future subtenants or assignees. Tenant agrees that any and all
Tenant's Hazardous Materials Activities shall be conducted in strict, full
compliance with applicable Environmental Laws at Tenant's expense, and shall
not result in any contamination of the Property or the environment. Tenant
agrees to provide Landlord with prompt written notice of any spill or release
of Hazardous Materials at the Property during the term of the Lease of which
Tenant becomes aware, and further agrees to provide Landlord with prompt
written notice of any violation of Environmental Laws in connection with
Tenant's Hazardous Materials Activities of which Tenant becomes aware. If
Tenant's Hazardous Materials Activities involve Hazardous Materials other than
normal use of customary household and office supplies, Tenant also agrees at
Tenant's expense: (i) to install such Hazardous Materials monitoring, storage
and containment devices as Landlord reasonably deems necessary (Landlord shall
have no obligation to evaluate the need for any such installation or to
require any such installation); (ii) provide Landlord with a written inventory
of such Hazardous Materials, including an update of same each year upon the
anniversary date of the Commencement Date of the Lease ("Anniversary Date");
and (iii) on each Anniversary Date, to retain a qualified environmental
consultant, acceptable to Landlord, to evaluate whether Tenant is in
compliance with all applicable Environmental Laws with respect to Tenant's
Hazardous Materials Activities. Tenant, at its expense, shall submit to
Landlord a report from such environmental consultant which discusses the
environmental consultant's findings within two (2) months of each Anniversary
Date. Tenant, at its expense, shall promptly undertake and complete any and
all steps necessary, and in full compliance with applicable Environmental
Laws, to fully correct any and all problems or deficiencies identified by the
environmental consultant, and promptly provide Landlord with documentation of
all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its expense,
shall (i) properly remove from the Property all Hazardous Materials which come
to be located at the Property in connection with Tenant's Hazardous Materials
Activities, and (ii) fully comply with and complete all facility closure
requirements of applicable Environmental Laws regarding Tenant's Hazardous
Materials Activities, including but not limited to (x) properly restoring and
repairing the Property to the extent damaged by such closure activities, and
(y) obtaining from the local Fire Department or other appropriate governmental
authority with jurisdiction a written
concurrence that closure has been
completed in compliance with applicable Environmental Laws. Tenant shall
promptly provide Landlord with copies of any claims, notices, work plans, data
and reports prepared, received or submitted in connection with any such
closure activities.
D. If Landlord, in its sole discretion, believes that the Property has become
contaminated as a result of Tenant's Hazardous Materials Activities, Landlord
in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to obtaining and
analyzing samples of soil and groundwater, for the purpose of determining the
nature and extent of such contamination. Tenant shall promptly reimburse
Landlord for the costs of such an investigation, including but not limited to
reasonable attorneys' fees Landlord incurs with respect to such investigation,
that discloses Hazardous Materials contamination for which Tenant is liable
under this Lease. Except as may be required of Tenant by applicable
Environmental Laws, Tenant shall not perform any sampling, testing, or
drilling to identify the presence of any Hazardous Materials at the Property,
without Landlord's prior written consent which may be withheld in Landlord's
discretion. Tenant shall promptly provide Landlord with copies of any claims,
notices, work plans, data and reports prepared, received or submitted in
connection with any sampling, testing or drilling performed pursuant to the
preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to Landlord,
whose consent shall not unreasonably be withheld) and hold harmless Landlord,
its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but
not limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 52 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and
properly implement to completion, at Tenant's expense, any and all
environmental investigation, removal, remediation, monitoring, reporting,
closure activities, or other environmental response action (collectively,
"Response Actions"). Tenant shall promptly provide Landlord with copies of
any claims, notices, work plans, data and reports prepared, received or
submitted in connection with any Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous Materials
will survive the expiration or termination of this Lease and that Landlord may
obtain specific performance of Tenant's responsibilities under this Paragraph
53. CROSS DEFAULT: It is understood that Landlord and Tenant have previously
entered into another lease dated February 5, 1996 for premises contiguous to
the premises leased hereunder located at 3260 Jay Street, Santa Clara,
California. As a material part of the consideration for the execution of this
Lease by landlord, it is agreed between Landlord and Tenant that a default
under this Lease, or a default under said Existing Lease may, at the option of
Landlord, be considered a default under both leases, in which event Landlord
shall be entitled (but in no event required) to apply all rights and remedies
of Landlord under the terms of one lease to both leases including, but not
limited to, the right to terminate one or both of said leases by reason of a
default under said Existing lease or hereunder.
54. LEASE TERMS CO-TERMINOUS: It is the intention of the parties that the Term
of this Lease be co-terminous with the term of the Existing Lease such that
the terms of both leases expire on the same date; provided, however, the
termination of this Lease resulting from the terms and conditions stated under
Paragraph 22 "Bankruptcy and Default" (subject to Landlord's option as stated
in the respective leases' "Cross Default" Paragraph) or Paragraph 24
"Destruction" or Paragraph 25 "Eminent Domain" shall not result in a
termination of the Existing Lease, unless Landlord elects, at its sole and
absolute discretion, to terminate both of the leases.
55.LEASE CONTINGENT UPON LANDLORD OBTAINING TERMINATION AGREEMENT WITH CURRENT
TENANT: This Lease is subject to and conditional upon Landlord obtaining from
Basic Measuring Instruments ("BMI"), the current tenant occupying the Premises
leased hereunder, a Termination Agreement satisfactory to Landlord on or
before December 31, 1997. In the event Landlord is unable to obtain said
satisfactory Termination Agreement on or before December 31, 1997, this Lease
Agreement shall, at Landlord's option (a) be rescinded, or (b) the
Commencement Date hereof shall be modified to reflect the date Landlord so
obtains said satisfactory Termination Agreement and receives possession of the
Premises hereunder free and clear of BMI's occupancy; provided, however, that
said period of delay caused by BMI shall not extend beyond February 28, 1998.
In the event this Lease does not commence by March 1, 1998 (subject only to
the delays covered in Paragraph 3) this Lease shall be automatically
rescinded.
56. DESTRUCTION CONT'D: Notwithstanding anything to the contrary in
Paragraph 24 ("Destruction"), Tenant shall have the right to terminate this
Lease if any damage to the Premises occurs during the last year of the
Term of this Lease and said damage cannot be repaired within six (6)
months. In the event Tenant elects to terminate this Lease, Tenant shall
give written notice to Landlord of Tenant's election to terminate this
Lease within five (5) days of Tenant's receipt of notice from Landlord
identifying the projected time required to make the necessary repairs of
said damage in which event this Lease would terminate thirty (30) days
after Landlord receives written notice from Tenant of Tenant's election to
terminate. Tenant will remain responsible for the full performance of all
terms, covenants and conditions here in contained through the effective
date of termination.
Exhibit 10.2
============
AMENDMENT NO 1
TO LEASE
THIS AMENDMENT NO. 1 is made and entered into this 15th day of October
1997, by and between BOYD C. SMITH, Trustee, or his Successor Trustee, UTA
dated 12/22/77 (RICHARD T. PERRY 1976 CHILDREN TRUSTS) as amended, and LOUIS
B. SULLIVAN, Trustee, or his Successor Trustee, UTA dated 12/26/77 (JOHN
ARRILLAGA 1976 CHILDREN TRUSTS), as amended collectively as LANDLORD, and
NEOMAGIC CORPORATION, a California Corporation, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated February 5, 1996 Landlord leased to
Tenant all of that certain 45,000 square foot building located at 3260 Jay
Street, Santa Clara, California, the details of which are more particularly
set forth in said February 5, 1996 Lease Agreement, and
B. WHEREAS, said Lease was amended by the Commencement Letter dated May 7,
1996which confirmed the May 1, 1996 Lease Commencement Date and the April
30, 2003 Lease Termination Date, and,
C. WHEREAS, it is now the desire of the parties hereto to amend the Lease by
adding a co-terminous paragraph and a cross default paragraph in relation
to a separate lease agreement dated October 9, 1997 between the parties
hereto for said Lease Agreement as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. LEASE TERMS CO-TERMINOUS: It is acknowledged that (i) concurrently with
the execution of this Amendment No. 1, Landlord and Tenant are also
executing separate lease agreement dated October 9, 1997 (hereinafter
referred to as the "1997 Lease") affecting adjacent property located at
3250 Jay Street, Santa Clara and (ii) it is the intention of the parties
that the term of this Lease be co-terminous with the term of the 1997 Lease
such that the terms of both leases expire on the same date; provided,
however, the termination of this Lease resulting from the terms and
conditions stated under Paragraph 22 "Bankruptcy and Default" (subject to
Landlord's option as stated in the respective leases' "Cross Default"
Paragraph) or Paragraph 24 "Destruction" or Paragraph 25 "Eminent Domain"
shall not result in a termination of the 1997 Lease, unless Landlord
elects, at its sole and absolute discretion, to terminate both of the
leases.
2. CROSS DEFAULT: As a material part of the consideration for the execution
of the 1997 Lease by Landlord, it is agreed between Landlord and Tenant,
that a default under this Leases, or a default under said 1997 Lease may,
at the option of Landlord, be considered a default under both leases, in
which event Landlord shall be entitled (but in no event required) to apply
all rights and remedies of Landlord under the terms of one lease to both
leases including, but not limited to , the right to terminate one or both
of said leases by reason of a default under said 1997 Lease or hereunder.
EXCEPT AS MODIFIED HERIN, all other terms, covenants, and conditions of
said February 5, 1996 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1
to Lease as of the day and year last written below.
LANDLORD: TENANT:
RICHARD T. PEERY 1976 NEOMAGIC CORPORATION
CHILDREN TRUSTS a California Corporation
By /S/ Boyd C. Smith By /S/ Ibrahim Korgav
----------------------- ---------------------
Boyd C. Smith, Trustee Ibrahim Korgav
Date: October 31, 1997 Title: VP Manufacturing Operations
JOHN ARRILLAGA 1976 CHILDREN Date: October 22, 1997
TRUSTS
By /S/ Louis B. Sullivan
-----------------------
Louis B. Sullivan, Trustee
Date: October 31, 1997
Exhibit 10.3
============
Exhibit A
CREDIT LINE
NMC and MIC agree with the credit line and credit line period from MIC to NMC
as follows:
CREDIT LINE: US$ 18,000,000,000
CREDIT LINE PERIOD: from April 1, 1997 to January 31, 1998
The credit line after January 1998 shall be determined by the end of January
1998 by mutual agreement between NMC and MIC.
Mitsubishi International Corp. NeoMagic Corporation
/S/ JUNJI INOUE /S/ P.C. AGARWAL
- ----------------------- -------------------------
By: Junji Inoue By: Prakash Agarwal
Title: General Manager Title: President & CEO
Date: Date: April 21, 1997
EXHIBIT 11.1
============
EXHIBIT 11.1 COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
(Unaudited)
Three Months Nine Months
---------------- ----------------
Ended Ended
October October October October
31, 31, 31, 31,
1997 1996 1997 1996
------ ------ ------ ------
Pro forma net income (loss) per share:
Weighted average shares outstanding 24,089 6,724 21,220 6,844
Common equivalent shares from common
stock, stock options and preferred
stock warrants granted or issued
during the twelve-month period prior
to the Company's initial public
offering related to Staff Accounting
Bulletin Topic 4D - 2,832 - 2,832
Dilutive common stock equivalents:
Common stock options, using treasury
stock method 2,079 147 1,865 -
Common stock warrants, using treasury
stock method 104 256 218 -
Convertible preferred stock using
the as-if converted method - - 2,084 -
Adjustment to reflect the effect of
the retroactive conversion of
convertible preferred stock from
the date of issuance - 12,260 - 12,260
------ ------ ------ ------
Common and common equivalent shares
used in the calculation of pro forma
net income (loss) per share 26,272 22,219 25,387 21,936
====== ====== ====== ======
Net income (loss) $6,545 $ 567 $12,595 $(2,203)
====== ====== ====== ======
Pro forma net income (loss) per share $.25 $.03 $.50 $(.10)
====== ====== ====== ======
Pro forma fully diluted net income
(loss) per share:
Weighted average shares outstanding 24,089 6,724 21,220 6,844
Common equivalent shares from common
stock, stock options and preferred
stock warrants granted or issued
during the twelve-month period prior
to the Company's initial public
offering related to Staff Accounting
Bulletin Topic 4D - 2,832 - 2,832
Dilutive common stock equivalents
Common stock options, using treasury
stock method 2,079 147 1,928 -
Common stock warrants, using treasury
stock method 104 256 221 -
Convertible preferred stock using the
as-if converted method - - 2,084 -
Adjustment to reflect the effect of the
retroactive conversion of convertible
preferred stock from the date of
issuance - 12,260 - 12,260
------ ------ ------ ------
Common and common equivalent shares used
in the calculation of net income (loss)
per share 26,272 22,219 25,453 21,936
====== ====== ====== ======
Net income (loss) $6,545 $ 567 $12,595 $(2,203)
====== ====== ====== ======
Pro forma net income (loss) per share $.25 $.03 $.50 $(.10)
====== ====== ====== ======